IMF’s Christine Lagarde warns of political risks to global economy amid mediocre growth

The global economy is beset by a range of political risks, from terrorism to the U.K.’s potential departure in the Eu, at a time when growth is at best mediocre, IMF Md Christine Lagarde said.

The world outlook is clouded by “weak growth, no new jobs, no high inflation, still high debt – all those stuff that ought to be low which are high,” Lagarde said within an interview in Frankfurt with Bloomberg Television’s Francine Lacqua. The down-side risks have raised and “we don’t see much by means of upside,” she said.

The International Monetary Fund’s view of the world economy has dimmed during the last six months, exacerbated by China’s slowdown, lower commodity prices and also the chance of financial tightening in lots of countries. The Washington-based fund, which will hold its spring meetings starting April 15, is warning that political populism now also poses an increasing risk to the economic order, fuelled by income inequality and also the ongoing fallout from last decade’s financial crisis.

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“What we fear is this kind of very new mediocre,” Lagarde said within the interview after delivering a speech at Frankfurt’s Goethe University. Within the talk, she urged governments to front-load structural reforms that may boost growth potential and warned that monetary policy can’t bear the responsibility for supporting output alone.

Lagarde, 60, an old French finance minister, used an estimate from Goethe’s “Faust,” the german language, to chastise governments for not doing enough on the reform or fiscal-spending front to prevent economies from slipping into torpor.

“The content well I hear, my faith alone is weak,” she said. “There’s always a good reason to not act. But that would be exactly the wrong move. The development momentum is weak, risks are probably on the rise, and confidence is sorely lacking.”

Lagarde flies to Berlin Tuesday for any meeting with German Chancellor Angela Merkel, with whom the IMF is at loggerheads on the subject of debt relief for Greece. Lagarde spoke after strongly-worded letters were exchanged in the aftermath from the publication by WikiLeaks of what it alleged was a transcript of the IMF meeting on the country’s bailout program.



Fiscal Flexibility

Signaling some flexibility over the fiscal targets the IMF wants to see Greece meet to be able to get money in the fund, Lagarde asserted if so, more action on debt sustainability would be needed. The German government argues that Greece’s debt-servicing cost is already sustainable.

“If the primary surplus is a bit lower,” then the debt operation must be stronger or longer term, “however it needs to accumulate,” Lagarde said. The IMF isn’t prepared to “cut a deal on the side,” bending its own rules on debt sustainability and reform.

What we fear is this sort of very new mediocre.

Lagarde, fresh from winning a new five-year term at the fund’s helm, used her university speech to caution against being drawn to the kinds of forces that have fuelled the populism-driven candidacies of Bernie Sanders and Mr . trump in the U.S. presidential election. While inequality continues to be declining on the global scale, the perception remains that “them are stacked from the common man – and woman – in favour of elites,” she said.

“With a, the answer is to look inward, to somehow unwind these linkages, to shut borders and retreat into protectionism,” she said, without naming any politicians. “As history has told us – time and again – this is a tragic course.”

Lagarde’s comments around the global economy add to signs that the IMF will downgrade its growth forecast if this releases its updated World Economic Outlook on April 12. Finance ministers and central bankers in the fund’s 188 member nations will gather later that week for the spring meetings.

No Crisis

“The good news is the recovery continues; we have growth; we are not in a crisis,” Lagarde said. “The not-so-good news would be that the recovery remains too slow, too fragile, and risks to its durability are increasing.”

Lagarde reiterated her demand countries to use the 3 major tools available to enhance growth: structural reforms, fiscal stimulus and monetary policy.

In the Bloomberg interview, she circled to the political risks that menace the scenario of gradually improving growth prospects delivered by reform. Included in this, the probabilities the U.K. leaves the European Union following a referendum on June 23 looms large, Lagarde said.

“We have seen several very concerning geopolitical threats,” she said in the interview. Brexit is “clearly area of the uncertainty that we have right now.”

– With the help of Nikos Chrysoloras.

Bloomberg News