Steven Barnett: Reflections on the Global Economy

2020-10-13 IMI

This is a speech draft by Steven Barnett at the Macro-Finance Salon (No. 157) and Seminar on World and China’s Economy on September 22, 2020. Steven Barnett, Member of IMI International Committee, Senior Resident Representative of IMF China Intro I would like to thank IMI for inviting me to speak today. It is a pleasure for me to be here today. And, this is my first in-person event since coming to China. On a personal note, I’m happy to be in Beijing, out of quarantine, and enjoying this beautiful Fall weather. And, I must confess, also enjoying going to malls, restaurants, and cafes. I will make 5 points in my remarks. And, my personal experience is a segue to my first point. A year ago, I couldn’t imagine that I would be saying “happy to be out of quarantine.” A personal and somewhat trivial reminder that: We are experiencing a crisis like no other. Which is my first point. If my first point is a bit depressing, I promise I will end on a more optimistic note. My last and, I would highlight, main point is that the crisis is also an opportunity. An opportunity to build a better future for all people. An opportunity that we must seize. Crisis like no other Perhaps it goes without saying that the state of the global economy is not good. We are in a deep recession and experiencing a crisis like no other. The size, breadth, and speed of the decline is extraordinary. In 2009, the world experienced the global financial crisis. It generated a historically large recession, with global growtharound zero. Such low global growth is almost unheard of. Until now. This year, we expect sharply negative growth. Our forecast published in June was for the global economy to shrink by nearly 5 percent this year. All economies are feeling the impact. In emerging market and developing economiesour June forecast was for growth this year of minus 3 percent. China is a relative bright spot, with an emphasis on relative. It is the only major economy where we forecastgrowth in 2020 to be positive. Nonetheless, the economic impact of the pandemic in China has been large. Indeed, in the first half of this year growth was minus 1.6 percent. As for advanced economies, our June forecast was for growth in 2020 of minus 8 percent. The pandemic clearly has done enormous economic damage. We do expect a broad-based rebound in activity next year. But, even with that, the global economy in 2021 will be substantially below the pre-crisis trend. Anotherreason this is a crisis like no other is the reason for the output decline. It is to a large extent a consequence of necessary measures to contain the virus. In other words, it is the result of policies. This, obviously, is not the typical role of economic policy. Usually, in a downturn, we would think of governments trying to stimulate activity. Instead, this time, they were initially focused on virus containment, which required shutting down parts of the economy. And, a final reason this is a crisis like no other relates to the significant amount of uncertainty about the outlook. Aside from pre-existing sources of uncertainty, there is a large amount of uncertainty related to the virus. This includes: - How long the pandemic and required lockdowns will last. - How voluntary social distancing will affect spending. - Whether displaced workers will be able to find new jobs, possibly in different sectors. - How much economic scarring there will be. Scarring that could make it hard for shuttered businesses and unemployed workers to bounce back once the pandemic fades. Policy response My second point is that there has been an extraordinary policy response. The public health response remains the top priority. This is needed to protect people, jobs, and economic activity. Across the world, countries have implemented exceptional measures to support individuals and workers. Going forward, all economies need to ensure that their health care systems have enough resources. Second, supportive fiscal and monetary policies will need to continue until we can secure a safe and durable exit from the crisis. The goals include containing the economic fallout and then facilitating the recovery. The good news is that around the world, countries have responded forcefully to the pandemic. We have seen large fiscal and financial sector measures deployed in a range of countries. Central banks have taken strong actions. For example, in a number of countries, policy interest rates have been cut and are expected to remain at very low levels for several years. And, as one example of the extraordinary response we can look at the G10 (a group of 10 large advanced economy central banks) central banks. Their assets have increased by about US$ 6 trillion since mid-January. This is more than double the increase we saw during the two years of the global financial crisis. And, it is equivalent to about 15 percent of G10 GDP. On the fiscal front, we have also seen a substantial response. And, since April, more than 2/3 of the countries have increased their fiscal support to deal with the economic fallout. We estimated that the announced fiscal measures globally are nearly 11 trillion US$. On our web page (www.imf.org), we have a policy tracker that catalogues countries’ policy responses. While a lot has been done, efforts will need to continue. Post-pandemic Which brings me to my third point: The post-pandemic recovery. In thinking about the recovery, I will touch upon something new and something old. Regarding the new, it is likely that the post-pandemic world will look different. Thus, a key challenge will be to pursue policies that support transformational change.Some sectors may permanently shrink, while others—such as digital services—will likely expand.Policies that facilitate the corresponding reallocation of resources will ensure that this transformational change is as smooth as possible. Regarding the old, it is easy to forget that even pre-pandemic the global economy was facing significant challenges. These have not gone away. High on the list were, and are, goals such as: addressing climate change and fostering inclusive growth. Another, more wonky but in my view extremely important is to boost medium-term growth. Prior to the pandemic, the global economy was struggling with a trend decline in global growth, largely reflecting declining gains in productivity. Thus, a key challenge remains the pursuit of economic reforms to boost productivity, which will be critical for ensuring continued gains in living standards. Multilateralism My fourth point is actually a continuation of my last argument on old challenges. But, it is so important that it gets its own point. This is the importance of multilateralism. The global scale of the crisis requires global solutions. Countries, therefore, must cooperate on multiple fronts. One is on health. The international community needs to vastly step up efforts to support national initiatives. This includes removing trade restrictions on essential medical supplies; providing financial assistance and expertise to countries that need it; ensuring adequate funding for vaccines, so when ready, affordable dose are quickly available to all countries. Beyond the pandemic, policymakers must cooperate to address underlying issues related to trade and technology tensions. This includes, for example, strengthening the rules-based multilateral trading system. Another area is climate change, where efforts need to be scaled up at the international level, ideally through means such as equitable carbon taxation. Multilateral financial assistance is also necessary. We need to unite to help the poorest and most vulnerable economies, especially those struggling with high debt or dependent on hard-hit sectors. The G20’s Debt Service Suspension Initiative (DSSI), for example, has been commendable. Greater private sector participation should also be strongly promoted. Beyond the DSSI, there is a need to fill gaps in the international debt architecture and think about more comprehensive debt relief for many countries. The IMF, I would add, has moved with unprecedented speed. We have provided emergency financing to around 75 countriessince the pandemic hit. We have also enhanced access limits to our emergency financing facilities and provided grant-based debt service relief to our lowest-income members. Conclusion My last and main pointis about the opportunity in front of us. A common saying—sometimes attributed to Winston Churchill is: “Never let a good crisis go to waste.” Of course, we never want to have a crisis. The economic, human, and social costs are too high. But, when we have one, we should use it. So, this is my main message. “We can use the crisis as an opportunity to build a better future for all people.” A message which I borrowed from Kristalina Georgieva, the Managing Director of the IMF. In that spirit, and in conclusion, I will leave you with the hope the world uses this crisis to build a better future for all people. Thank you.

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Steven Barnett: Reflections on the Global Economy

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