U.S. shutdown could seriously damage the entire global economy: IMF’s Lagarde

WASHINGTON—The U.S. risks “seriously damaging” the global economy if lawmakers fail to raise the government’s borrowing limit in the coming weeks, the head of the International Monetary Fund, Christine Lagarde, warned Thursday.

With a weak global recovery facing headwinds from the euro zone, bouts of market volatility and slowing output in emerging markets, “the ongoing political uncertainty over the budget and the debt ceiling does not help,” Ms. Lagarde said in prepared remarks for a speech at George Washington University.

“The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the U.S. economy, but the entire global economy,” she said.

The U.S. political impasse only further hobbles the transition of the global economy from the worst global economic recession since the 1930s to a full recovery, the IMF managing director said in a speech ahead of a major meeting of finance ministers and central bankers next week.

She said that while the shift from recession to recovery usually takes a year or two, “The transitions I am talking about today are different. They will likely play out over the rest of the decade, if not longer.”

To ensure that transition, greater action and collaboration is required by governments around the globe, Ms. Lagarde said.

She said the euro zone, which should expand by 1% next year after more than a year of recession, needs to move faster in bolstering the currency union with a unified budget and banking union. The U.S. must tame its hazardous debt and deficit while the Federal Reserve carefully manages an appropriately timed exit from its easy-money policies.