At a time when the world is battling inflation, energy crises, higher interest rates, recession fears, and the lingering threat of Covid, where are economies around the world heading? What steps should governments be taking to help them out?
Mentioning all these concerns, Gita Gopinath, the first deputy managing director of the International Monetary Fund (IMF), recently spoke with Wall Street Journal (WSJ)¡¯s chief economics commentator at the Journal¡¯s CEO Council Summit.??
She had previously served as chief economist of the IMF from 2019 till January 2022.??India-born Gita Gopinath this year became the first woman and second Indian to feature on the 'wall of former chief economists' of the IMF.
Here are edited excerpts of the conversation.
WSJ: In October, the IMF projected economic growth of about 2.7% next year and said we¡¯re going to avoid a global recession. How has the outlook changed since then?
IMF¡¯s Gita Gopinath: What we said in October was that 2023 will be worse than 2022. That remains true. Growth will slow. In October, we had it at 2.7%; we will have an updated number in January.
The region where I would say the outlook has darkened noticeably is China. Compared to October, we had downside risks in China from Covid lockdowns, and property-sector crises. We are seeing weakness in private consumption, weaker than we had expected. Weaker mobility than we had expected.
That¡¯s the big change. But, again, going into 2023, we have a broad-based slowdown in the global economy.
WSJ: Will the U.S. avoid a recession and achieve the much hoped-for soft landing?
IMF¡¯s Gita Gopinath: We have the average growth for the year for the U.S. next year at 1%. The possibility of avoiding a recession is really narrow for the U.S. You also have a significant fiscal tightening, a slowing economy and the unemployment rate going up. The unemployment rate is at record lows, and it¡¯s an incredibly tight labour market. Given all the policy tightening that¡¯s happened, the unemployment rate should go up.
WSJ: The consensus view was that Europe would have a recession because they sustained a catastrophic rise in energy cost. But in the last few weeks that has improved. How do you read the latest tea leaves on Europe?
IMF¡¯s Gita Gopinath: I think the fourth quarter is going to be negative growth. It¡¯s what we have. It¡¯s what everybody is forecasting, the first part of next year too would see a weakness in the euro area, given the size of the energy shock that they¡¯ve had to deal with, and the cost of living that they¡¯ve had.
That, by the way, is an interesting difference between what we¡¯re seeing in Europe and the U.S. U.S. consumption is still holding up very strongly, but we¡¯re seeing weaknesses in the euro area. We will update our numbers in January. But I think we have about half of the euro area that will be in contraction in winter.
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WSJ: With respect to China, Covid continues to spread, and the lockdowns have become more disruptive. What¡¯s your assessment of the policy approach the Chinese are taking now?
IMF¡¯s Gita Gopinath: The policy of zero Covid worked very well for China at the beginning. They recovered very quickly. If you look at the number of deaths from Covid, China has done really well.
But we have a new form of the virus, highly contagious. It is a big challenge for China because, if you look at the vaccination rates among those above the age of 80, it¡¯s quite low. If you have a very quick opening up from lockdowns, there is the risk that you would have a large number of people in hospitals. That could overwhelm the healthcare system.
They are moving more aggressively to get higher vaccination rates. The movement has to be toward getting more vaccination rates, increasing healthcare capacity and then having a safe exit.
WSJ: Going beyond zero Covid, what¡¯s the medium-longer-term outlook for China? I believe the fund¡¯s medium-term forecast is 4.6%, which is low for China but good for almost anybody else. But there are many structural secular headwinds. Is that still a realistic forecast for China?
IMF¡¯s Gita Gopinath: We will have a new forecast for the medium-term growth for China in January. There are several headwinds. There is a shrinking workforce. We have weakness in productivity growth that continues to be a major concern. All of this points toward a medium-term growth that¡¯s slowing. It used to be 6%, we brought it down to 4.6%, and in January, we will be going lower.
WSJ:?Let¡¯s turn to inflation. Chief of staff to President Biden,?Ron Klain, said, ¡°We¡¯re not putting up the ¡®Mission Accomplished¡¯ sign yet, but we are seeing some moderation.¡± The markets seem to be optimistic. Is the inflation problem solved?
IMF¡¯s Gita Gopinath:?I think of the markets like kids in a car drive. ¡°Are we there yet? Are we there yet?¡± We have a Fed that needs to be the adult.
Yes, there was one good inflation reading, the one for October. The more relevant question is how far the inflation number is from the target. That¡¯s the bigger concern, and how long it will take to get back down to 2%.
We do have, even in our own forecast, that we¡¯ll come down to around 3% by the end of next year.
The expectation was that you could get inflation down without needing significant monetary-policy tightening if any at all. You had a very odd adjustment because of the pandemic, with a big crash in demand for energy. The expectation was that this will rebound. Prices will come back up, things will unwind themselves.
It¡¯s clear that the concept of transitory inflation is no longer valid. The expectation is that inflation will come down, but what will it take? It¡¯s taken about 400 basis points of interest-rate increases so far. From everything we know, there will be more. How long do you keep it at that level?
A few months back, both the IMF and World Bank warned about rising risks of global recession in 2023.
In July, IMF Chief and Managing Director Kristalina Georgieva had?said the outlook for the global economy had "darkened significantly" since April (2022) and she could not rule out a possible?global recession next year?given the elevated risks.
Then in September,?World Bank said that the world may be edging towards a global recession as central banks across the world simultaneously hike interest rates to combat persistent inflation.
In a new?study, the world bank said that the world's three largest?economies?- the United States,?China, and the Euro area (Member States of the European Union that have adopted the euro as their currency) - have been slowing sharply, and even a "moderate hit to the global economy over the next year could tip it into recession."
And that's not all. Even?Nouriel Roubini, the economist who had correctly predicted the?2008 financial crisis, too has already warned of a global recession. He sees a?¡°long and ugly" global recession, including in the US, by the end of 2022. And it could last all of?2023.
Last month, the?Bank Of England had mentioned that it expects 5 Lakh job losses in UK?recession.
Earlier in July, a?survey of economists by Bloomberg had mentioned that?India has zero probability of slipping into recession?next year.??
Even last month, RBI governor Shaktikanta Das had made optimistic comments, saying that?'India Has Lower Risk Of?Recession.' And as recently as a week ago, IT giant Infosys' co-founder Kris Gopalakrishnan?said?'India Is The Best Place To Work, Especially During?Recession".
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