The IMF expects global economic growth to remain resilient in 2024, forecasting an expansion of 3.2%. IMF First Deputy Managing Director Gita Gopinath joins Yahoo Finance's Jennifer Schonberger to discuss the key global market dynamics shaping this outlook.
Gopinath explains that growth has been slowing since the early 2000s, driven by three primary factors: weakening productivity growth, aging demographics and declining working-age populations, and decreasing overall investments. She noted that while AI "has the potential" to strengthen productivity growth, it is still "too early to say that that's the solution."
On the inflation front, Gopinath highlights the risks posed by commodities like oil, given heightened tensions in the Middle East following Iran's attack on Israel. However, she believes the situation has not yet reached a point "where we could see oil prices shooting up," noting that there are "alternate sources of supply that can make up for it." Gopinath also observes that European inflation "has been coming down really well," while US inflation "has been holding up a little more stubbornly;" she predicts the ECB could cut rates in June, but the Fed may wait.
Regarding the US economy, Gopinath acknowledged that growth "has exceeded anybody's most optimistic expectations." She expects inflation to continue to decline gradually but cautions that the "last mile" to the target will be "bumpy," necessitating patience from the Fed.
Finally, Gopinath commented on China, noting that the economy is showing signs of resilience, with first quarter GDP growth at 5%. However, she notes that the nation has "important issues to deal with" in its property sector and overall consumer confidence.
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This post was written by Angel Smith
Video Transcript
JENNIFER SCHONBERGER: The IMF expects global economic growth to remain resilient this year, expanding at 3.2%, on par with what we saw last year. Still, that is below historical averages that we've seen over the past years.
Looking at the medium-term prospects for growth, those are expected to be the lowest in decades. Joining me now is Gita Gopinath, first deputy managing director of the IMF. Gita, thank you so much for sitting down with me.
GITA GOPINATH: It's a pleasure to join you, Jennifer.
JENNIFER SCHONBERGER: As we just mentioned, prospects for the medium-term for global growth remain the lowest in decades that's owed to lower productivity. Why do you see productivity remaining so low over the coming years? And can AI be a game changer for that?
GITA GOPINATH: So growth has been slowing since the early 2000s. It first started for advanced economies. And then we saw that after the great financial crisis, we saw it for emerging and developing countries. And if you look at the main drivers of it, productivity growth-- weak productivity growth explains about over 50% of that decline in growth.
Another factor is aging demographics and declining working age population. That plays an important role, too. And the third factor is just overall investment is weaker than it was before the GFC. And so that's playing an important part. Why is productivity growth so low?
One of the big factors is what we call misallocation of resources, which is if you look at the way labor and capital has been allocated across firms within sectors, that has not been very efficient and that has played a role in keeping productivity growth weak. And what do we need to solve this?
Of course, we need to be able to take out all kinds of restrictions on product markets and labor markets that generate this misallocation. But we need more than that. We need new kinds of technological innovation. Now, AI has the potential. It is promising.
I think there's a lot of uncertainty though in terms of what could happen, in terms of productivity growth. The range of estimates are wide. The early estimates seem to-- you know, when you look at certain firms that have used it, you're seeing some positive outcomes. But I think it's too early to say. It has promise, but it's too early to say that that's the solution.
JENNIFER SCHONBERGER: All right. Moving on, I want to ask you about your outlook for global inflation, because the IMF sees global inflation continuing to decline this year, falling to about 5.9%. But now that Iran has attacked Israel, it raises the risk for burgeoning conflict in the Middle East.
And just today, we heard Treasury Secretary Yellen warn that the US is going to put forth more sanctions on Iran, perhaps on Iranian oil exports. So, how does that change your outlook, possibly, for global inflation this year, as well as the potential for spillovers for global growth?
GITA GOPINATH: Developments in the Middle East are going to have important implications for the world. As of now, we are not in the space where the conflict has gotten to a point where we could see oil prices shooting up a lot. It's not there yet. And we already see that in terms of commodity price markets. You're not seeing much movement over there.
It does depend a whole lot and how much-- and if we have a big escalation. And that's the uncertainty. Now, we do have sources of supply that can make up. For instance, if there is a disruption in oil coming out of Iran, I mean, there is the OPEC+, but there's also US shale. So there are alternative sources of supply that can make up for it. But, again, we just have to wait and to see how this develops.
JENNIFER SCHONBERGER: Depending on the outlook for global inflation, if it does hold your initial forecast, you do expect central banks to begin cutting rates in the second half of this year. Many expect the European Central Bank to begin cutting rates in June. Is that your expectation as well? And what are the implications for the ECB cutting rates before the US Federal Reserve?
GITA GOPINATH: So inflation has been coming down really well in the euro area. Now, the economy is also in a weaker place than, say, compared to the US. Now, if the data holds up the way we expect it will, then we can see that there's absolutely good ground for having a rate cut by the ECB in June.
Now, what we are seeing is US inflation seems to be holding up a little more stubbornly than in the euro area. That could cause the Fed to wait, and it would be prudent to wait to bring in, you know, before you start an easing cycle in the US. So there could be that asynchronicity. But, you know, we don't really see that as having big implications for the ECB in terms of their June rate cut decision.
JENNIFER SCHONBERGER: You mentioned the US Federal Reserve, the fact that inflation has been stickier in the first quarter of this year. Fed Chair Jay Powell just said this afternoon he needs to see more data to feel more confident before he can begin cutting rates. Given the economic picture here in the US, do you see the Fed cutting rates at all this year? Should they cut rates this year?
GITA GOPINATH: The US economy in terms of its growth has exceeded even our most-- anybody's most optimistic expectations. It's been a very strong economy. But that said, we are seeing signs of softening labor markets, and wage growth is coming down. We have seen a huge amount of disinflation that came last year as goods inflation came down and energy prices came down.
So, as of now, we expect to continue to see inflation declining. Now, we've always said this, that this year was going to be tougher than last year. This year, it's the last mile, it is going to be bumpy. And we have seen those bumps.
But we continue to believe that inflation will come down. It may take somewhat longer, but we're not-- we're in the path to getting it down back to target. What does this mean? This means for in terms of monetary policy is that it will be prudent to wait and see how the data comes in over the next months before deciding whether to ease or not.
JENNIFER SCHONBERGER: In the report, it noted three rate cuts by the fourth quarter. Do you really think that we could see three rate cuts this year in the United States?
GITA GOPINATH: So when we make our projections, we have to make assumptions on what's going to happen to interest rate path. And in this particular case, it was using the Fed's dot plot. I would say as of now, given the most recent data that we have seen, that this process could take longer.
So, it may not be as many cuts. It may start later. And, again, this is an economy that is doing very well. It's a strong economy. And the central bank can wait to see how inflation plays out.
JENNIFER SCHONBERGER: Switching gears, I want to ask you about trade and fragmentation. In the aftermath of the pandemic, we've seen supply chains reconfigured. In the aftermath of the Russia-Ukraine war, we've seen a reweighting of trade relations. How has that impacted global growth, as well as the outlook for global growth?
GITA GOPINATH: So we're at the early stages in terms of what's happening in global trade and even in global foreign direct investment. We are seeing a rerouting of trade channels. You know, China used to be one of the biggest trading partners of the US. That's not the case anymore.
Mexico plays a bigger role. We are seeing supply chain stretched, goods that used to come directly from China and now go through Vietnam or go through Mexico. All of this adds cost and, therefore, has implications for the prices at which we buy things. But still, it's early days.
And that's why we remind everybody that there is still time to make sure that we don't end up with a severe fragmentation in the global economy. Because if we do that, then you just throw out all the benefits we have of global trade, including living in an environment with low inflationary pressures.
JENNIFER SCHONBERGER: Former President Trump, now candidate Trump, has put forth the idea of slapping 10% tariffs on all US exports, 60% on Chinese imports. If that plan were to be implemented, what impact could that have on global trade patterns, on trade relations globally? Would we see a step back?
GITA GOPINATH: So, we wait to be sure about what governments plan to do in terms of their policies before we comment on that. So I think I would hold off on that particular question. But we are in an environment where we're seeing decoupling in trade across different trading partners.
And all of that adds costs to households, it adds costs to firm. It remains our argument that for the US to be competitive, if that's the goal, of course, is to have strong, well-trained labor force, making sure that it keeps up with the technological developments that are happening in the world. All of that can help. Strong infrastructure.
That just helps making the US competitive and productive. The US actually is doing very well on productivity right now. In fact, compared to, say, Europe, the US productivity growth is strong. So it is a strong economy and that's going to be the basis for the US competitiveness globally, too.
JENNIFER SCHONBERGER: I want to ask you about China because you see growth slowing this year and next. Certainly, there has been some strain in terms of US-Chinese relations in the aftermath of tariffs that were put on in 2017. Now those relations seem to be easing a bit, thawing a bit. But given the trajectory of growth, where is China's economy now? Is China's economy on the decline?
GITA GOPINATH: So we just got the first quarter GDP numbers for China and that came in over 5% growth for this first quarter, which was more than we were expecting. So, we are seeing more resilience in China's economy. And it's a pretty broad-based expansion.
We've seen it in consumption, we're seeing it in exports. So it is broad-based. Now, that said, China does have some important issues to deal with, including the health of its property sector. That is weak.
That's a correction that's been happening now for a couple of years. It's not completed, and we are still seeing weak investment over there. Secondly, we still have weak consumer confidence. It is an economy where we do believe the government can help by providing more income to low-income households, because that can help with consumption spending.
Stronger social safety nets can help bring up demand. It is an area where a lot more work can be done. I think China needs to be able to bring up its demand, given the amount of supply that it has produced, so that it can raise its productivity and its growth rate.
JENNIFER SCHONBERGER: Gita, thank you so much for your insight. I so appreciate it. I hope to speak with you again soon.
GITA GOPINATH: Thank you.