IMF's Gita Gopinath Projects Better Days For Global Growth, Lays Out Critical Risks

International Business

Speaking at the World Economic Forum in Davos, IMF's Chief Economist Gita Gopinath noted easing trade tensions & cheap credit can lift growth, but risks remain.

Written By Shubhayan Bhattacharya | Mumbai | Updated On:
Gita Gopinath

In a statement that eases worries of a global synchronized slowdown, International Monetary Fund's Chief economist Gita Gopinath on Monday said the signing of a US-China Phase One trade deal and a lower likelihood of a no-deal Brexit has raised expectations of a modest pickup in global growth.

She noted that accommodative monetary policy continues to support growth and buoyant financial conditions, but risks due to geopolitical tensions and social unrest may reverse that.

"There are now tentative signs that global may be stabilising, though at subdued levels," Gopinath said. She stated that global growth will be 3.3% in 2020, compared to 2.9% in 2019, each with a 0.1% downward revision from forecasts made in October. This fall, the Indian American economist said, is attributed to a severe slowdown in India where the government's own estimate has projected growth for FY2019-20 at 5%.

READ | IMF Lowers India's Growth Estimate For 2020 By 1.2%, Trims Global Forecast Too

Manufacturing slowdown bottoming out

Gita Gopinath said preliminary signs in the global economy suggest that a decline in manufacturing and trade may be bottoming out. According to her, the recovery is partly due to an improvement in the automobile sector where disruption due to stronger emissions curb by countries starts to fade.

Several countries, including India, have pushed automakers to make their products more eco-friendly and less pollutant by adopting stricter carbon emission standards.

READ | IMF Chief Warns Return Of Great Depression Driven By Inequality & Fin Sector Instability

Easy credit market helps, but risks remain

"The almost synchronized monetary easing across major economies have supported demand and contributed an estimated 0.5% to growth in 2019 and 2020," Gita Gopinath said.

She painted a brighter picture for China with a 0.2% upward revision of growth rate while saying that the fiscal stimulus through tax cuts in the US will start to fade and the world's largest economy will slow.

Gopinath also pointed out that risks to global economic growth would not just stem from trade tensions, but also geopolitical frictions (like the US-Iran standoff) and intensifying social unrest (like protests in Hong Kong and France). 

"Monetary policy should remain accommodative where inflation is still muted. With interest rates expected to stay low for long, it is very important for countries to proactively use macroprudential tools to prevent the buildup of financial risks," Gopinath said. She added that rich countries that have low-interest rates but poor productivity growth, like Japan and Eurozone economies, should invest in human capital and climate-friendly infrastructure to raise potential output.

READ | IMF Economic Councillor Gita Gopinath Meets PM Narendra Modi

Coordinated fiscal response by nations required

"To ensure a timely fiscal response if growth were to slow severely, countries should prepare contingency plans in advance and enhance automatic stabilisers. A coordinated fiscal response would be needed to improve the effectiveness of individual measures. Countries need to coordinate on multiple fronts, raise growth and prosperity. They need to reverse protectionist measures and resolve the impasse over the WTO Appellant Court."

READ | IMF: Low Rates And Reduced Trade Tension To Aid World Growth

Call for digital taxation regime

Gita Gopinath also pitched for a new international taxation regime to adapt to the increasing digitisation of economies. Such a regime, she said, would help to arrest tax evasion and thereby allow countries to mobilise more revenue. This remark is significant given the deep apprehension the US has for other countries taxing American tech giants like Amazon and Facebook, as evident in a recent tussle with France over the country's new digital tax.

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