IMF’s Lagarde warns G20 to avoid ‘low-growth trap’

WASHINGTON, USA (UPDATED) – The head of the International Monetary Fund (IMF) on Thursday, September 1, called on global leaders to take “forceful” action to revive the world economy, sounding a stark warning ahead of this weekend’s G20 summit.

Christine Lagarde, the IMF managing director, said that as of 2016, global economic growth had stagnated for 5 years below the 3.7% average that prevailed between 1990 and 2007.

“Not since the early 1990s… has the world economy been so weak for such a long time,” Lagarde said in a note issued to coincide with the start of the summit. (READ: IMF warns G20: World economy ‘highly vulnerable’)

With member states representing 85% of the world’s GDP, the Group of 20 summit is due to convene in Hangzhou, China beginning Sunday, September 4, amid a climate of sluggish growth and uncertainty.

Lagarde warned of a “low-growth trap” – high debt, weak demand, eroding work forces and labor skills, weakening incentives for investment, and slowing productivity.

She said the world’s economies faced a potentially toxic mix of low long-term growth and rising inequality, creating political temptations to populism and raised trade barriers. (READ: G20 nations pledge to boost trade despite growing protectionism)

But analysts say the G20 summit is unlikely to achieve a breakthrough, given that it occurs in the absence of a crisis which could prod governments to take action.

With varying difficulties and pressures – Britain exiting the European Union, Japan considering more easing, Germany skeptical of stimulus, and China pressed on its industrial overcapacity – member states currently have too few common interests to stick to difficult commitments that are easier to make than to live with, analysts said.

“At the moment there’s simply not a lot of common overlapping interests between the major economies,” Christopher Balding, professor of economics at Peking University HSBC Business School, told AFP.

US growth outlook dimmer

In a report on global economic conditions for G20 members, IMF economists said US growth would likely be weaker than previously expected in 2016.

The report’s chief author, IMF economist Helge Berger, told reporters in Washington the organization expected to downgrade its US growth forecast in light of the poor performance seen in the first half of this year.

In July, the IMF said it expected the US economy to grow at 2.2% this year and 2.5% in 2017, already downward revisions from an April forecast. (READ: IMF warns the US over high poverty, inequality)

“It’s clear for the US given the developments in the first two quarters this year that we’re in for a downgrade of that outlook,” said Berger.

In its G20 report, the IMF said G20 leaders in 2014 had pledged to raise their collective GDP by 2% by 2018. But, as of 2016, member countries had carried out only 55% of the commitments they made then, demonstrating a “lack of determined policy action.”

Since the Great Recession, the main causes of persistently low inflation have been high unemployment and low commodity prices – with excess industrial capacity driving the price of goods downward, the report said. If unaddressed, prolonged low inflation could reduce investment and drag growth further downward.

While the top 10% of earners in advanced economies had seen their average household incomes rise about 40% to nearly $350,000 between 1989 and 2010, according to a chart in the report, the bottom 40% had seen their incomes largely flat over the same period at about $50,000.

“More progress is urgent,” the report said, calling also for new fiscal and monetary policies to support growth, such as public investment in education, more equitable tax-benefit regimes, and reducing private-sector debts. – Rappler.com