WASHINGTON - The International Monetary Fund has recently trimmed this year's global economic forecast as supply chain disruption and inflation weigh down the recovery from the coronavirus pandemic.
But conditions are nowhere near the 1970 s-style stagflation, when stubbornly slow economic growth combined with high inflation, warned Gita Gopinath, the IMF's chief economist, to Nikkei. Although the global economy faces downside risks, inflation rates are expected to return to normal in near term.
Gopinath also reiterated the IMF's position that China will be able to control the crisis surrounding Evergrande Group. However, the effect of tighter U.S. monetary policy on emerging countries will depend on how smoothly the process goes, Gopinath said.
Q: Given the 0.1 - point drop in the IMF's latest World Economy Outlook, is there any concern over what is called "stagflation" in the global economy?
A: We are projecting stronger momentum in the global economy, and certainly higher pressures on inflation. However, that said, our global growth for this year is 5.9% and then 4.9% in the next 10 years. That is nowhere near stagnation.
In the case of inflation, while inflation is elevated, the baseline is for inflation to come down to normal ranges at the middle of next year, for many countries.
Also, I would say that the risks are tilted to the downside. But at the same time, our projections are not of a world having to deal with stagflation.
Q: Inflation is still in the U.S. Economy and there is a significant slowdown in growth. How will supply bottlenecks and high inflation contribute to a vicious cycle that will unwind demand and consumption?
That is indeed a risk, which is that we are witnessing supply disruptions that lead then to increases in prices.
But if you look at the recovery in the United States economy, it's already back to pre-pandemic levels, where it was back in the second quarter and by early next year it's back to the pre-pandemic trend.
So this is a very strong recovery for the U.S. economy and it's quite the opposite of having to worry about what would happen if there is some weakness in the economy. We are expecting a strong return.
Will the Federal Reserve fall behind the curve in terms of inflation?
A: If you can imagine the forces that have driven inflation, a large part of it is transitory in nature. Some of it is just because inflation was so high last year that we are seeing higher inflation this year. Some of it is the big increase in used car prices.
Our advice is to be very prepared, and make sure that, firstly, you clearly communicate to the market your expected path on inflation and how you would respond if it turns out to be much higher than expected.
It is widely believed that the tightening of Chinese authorities on the real estate sector will lead to an economic slowdown. What do you think of the IMF's optimism on China?
A: The regulation of the real estate sector in China started last year and because of that, we expected that there would be a weakening of investment in the real estate sector, which is why we already had a 0.3 point downgrade in July, for instance, in China.
As of now, we had that previously incorporated and that is why we didn't have much change this time around. We only had a small 0.1% downward revision.
But I would say that in terms of the risks to our forecast, it's certainly a risk for our forecast for China. The industry of property is important in the real estate economy. Evergrande is the largest property developer in China.
If it turns out that the liquidity issues of Evergrande spill over to the real estate sector as a whole and have an effect, for instance, on housing prices then this would certainly slow down growth much more substantially.
But as of now we are of the view that the government has the tools and it has policy space to be able to contain spillovers from the problems in the real estate sector.
If you only have five minutes on the clock are you worried that the Lehman collapse will become the second worst?
A: No, for now. We believe China has the tools that they need, that they have the policy space that they need, to be able to prevent the problem from turning into a systemic crisis also into the financial system, which would then spill over to the rest of the world.
Q: The Fed will soon start trimming asset purchases and is looking at rate hikes next year. Would that not be a further blow to emerging economies and low-income countries where recovery is lagging?
A: I believe it will depend on how smooth the Fed process is. If we have a very general slowing of asset purchases and a predictable increase in rate rates then there will be a relatively predictable increase in interest rates around the world. I think that the problems that such a scheme would create would not be severe.
And the U.S. economy recovering strongly has good spillovers to the rest of the world in terms of the demand it provides to the rest of the world.
The problem, of course, is that there are policy accidents. We see data that inflation expectations are starting to rise much faster than expected. Those kinds of events could then trigger faster-moving monetary policy tightening.
That could have very negative spillovers to the emerging and developing economies, particularly those who rely heavily on foreign funding for borrowing foreign currency, and don't have very deep trade relations with the U.S.