When asked if US President Donald Trump's economic policies disruptive as far as the world economy is concerned or is it creating an upheaval, Gita Gopinath said the IMF has repeatedly highlighted the dampening impact of trade tensions on investment and growth.
IMF chief economist Gopinath said that in the near term, the main challenge is to deal with potential downside risks.
The announcement of a trade deal between the US and China that will de-escalate trade tensions, along with other developments like reduced likelihood of a no-deal Brexit, is likely to support a pick-up in the global economic activity in 2020, said IMF Chief Economist Gita Gopinath.
Global growth moderated to the lowest level since the global financial crisis this year, Gopinath said adding that this is an outcome of heightened trade and geopolitical tensions and country-specific factors in emerging markets.
In addition, advanced economies’ growth is being weighed down by weak productivity growth and aging demographics. These factors lead to sharp weakness in manufacturing and trade almost across the globe, she added.
The IMF’s October 2019 World Economic Outlook projected global growth at 3 per cent this year and 3.4 per cent in 2020 — 0.3 and 0.2 percentage points lower than our April forecast respectively, she noted.
“A recovery is expected in 2020 but that remains precarious. Since then, global growth has been lower-than-forecasted in some large emerging markets, notably India, and civil unrest is taking a toll on some countries,” Gopinath told PTI in an interview. Gopinath, 48, one of the top world economist, joined the IMF early this year. “It has been a wonderful learning experience and I am enjoying all aspects of the job,” she told PTI when asked about her experience at the world body.
“At the same time, we are seeing tentative signs of stabilisation, with the decline in manufacturing and trade appearing to have bottomed out. The announcement of a trade deal between the US and China reduced likelihood of a no-deal Brexit and the significant policy stimulus put in place in 2019 should support a pick-up in activity in 2020,” the top IMF official said in response to a question.
Gopinath said that in the near term, the main challenge is to deal with potential downside risks. “While the recently announced trade deal between the US and China is positive, the risk of further disruptive trade barriers, including in areas of technology and foreign investment, remains substantial. This could dent sentiment and slow investment further,” Gopinath said.
Investment growth is already at a multi-year low. Low investment today could imply lower potential growth going forward, she said. The second risks are geopolitical tensions and domestic political risks, including from intensifying social unrest in some countries, she added.
These, again, could still sap confidence and weaken investment. At the same time, financial vulnerabilities continue to build amid low-interest rates and policy support, and a sudden tightening of financial conditions could trigger disorderly adjustments, she said.
When asked if US President Donald Trump’s economic policies disruptive as far as the world economy is concerned or is it creating an upheaval, she said the IMF has repeatedly highlighted the dampening impact of trade tensions on investment and growth.
“When there is policy uncertainty, investors hesitate to act which can create a negative feedback loop that ultimately damages growth and job creation. In this context, we welcome the announcement of the “Phase One” trade deal. When implemented, this will help to de-escalate trade tensions and begin to reverse some of the tariffs imposed by both countries since 2018,” Gopinath said.
The position of IMF, she said, has been to encourage both sides to work cooperatively to ensure a full and comprehensive solution to their disagreements. The IMF believes that a negotiated solution will provide the certainty business needs to fuel investment and reassurance for consumer spending growth, she said.
“An agreement that leads to more open and fair trade will also lead to positive spillovers to other trade partners,” Gopinath said.
“Trade is an engine for growth. Trade relationships prosper and flourish when there is a certainty, a rules-based framework, and predictability. Unfortunately, trade tensions and new trade measures are no longer only a threat but are weighing down dynamism in the global economy,” Gopinath said.
“The impact of tariff hikes that have been announced is sizable. This has already been incorporated into the projections. The direct impact of the tariffs included in the baseline on the global economic activity as well as their potential repercussions for financial market sentiment, business confidence, and productivity. The impact on world GDP is (-) 0.8 per cent for 2020,” Gopinath said.
Challenges to stability and sustainable economic growth have evolved over time and the IMF has made an effort to address these new challenges, she said. For example, the IMF has increasingly taken into account climate change into its surveillance and capacity development work as it has become macro-critical. Vulnerable countries need to adapt to changing weather patterns and integrate climate/disaster risk into their macro-financial and fiscal frameworks, she noted.
“Another example is our analytical work on other macro-critical issues. In our flagship World Economic Outlook in April, we investigated the rise of corporate market power, which is not our traditional topic. We find that rising corporate market power has had a fairly limited negative economic impact so far,” Gopinath said.
“But, if left unchecked, it could take a bigger toll on growth and people’s incomes in the future. Policymakers need different policies to keep market competition strong,” said the top IMF official.