Lagarde sounds global growth warning

IMF chief raises alarm as US jobs data falls short and eurozone worries return

Christine Lagarde, the managing director of the International Monetary Fund, sounded the alarm bell over the state of the global economy yesterday, as the latest US job figures confirmed that even the world's largest economy is now struggling to grow.

In a speech in Tokyo, Ms Lagarde said: "In the last few months, the global outlook has been more worrying for Europe, the United States and large emerging markets. The IMF's forecasts are likely to be lower than our previous forecasts."

In April, the IMF said that global growth for 2012 would be 3.5 per cent, rising to 4.1 per cent in 2013. Since then, eurozone economies have deteriorated and the growth rate of the Chinese economy has fallen. There were further clear signs of slowdown in the US, where the economy produced fewer jobs in July than analysts had been expecting.

Non-farm payrolls rose by 80,000 over the month, below the consensus forecast of 90,000. The job creation was greater than May's figure of 77,000. But it is still well down on the 125,000 monthly new jobs needed to keep pace with population growth, and increases the likelihood the US Federal Reserve will introduce more stimulus into the American economy. "[This] confirms that the better payroll increases in the beginning of the year were another false start" Kathy Bostjancic of the Conference Board consultancy said. "This economy has no forward momentum and little help from monetary or fiscal policy".

Ms Lagarde welcomed measures agreed by leaders in Brussels last month to recapitalise eurozone banks and support weaker member states, but warned that "more needs to be done". Confidence in the debt markets, which rose in the wake of the Brussels summit, has now dissipated. Spanish borrowing yields rose back yesterday to the distress levels seen before the meeting. Spanish 10-year bond yields breached 7 per cent. Italian 10-year yields were also up, rising to 6.1 per cent. German two-year bond yields, regarded as the soundest sovereign debt in the eurozone, briefly turned negative as investors rushed for safety.

Markets were disappointed by Thursday's press conference by Mario Draghi, the European Central Bank president. Although the ECB cut interest rates to a record low of 0.75 per cent, Mr Draghi ruled out any extra help from the central bank for struggling Spain and Italy, reawakening fears these nations could be forced to request a bailout.

Comments from the German ECB board member Jörg Asmussen also dented hopes the ECB would provide more support. "There should be no illusion that the ECB can singlehandedly ensure a plain sailing for our economies and the markets, " he said.

In a further indication of heightened stress in financial markets, the Swiss National Bank revealed that its foreign currency reserves hit a record Sfr364.9bn ($376bn) in June from an upwardly revised Sfr305.9bn the previous month.

Foreign capital has been flowing into Switzerland as investors have sought to pull money out of the eurozone, pushing up the value of the Swiss franc.

The central bank has been buying up foreign exchange in large quantities to drive its own currency back down to tolerable levels.