Global recession unlikely, but trade war is a key risk, says Christine Lagarde

Bloomberg Washington/New York | Updated on September 25, 2019 Published on September 25, 2019

Incoming European Central Bank President Christine Lagarde said the global economy is likely to dodge an outright contraction, though trade tensions remain the top threat to the growth outlook.

“It is not in the baseline to have a recession,” Lagarde said in a Bloomberg Television interview on Tuesday. “That said, its mediocre growth, its at risk because of essentially one major threat, which is the trade war that we see developing or brewing and the uncertainty it generates for investors.”

The comments from the former International Monetary Fund leader come as she prepares to take the helm of the ECB at a precarious time for Europe and the global economy alike, as well as growing divisions inside the central bank.

The IMF has made a series of cuts to its global growth estimate for this year, reducing it to 3.2 per cent in July, which would be the weakest pace since the financial crisis. The fund will release updated economic projections next month.

In what could be seen as a warning to future colleagues unhappy with the ECB’s direction under President Mario Draghi, Lagarde said one word of advice she would take with her is teamwork. She said that at the IMF, officials could disagree, but move together once a decision was taken.

Combating dissent

The end of Draghi’s tenure has been plagued by unprecedented public dissent as policy makers from Germany, the Netherlands and Austria went on the record to say they disagreed with this month’s decision to resume quantitative easing. Draghi used an appearance at the European Parliament this week to say such disagreement could undermine the effectiveness of the stimulus.

Lagarde, a former French finance minister who had led the IMF since July 2011, said her lack of direct central banking experience would not be a handicap in taking charge at the ECB. She singled out ECB Chief Economist Philip Lane for particular praise.

“There’s such a strong and intelligent and powerful staff within the institution that I will get the right support, the right expertise,” Lagarde said. “There’s a fantastic member of the board, Philip Lane, who was himself former governor of the central bank of Ireland, and the Board members are talented in their own respects.

Lagarde said she did have some hesitation about taking the helm of the ECB in part because she had not held such a policy making role, but agreed after speaking with former central bank chiefs who backed her in the position.

“They all confirmed that, yes, under current circumstances and given the strengths of the institution and the situation we are in in Europe I had to say yes,” she said. “The point they made clearly to me, and which I believe as well, is that a lot of diplomatic skills, political sense, understanding of the perspectives of finance ministers and euro country leaders, all of that will matter probably more than a deeply acquired, ingrained market experience or monetary policy determination.”

Brexit impact

Lagarde will also confront strains stemming from the risk of a ‘no-deal’ UK exit from the European Union. “I’m at a loss as to what is going to happen, but clearly Brexit uncertainty is questioning many economic decisions on both sides of the channel,” she said.

Asked what leaders stayed in her mind most while leading the fund, Lagarde said she admired the head of the Catholic Church. “Pope Francis is not necessarily a financial actor, he’s not a market maker, but in terms of leadership, he commands huge respect and has obviously his spirituality, which I happen to share, but he has also a societal vision which I share in many respects,” she said.

Lagarde said she is disappointed by Aung San Suu Kyi after once admiring her enormously. Myanmar’s de facto leader, a former political prisoner awarded the 1991 Nobel Peace Prize, has seen her image suffer from defending the military against what the United Nations called ethnic cleansing of Rohingya Muslims. “I still don’t understand, given the background and strength of her position, why she ended up where she is,” Lagarde said.

Published on September 25, 2019
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