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IMF Warns of Slow Growth and Economic “Shocks” in 2016

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International Monetary Fund Managing Director Christine Lagarde offered a bleak economic forecast for 2016 and beyond in a guest column published Wednesday in the German financial newspaper Handelsblatt .

The IMF head wrote that global economic growth next year would be “disappointing” and the outlook for the medium term had also deteriorated. Lagarde pointed to the continuing slowdown in China and the prospect of rising interest rates in the US as major factors leading to a continued slowdown in world growth rates and the potential for financial shocks.

Lagarde also noted the substantial decline in the growth of world trade, the ongoing fall in oil and other commodity prices, and the worsening economic and financial crisis in so-called “emerging market” and “developing” countries whose economies are heavily dependent on commodity exports and expanding trade.

“All of that means global growth will be disappointing and uneven in 2016,” Lagarde said. She warned, in particular, of “spillover effects” resulting from the decision of the US Federal Reserve Board earlier this month to begin raising its benchmark interest rate from near zero, the first Fed rate increase in over nine years.

Lagarde and the IMF had lobbied against the Fed move, warning that it could spark a panic outflow of capital from emerging market countries with high levels of dollar-denominated corporate debt such as Brazil, Turkey and South Africa.

In the Handelsblatt article, Lagarde said that she was concerned about the ability of such countries to absorb “shocks,” citing in particular an increase in financing costs for corporations that sold large volumes of dollar-denominated bonds during the emerging market and oil boom that followed the financial crisis of 2008. The rise in the dollar means the real cost of debt repayment for these companies, whose revenues are in sinking local currencies, increases.

Lagarde hinted that the crisis could spread more broadly across the financial system, suggesting that emerging market and energy sector companies defaulting on their payments could “infect” banks and state treasuries.

On Wednesday, oil prices resumed their slide to their lowest levels in eleven years after the Saudi oil minister said the kingdom had no intention of scaling back petroleum production in 2016. Since the middle of 2014, oil prices have plummeted by two-thirds. In 2015 alone they have dropped by 35 percent.

But the oil price fall is only part of a broader collapse in industrial commodity prices. Nickel has dropped by more than 40 percent. Zinc, which was widely expected to rise in price this year because of the signaled closure of large mines in Australia and Ireland, has fallen 28 percent. Iron ore has also plummeted.

The new drop in oil prices and Lagarde’s pessimistic forecast combined to push down global stock prices Wednesday, with the Dow Jones Industrial Average falling 117 points (0.66 percent), in line with other major indexes in the US and Europe.