Photo by IMF

JAKARTA (TheInsiderStories) – The head of the International Monetary Fund (IMF) Christine Lagarde, said on Thursday (5/10) that “the long-awaited global recovery is taking root” and that three-quarters of the globe is enjoying an economic upswing in “the broadest-based acceleration since the start of the decade.”

In remarks prepared for delivery at Harvard’s Kennedy School of Government, Lagarde suggested that the 189-country finance agency will likely upgrade its outlook for global growth when it releases its latest forecasts next week.

In July, the IMF predicted that global growth would hit 3.6 percent in 2018, its fastest since 2011 and a welcome sign that the world economy had broken out of a period of stagnation, following the Great Recession of 2007-2009.

Her argument was that, measured by gross domestic products (GDP), nearly 75 percent of the world is experiencing an upswing – the broadest-based acceleration since the start of the decade. This means more jobs and improving standards of living in many places all over the world.

“But the recovery is not complete,” she said.

Lagarde also pointed out how some countries are growing too slowly, while 47 countries experienced negative GDP growth per capita last year. “And far too many people — across all types of economies — are still not feeling the benefits of the recovery.”

Persistent low-growth in the decade since the global financial crisis has put a spotlight on the problem of inequality. It has also exposed long-running weaknesses in our ability to adapt to technological change and global integration. As a result, our social fabric is fraying, and many countries are experiencing increased political polarization.

Meanwhile, commodity prices have rebounded, after plummeting in 2014 and 2015, pinching off growth in many developing countries. Confidence also is returning to Europe, which has struggled with high government debts and a dodgy banking environment, especially in the southern countries of the E.U.

She also pointed out how the global recovery is leaving many behind and that the income gap between rich and poor is growing. Lagarde urged countries to take advantage of improving conditions to enact reforms that could spread prosperity, such as fighting corruption and expanding child care to lure women into the workforce.

“Reforms are more potent and easier to implement when economies are healthier,” she pointedly commented.

Central Banks should go Smoothly

She mentioned how low global inflation has persisted, and has stayed remarkably subdued, despite near-full employment in many advanced economies. She suggested monetary policies should continue to support recovery; at the same time, easy financial conditions can create complacency in markets and a buildup in vulnerabilities, including swelling private sector debt.

“Central banks should thus communicate their plans clearly and execute monetary policy normalization smoothly, appropriate to each country. This will help avoid market turbulence and a sudden tightening of financial conditions that could derail a recovery,” she stated.

Countries with healthier public finances (such as Germany and South Korea) can take advantage of this moment to invest more in their own economies. In places where public debt is too steep, governments should exploit the opportunity for growth to shrink debt relative to GDP and strengthen their own resilience.

Containing public debt is also an imperative in many lower-income countries, where debt levels have risen markedly in recent years.

Reducing excessive global imbalances — which includes investing more where fiscal positions are healthy, and lowering deficits elsewhere — can support growth and avoid financial and exchange rate instability.

At the same time, Lagarde stressed that we know that monetary and fiscal tools can only take us so far. “We need the whole toolkit, including structural reforms, to fully repair the roof.”

Writing by Elisa Valenta, Email: elisa.valenta@theinsiderstories.com