Is it possible that the slowdown of China’s expansion is good for the rest of the world? That might not make sense if you just looked at the worst U.S. stock market annual start ever. Christine Lagarde, managing director for the International Monetary Fund (IMF), might not entirely agree with the market-based assessment.

Lagarde spoke at a farewell symposium for Christian Noyer, Banque de France, in Paris on Tuesday, January 12, 2016. She had many pointed discussions around the farewell itself, but what matters are the views on the rest of the world.

The role of emerging and developing countries to the global economy were first pointed to — they are home to 85% of the world’s population and account for almost 60% of global gross domestic product. Together they were shown to have contributed more than 80% of global growth since the crisis.

China has emerged as an economic superpower and has become a member of the SDR currency basket. The problem today is that emerging and developing nations are now confronted with a new reality of slower growth with cyclical and structural forces undermining traditional growth paradigms. Lagarde warned:

On current forecasts, the emerging world will converge to advanced economy income levels at less than two-thirds the pace we had predicted just a decade ago. This is cause for concern.

China itself has embarked on an ambitious multi-year rebalancing of its economy, toward slower and more sustainable growth. This is a positive endeavor that, in the long run, will benefit everybody. In the short run, however, this transformation generates spillover effects – through trade and lower demand for commodities, and through financial channels as well.

Lagarde also mentioned oil and metals prices being down by about two-thirds from their most recent peak. She believes that supply and demand factors suggest oil and metals prices now are likely to stay low for a sustained period. Lagarde warned:

Many commodity exporting emerging and developing economies are under severe stress, and some currencies have already experienced very large depreciations. We have all seen it in Latin America, and I have seen it first-hand last week in Nigeria and Cameroon – two countries that are hit hard by lower oil prices and domestic fragilities… More generally, in advanced economies, monetary policy can no longer be the only game in town. It needs the support of fiscal policy and structural reforms to support aggregate demand and raise growth potential. And emerging economies need to redirect their economies toward new sources of growth.

Then there is the view of current and future central banks and their monetary policy. Lagarde sees weak growth and low inflation in the euro area and Japan being a call for continued monetary accommodation. On the other hand, firming activity laid the ground for monetary normalization by the Federal Reserve in the United States. Her view is that this monetary policy liftoff has gone smoothly, and she believes that it was clearly communicated and priced in by the financial markets. There could be further dollar appreciation against the euro and the yen.

Lagarde went on to show that the IMF’s own estimates indicate that a slowdown of 1% in the emerging world would lower growth in advanced countries by at least about 0.2 percentage points. She also called for the size of the safety net from central banks and monetary policies to be reconsidered as it has become more difficult to prevent liquidity shocks from doing serious harm to an economy.

Lagarde concluded:

According to some estimates, a successful convergence process in the emerging world could triple the size of the global economy in the next 25 or 30 years. The global community cannot afford the costs of stalled convergence. The 85 percent matter!

Is there a silver lining in China and emerging markets facing slower growth and pressure? Perhaps, but with some serious caveats.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.