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IMF’s Lagarde dampens optimism for broad global recovery

IMF’s Lagarde dampens optimism for broad global recovery
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Just weeks ahead of the release of its much awaited update of global economic forecasts, the International Monetary Fund has offered little to feed optimism.

“While we are seeing some signs of recovery, global growth remains subdued,” the IMF’s managing director Christine Lagarde said in a speech to the US Chamber of Commerce in Washington.

More and more economies were moving at different speeds, Lagarde said, suggesting a widening wealth gap in the world. “The fruits of growth are far from being shared widely,” she told the gathering.

While praising modest improvement of the economic performance in advanced economies – notably in the eurozone and in the United States – Lagarde said she sees momentum slowing in many emerging markets. This reflected the need to address imbalances that have made them more vulnerable to recent market turbulences, Lagarde added.

The IMF is due to release its latest predictions on October 8, three months after cutting its global growth forecasts to 3.1 percent for this year and 3.8 percent in 2014.

US problems

In thinly veiled criticism of widening political rifts between the political parties and institutions in Washington, Lagarde called on US policy makers to “fix public finances”.

While it would have been advisable to have a slower pace of fiscal consolidation in the short term, more action was needed to reduce long-run pressure on the budget she concluded, adding: “In addition, the ongoing political uncertainty over the budget and the debt ceiling does not help.”

Congressional Republicans have called for further spending cuts and a delay in President Obama’s healthcare programme before they agree to raise the limit.

“The United States economy should fix its public finances,” Lagarde said. “The private sector is yet again proving to be the primary growth, the primary engine of growth and job creation, and the main reason for weak growth this year… is really caused by the very large ongoing fiscal adjustment.”

The IMF chief also said the US economy’s growth rate would be below 2.0 percent this year and about one percentage point more in 2014.

Reform support call

Speaking about the need for major reform of the IMF, Lagarde called for support from US policymakers.

The IMF agreed to reform its governance structure in 2010 to give greater influence to emerging economies, including China. But the reform of voting rights, known as quotas, cannot proceed without approval from the US Congress.

In her speech Lagarde said the reforms will give the global financial institution more money to prevent and resolve crises.

“These ‘quota’ reforms need the support of all our member countries, including the United States,” Lagarde said.

The US is the Fund’s largest member and holds the only controlling share of IMF votes, meaning no major changes can happen without its approval. Under the reforms, US voting power would decrease slightly, but it would still maintain veto power over decisions.