IMF chief warns of mediocre growth becoming 'new reality'

WASHINGTON - Despite decreasing macroeconomic risks since last fall, the global economy continues to face a number of significant challenges, and the world should take measures to prevent the mediocre growth from becoming a "new reality", International Monetary Fund (IMF) Managing Director Christine Lagarde said Thursday.

While global growth is running at roughly the average of the last three decades, it is just not good enough to offset the lingering impact of the Great Recession, ranging from low growth and low inflation to high unemployment and high debt, Lagarde said in a speech delivered at the Atlantic Council ahead of the IMF/ World Bank spring meetings next week.

In advance of the release of the IMF's flagship World Economic Outlook report, the IMF chief expected the global growth this year to remain roughly the same as last year when it grew at a moderate rate of 3.4 percent. The growth for advanced economies will run slightly better than last year, while the forecasts for most emerging and developing economies are slightly worse than last year.

Last October, the IMF chief warned of the risk of "new mediocre ": low growth for a long time. "We must prevent the new mediocre from becoming the 'new reality'," said Lagarde on Thursday, adding that "all policy space and levers must be utilized."

She said euro area and Japan will need to continue monetary accommodation and calibrate fiscal policy to support the recovery without losing sight of debt sustainability over the medium term.

For emerging and developing oil-importers, Lagarde called on them to take the opportunity of low oil prices to reduce energy subsidies and save resources to boost growth-enhancing investments, such as infrastructure, education or health.

The IMF chief also warned of the rising financial risks amid the environment of low or even negative interest rates caused by the accommodative monetary policies.

"If the low interest environment persists, it can create solvency challenges for life insurers and defined benefit pension funds," she said.

The negative impact from the strong US dollar is another risk the global economy is facing now, according to the IMF chief. " Business in emerging market economies (with large amounts of dollar-denominated debt) are wedged between a strong US dollar, lower commodity prices, and higher borrowing rates," said Lagarde.

To leverage national initiatives for the benefit of the global community, the IMF chief called for giving emerging markets and developing countries greater weight and voice in global economic institutions.

In order to strengthen the resilience of the international financial architecture, the ratification of the IMF 2010 quota and governance reform by the US Congress, a stronger collaboration with regional facilities and institutions, including China- proposed Asian Infrastructure Investment Bank (AIIB), and increasing the role of the Special Drawing Rights (SDRs) as a global reserve asset and facilitating the integration of dynamic emerging markets into the global economy will help meet the objective.

When asked about the AIIB in the Q&A session, Lagarde said the AIIB was part of the broader project by the Chinese authorities to build infrastructure projects, and to stimulate growth and economic activities not only within China but also with many neighbors along the Silk Road and along the Maritime Road.

It's a great initiative in the sense that its broad spectrum reflects the new landscape of the global economy with new key players, said the IMF chief.