Mr. Anspach – Good morning, everyone. Welcome to this press conference on the World Economic Outlook. I am delighted that you could join us today. Welcome also to our colleagues who are following us online. Let me introduce to you the speakers for today’s press conference. We have to my right, Gita Gopinath; she is the Economic Counsellor and the head of the IMF’s Research Department. To her right we have Gian Maria Milesi-Ferretti; he is the Deputy Director of the IMF’s Research Department. To his right we have Oya Celasun; she is the head of the division in charge of the World Economic Outlook in the Research Department. Gita will have some introductory remarks, and then we will be happy to take your questions. With that, I am handing the floor to Gita.
Gita Gopinath (born 8 December 1971) is an Indian-American economist. She is the John Zwaanstra Professor of International Studies and Economics at Harvard University. She is also a co-director of the International Finance and Macroeconomics program at the National Bureau of Economic Research and has worked as the Economic Adviser to the Chief Minister of Kerala.
Ms. Gopinath – Good morning, and welcome, everyone. A year ago, economic activity was accelerating in almost all regions of the world. One year later, much has changed. The escalation of US-China trade tensions, needed credit tightening in China, macroeconomic stress in Argentina and Turkey, disruptions in the auto sector in Germany, and financial tightening, alongside the normalization of monetary policy in the larger advanced economies, have all contributed to a significantly weakened global expansion, especially in the second half of 2018.
With this weakness expected to persist into the first half of 2019, our new World Economic Outlook projects a slowdown in growth in 2019 for 70 percent of the global economy. Global growth softened to 3.6 percent in 2018 and is projected to further slow to 3.3 percent in 2019.
The downward revision in growth of 0.2 percentage points for 2019 is also broad-based. It reflects negative revisions for several major economies, including the euro area, Latin America, the United States, the United Kingdom, Canada, and Australia.
After this weak start, growth is projected to pick up in the second half of 2019. This pickup is supported by significant monetary policy accommodation by major economies, made possible by the lack of inflation pressures despite growing at near potential. The US Federal Reserve, the European Central Bank, the Bank of England have all shifted to a more accommodative policy stance. China has ramped up its fiscal and monetary stimulus in response to the trade tariffs. Furthermore, the outlook for US-China trade tensions has improved as the prospect of a trade agreement takes shape.
Now, these responses have helped reverse the tightening of financial conditions to varying degrees across countries. Emerging markets have experienced some resumption in portfolio flows, a decline in their sovereign borrowing costs, and a strengthening of their currencies relative to the US dollar. While the improvement in financial markets has been rapid, those in the real economy have been slow to materialize. Measures of industrial production and investment remain weak for now in many major economies, and global trade has yet to recover. With improved prospects for the second half of 2019, global growth in 2020 is projected to return to 3.6 percent. This recovery is precarious and predicated on a rebound in emerging markets and developing economies where growth is projected to increase from 4.4 percent in 2019 to 4.8 percent in 2020. Specifically, it relies on an expected rebound in growth in Argentina and Turkey and a few other stressed economies and is therefore subject to considerable uncertainty. Growth in advanced economies will slow slightly in 2020 despite the projected partial recovery in the euro area, as the impact of US fiscal stimulus fades and growth tends towards modest potential for the group given aging trends and low productivity growth.
Beyond 2020, global growth is expected to stabilize at around 3.5 percent, bolstered mainly by growth in China and India and their increasing weight in the world income. Growth in emerging market and developing economies will stabilize at 5 percent, though with considerable variants as emerging Asia continues to grow faster than other regions. A similar pattern holds for low-income countries with some, particularly commodity importers, growing rapidly but others falling behind the advanced world in per capita terms.
So while the global economy continues to grow at a reasonable rate and a global recession is not in the baseline projections, there are many downside risks. Tensions in trade policy could flare up again and play out in other areas, such as the auto sector, with large disruptions to global supply chains. Growth in systemic countries, areas, like the euro area and China, could surprise to the downside, and the risks surrounding Brexit remain heightened.
A deterioration in market sentiment could rapidly tighten financial conditions in an environment of large private and public sector debt in many countries, including sovereign bank doom loop risks. Given these risks, it is imperative that costly policy mistakes are avoided. Policymakers need to work cooperatively to help ensure that policy uncertainty does not further weaken investment.
Fiscal policy will need to manage tradeoffs between supporting demand, protecting social spending, and ensuring that public debt remains on a sustainable path with the optimal mix depending on country-specific circumstances.
Financial sector policies must address vulnerabilities proactively by deploying macro-prudential tools such as countercyclical capital buffers, a task made more urgent by the possibility that interest rates will remain low for longer. Monetary policy should remain data dependent, be well communicated, and ensure that inflation expectations remain anchored.
Across all economies, the imperative is to take actions that boost potential output, improve inclusiveness, and strengthen resilience. There is a need for greater multilateral cooperation to resolve trade conflicts, to address climate change and risks from cybersecurity, and to improve the effectiveness of international taxation.
This is a delicate moment for the global economy. If the downside risks do not materialize and the policy support put in place is effective, global growth should rebound. If, however, any of the major risks materialize, then expected recoveries in stressed economies, in high-debt economies, in export-dependent economies, may be derailed. In that case, policymakers will need to adjust. Depending on circumstances, this may require synchronized, though country-specific, fiscal stimulus across economies, complemented by accommodative monetary policy. Lastly, adequate resources for multilateral institutions remain essential to retain an effective global safety net, which would help stabilize the global economy.
Mr. Anspach – Thank you very much, Gita. We will try to get to as many questions as possible and cover as many countries and regions, so I will start in the second row.
Question – As you said, the recovery you are predicting for the global economy is precarious, and there are many risks around. How much ammunition do you think there is left in monetary policy to address the risks if they do come to pass? And how big should any coordinated fiscal stimulus be, which you have mentioned right at the end, again, if it is needed?
Ms. Gopinath – Our baseline forecasts are for global growth to recover in 2020, but, indeed, this is precarious, and there are serious downside risks. Monetary policy space varies across countries in the world. For many advanced economies it remains limited, and we would expect to see unconventional monetary policy tools being used, for instance, in the euro area. Now, on the plus side, inflation pressures stay low, so there is a possibility for monetary policy to be even more accommodative. On the fiscal side, again this is going to be very country-specific because it depends upon the fiscal space that countries have. If the downturn turns out to be much more severe than what is in our baseline projection, we would expect a synchronization in fiscal spending because that would be more effective given that it would be better in terms of boosting confidence, and also it would mitigate some of the negative spillovers from imports. But that said, the actual magnitude of that is going to depend on the circumstances and going to depend on the country.
Question – Because of this trade war, there was a concern that a currency war could take place, but that did not really happen. Of course, emerging market currencies witnessed some pressure. The Indian rupee depreciated a lot. Do you think in this globally connected world, this currency war situation is a real possibility, or it is losing relevance?
Ms. Gopinath – In the early part of 2018, we did see in response to a combination of factors, not just trade tensions but also the increase in oil prices, that several emerging markets faced pressure on their currency. The volatility of the exchange rates will remain in the event of further downside risks being realized. The question of what would be the impact of exchange rates on trade, I think what we have to keep in mind is that exchange rate movements are driven a lot by monetary policy in different countries and driven a lot by financial risks, and so it is very hard to pin down the direction of exchange rates for any of these regions going forward. What we have seen is that with the more accommodative stance in monetary policy in many of the major [central] banks, we have certainly seen emerging market currencies strengthening relative to the US dollar somewhat partially; and as long as things stay relatively stable, that trend might persist.
Question – What is your view about Italy, high debt and very, very low growth; and do you think that Italy is a risk factor for the international economy? And the Italian government would be introduced a flat tax in Italian economy. What is your opinion about this? Thank you.
Ms. Gopinath – The second half of 2018 was particularly weak for Italy. Italy was in a recession, and that weakness carries over into 2019. The concerns that remain have to do with the high levels of debt, with the high levels of sovereign borrowing costs, banks’ costs of borrowing; and all of this is reflected in weaker investment in Italy. So these are risks to keep in mind, especially given that growth in Italy is weak, not just in real terms but in nominal terms, which means that we are projecting debt as a ratio of GDP to increase in Italy going forward. To your question about the flat tax, we would have to wait to see what the details are about the particular nature of that tax before we can comment on it.
to be continued