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Interview

World cannot afford any more policy mistakes: IMF economist

Gita Gopinath says trade war escalation will be dangerous for the global economy

Gita Gopinath, chief economist at the International Monetary Fund, speaks during a news conference in Santiago, Chile, on July 23.   © Reuters

WASHINGTON -- The International Monetary Fund's chief economist has issued a stern warning about the global economy, saying there is no room for more policy mistakes as growth in 90% of the world is slowing.

Painting a bleak picture, Gita Gopinath said in an interview with Nikkei on Tuesday that there will be an increased chance of a recession if the U.S.-China trade war and other geopolitical risks worsen.

Although the economy is expected to recover slightly in the future, the outlook is "precarious," Gopinath said, adding that the balance between monetary and fiscal policies will become important.

"We just can't afford to have any more policy mistakes," said the 47-year-old Indian-born economist and former Harvard University professor. Gopinath became the first woman to assume the IMF post in January.

The economist said the IMF has further downgraded its forecast for global growth in 2019 to 3.0%. A growth rate below 2.5% means the global economy has slipped into recession, she said.

But according to the IMF's baseline scenario, a recession is not currently in the cards. "You could think of a situation where the world economy would go below 2.5%. That's usually the case when you have several countries that are in recession," she said. "Now that is not in our baseline. We're not projecting that for either 2019 or 2020."

She cautioned, however, that if geopolitical risks continue to rise due to the escalating U.S.-China trade war or other reasons that could trigger a credit crunch, economic growth will hover dangerously close to 2.5%.

On Tuesday, the IMF lowered its global economic outlook for the fifth straight quarter. The current 3.0% growth forecast for this year is the slowest since 2009, following the 2008 global financial crisis. In comparison, the global economy grew 3.8% in 2017.

Gopinath argued that the U.S.-China trade war could lower global gross domestic product by 0.8% in 2020. Even if the U.S. does not levy additional tariffs on Chinese products in December, global GDP could still decrease by 0.6% due to the current tariffs, she said.

In its latest forecasts, the IMF saw the global economy picking up slightly and growing at a faster pace of 3.4% in 2020. But the global outlook remains uncertain as growth in the U.S., China, Japan and other major economies is likely to slow in 2020, Gopinath said.

The eurozone economy as a whole is expected to recover in 2020, she said, but this could be derailed in countries highly dependent on external demand, like Germany, due to trade frictions.

Gopinath described the current global economic slowdown as a "synchronized" one. The IMF cut its growth forecasts for not only the U.S. and China but also all major European economies, including Germany and France.

Meanwhile, if the U.K. is forced to leave the European Union without a Brexit deal, the global economy will continue to falter.

Gopinath noted that monetary policies implemented by major central banks such as the U.S. Federal Reserve and the Bank of Japan have been adequate.

If not for major countries' monetary easing, growth would have been 0.5 percentage points lower in both 2019 and 2020, she said. But since there is little room for further easing, the IMF is pinning its hopes on fiscal spending by other countries, including Germany.

According to the latest IMF forecasts, developed countries will grow at a lackluster 1.7% in 2019 and 2020, while emerging and developing countries will see 3.9% and 4.6% in the same years.

Growth in Brazil, India and Saudi Arabia will be anemic this year, but is expected to recover in the medium term, Gopinath said. China's growth will drop below 6% in 2020 due to trade frictions.

As the U.S. and China -- main drivers of the global economy -- see their economies soften due to trade tensions, she said the global recovery from 2020 will depend on certain emerging markets.

But India has seen domestic demand slump, and fears are growing on the financial front, partly due to bankrupt nonbank financial institutions. And Brazil cut its policy interest rate to the lowest level ever, but the country's exports and investment remain stagnant.

Just which country or countries will reignite the global economy remains unclear.

The economist said that despite the negative effects of a consumption tax hike, the Japanese economy is likely to expand 0.9% in 2019 thanks to solid household spending and public expenditures. Although growth is expected to slow to 0.5% -- as high as the potential growth rate -- in 2020, the IMF's baseline scenario projects no impeding recession.

Gopinath sees minimal damage to the economy from the consumption tax increase.

Japan's fiscal stance is "neutral," as the country is offsetting a decline in demand caused by the tax hike with demand-stimulating measures taken through fiscal spending, she said. The IMF expects Japan's growth rate to remain low, at 0.5%, even in 2024.

Finance ministers and central bank governors from the major economies of the Group of 20, including Japan, the U.S., the European Union and China, will meet in Washington on Thursday and Friday.

Gopinath senses danger, but unfortunately there is no clear path out of the current crisis afflicting global economics and politics.

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