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India a bright spot in slowing world economy: IMF chief Christine Lagarde

PTI 01 Oct 2015, 16:24:57 IST

Washington: IMF chief Christine Lagarde has said that global growth will likely be weaker this year with only a modest acceleration expected in 2016 but India remains a bright spot.

"India remains a bright spot. China is slowing down as it rebalances away from export-led growth. Countries such as Russia and Brazil are facing serious economic difficulties. Growth in Latin American countries, in general, continues to slow sharply," Lagarde said.

"We are also seeing weaker activity in low-income countries, which will be increasingly affected by the worsening external environment. At the global level, there is still a drag on the economy because financial stability is not yet assured," said she in her address Wednesday.

She noted that despite progress in recent years, financial sector weaknesses remain in many countries, and financial risks are now elevated in emerging markets.

Also Read: Indian economy sees 'firming growth', says OECD

Referring to the release of World Economic Outlook numbers next week, she said global growth will likely be weaker this year with only a modest acceleration expected in 2016.

"The good news is that we are seeing a modest pickup in advanced economies. The moderate recovery is strengthening in the Euro Area; Japan is returning to positive growth; and activity remains robust in the US and the UK as well," she said.

Lagarde said the prospect of rising interest rates in the US and China's slowdown are contributing to uncertainty and higher market volatility.

"There has been a sharp deceleration in the growth of global trade. And the rapid drop in commodity prices is posing problems for resource-based economies," she said.

China, Lagarde said, is in the midst of a fundamental and welcome transformation. "It has launched deep structural reforms to lift incomes and living standards. These reforms will, by design, lead to a new normal of slower, safer, and more sustainable growth.

"The new model relies more on consumption and less on commodity-intensive investment. More on services and less on manufacturing," she said.

"It also requires transitioning to a stable, more market-driven financial system. In other words, China's policymakers are facing a delicate balancing act: they need to implement these difficult reforms while preserving demand and financial stability," she said.

This kind of major transition can create spillover effects through trade, exchange rates, asset markets, and capital flows, the IMF chief added.

"We saw some of these spillovers in recent months: investors were worried about the speed at which China's economy is slowing. These concerns put further pressure on commodity markets and triggered sizeable currency depreciations in a number of commodity exporters.

"Those countries have, for many years, relied on China as an export destination. For example, China consumes 60 % of the world's iron ore. But as it invests less, China will reduce its appetite for commodities," she said.

The IMF chief said that this will contribute to what could be a prolonged period of low commodity prices, a change that will need to be managed by policymakers, particularly in the large commodity exporters.