IMF’s Gopinath Says Risk of ‘Severe Oil Shock’ Exists
Summary
TLDRIn an interview at the IMF headquarters, Gita Gopinath, the first deputy managing director, discusses the current state of global trade amid geopolitical tensions. She notes that while the ratio of global trade to GDP appears stable, there are underlying signs of fragmentation, particularly in trade between US and China-centric blocs. This shift is also evident in foreign direct investments. Gopinath highlights the emergence of countries like Vietnam and Mexico in rerouting global supply chains, which could potentially increase the cost of goods and lead to higher inflation. She emphasizes the IMF's role in promoting diplomacy and pragmatic solutions to slow fragmentation and rebuild trust among nations. The conversation also touches on the potential for an oil shock due to escalating geopolitical tensions, the impact of US sovereign debt on global borrowing costs, and the possibility of a higher inflation target in the future, though Gopinath stresses that the immediate focus should be on bringing inflation back down to 2%.
Takeaways
- 📉 Trade between US-centric and China-centric blocks has decreased significantly compared to trade within geopolitically aligned groups.
- 🌐 There is a shift in foreign direct investments, with countries like Vietnam and Mexico emerging as key players in global supply chains.
- 💰 The new era of fragmentation could lead to higher costs for goods and potentially higher inflation rates.
- ⚖️ The IMF sees its role as crucial in promoting diplomacy and pragmatic approaches to slow the process of fragmentation.
- 🛑 The recent attacks in Iran raised concerns about oil prices, but the market has remained relatively stable so far.
- 📈 If geopolitical tensions escalate, there is a risk of a severe oil shock, which could drive prices up to $100 a barrel.
- 🇺🇸 Concerns about sovereign debt, particularly in the US, have implications for global borrowing costs and debt servicing.
- 📊 The US cannot sustain a deficit of 7% of GDP and needs to reduce it to avoid negative spillovers to the rest of the world.
- 📉 The IMF expects interest rates to come down as efforts to bring inflation back to target continue.
- 🎯 Central banks should focus on bringing inflation back to 2% before considering a higher long-term target.
- ⏳ The current conversation should prioritize stability and predictability in monetary policy rather than changing the inflation target.
Q & A
What does Gita Gopinath discuss regarding the current state of global trade in relation to GDP?
-Gita Gopinath mentions that superficially, the ratio of global trade to GDP appears to be stable, suggesting a healthy state of global trade. However, deeper analysis reveals signs of fragmentation in trade, particularly between U.S.-centric and China-centric blocks where trade has significantly declined.
How does Gopinath describe the effect of geopolitical shifts on foreign direct investments?
-She observes a noticeable shift in foreign direct investments due to geopolitical alignments, with changes in trade and investment flows between major economic blocks.
What concerns does Gopinath express about inflation in the context of economic fragmentation?
-Gopinath expresses concern that ongoing economic fragmentation and shifts in global trade dynamics could structurally raise the costs of goods, potentially leading to higher inflation rates.
What role does Gopinath believe the IMF should play amidst increasing global economic fragmentation?
-Gopinath highlights the IMF's critical role as a multilateral institution in facilitating diplomacy and pragmatic approaches to maintain cooperation in areas like services trade, debt management, and climate issues, helping to rebuild trust and mitigate fragmentation.
How does the ongoing geopolitical tension, specifically attacks in Iran, relate to global oil prices according to the discussion?
-Gopinath discusses the potential risk of an oil shock, similar to that of the 1970s, if geopolitical tensions escalate, although current market reactions have been relatively stable due to de-escalation talks and sufficient supply capacities from non-OPEC countries.
What potential economic impact does Gopinath foresee if the U.S. continues to run large deficits?
-Gopinath warns that sustained high U.S. deficits could lead to higher interest rates and debt servicing challenges not just for the U.S. but globally, as heavy U.S. borrowing could crowd out other countries' access to capital, raising their borrowing costs.
What is Gopinath's view on the current U.S. interest rates and their future trajectory?
-She suggests that although current interest rates are high, the IMF does not expect them to stay elevated. The rates are anticipated to decrease as efforts to control inflation succeed.
Does Gopinath think central banks should consider raising their inflation targets in response to a new economic reality?
-Gopinath advises against discussing higher inflation targets at the moment. She emphasizes the need for central banks to first achieve the existing target of 2% inflation before considering adjustments.
What does Gopinath imply about the possibility of the U.S. facing a sovereign debt crisis?
-While she does not currently see a debt sustainability problem for the U.S., Gopinath indicates that the high level of U.S. borrowing could lead to economic issues, both domestically and internationally, if not addressed.
How does Gopinath describe the role of emerging economies like Vietnam and Mexico in global trade?
-Gopinath notes that countries like Vietnam and Mexico are becoming increasingly significant in reshaping and channeling supply chains around the world, highlighting their growing importance in a fragmented global economy.
Outlines
🌐 Geopolitical Tensions and Economic Fragmentation
The first paragraph discusses the current geopolitical tensions and their impact on global trade and economic fragmentation. Gita Gopinath, the first deputy managing director for the IMF, explains that while the ratio of global trade to GDP appears stable, there are underlying signs of fragmentation, particularly in trade between US-centric and China-centric blocks. This trend is also observed in foreign direct investments. The discussion also touches on the rising costs for countries due to reshuffling of supply chains and the potential for increased inflation. The IMF's role in promoting diplomacy and pragmatic approaches to slow the fragmentation process is highlighted, along with concerns about the impact of escalating geopolitical events, such as the attacks in Iran, on oil prices and the broader economy.
📉 Inflation, Debt, and Monetary Policy Outlook
The second paragraph delves into the concerns about inflation, sovereign debt, particularly in the United States, and the implications of the US's heavy borrowing on global financial markets. It is mentioned that the US cannot sustain a deficit of 7% of GDP and needs to reduce it to avoid negative spillover effects on the rest of the world. The potential for higher interest rates affecting corporations and households is also discussed. Gopinath expresses the expectation that interest rates will come down as inflation is brought back to target. Regarding the era of fragmentation leading to a higher inflationary regime, she advises against changing the central banks' inflation target from 2% until inflation is stabilized, emphasizing that monetary policy can control inflation levels and that volatility in inflation statistics could be problematic in a shock-prone world.
Mindmap
Keywords
💡Geopolitical tensions
💡Fragmentation
💡Offshoring, nearshoring, reshoring
💡Global trade to GDP ratio
💡Foreign direct investments (FDI)
💡Supply chains
💡Inflation
💡Multilateral institution
💡Diplomacy and pragmatic approaches
💡Debt issues
💡Sovereign debt
💡Inflation targeting
Highlights
Gita Gopinath, the first deputy managing director for the IMF, discusses the current state of geopolitical tensions and their impact on global trade.
Despite global trade to GDP ratio holding up, there are underlying signs of fragmentation in trade and foreign direct investments.
Trade between US-centric and China-centric blocks has decreased significantly compared to trade within geopolitically aligned firms.
The role of connector countries like Vietnam and Mexico is increasing as they help rechannel supply chains globally.
The current shifts in trade and investment patterns could ultimately raise the cost of goods and structurally increase inflation.
Gopinath expresses concern about the potential for higher inflation in the new era of fragmentation, with implications for economic policy.
The IMF's role as a multilateral institution is crucial in promoting diplomacy and pragmatic approaches amidst moving away from a rules-based trading system.
Progress in services trade is happening, which could be a key area of agreement among countries to slow fragmentation.
Geopolitical tensions, such as the attacks in Iran, raise concerns about oil prices and potential shocks to the economy.
Gopinath discusses the risk of a severe oil shock if there is a serious escalation in the Middle East, which could lead to oil prices reaching $100 a barrel.
The IMF is concerned about sovereign debt, particularly in the United States, and its potential impact on global economic stability.
The US's large deficits and borrowing could lead to higher rates, affecting not just the US but also global corporations and households.
Gopinath suggests that the US does not currently have a debt sustainability problem, but the heavy borrowing has global implications.
The IMF expects interest rates to come down as efforts to bring inflation back to target are successful.
The era of fragmentation may lead to a higher inflationary regime, prompting discussions about adjusting central banks' inflation targets.
Gopinath emphasizes the need to bring inflation back down to 2% before considering any changes to the inflation target.
Monetary policy can control inflation levels, but volatility in inflation statistics can create problems in a shock-prone world.
The conversation about potentially adjusting the inflation target is deemed premature and should be revisited at a later time.
Transcripts
I am here at the IMF headquarters with Gita Gopinath, the first deputy managing
director for the IMF, at a time of highly fraught geopolitical tensions.
All this discussion about fragmentation. You wrote a paper that was fascinating
about fragmentation. Just how much of it is actually
happening? The offshoring, near shoring, reshoring,
etc.? Yes.
So, Lisa, if you look at the data and if you look at.
Just a superficial number, which is the ratio of global trade to GDP.
So that number is holding up really well and you think everything looks fine.
But if you look under the surface, you're absolutely seeing signs of
fragmentation. And if you look at trade between US
centric blocks, this is a China centric bloc that trade has gone down by much
more than trade within geopolitically aligned firms.
That's also true for foreign direct investments.
So we are seeing these shifts, but at the same time, we're also seeing the
role of connect to countries like Vietnam and Mexico that are coming in
and reads channeling supply chains around the world.
And all of this can raise the cost ultimately of goods for countries, which
is really the key question here, which is how much structurally higher is
inflation in this new era of fragmentation?
This is a main concern and these are numbers that we have to determine.
Now, we're still at an early stage. So we we are looking at very dramatic
movements over here. But if this process continues, it could
lead to much more inflation in the process.
I do have a weight in mind about is it 3% or 4%?
Is that the kind of rate we can imagine in this world right now based on the
scale at which is happening? I wouldn't say it will be that large.
But again, the risk is if it heads in a much worse direction, it seems like this
is the path of travel. Everyone's talking about the
fragmentation, everyone's talking about protectionist policies in an era where
so many countries seem to be rejecting free trade.
What's the IMF role? We have a really important role to play
as a multilateral institution. You know, the world is moving away from
a rules based trading system. So what needs to happen is diplomacy and
pragmatic approaches. And that's what we're trying to push for
it through this meeting, getting countries together to work at least on
areas where they can agree on on services, trade, there's much more
progress is happening on services trade. We need to work together on debt issues,
on climate issues that will hopefully rebuild trust and slow the process of
fragmentation. We also see an increase in geopolitical
tensions, and we saw this overnight with the attacks in Iran.
There were some real questions around what the price of oil would do.
It did nothing. But that's as people were talking about,
de-escalation, as you're done yesterday was talking about the possibility of an
oil shock akin to the 1970s with oil prices going to $100 a barrel.
Should this escalate? Do you foresee a similar type of thing
happening? This is a risk we worry about.
If there is a serious escalation, which means a much more wider regional
escalation than what we've seen so far, then yes, we could have a severe oil
shock. But we're not there yet.
And as you can see in terms of oil prices went up somewhat, has come back
down. We have supply excess capacity in Saudi
Arabia. We have non-OPEC countries putting a lot
more oil out on the market. So there are other sources of supply
that can, you know, buffer these pre shocks.
But if there's a large scale escalation in the Middle East, that is the problem,
is that the line in the sand, $100 a barrel amount would consist of the
shock. I think you're going up $100 a barrel
would be problematic. But even going from here to $100 a
barrel would be very difficult for countries to deal with.
We're still fighting the last inflation fight, which is to bring inflation back
down to target. One thing that the IMF has talked
extensively about is concern about sovereign debt, in particular in the
United States and the overhang there. What's the outcome of that?
Is the fear of some sort of sort of slug flirtation or just sort of a sluggish
growth kind of picture because of the overhang?
Is it higher rates and potentially a Liz Truss moment, which I've been talking
about, get shot down all the time in the US, but is there something like that
that could potentially happen in the US is running very large deficits for a
country where demand is very strong and there is still the last mile in terms of
bringing inflation down. So for all those reasons, the deficit,
we can't have a deficit of 7% of GDP. It needs to be lower.
And if you project out, it's going to stand those high levels for a while.
That has consequences, of course, for debt servicing in the U.S.
But you sense the bigger problem is in terms of spillovers to the rest of the
world, because the rest of the world, when you have so much of death being
issued by the US that can crowd out the lend and borrowing from other countries,
their costs of borrowing goes up and their debt servicing costs go up by much
more. So, you know, I wouldn't say the US has
a debt sustainability problem now, but at the same time when the US is
borrowing that heavily, that causes rates to be that much higher.
It has implications for the rest of the world and for, you know, corporations
and and households in the US. How much higher I mean, could you see
rates staying here between 525 and 550 for the rest of this year for even into
next year? That would not be our baseline.
We would expect to see rates coming down.
So, you know, right now there is a fix for getting inflation back to target.
So we expect that to come down. You know, it's going to take a little
longer, but we expect that to come down. The question is whether it comes back
down to what we saw in the decade after the GFC.
And there you know, right now that doesn't seem to be the case.
One thing that you talk about is this era of fragmentation is going to lead to
a higher inflationary regime. Do you think it's appropriate for
central banks to have a higher inflation target long term as sort of their goal,
say not 2%, but two and a half percent or somewhere between two and 3% just
because it is a different reality now. So firstly, that's the conversation we
should not be having now. We need to ensure that information comes
back down to 2%. You know, monetary policy can pin down a
level of inflation. Yes.
If you're going to have a lot of volatility in that inflation statistic,
that could create problems because we are in a much more shock for a world.
But again, you know, that is a conversation for later.
For later. But it might be.
Yes.
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