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Goldman Sachs executive optimistic on economy

MONTREAL - The managing director of investment banking giant Goldman Sachs says the global economic outlook and the prospect of reaching full employment in the United States by 2016 are encouraging despite the downside risks caused by events like the political crisis in Ukraine.

"Certainly it's better than it has been at least for the last four or five post-crisis years," E. Gerald Corrigan said Tuesday during a speech to the Montreal Council on Foreign Relations.

The former president of the Federal Reserve Bank of New York said there will always be "bumps" in the road and periodic disappointments such as the very weak U.S. first-quarter housing market data, but the overall trend is promising.

For example, the International Monetary Fund has forecast four per cent global economic growth in 2014, which would be the strongest since the 2008 crisis and bodes well for 2015, he said.

The world's emerging market and developing countries are expected to grow by 5.7 per cent, led by 8.2 per cent in China, while advanced economies are slated to remain "sluggish" with average growth of 2.2 per cent. Canada's GDP is forecast to grow by 2.4 per cent, between 1.1 per cent in Europe and three per cent in U.S.

Corrigan said achieving three per cent economic growth in the US$17-trillion U.S. economy is "quite encouraging" given that it has hovered around two per cent. He also said 6.1 per cent projected growth in sub-Saharan Africa is especially encouraging even though it has limited impact on global numbers.

"From the point of view of a human being, that kind of makes me feel good to think that we have gotten to the point where there are at least a ray of light here and there in those countries that have been through so many difficult things," he said.

U.S. forecasts by the Congressional Budget Office and top economists also suggest inflation in the world's largest economy will remain below two per cent through 2016 while unemployment of around 5.2 to 5.6 per cent, considered full employment, could be reached in two years.

Corrigan said the unemployment forecast is encouraging even though he warned that other factors such as long-term unemployment, part-time jobs and depressed labour force participation must be considered.

"Full employment as a reality provides some hope that other aspects of labour markets and labour market conditions will benefit from that and that job opportunities and perhaps even higher rates of compensation in some segments of the economy could follow and, at least at the margin, that might help take some of the pressure off some of the serious social and economic problems we in the United States and most of the world have been facing for quite a number of years."

Corrigan said the Federal Reserve and the world's big central banks face a crucial challenge of gradually winding down large infusions of money and also ensuring regulatory reforms to strengthen the financial stability of the U.S. banking and financial system.

He said it could easily take another three or four years before the effectiveness of these reforms can be properly evaluated.

While Fed monetary actions have been largely well received, Corrigan said he is among those who worry that the wind-down could be difficult and risky.

He points to abnormally low market interest rates triggering a large scale "reach for yield" by all classes of investors. For example, a projected rise in 10-year U.S. treasuries to 3.4 per cent in 2014 and 4.5 per cent in 2016 could imply a larger spread increase for lower credit quality debt instruments.

But Corrigan said he's convinced that Fed chair Janet Yellen is "highly sensitive" to these risks and is exploring new policies.

Follow @RossMarowits on Twitter.

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