Lagarde says global economic growth may slow down

International Monetary Fund Managing Director Christine Lagarde has said Global economic growth may be entering a "softer patch".

The Washington-based IMF, which in April trimmed its global growth forecasts to 3.3 per cent this year, has since cut predictions for countries including Germany and China.

There are “some glimpses of more somber trends,” Lagarde said in a speech at the Brookings Institution in Washington.

“Recent data, for example, suggest some slowdown in growth,” she said. “At the same time, the downside risks to growth remain as prominent as ever.”

Seperately, Lagarde said Greece is broadly on track with its bailout programme but must do more to crack down on tax evasion and pursue reforms to attract foreign investors.

Lagarde’s interview with state TV was aired as officials from the country’s international lenders – the European Union and the IMF – return to Athens to start another inspection after giving Greece the green light for more bailout funds.

The Greek economy is in its sixth year of recession but the country is seeing revived interest in its deeply discounted bonds and stocks, helped by praise from foreign lenders for government efforts to get the bailout programme back on track.

Asked whether she subscribed to prime minister Antonis Samaras’s notion that Greece is now a “success story”, Lagarde said: “I certainly hope it’s on its way to being a success story.”

“There are some really positive developments but obviously more needs to be done,” she told state NET television.

“There has been significant improvement with a programme that is now pretty much on track. The programme has seen massive, unprecedented consolidation, which is hard.”

Lagarde said Athens must improve tax revenue collection and liberalise entry into some professions to push the economy towards growth. Last week the IMF cleared the path to disburse a $2.26 billion loan tranche to Athens after its latest review.

During the inspection that starts this week, Athens is expected to press for lowering the 23 per cent value-added tax on restaurants to boost consumption and tax revenue.

Inspectors are also expected to assess whether Athens has made progress in cutting state jobs, a sensitive issue in a country where unemployment is at a record high of 27 percent.

Also yesterday, the IMF said France – where Lagarde was minister for finance – must lower labour costs, open up regulated professions, deepen its labour and business reforms and cease tax hikes to get back to growth and bolster competitiveness.

The IMF said France was set to contract slightly more than its current forecast and that unemployment would keep rising in spite of the government’s promise to reverse the jobless trend by year-end.

“The number of reforms initiated in the last six months speak well of the government’s understanding that France needs to be reformed,” the IMF’s Mission Chief for France, Edward Gardner, said, adding: “It’s a first step in a long process.”

The Fund urged France to remove constraints on housing construction and push for more negotiations at enterprise level. It also suggested giving the competition authority more power to review all sectors of the economy and push to remove regulatory obstacles.

With rising youth unemployment a growing concern throughout Europe, the IMF said more instruments should be found to lower the effective cost of hiring young workers.

Gardner said that could include a lower minimum wage or more flexible contracts, an idea that has been fiercely opposed by young people and unions in the past.

Regarding structural reforms, the IMF stressed that France’s focus should be on reining in public spending.

“Following three years of substantial fiscal adjustment, there is scope to moderate the pace of consolidation going forward, provided the effort is concentrated on expenditure and backed by continued structural reforms,” it said in a regular review of France.

RISKS

The IMF’s report said the French economy would start turning around in the second half of 2013. On Monday, the Fund halved its 2013 forecast for Germany based on uncertainty in other euro zone economies, including neighbouring France.

It trimmed its forecast for France to a contraction of 0.2 percent this year from a previous forecast of -0.1 percent and predicted growth of 0.8 percent next year, down from a previous estimate of 0.9 percent.

But Gardner warned that one of the main downside risks for France was the lack of household and business confidence, adding that uncertainty over taxes was weighing on that.

“There is no more scope for increasing the tax burden, not only because it has reached very high levels which are distorting incentives and in the end undermining growth,” he said. “But also the perception that taxes are the instrument of adjustment ... is creating a lot of uncertainty ... undermining consumer confidence and enterprise investment capacity.”

The Fund said risks to financial stability had abated considerably as banks had repaired their balance sheets, but it noted banks still had some way to go in increasing their liquidity buffers and improving net stable funding ratios.

“This requires a move toward more market-intermediated credit and higher deposit collection,” it said.

France entered a shallow recession in the first quarter as weak exports, investment and household spending caused a 0.2 percent contraction. (Editing by Catherine Bremer)