30 December, AtoZForex.com, London – The IMF warns of disappointing 2016, following the worrisome outlook of Morgan Stanley that the world will be 5 percent poorer than it was at the start of the year, projecting global GDP to shrink 5%. In a recent announcement the International Monetary Fund (IMF) chief Christine Lagarde warned that the world economic growth will be “disappointing” in 2016, pointing to possible effects of a slowdown in the EM that would have an impact on the rest of the world.
EM financial risks are increasing
The prospect of rising US interest rates and an economic slowdown in China are adding to the uncertainty and a higher economic vulnerability worldwide. In addition, growth in global trade has decreased significantly and a decline in commodity prices causes drag on the economies.
“In many countries the financial sector still has weaknesses and in emerging markets the financial risks are increasing. All of that means global growth will be disappointing and uneven in 2016,” Lagarde said.
Environment of hinger US interest rates
As the IMF warns of disappointing 2016, the begging of normalisation of US policy and China’s transition towards consumption led growth were “necessary and healthy” economic changes but needed to be implemented as efficiently as possible. The Federal Reserve (Fed) hiked increased rates for the first time in nearly a decade earlier this month and made clear that was a start to a “gradual” tightening cycle.
However, there are “potential spillover effects”, with the prospect of rising interest rates, Lagarde added. The increase has already contributed to higher costs for some borrowers, including in emerging and developing markets.
Consider reading: Currency wars to drive 2016 FX
While countries other than developed economies were better prepared for higher interest rates than they had been in the past, she was still concerned about their ability to cope with it.
“Most highly developed economies except the USA and possibly Britain will continue to need loose monetary policy but all countries in this category should comprehensively factor spillover effects into their decision-making,” Lagarde said.
Lastly, she warned that rising US rates and a stronger USD could lead to firms defaulting on their payments, thus potently infecting banks and states.
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