IMF’s Lagarde Brushes Off Excessive Negativity On Global Economy

Comments by the Managing Director of the International Monetary Fund (IMF) Christine Lagarde revived investors’ hopes for an end to the current global economic slowdown sooner than later, by stating that China’s economic state is not so dramatically bad.

Ms. Lagarde said that the second largest economy’s recovery is not progressing with the same acceleration as in the past, but she reckons that 2016 could be the year where its economy will pick up where it left off a few months ago. According to her, there are enormous financial transitions currently taking place that have dented Chinas double digit growth figures achieved over the past few decades. The Chinese economy achieved an annual growth of only 7.4% during 2014, but both the local authorities’ and IMF’s outlook for this year are for an even slower growth of 7% and 6.8% respectively.

According to the IMF’s head, there are some noteworthy changes taking place on a global scale that cause new dynamics. One of them is the drop of commodities’ prices that make it difficult for emerging markets to achieve their growth targets. Moreover, China is on a massive effort to economically shift from an export-led nation to a consumer-led one and there is an apparent mega-shift of the economy’s structure from being heavily controlled towards being market determined, while the IMF is providing as much support as possible to offset any transitional vulnerabilities that the country is facing. She also acknowledges China’s attempts to better manage the yuan’s exchange rate towards other major currencies and also its growing volume of feedback to the rest of the world about how the economy is performing.

The Federal Reserve also provided its rather encouraging economic outlook through its September meeting minutes that were published on Thursday, as the report stated that the U.S. economy could manage following an interest rate increase. The minutes revealed that policymakers were not worried that the global economic slowdown would significantly change the U.S. economic outlook, but on the other hand agreed that it was prudent to refrain from raising interest rates. The Federal Open Market Committee (FOMC) members wanted to collect more information on the economy’s performance and be more assured that it has not weakened.

While there are attempts by the FOMC to communicate to the markets that the economic situation is not all doom and gloom, the policymakers themselves are not feeling confident enough to make the giant step of increasing interest rates even by a small margin. This situation leaves investors in the same state they have been for the past few months, undecided on whether to expect a rate rise before the end of the year.

The EUR/USD jumped by 0.6% within the next hour of the FOMC minutes release on Thursday, and increased by 0.7% during Friday’s trading session to end the week at 1.13575.

Additional data expected by the Fed in order to make its mind up on whether to proceed with an interest rate increase is expected with the upcoming release of the U.S. Consumer Price Index (CPI) for September. The report will shed more light on the U.S. inflationary performance – could it be the drive for upcoming U.S. dollar demand?