WASHINGTON—Two problems stemming from the 2008 financial crisis — heavy government borrowing and high unemployment — still pose challenges to the global economy and require bold action, the head of the International Monetary Fund said.
Christine Lagarde, IMF managing director, said Thursday that cheaper oil and strong U.S. growth aren’t enough to counter those threats.
“We believe that global growth is still too low, too brittle and too lopsided,” she said in remarks before the Council on Foreign Relations.
Europe and Japan potentially face years of slow growth and ultra-low inflation, she said, while the United States “is the only major economy that is likely to buck that trend this year.”
Her warnings came after the IMF’s sister organization, the World Bank, on Tuesday lowered its forecast for international growth. The World Bank now expects the global economy to expand 3 percent in 2015, down from a 3.4 percent estimate in June. The bank cuts its forecast because of stagnation in Europe and Japan and slower growth in China.
The IMF will issue its own update to its forecasts next week.
Cheaper oil should leave consumers in most wealthy nations with more money to spend on other goods, thereby supporting their economies, Lagarde said. But there are downsides as well, she added. Falling gas prices are pushing the 19 European nations that share the euro currency closer to deflation, a destabilizing fall in prices and wages.
The threat of deflation in Europe “bolsters the case” for the European Central Bank to provide more stimulus, she said. Next week, the ECB is expected to launch a bond-buying program intended to reduce borrowing costs for businesses, households and governments.
While the ECB is acting to ease rates, the U.S. Federal Reserve may raise them later this year, Lagarde noted. Those opposing actions could cause widespread volatility in currency values and interest rates.
On Thursday, Switzerland’s central bank caused violent swings in currency markets by announcing that it would no longer peg the Swiss franc to the value of the euro. That was an illustration of the interconnected nature of world financial markets. Switzerland acted largely because the expected stimulus by the ECB will likely lower the value of the euro.
That would make it more expensive to keep the Swiss franc from rising in comparison to Europe’s common currency.
Lagarde warned that many emerging markets could face a “triple hit” from a strengthening dollar, higher interest rates and volatile capital flows.
Many companies in developing countries have borrowed in dollars in recent years. Those loans would become harder to repay if the dollar rose in value compared with local currencies those companies do business in.
Lagarde also urged governments to take tough steps to restructure their labor markets, which in many cases would make it easier to hire and fire workers.
“Too many countries are still weighed down by the legacies of the financial crisis, including high debt and high unemployment,” she said.
From The Associated Press