Why Christine Lagarde considers 2015 important
World leaders talk about economic growth at World Economic Forum (Part 2 of 9)
Make or break
Christine Lagarde, managing director of the International Monetary Fund (or IMF) called 2015 a “make-or-break year for the global community.” She said that policymakers around the world have to make the following three fundamental choices:
“strive for economic growth or accept stagnation”
“work to improve stability or risk succumbing to fragility”
“cooperate or go it alone”
Outlining the current economic situation, Lagarde said that six years after the Great Recession of 2008 began, global economic recovery is “weak and uneven.” The IMF, which came out with an update on its projections on economic growth, expects the world’s economic growth (VEU) (ACWI) to rise by a moderate 3.5% in 2015 and 3.7% in 2016.
There is a large divergence among the economic growths of various countries. While the US economy is expected to grow faster than previously estimated by the IMF, all other major economies are expected to grow more slowly. The employment situation is also grim as more than 200 million people around the world do not have jobs.
With this as a backdrop, Lagarde highlighted that “the global economy risks getting stuck in a ‘new mediocre’—a prolonged period of slow growth and feeble job creation.”
Economic growth versus stagnation
Structural and policy reforms are key to embracing economic growth and breaking free from stagnation. Lagarde highlighted that if the G-20 countries implement the measures agreed upon in a November 2014 meeting, it will add $2 trillion in global income. This can increase the global gross domestic product by more than 2% by 2018.
On monetary policy, Lagarde held onto her view that accommodative monetary policy will be required until such time that sustained economic growth is achieved.
However, central bankers will need to watch out for potential spillovers. For instance, in the United States, if the Federal Reserve is too late in raising the federal funds rate, it can cause runaway inflation. A hike in the rate will negatively affect U.S. Treasuries and associated ETFs such as the Barclays iShares 20+ Year Treasury Bond Fund (TLT), the Barclays iShares 7–10 Year Treasury Bond ETF (IEF), and the Barclays iShares 1–3 Year Treasury Bond ETF (SHY).
In the next article, we’ll look at Lagarde’s views on the remaining two fundamental choices she highlighted.
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