Gita Gopinath, First Deputy Managing Director, International Monetary Fund
In conversation with: Clay Chandler, Fortune
In conversation with: Clay Chandler, Fortune
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00:00Gita, good morning and thank you so much for joining us.
00:03We're really thrilled to have you with us.
00:07Let's start just kind of with an outlook
00:08of where the world is right now in the global economy.
00:12Are we in a good place, a bad place,
00:13and kind of maybe start with kind of
00:16global inflation outlook.
00:18What's your sense of where we are?
00:19Yeah, so Clay, firstly, thank you.
00:20Thank you for having me.
00:23The outlook, I mean, best way for us to describe it
00:25is that we've seen a global economy
00:27that has been resilient.
00:30In a way that we haven't seen before.
00:32So let me explain.
00:34We've had a global economy the last four years
00:36that's been hit by a pandemic, an energy crisis,
00:40inflation that shot up and central banks everywhere
00:43raised interest rates by a lot.
00:46Usually in the past, you have these kinds of knocks.
00:48You would see a more prolonged global recession.
00:52You would see some sort of an emerging market
00:55sovereign debt crisis.
00:57And we did not see that.
00:58So I think that's the first thing we should recognize
01:00is that this is a world that has been resilient.
01:03And now some parts more than others,
01:06the US really does stand out as doing extremely well.
01:09Europe less so, China still with weak demand,
01:12but still again, resilience.
01:14And resilience doesn't mean that everything is great.
01:16Resilience is coming along with
01:18kind of a weak growth outlook.
01:20So growth is expected to be around 3.2% this year and next.
01:25Settles around 3% five years out.
01:28That's not a bad number,
01:29but if you compare that to the historical averages
01:32over the last two decades, it used to be around 3.8%.
01:35So it's coming down.
01:36So growth is coming down, but you have resilience.
01:39And in terms of inflation, since you asked about inflation,
01:42again, inflation went up almost uniformly
01:46all parts of the world has come down by a lot.
01:49And our forecast is for inflation to return
01:52to central bank targets by next year in pretty much,
01:57I mean, all the major economies of the world.
01:58So we see that coming down.
02:00And like I said, that has all happened
02:02without there being a big hit to economic activity,
02:06to labor markets are still strong in many parts of the world.
02:09This is not how it was in the 1970s
02:13when we had the previous episode of very high inflation
02:16and inflation came down.
02:17Those were marked with deep recessions,
02:20big increases in unemployment rates.
02:22That's not been the case this time.
02:24That's remarkable.
02:25So what I hear you saying is that,
02:27relative to coming out of crises historically,
02:31that we're actually doing pretty well.
02:33And yet that seems not necessarily to be reflected
02:36at least in the democratic countries
02:38and some of the political outcomes that we've seen,
02:40which is interesting.
02:43Let's talk about debt a little bit
02:45because that's another thing that the fund covers very,
02:48follows very closely.
02:51You've, I think the fund has noted
02:54the global public debt levels will exceed 100 trillion,
02:57about 93% of global GDP by the end of this year.
03:01Is that something we should worry about
03:02or is that still something that's an okay ratio?
03:05We just, to start with the point you previously made
03:08about why is it that people haven't felt
03:10the resilience and strength.
03:12There are two reasons.
03:13I'm making a comparison to how bad things could have been.
03:16Right, I see.
03:17And in that sense, things were more resilient.
03:20But then the second fact is inflation did go up,
03:23which means prices went up by a lot.
03:25Inflation rates came down,
03:27which means prices are continuing to go up,
03:29but at a slower pace.
03:31So if you look over a four year period,
03:35you have seen households who looked at
03:37how much they're paying for their goods
03:40that they bought in the past and said,
03:41well, everything is a lot more expensive.
03:43So it's not surprising,
03:46the way people feel versus the way I'm describing
03:48how the global economy is.
03:50In terms of debt, yes.
03:51I think this is,
03:55at the International Monetary Fund,
03:56we pay very close attention to debt buildup
03:59in different parts of the world.
04:00This year, we expect by the end of this year,
04:02debt around the world would be about $100 trillion.
04:06Those are very large numbers.
04:08As a share of a global GDP,
04:10we're getting close to post-World War II peaks.
04:15This is a high debt world.
04:16Now, some of this was, of course,
04:18a reflection of the buildup that happened
04:20during the pandemic
04:21and governments trying to support their populations.
04:24That buildup did come about.
04:25But interest rates have also gone up.
04:27So what we are seeing are two sets of issues.
04:30So again, you could ask,
04:31does this mean that we're heading for now a debt crisis?
04:33Is there going to be a debt crisis?
04:35No, we don't see that.
04:37So even if you look at the group of low-income countries,
04:41it's not as if we're seeing,
04:43our projection is for many of these countries
04:45to see themselves in default.
04:47That's not where we are.
04:48There are some, but not the large number.
04:51The bigger concern is more liquidity.
04:53So if you take the numbers
04:56for low-income countries this year and next year,
04:59they have about $40 billion that they have to refinance.
05:04Now, if the market provides that easily
05:06at fairly affordable rates, that will be manageable.
05:09If it doesn't, then in that case,
05:11you could see much more debt distress.
05:14Interesting.
05:15So again, it's a pretty positive outlook though,
05:17a message in terms of where we are
05:20relative to where we might've been.
05:22So I find that quite encouraging.
05:23I want to ask you about something
05:25you may not be able to completely answer,
05:28but there's been a lot of talk here yesterday
05:30about the prospect that the largest economy in the world
05:34is about to sort of embark on this program
05:36that involves a lot of tariffs,
05:39whether they're tariffs on China in particular,
05:41whether it's tariffs across the board
05:43on all of its trading partners.
05:45And I know that the IMF has done a lot of research
05:47on the impact of tariffs previously
05:50and has warned that tariffs are bad for everybody
05:54and relative to open trade flows, that's much, much better.
06:00To what extent do you see sort of the IMF's role
06:04in warning people about the implications
06:07of another round of tariffs?
06:10How much can you say or not say
06:12about what the likely consequences
06:14of a very expansive tariff program might be?
06:17Yeah.
06:18Now, firstly, I think we all recognize,
06:20and that's in the data,
06:21that global economic integration
06:25through trade and capital flows
06:26has been very helpful for the world
06:29in terms of raising hundreds of millions out of poverty,
06:32but more generally in having prosperity
06:35in many parts of the world.
06:37Now, I can't speak to what will come next
06:40in terms of what the actual trade policies will be
06:42because the honest answer is I don't know at this point.
06:45We have to wait.
06:46Once the policy announcements happen,
06:47then we will analyze the consequences of that.
06:50What I can point to,
06:51basically looking at the last two or three years,
06:54is that there has been a shift,
06:56a very important shift in the way economies see integration.
07:01And there are good reasons for it.
07:03In the past, countries and businesses
07:06were hyper-focused on efficiency,
07:08which is you bought from wherever the cheapest source was.
07:11And then you had a pandemic when supply chains broke down.
07:14And you have Russia's invasion of Ukraine
07:18and Germany getting shut out from gas supplies.
07:21And so countries are now saying,
07:24well, efficiency alone won't do it.
07:26You need to be able to have resilience
07:28in your supply chains.
07:29And that's a perfectly legitimate argument to make.
07:33In addition to that, of course,
07:34countries worry about that some of their trading partners
07:37have long-standing subsidies
07:39and have provided a lot of support to their industries.
07:41And that creates an unfair playing field,
07:46not a level playing field.
07:47So what are we seeing,
07:48if you look at the data over the last few years,
07:51is that unlike the past,
07:52and I would say since the Cold War
07:55we haven't seen patterns of this kind,
07:56is that we're seeing much more of global trade
08:00and foreign direct investment
08:02that is driven by geopolitical,
08:04that is affected by geopolitical factors.
08:07So trade between countries
08:09that are more geopolitically aligned
08:11is holding up much better than trade
08:13across countries that are not geopolitically aligned.
08:15And so we're seeing those shifts.
08:16Like I said, some of that makes sense,
08:19but we have to see what the actual policies are
08:21to see how big of a shift this will be.
08:25Really interesting.
08:25So I guess my question to you is,
08:27if we shift further into this world that you're describing
08:31that's more fragmented on kind of geopolitical lines,
08:35and so instead of this open global system
08:36where everyone trades with everyone more or less,
08:39we kind of split apart into these blocks,
08:42whether they're regional
08:43or whether they're kind of superpower blocks,
08:45can the global economy maintain
08:48the relatively stable growth and resilience
08:51that you've described that it has right now?
08:54Is it able to preserve that or does it put it at risk?
08:57Again, without knowing the actual policies,
09:00it's hard to speculate on the extent
09:02of what the impact would be.
09:04But we have, of course, simulated scenarios in the past
09:09about what could happen if you had very deep breakdowns
09:14and if you have a decoupling in the world.
09:16And the cost can be quite substantial.
09:19It's not one of those minor events.
09:21Those would be very substantial.
09:22On the other hand, if it is done well and it's well managed,
09:26the cost could be relatively small.
09:27So it could be as low as 0.2% of GDP.
09:30So again, a lot depends on how it is managed.
09:34Yeah, interesting.
09:35Paul Krugman's got a little audio snippet
09:38on the New York Times website this morning
09:40where he declares that the Trump package of initiatives
09:43is the most inflationary package of proposals
09:46that any president in the history of the US
09:49has ever put forward, which is quite a statement,
09:51and he goes through point by point by point why that's.
09:53So I mean, just as a general rule, though,
09:55is it correct to conclude that high tariffs in general
09:59tend to be inflationary?
10:02So again, we'll need to know how exactly the tariffs work.
10:07But if you take the example of what happened in 2018-19,
10:11the tariffs that were put in terms of what the impact was,
10:14for example, on the US economy.
10:16So yes, it was a cost push in the sense
10:20that it made it more expensive for US firms
10:23that were buying those inputs.
10:25But the pass-through from there to consumer prices
10:28was not that big.
10:30So that was not the case.
10:31But again, the details matter in terms
10:35of what goods you put the tariff on, how widespread it is,
10:40whether there are substitute sources where
10:43you can get the product.
10:44So all of those details matter for what the precise impact
10:46is going to be.
10:47Let me shift gears a bit and ask you
10:49about a topic that came up a lot yesterday and will again today,
10:53and that's AI.
10:55We've heard a lot about how AI can improve our productivity,
11:00where it can accelerate scientific breakthroughs.
11:03Many positive, promising things will come out of it.
11:07There's also a concern about what it means, though,
11:09for jobs.
11:10And you've made some very interesting observations
11:13about how AI may possibly have unexpected interactive effects
11:20with the macroeconomic cycle.
11:21Can you say a little bit more about that?
11:23Because I thought your comments were really fascinating.
11:26Sure.
11:26So again, going back to where we started
11:29in terms of the global economy, I
11:30pointed to the fact that growth, while holding up,
11:34is not a good number.
11:36We would like that growth to be higher.
11:39And one of the main factors that can raise that
11:41is if we can raise productivity, raise productivity growth.
11:44Because that's what's slowed over the last two decades.
11:48And so in that sense, this new technology
11:51generative AI and its new forms of it, it sounds exciting.
11:55It's like, OK, well, maybe this is
11:56something that can actually raise productivity.
11:59And we've simulated what the effects could be.
12:02We can see that, say, five years out,
12:05growth could be higher by around 10 basis
12:08points or 80 basis points.
12:09Now, if you're looking at a baseline of growth of 3%,
12:13if you have an 80 basis point increase,
12:15that's a pretty strong effect.
12:17But there's a range.
12:18And it's not very clear how effective it would be.
12:21It depends upon how quickly it is being adopted.
12:24So there's a lot of promise that comes with AI.
12:27It's going to depend upon how quickly it's adapted.
12:29Now, your point to do this piece that I put out,
12:32which is that there's something very interesting in the way
12:36technology affects the business cycle.
12:39Technology has huge amounts of productivity effects,
12:42but also does have an effect on the labor market.
12:44Now, the extent to which that happens
12:46varies depending on the technology.
12:48Our estimates are about 40% of labor in the world
12:53is exposed to AI.
12:54That doesn't mean it's a bad thing.
12:56But half of those can positively benefit from it,
12:59and half of those could be negatively impacted from it.
13:04Now, that is a challenge.
13:05And what we've seen in the past is
13:08that when do you actually see the effect of new technology
13:12on the labor market?
13:13And what we've seen from previous cycles of technology
13:16booms is that it doesn't happen in good times.
13:19So when you have good times and companies
13:22are making lots of profits, they hold on to workers.
13:24They're investing in the technology,
13:26but they're holding on to workers.
13:28So you see it when the recession strikes.
13:30That's when you really see the effect of automation
13:33on the labor market.
13:35And that's what we saw, for example,
13:36after the great financial crisis.
13:39If you remember, we all talked about jobless recoveries
13:42for a long time.
13:43And that jobless recovery was a reflection of, finally,
13:47companies letting go of workers, fully automating the task,
13:52and not hiring those workers back.
13:55So that's when you see it.
13:56So the caution here is for policymakers,
13:59which is to say, just because you're not
14:01seeing it now when things are good,
14:03that doesn't mean that you will not have
14:05an abrupt shift in a recession.
14:07Very interesting.
14:09I want to ask you, if I can, also about China.
14:13Second largest economy, very important to global trade
14:17flows.
14:19We spoke yesterday on a panel that was all about China,
14:22trying to assess where China's macroeconomic outlook might
14:26be.
14:26Last week, they introduced a $1.4 trillion stimulus program.
14:31It hasn't seemed to really impress markets too much.
14:34What's your assessment of China's economy,
14:37its prospects, and particularly what its structural challenges
14:41might be?
14:42So again, China, the second largest economy of the world,
14:46we would expect the growth in China not to be 10%.
14:49We would expect it to go down.
14:50We have it this year for about 4.8%
14:54and going down slightly next year.
14:57In the case of China, the main constraining factor
15:00is that domestic demand, especially consumption,
15:03is weak.
15:04Household consumption is weak in China.
15:07And you have more deflationary dynamics
15:11than in other parts of the world.
15:13The property market is a big issue.
15:15It's been a problem for a couple of years.
15:18Part of this is the government trying
15:20to moderate the size of the property market.
15:24But we haven't seen a positive turnaround.
15:26So I think the important thing is the government is moving
15:30and putting a lot of measures in place.
15:33For there to be a big effect on growth in China,
15:38we see the need for policies that
15:40are more directed to households.
15:42And that is not the case as of now in a lot of the policies
15:46they've announced.
15:47But that's what's going to be needed
15:48to be able to raise consumption so they're
15:50less dependent on exports to the rest of the world
15:52and more dependent on domestic demand.
15:55Fascinating.
15:56Certainly no shortage of things for the IMF
15:58to keep track of and monitor as we move forward
16:02over the next few years.
16:03Geeta, I want to thank you so much for being with us
16:06this morning.