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Berke Çavuşoğlu

Chief Economist IMF, Gita Gopinath, in RfD: “Recession Unlikely in the next 2 Years”

This week, Room for Discussion hosted Gita Gopinath, the newly appointed Chief Economist of the IMF and also Professor of International  Studies and Economics at Harvard University. It was her first visit to the Netherlands and eventually UvA was the only place she experienced about Amsterdam, due to her busy schedule.

She began by introducing herself to the room full of students and academics, followed by the answer to the first question: “What does the position ‘Chief Economist of the IMF’ mean exactly?” She mentioned it actually is a combination of two positions: Director of the Fund’s Research Department and the Economic Counselor. Put simply, she gives research insight into the design of policies and directly advises the Managing  Director, Christine Lagarde. Allegedly this is a seat offered only to the most remarkable researchers in the field, and it is now occupied by a female for the first time.


The discussion began with, evidently, the hot topic of the macroeconomic scene, being “the Trade War”. She mentioned that “global growth is sluggish, risks are high and it is mostly due to the Trade War. Even though the trade volume between China and the US is at the lowest levels since 2012, the real blow will come to the business sector”. She added that: “Globally, manufacturing and trade is in decline, whereas the service sector is thriving, creating a ‘divergence’ in the business climate. Therefore countries like China relying on production suffer from the trade war the most. This divergence and unpredictability of the trade flow between the two superpowers create a ‘policy uncertainty’ across the world”.


As a serum, interest rates are being lowered by central bank after central bank, injecting money into the world economy, but mostly for developing countries. Developing countries are defined in a different way right now. The flow of capital does not seem to be that smooth compared to the previous Quantitative Easing periods as they have been struggling to keep their economies and currencies stable in the middle of the global risk times, as opposed to the current investor profile with lowered risk appetite (i.e. Turkey, Argentina). Adding to this, enforcing tariffs has an appreciating impact on the US Dollar as the capital turns back home as a consequence of the increased risk and cost of trade. In the end, whatever happens in the US political scene or the world economy, the US Dollar is still the safest port for capital. This journey back home inverts the money flow back to the USA from developing countries, leaving them with inflationary pressures and weakened currencies.


This change of dynamics is leading the world into, in her own words, a “Dollar Dominant Era”. The most widely used currency in the world is here to stay in the world trade according to Gopinath. What about the Euro? Not there yet. She thinks that the Euro can host trade, but cannot yet match the US Dollar.


The next hot topic discussed was “Brexit”. She addressed that unemployment levels in the UK are close to pre-crisis levels and they face a lot of growth pressures. As a “No-Deal solution” might be approaching, the UK is expected to face tempered inflation, leading to the depreciation of the British Pound. An investment decline, also, looks inevitable.


Finally, the most tampering issue in the world came in: “a potential recession”. The biggest indicator on this was the inversion of the US long-term yield curve. Gopinath describes this inversion as “reputable in predicting a future crisis”. Is this a domestic issue of the US? According to the Chief Economist, the main reason of the inversion is low inflation rates and low expected returns in the long run. For now, low unemployment rates and positive wage growth signals no such recession in the US. She stated that the world should not expect a global recession during 2019 and 2020, not just because of the strong record of the US economy, but also because of the strong services sector. As of now, the tertiary sector is still bearing the load of the world economy pretty solid as opposed to trade and manufacturing.


Be there as it may, since the world GDP keeps downgrading, there is no room for another shock, according to Gopinath. The solution? In the short-term, global policies based on GDP growth; in the long term, financial consolidation. The issue of financial consolidation came up after the question “Should IMF cooperate with emerging Asian economic institutions like Shanghai Cooperation Organisation?” She answered: “Definitely yes! The world still needs a lot of infrastructure investment along with the consolidation of policies for stability and collective growth.”


All in all, an upcoming possible recession, Trade War and Brexit were the main topics that came up during the interview.  Gita Gopinath was on point and clear in every question, she loved being with us at the UvA and we were so glad having her. Many thanks to all parties involved, but, first and foremost, Room for Discussion for organizing the event.

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