The Managing Director's Interview on the Global Economy

The Managing Director (MD) discussed key issues in the global economy. Downside risks to the outlook remain elevated. Growth is too slow and too fragile, and recent data suggest that it is likely to remain modest in 2016, with a continuation of the modest recovery in advanced economies and still-difficult conditions in several emerging and developing economies, particularly commodity exporters. If policy makers do not decide promptly on strong measures, global growth could be derailed.

Key Points:

State of the world economy: The global economy is recovering—there is some growth—but forecasts have been downgraded again. We are on alert, but not on alarm. Nevertheless, growth is too slow and too fragile to respond to the demands of 200 million people looking for jobs, to increase the standard of living of many, and to continue to eliminate poverty around the world. If policy makers do not decide promptly on strong measures, there could be a real deterioration of this fragile and slow growth.

Financial system: The financial sector has changed significantly over the last seven years. Measures have been taken to strengthen banks, including globally systemic ones; they have now more capital and loss absorbing capacity. In addition, the authorities are more concerned with supervising them and making sure that, if something goes wrong, they can be dismantled in an organized way. We are not in a 2008 situation but, if the slow and fragile growth entrenches, dealing with crisis legacies will be increasingly difficult. Shortly after the financial crisis, many banks dealt with the non-performing loan problem, but this has not happened everywhere, particularly in some of the euro area. The landscape has changed; it is not just about banks, it is also about the shadow banking system, which is growing and supervisors and regulators are expanding regulation accordingly, but much remains to be done.

Greece: The IMF will not walk away from the troika, but its form of participation may vary depending on the commitments of Greece and the European partners. The IMF wants Greece to be more stable, more solid, and less reliant on IMF or European Stability Mechanism financing. For this, real reforms have to be conducted and, on a parallel track, the debt has to be analyzed and, if it is not sustainable—which is currently the case—a debt operation has to be considered, which can take multiple forms. The more that realistic measures are taken, the less restructuring will be needed; but one cannot go without the other.

Brexit: The Article IV report will include a special chapter on the potential costs and benefits of an exit from the European Union. Preliminary work indicates that it could cause severe domestic and regional damage.

China: The IMF has slightly upgraded its growth forecast for China. The authorities have endorsed some of the recommended structural reforms, particularly SOE reform. The economy is going through a massive transformation, from export-driven to being focused on its domestic market, from heavy industry-based to service-driven, from close capital account to a more open one. It is normal and manageable to see somewhat lower growth in China. Regarding spillovers, the IMF is seeing that policy decisions of some big emerging markets are also having an impact on other countries.

Panama Papers: The Base Erosion and Profit Shifting (BEPS) project has been endorsed by many countries, but the problem is that everybody has to be part of it, otherwise loopholes will remain. It needs global leadership, to be completely comprehensive, and to include the implementation part of it.

Corruption: When the IMF becomes aware of corruption practices in a country where it has a program, the IMF stops the financing. Unfortunately, it cannot apply pressure everywhere.

Quotes:

“Growth is too slow and too fragile to respond to the demands of 200 million people looking for jobs, to increase the standard of living of many, and to continue to eliminate poverty around the world.” Christine Lagarde, IMF Managing Director

“We are not in a 2008 situation but, if the slow and fragile growth entrenches, dealing with crisis legacies will be increasingly difficult.” Christine Lagarde, IMF Managing Director

“The IMF will not walk away [from the troika]; our form of participation may vary depending on the commitments of Greece and the European partners; but we will not walk away.” Christine Lagarde, IMF Managing Director

“When we go into a country to help, we do not go to help the president or the prime minister; we go to help the people of that country, and our mission is to see stability.” Christine Lagarde, IMF Managing Director