A sharp drop in oil prices and a stronger US economy probably won't be enough to brighten the outlook for global growth this year, the head of the International Monetary Fund warned on Thursday. IMF Managing Director Christine Lagarde said that while cheaper oil would help the world's consumers, the United States would likely be the only major economy to buck a trend of weakness in investment and consumption.
In a speech that previewed IMF global growth forecasts due next week, Lagarde wondered aloud if plunging oil prices and US growth should make the IMF more upbeat. "The answer is most likely 'No'," she said before rattling off a laundry list of the world's economic sore spots. The euro zone and Japan risk suffering a long period of weak growth and dangerously low inflation, with the specter of a nightmarish deflationary spiral of falling prices and wages already looming over Europe, she said.
At the same time, the IMF also sees growth slowing in emerging markets, led by a slowdown in China. America's relative strength is also translating into some pain abroad. While softer US data from December has pushed investors to bet the Federal Reserve will wait longer, perhaps until October, to raise interest rates, Lagarde said the expected monetary policy tightening could lead to more volatile swings in financial markets, particularly in poorer countries where banks and firms have borrowed more in dollars in recent years.
Falling prices for oil and other commodities are already putting "huge currency pressures" on Nigeria, Russia, and Venezuela, she said. "A shot in the arm (from lower oil prices) is good, but if the global economy is weak on its knees, it's not going to help," Lagarde said. Beyond being a boon for consumers, she said low oil prices are more a "golden opportunity" for countries to reduce energy subsidies and focus government spending more on alleviating poverty.