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Global recovery 'taking root,' says IMF chief

A cyclical pickup in investment and trade in the advanced economies, especially in Europe and Japan, has led to better-than-expected growth, prompting IMF Managing Director Christine Lagarde to say that "the long-awaited global recovery is taking root." The IMF director spoke Oct. 5 at Harvard University.

In July, the fund projected 3.5% global growth for 2017 and 3.6% for 2018. Lagarde said IMF's updated forecasts in its World Economic Outlook, to be released in the week of Oct. 9, will likely be "more optimistic."

Measured by GDP, Lagarde said "nearly 75% of the world is experiencing an upswing, the broadest-based acceleration since the start of the decade. This means more jobs and improving standards of living in many places all over the world."

While US economy forecasts have been "fluid", growth for 2017 and 2018 will be "above trend." Growth levels in Asia's emerging markets led by China and India have remained strong, she said.

But high levels of debt in many countries, rapid credit expansion in China, and excessive risk-taking in financial markets are threatening growth. Noneconomic challenges, from weather-related disasters to heightened geopolitical tensions on the Korean peninsula, are also potential risks.

"Yes, we are seeing some sun break through — but it is not a clear sky," Lagarde said.

She said this moment is an "opportunity to make changes that will enable prosperity over the long term."

IMF research has shown that reforms are more potent and easier to implement when economies are healthier. Monetary policy should continue to support the recovery, but easy financial conditions can create complacency in markets and a buildup in vulnerabilities, including private sector debt, said the IMF director.

"Central banks should communicate their plans clearly and execute monetary policy normalization smoothly, as appropriate in each country," Lagarde said. "This will help avoid market turbulence and a sudden tightening of financial conditions that could derail the recovery."

She said countries with healthy public finances, such as Germany and South Korea, should invest more in their own economies. In countries where public debt is too high, governments should use the opportunity of growth to reduce debt relative to GDP.