At the ongoing IMF/World Bank Annual Meetings, Gita Gopinath Economic Counsellor and the head of the IMF’s Research Department, Gian Maria Milesi‑Ferretti, Deputy Director of the IMF’s Research Department and Oya Celasun, the head of the division in charge of the World Economic Outlook in the Research Department had an interactive session with the media here are some excerpts
Introductory remarks by Ms. Gopinath
The global economy, is in a synchronised slowdown. And we are, once again, downgrading growth for 2019 to 3 per cent, its slowest pace since the global financial crisis. Growth continues to be weakened by rising trade barriers and growing geopolitical tensions. We estimate that the U.S.‑China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020. Growth is also being weighed down by country‑specific factors in several emerging market and developing economies and also by structural forces, such as low productivity growth and ageing demographics in advanced economies. Now, we are projecting a modest recovery, to 3.4 percent in 2020, another downward revision of 0.2 percent from our April projections. However, unlike the synchronised slowdown, this recovery is not broad base and remains precarious.
The weakness in growth is driven by a sharp deterioration in manufacturing and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods. In addition, the automobile industry is contracting, owing also to a variety of factors, such as disruptions from new emissions standards in the euro area and in China that have had durable effects. Overall, trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012. In contrast to weak manufacturing and global trade, the services sector continues to hold up, almost across the globe. Now, this has kept labor markets buoyant and wage growth and consumption spending healthy in advanced economies. There are, however, some initial signs of softening in the services sector in the United States and the euro area.
What are your specific findings on Nigeria. Last week you released the Article IV on Nigeria, where you said there was a need for a package of measures to reform the economy. You highlighted the fact that the government is making steps to increase VAT. You noted the fact that the prior reform is ongoing. What are those measures of reforms that you think the government should introduce? You also noted the fact that, in the banking sector prudential issues are improving. I want you to highlight more about that.
Ms. Gopinath: In the case of Nigeria, a lot depends upon oil prices and oil prospects. And there has been some weakness coming from that. The important thing to keep in mind about Nigeria is that per capita growth remains weak. And this is why we call for structural reforms. I am going to ask Oya to add more to that.
Ms. Celasun: Thank you. That is right. There was a slight upward revision for growth this year that came mostly from strong agricultural production early in the year. But growth is not high enough to lift or to turn per capita growth into positive territory, as Gita said. For some time now, we have been emphasising the need for a comprehensive package to lift growth. One element of that will have to be stronger non‑oil revenue mobilisation. Nigeria has one of the lowest rates of revenue in the world, which was hit hard by the drop in oil prices. That is essential for the country to be able to spend more on priorities, such as social safety net and infrastructure. Other areas are the need for tight monetary policy and a simpler unified exchange rate system. Foreign exchange restrictions have also been distorting public and private sector decisions and holding back investment.
More generally, as you mentioned, strengthening the banking system’s resilience and continued stronger structural reforms, especially in infrastructure and the power sector and broader governance, are critical.
In your report have you assessed the impact of the implementation of the continent wide free trade agreement for Africa. And how will this impact growth in Africa?
Ms. Celasun: So this was a very favourable development in a world where we see trade barriers rising. African countries do not trade much with each other. So greater facilitation of trade and lower tariff barriers would help greatly and create new opportunities for growth. It is a medium to longer term issue, it creates an upside potential and we would expect this to have a positive impact over the medium term. Much needed given the demographics in Africa, many jobs will have to be created given a young population.
I would like to follow up on your comment after the U.S.‑China agreement in principle. You welcomed the good step. Does it change your view on the global growth and outlook?
Ms. Gopinath We look forward to hearing the details of the trade agreement, when they play out. Right now, in our assessment, if you look at all the tariffs that have been put in place, and if you include the ones that were supposed to come into effect today, October 15, and the one in December, that would cumulatively reduce the level of global GDP by 0.8 percent by end 2020. Now, if the October tariffs were never to happen, that would bring down the estimated negative impact from 0.8 to 0.7. And if the December tariffs were, again, never to happen, you would come closer to 0.6 percent being the negative impact. We should emphasise that much of this negative impact comes from confidence effects, which is why it is very important that these changes or the trade truce has a feature of being permanent and durable.
What fallout would you expect from a no‑deal Brexit? What market fallout would you expect? And what preparations should the U.K. and the eurozone be taking for that potential outcome?
Ms. Gopinath: Our baseline assumes that there will be an agreement and that the transition will be smooth. In the absence of that, if there were to be no agreement and a no‑deal Brexit, then that would reduce the level of GDP in the U.K. by about 3 percent over the long run and between 3 to 5 percent, depending upon how disruptive the exit is, over a two‑year period. So those are the numbers that we have. It is about 3 to 5 percent over two years, if there was ‑‑ depending upon how disruptive the Brexit is. And in the long run, we are talking about 3 percent.
Can you expand a little bit on your assessment, that the recovery next year will be precarious. Exactly what would be driving that? And at what point do you consider growth to sort of turn recessionary? Do we have to see negative global growth for us to use the “R” word? Or would that be something that would happen both ‑‑ just in the U.S. and Europe and other places?
Ms. Gopinath: We describe the recovery as precarious because about half of it comes from recoveries in what we called stressed emerging markets. These include Argentina, Iran, and Turkey. And this could be recoveries, or it could be shallower recessions. And another half comes from recoveries in some emerging markets, like Brazil and India, where growth in 2019 was particularly weak, relative to their recent growth numbers. I think the way we want to think about it, from the perspective of global growth, is that if global growth were to go below 2.5 per cent, that is usually a scenario where there are several countries in a recession; but that is, however, not in our baseline. We do not project a recession in our baseline over the next 12 months.
Between the April WEO and the July update, there is a slight increase in the prospects of the Brazilian economy. My question is, is this a sign of an increased pace? Or is the Brazilian economy just barely walking?
Ms. Gopinath: So, in the case of Brazil, they have had some recovery, some improvement. But what remains the case is that there is policy uncertainty that remains. Now, the pension reform is ‑‑ the progress being made on that front is very good. But given that debt levels are still quite high, more needs to be done. Also, in the case of Brazil, there have been other very specific factors, like there was the mining disaster that negatively impacted growth. We expect things to improve, if this policy uncertainty continues to be reduced and more reforms get undertaken.
Ms. Celasun: So, Brazil has elevated levels of pent‑up demand. It has barely recovered from the ’15, ’16 severe recession. It has had growth of about 1 percent for two years, ’17, ’18; now, only 0.9. We expect, as Gita mentioned, as the fiscal reforms, structural reforms progress, confidence to spread into the real economy and that pent‑up demand to be realised.
We expect the growth outturn was favourable in that regard. We saw an uptick in investment and, in particular, growth in the construction sector, which has been weak for some time.
Mr. Milesi-Ferretti: Maybe I can add just one word. Brazil clearly benefits from the fact that monetary policy has been able to ease. Interest rates are at historical lows for Brazil. And global financial conditions have been quite accommodative. So spreads are low. So those elements would clearly be [helpful] for a recovery.
Gita, you talk about, if the tariffs for today and for December are not going to happen, that would kind of save global GDP by 0.2 percent. So do you have an estimation of, if all the tariffs that have been added between the U.S. and China in the trade tensions are removed, what would that mean for global GDP? Also, just more generally, what do you think a trade deal between the two countries would bring for global growth?
Ms. Gopinath: The answer to your question, of course, depends on the specifics of a trade deal. But based on what we have right now, if all the tariffs were to come off, the ones that were put in 2018 and 2019, including those announced, we would be talking about a boost to the level of global GDP by 0.8 percent by the end of 2020.
You mentioned climate change. How big of an impact will climate change have on the African economy? And how much do you support the green economy being championed by the African Development Bank?
Ms. Gopinath: Climate risks are an important concern, and it is not a concern just in the future, but it is a concern today and now. It certainly has affected some countries more than others, in particular, low‑income countries are more subject to these disasters. The particular consequences of that are country‑specific, and we would have to look at the details. But it is very important for countries to undertake both mitigation policies and we will soon have the release of the Fiscal Monitor, where there will be a very detailed discussion of carbon pricing and how that can help. But then also adaptation because, in the meantime, countries have to put infrastructure policies into place to adapt to it. This is a challenge because, of course, it has huge financing needs, but this is something countries have to address.
You say that monetary easing has been appropriate in the industrialised countries, but that very low inflation constrains future monetary policy. Are there negative impacts globally from very low or negative interest rates?
Ms. Gopinath: So, indeed, in our estimates, global growth would have been a half percent lower in 2019 and 2020 in the absence of monetary easing that was almost simultaneous around the world; but we absolutely flag some of the risks from having interest rates be very low for long. And a major one is, of course, because of a buildup of fiscal risks, very high levels of corporate debt. A search for yield in a world where interest rates are negative in many countries are leading to a buildup in financial risks. The Global Financial Stability Report will be going into that in much greater detail, but that is a very important factor that we keep in mind; that during the time when monetary policy remains in this highly accommodative stance, it is very important for prudential policies to be implemented and made sure that they are effective.
Trade volume growth has dropped dramatically in the first half, to 1 per cent, and is projected to rebound to 3.2 per cent. So what is the main driver of this pickup?
Ms. Gopinath: There are several factors behind it. On the one hand, there is the trade policy uncertainty and trade barriers, but there is also a lot going on in other areas, like in the auto sector.
Mr. MILESI‑FERRETTI: Part of the explanation for the rebound is, of course, that there is a bit of a pickup in global activity projected for next year. And that is a recovery in investment. That is a recovery in trade. You also have to think, we have what we call a base effect. Fundamentally, trade has been very weak in 2019. So just some normalisation in the later part of 2019 and early 2020 will give you a notably positive growth rate. In terms of specifics, clearly, the car sector has been weighing heavily on manufacturing activity and growth. And some stabilisation, improvement of the situation in the car sector would lead to a recovery in trade.
The same is true for semi‑conductors. The so‑called tech cycle was one contributor to the big weakening in global trade. And we have seen it in the numbers for countries in East Asia, where exports have suffered more than elsewhere. And, again, there, we see a little bit of a pickup.
So all these factors together lead us to expect some recovery in global trade. It is not a great recovery. If you look at the overall growth number, it is still relatively modest, but it is better than 2019.
You mentioned several factors in the Asian economic forecast. One is the spillover from the U.S. trade war. The other is the slowdown of China’s growth.
I wanted to ask, how concerned are you for the situation ongoing in Hong Kong for the global economic growth and their financial stability?
Ms. GOPINATH: In Hong Kong, we have actually had a significant revision down for growth in Hong Kong in 2019. We expect some recovery in 2020. In 2019, it is a combination of the trade tensions, the slowdown in trade, but also the slowing down, the structural slowdown in China. And it is also an outcome of the social unrest. We have seen declines in tourism, for instance, and in retail sales. But we expect there to be a recovery from Hong Kong going forward. In terms of the spillovers to the global growth, they remain quite small at this point.
In the World Economic Outlook, page 38, you noted that there is a sharp decline in foreign direct investment among major economies last year. And this is especially the case for FDI between China and the United States. So, my question is, how do you evaluate the FDI decline’s influence on the world economy? And what is the way to reverse it?
Ms. Gopinath: We have this very nice box in the WEO, which is about what is happening with FDI. And you see this decline in FDI. An important factor for that is, basically, the changes in tax rules, so including the tax policy changes in the US. I will have Gian Maria go into it in more detail.
Mr. MILESI‑FERRETTI: Yes. So at the global level, really, the main reason why we see a very large decline in FDI is fundamentally a restructuring of the internal financial activities of multinational corporations. There is repatriation of cash by U.S. multinational corporations, in light of U.S. tax changes, which have virtually no impact on economic activity. These may be funds invested in U.S. dollar securities from overseas and, with the tax change, they are now invested in the very same U.S. dollar securities, but from the U.S., so absolutely no change.
But you hint a different set of issues, which is definitely of more relevance for global financial integration, which is what could be the implications of increased fragmentations or trade tensions. One aspect of that could be a decline in foreign direct investment among major regions when we are talking about greenfield investment, about mergers and acquisitions, and so on. It is clearly way too early to be able to assess how much is actually happening. These are typically data that are released with a longer lag. And because they mix together financial operations with real investment, it is a bit difficult to tell them apart. But, of course, the potential for increased fragmentation to reduce the efficiency of production, to reduce productivity growth, is there. And it is one of the major concerns we have in regard to an increase in trade and investment barriers.
By Omoh Gabriel