‘New Mediocre’ Could Become Global Economic Reality, Lagarde Worries

"Fiscal policy should be better calibrated to the strength of the recovery," Christine Lagarde said.
Katie Kuehner-HebertApril 9, 2015

Policymakers across the globe should work together to pick up the pace of economic recovery to prevent the “New Mediocre” from becoming the “New Reality,” International Monetary Fund  managing director Christine Lagarde said in a speech at the Thursday.

While global growth is “not bad” — at 3.4% last year it’s roughly the average for the last three decades—it is “just not good enough,” Lagarde said in prepared remarks posted on the IMF website.

“The challenge for policymakers around the world is to combine the policies needed to boost today’s growth with those fortifying tomorrow’s prospects,” she said, speaking ahead of the IMF-World Bank Spring Meetings that take place next week in Washington, D.C.

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Policymakers in advanced economies should use “demand policies” to combat low growth-low inflation and high debt-high unemployment, Lagarde said. Continued monetary accommodation is needed—especially in the euro area and Japan—and fiscal policy should be better calibrated to the strength of the recovery.

Financial stability risks are migrating from banks to non-banks and from advanced economies more toward emerging markets, she said. Policymakers need to ensure market liquidity during times of stress, improve “macro- and micro-prudential policies” for non-banks, and follow through on the regulatory reform agenda to limit excessive risk-taking and manage existing vulnerabilities.

“Structural reforms need to go hand-in-hand with macroeconomic and financial policies to raise confidence and generate investment,” Lagarde said. “Our own research shows that boosting efficient infrastructure investment can be a powerful impetus to growth both in the short run and in the long run.”

A WSJ/Dow Jones article on Thursday reporting Lagarde’s speech said that the strong U.S. dollar is also having an impact on emerging-market economies.

“Strong currency movements — particularly the surge of the U.S. dollar against the euro and yen as central banks in Europe and Japan flood their economies with cheap cash — are also a threat to emerging-market economies that have borrowed in the greenback and face falling commodity revenues,” WSJ/Dow Jones wrote.