Gita Gopinath, First Deputy Managing Director, International Monetary Fund
In conversation with: Clay Chandler, Fortune

Fortune Global Forum 2024: Global Economics: Risk, Resilience And Recovery

Photograph by Michael O’Shea for Fortune

Conferences

GTA. Good morning and thank you so much for joining us. We're really thrilled to have you. Uh have you with us? Um Let's start just kind of with an outlook of where the world uh is right now in the global economy. Uh Are we in a good place, a bad place and, and kind of maybe start with kind of global inflation outlook. What's your sense of where we are? So Clare, thank you. Thank you for having me the outlook. I mean, the best way for us to describe it is that we have seen a global economy that has been resilient in a way that we haven't seen before. So let me explain. We have had a global economy in the last four years that has been hit by a pandemic and energy crisis. Inflation that shot up and central banks everywhere raise interest rates by a lot. Usually in the past, you have these kinds of knocks, you would see a more prolonged global recession, you would see some sort of an emerging market, sovereign debt crisis and we do not see that. So I think that's the first thing we should recognize is that this is a world that has been resilient and now some parts more than others, the US really does stand out. It is doing extremely well, Europe less. So China still with weak demand, but still again, resilience and resilience doesn't mean that everything is great, resilience is coming along with kind of a weak growth outlook. So growth is expected to be around 3.2% this year. And next settles around 3% 5 years out. That's not a bad number. But if you compare that to, you know, historical averages over the last two decades, it used to be around 3.8%. So it's coming down. So growth is coming down. But you have resilience and in terms of inflation, since you asked about inflation, again, inflation went up almost uniformly in all parts of the world has come down by a lot. And our forecast is for inflation to return to central bank targets by next year in pretty much all the major economies of the world. So we see that coming down and like I said, that has all happened without there being a big hit to economic activity, to labor markets are still strong in many parts of the world. This is not how it was in the 19 seventies when we had the previous episode of very high inflation and inflation came down. Those were marked with deep recessions, big increases in unemployment rates. That's not been the case. This time. That's remarkable. Um So what I hear you saying is that, you know, relative to, uh coming out of crises, historically, that we're, we're actually doing pretty well. And yet that, that seems not necessarily to be reflected, at least in the Democratic company, uh countries and some of the political outcomes that we've, we've seen, which is, which is interesting. Let's talk about that a little bit because that's another thing that uh we found covers very, it follows very closely. Um You've um I think the fund has noted the global public debt levels will exceed 100 trillion, about 93% of global GDP by the end of this year. Is that something we should worry about or is that still something that's an OK ratio? I mean, just to start with the point you previously made about, why is it that people haven't felt this the resilience and strength two reasons, I'm making a comparison to how bad things could have been. And in that sense, things were more resilient. But then the second fact is inflation did go up, which means prices went up by a lot, inflation rates came down, which means prices are continuing to go up but at a slower pace. So if you look over a four year period, you know, uh you have seen households who looked at uh the how much they're paying for their goods that they bought in the past and said, well, everything is a lot more expensive. So it's not surprising, you know, the way people feel versus the way I'm describing how the global economy is in terms of debt. Yes, I think this is uh you know, at the, at the International Monetary Fund, we pay very close attention to debt, build up in different parts of the world. This year, we expect by the end of this year, debt around the world will be about $100 trillion. Very large numbers as a share of global GDP, you know, we're getting close to post world war two uh peaks. Uh So we, we have this is a high debt world. Now, some of this was of course, a reflection of the build up that happened during the pandemic and governments trying to support their populations that build up did come about, but interest rates have also gone up. So what we are seeing uh you know, are two sets of issues. So again, you could ask, you know, does this mean that we're heading for an hour, a debt crisis? Is there going to be a debt crisis? No, we, we don't see that. So if you look at a group of low income countries, it's not as if we're seeing our our projection for many of these countries to see themselves in default, that's not where we are, there are some but not the biggest, not the large number, the bigger concern is more liquidity. So if you take the numbers for low income countries uh next year, this year and next year, they have about $40 billion that they have to refinance. Now, if the market provides that easily at fairly affordable rate, that will be manageable. If it doesn't, then in that case, you could see much more debt distress. Interesting. So again, it's a pretty positive outlook though, a message in terms of where we, where we are relative to where we might have might have been. So I find that quite encouraging, I I want to ask you about something you may not be able to completely answer. But uh there's been a lot of talk here yesterday about um the prospect that the largest economy in the world is about to sort of embark on this program that involves a lot of tariffs, uh whether there are tariffs on China, in particular, whether it's tariffs across the board and all of its trading partners. And I know that the IMF has done a lot of research on the impact of tariffs previously and uh has warned that tariffs are bad for everybody and relative to open trade flows. You know, that's much, much better. Um to what extent do you see sort of the IMF s role in warning people about the implications of another round of tariffs? How much can you say or not say about what the likely consequences of a very expansive tariff program might be? No, unfortunately, I think we all recognize and that's in the data that global economic integration to trade and capital flows has been very helpful for the world in terms of raising hundreds of millions out of poverty, but more generally, uh in having prosperity in many parts of the world. Now, I can't speak to what will come next in terms of what the actual trade policies will be. Because the honest answer is, I don't know At this point, we have to wait once the policy announcements happen, then we will analyze the consequences of that. What I can point to basically looking at the last two or three years is that there has been a shift, a very important shift in the way economies see integration. And there are, there are good reasons for it in the past, you know, countries and businesses were hyper focused on efficiency which is you bought from wherever the cheapest source was. And then you have a pandemic when supply chains broke down. And you have uh you know, Russia's invasion of Ukraine and you know, Germany getting shut out from gas supplies. And so countries are now saying, well, efficiency alone won't do it. You need to be able to have resilience in your supply chains and that's a perfectly legitimate argument to make. In addition to that, of course, countries worry about that. Some of their trading partners have long standing subsidies and have, have provided a lot of support to their industries and that creates an unfair playing field, uh playing field, right? Not a level playing field. So what are we seeing if you look at the data over the last few years? Is that unlike the past? And well, I would say, you know, since the Cold War, we haven't seen patterns of this kind that we are seeing much more of global trade and foreign direct investment that is driven by geopolitical, that is affected by geopolitical factors. So trade between countries that are more geopolitically aligned is holding up much better than trade across countries that are not geopolitically aligned. And so we see the shift, like I said, some of that makes sense, but we have to see what the actual policies are to see, you know, how big of a of a shift this really interesting. So I guess my question to you is if we, if we shift further into this, this world that you're describing, that's more fragmented on, on kind of geopolitical uh lines. And so instead of this open global system where everyone trades with everyone, more or less, we we kind of split apart into these blocks, whether they're regional or whether they're kind of superpower blocks can, can the global economy maintain the relatively stable growth and resilience that you've described that it has right now? Is it able to preserve that or does it put it at risk again without knowing the actual policies, it's hard to speculate on the extent of what the impact would be. But we have of course, uh you know, simulated scenarios in the past about what could happen if you had very deep, you know, breakdowns. And if you have a decoupling in the world and the cost can be quite substantial, it's not one of those minor events, it would be very substantial. On the other hand, if it is done well and it is well managed, the cost could be relatively small so it could be as low as 0.2% of GDP. So again, a lot depends on how, how it is managed. Yeah, interesting. Paul Krugman's got a little audio snippet on the New York Times website this morning where he declares that the Trump package of initiatives is the most inflationary package of proposals that any president in the history of the US has ever put forward, which is quite a statement and he goes through point by point by point. Why? That's so is it, I mean, just as a general rule though, is it correct to conclude that that high tariffs in general tend to be inflationary? So again, we need to know how exactly the tariffs work. But if you take the example of what happened in 2018, 19, uh the tariffs that were put in terms of what the impact was, for example, on the US economy. So yes, it it had it was a cost push in the sense that it made it more expensive for us firms that were buying those inputs. But the pass through of that from there to consumer prices was not that big. So that was not the case. But again, it was, it was the details matter in terms of what goods you, you you put the tariff on how widespread it is, whether there are substitute sources, one way you can get the product. So all of those details matter for what the precise impact is going to be. Ok, let me shift gears a bit and ask you about a topic that came up a lot yesterday. And well, again today and that's a I, um we've heard a lot about how A I can uh improve our productivity where it can accelerate scientific breakthroughs. Many positive promising things will come out of it. Um There's also a concern about what it means though, for jobs and you've made some very interesting observations about how A I may protect, possibly have unexpected interactive effects with the macroeconomic cycle. Can you say a little bit more about that? Because I thought your comments were really fascinating. Sure. So again, you know, going back to where we started in terms of the global economy, I point to the fact that growth while holding up is not, it's not a good number. We would like that growth to be higher. And one of the main factors that can raise that is if we can raise productivity raise productivity growth because that's what slowed over the last two decades. And so in that sense, this new technology generated A I and its new forms of it sounds, it sounds exciting. OK. Well, maybe this is something that can actually raise productivity and we simulated what the effects could be. You know, we, we can see that the five years out growth could be higher by around 10 basis points or 80 basis points. Now, if you're looking at a baseline of growth of 3% if you have an 80 basis point increase, that's a, that's a pretty strong effect. But there's a range and it's not very clear how effective it would be. It depends upon how quickly it is being adopted. So there's a lot of promise that comes with A I, it's going to depend upon how quickly it's adapted. Now, the you pointed to this piece that I put out, which is that there is something very interesting in the way technology affects the business cycle, you know, technology has huge amounts of productivity effects, but also does have an effect on the labor market. Now, the extent to which that happens varies depending on the technology. Our estimates there are about 40% of labor in the world is exposed to A I, that doesn't mean it's a bad thing, but half of those can positively benefit from it. And half of those will be, you know, they could be negatively impacted from it. Now. That is a challenge. And what we have seen in the past is that when you, when do you actually see the effect of new technology on the labor market and what we have seen from previous cycles of technology boom is that it doesn't happen in good times. So when you have good times and companies are making lots of profits, they hold on to workers, they are investing in the technology, but they are holding on to workers. So you see it when the recession strikes, that's when you really see the effect of automation on the labor market. And that's what we saw. For example, after the great financial crisis, if you remember, we, we all talked about jobless recovery for a long time and that jobless recovery was a reflection of finally, companies letting go, letting go of workers fully automating the task and not hiring those workers back. So that's when you see. So the question here is for policy makers, which is to say just because you are not seeing it now where things go. That doesn't mean that you will not have an abrupt shift in a recession. Very interesting. I want to ask you if I can also about, about China second largest economy, uh very important to global trade flows. Um We spoke yesterday on a panel that was all about China uh uh trying to assess uh where China's macroeconomic outlook might be last week. They uh introduced a $1.4 trillion stimulus program. It hasn't seemed to really impress markets too much. What's your assessment of, of China's economy, its prospects and, and particularly what its structural challenges might be? So again, China, the second largest economy of the world, we would expect the growth in China not to be 10%. We would expect it to go down. We have it this year for about 4.8% and going down slightly next year. In the case of China, what you know, the main constraining factor is the domestic demand, especially consumption is is weak. Uh household consumption is weak in China and you have, you know, more deflationary dynamics than in other parts of the world. The property market is is a big issue. It's been a problem for a couple of years. Part of this is the government trying to, you know, moderate the size of the property market, but we haven't seen a positive turnaround. So I think the important thing is the government is moving and putting a lot of measures in place uh for us, you know, for there to be a big effect on growth in China. We see the need for policies that are more directed to households and that is not the case as of now. And a lot of the policies they have announced, but that's what's going to be needed to be able to raise consumption. So they are less dependent on exports to the rest of the world and more dependent on domestic demand. Fascinating. Um Certainly no shortage of things for the IMF to uh keep track of and monitor as we uh as we move forward over the next few years. Kit, I wanna thank you so much for being with us this morning. Thank you. Thank you.