IMF / University of Tokyo Discussion of the World Economic Outlook During the COVID-19 Pandemic

[00:00:00] Tutomo Watanabe: International Monetary Fund, and the University of Tokyo. I'm Tutomo Watanabe from the University of Tokyo. International Monetary Fund, or IMF, published World Economic Outlook twice a year. And the most recent update was released just two weeks ago. Many countries, including Japan, is suffering a lot from the COVID-19 crisis, and so people in those countries would like to know what's going on in the global economy, how the government and the central banks reacted to the crisis, and what will happen in the future. In this event, the publication of the World Economic Outlook by IMF gets more attention than usual from the general public. I think many discussion about the crisis and are now going on here in Japan, and most of which are closely related to the topics discussed in the World Economic Outlook. So I strongly recommend you to take a look at the World Economic Outlook, which is available at the IMF website. It is very fortunate that today we have a special speaker from IMF. Let me introduce Professor Geeta Gopinas to all of you. She is a chief economist at IMF. More precisely, she is an economic counselor and the director of the research department at the IMF. In short, she is responsible for all important policy messages sent from IMF, including the World Economic Outlook. So I'm sure that there is no one in this world who knows more about the global economy than she does. Geeta was a professor at Harvard University of the Economics Department before joining IMF in January 2019. As an academic economist, Geeta has produced a number of very, very influential papers in the area of international finance, international trade, and macroeconomics. She did the papers on exchange rate, trade and investment, international financial crisis, monetary policy, public debt, and the emerging market, and so on. For example, she's recently published a paper in American Economic Review, the title of which is Dominant Currency Paradigm. This is about the invoice currencies used in international trade and international finance. We may be able to hear about something related to this topic in this webinar. I heard from someone that Geeta had a plan to visit Japan -- I mean, physically visit Japan this month to give a talk, which was unfortunately canceled. However, it's very good to have her online today and talk about the crisis with her today. Before starting, let me tell you about how the webinar today is structured. We will have three parts. In the first part, I will ask Geeta to make a presentation about world economy. After her presentation, I myself would like to ask a couple of questions to have. So this is going to be the second part of the webinar. And in the third part, I will open the floor to questions from the audience. Actually, we had already started to collect questions from the audience several days ago, and we now have more than 70 very good questions from the audience. Some of them from my colleagues and our students, economists in financial institutions, and central bank economists, and so on. I'd like to thank to those who sent questions to us. We will continue to collect questions even during the webinar. So if you have a -- if you come up with a question to Geeta while hearing her talk, please submit it online. We welcome any questions about world economy, fiscal and monetary policy, Asian economy, and Japanese economy. Geeta is not an expert of the Japanese economy. However, I strongly believe that she will have a curiosity about your question about the Japanese economy. And I hope that she will be happy to answer to those questions. Okay. Let's move on to the first part of the webinar. So, Geeta, the floor is yours. [00:04:51] Geeta Gopinas: Thank you, Dean Watanabe. It's a real pleasure to be here, and appreciate the kind introduction. As we were discussing earlier, and you told me that you were at Harvard some time ago, so that makes me have an even stronger connection now with you. So, let's jump in, and I'll get started with my presentation. To do that, I'm going to share my screen. Okay. So, I assume you can see my screen. So, what I'm going to present to you is the recent World Economic Outlook that we put out two weeks ago. And my first slide is kind of a quick overview of what we are seeing around the world. You know, the COVID-19 pandemic pushed economies into what we call the Great Lockdown. And that triggered the worst recession since the Great Depression. And now, many countries are reopening. Over 75% of countries are reopening at this point, at the same time as cases continue to rise in many parts of the world. So, the recovery is likely to be highly uneven and uncertain. So, what you see on the graph is our projected path for GDP. Now, the blue line is what we had projected in January. This is before the crisis. The green line is what we then projected in April when you put out our April World Economic Outlook. And the red line is our current projection. So, what you see is we are projecting a sharp drop in global growth of minus 4.9% in 2020. And then, we have a recovery in 2021. But it is a partial recovery because you're still well below the pre-crisis trend line. Now, there are several risks that still remain. There's high uncertainty on the recovery because we still don't have a solution to the health crisis. Financial conditions could tighten rapidly. Geopolitical tensions and social unrest could escalate. And the current crisis could generate prolonged scarring going forward. Now, in terms of policies, given the tremendous uncertainty, the policy advises to firstly just adapt as the situation evolves because there is tremendous uncertainty. It will remain a priority to help support health systems, shield affected people and firms. At the same time as you support hiring and enable reallocation of resources, ensure soundness of the financial system. And as the recovery strengthens, you want to foster a more inclusive green recovery. Now, international support will be required for vulnerable countries and to continue to improve globalisation. So the way we think of this crisis, we coined it the great lockdown. And we think there are three phases to it. The first phase is when countries were entering the great lockdown. That's the first row. And you saw countries putting in strict containment measures. Now, the second phase is when countries are reopening. And many countries are reopening in the second row. But we call it a tentative exit because in the absence of a medical solution, there is a possibility that countries will go back into lockdown, either de jure or de facto. And then the third phase is when there is a medical solution. So you either have very effective treatments so that this becomes like an ordinary viral infection, or we have a vaccine. And that's when the world truly escapes the great lockdown. We're not there yet. What we're seeing is cases around the world that continue to grow, especially in emerging and developing economies. So the pandemic is everywhere at this point. It started early in some places and have stabilised. But as you can see, it's across the board in advanced economies, emerging markets, low-income countries. Nobody has been spared. In that sense, it's truly a global crisis. Now, what I'm going to walk through in my next slides are what we're seeing in terms of the impact in the global economy in the first phase and in the second phase as countries reopen. So the first feature of this crisis is how the service sector has been hit hard. So this is quite unlike previous crises where typically the service sector is spared because consumption spending, even if it falls, it doesn't fall as much as, for instance, investment does. But this time around, because this crisis has meant that people have stayed away from going out and spending in restaurants and so on, there's been a big drop. And so you see that in the left graph. You can see for advanced economies, for emerging and developing economies, and you can compare manufacturing and services. And if you look at the red bar, that's when you had the peak contraction. And you can see that the effect on services, the red bar was much more severe because the shorter red bar as opposed to manufacturing. And now with the reopening, we are seeing signs of recovery. Now, in the case of services, as you can see, it's still below the 50 line, which means that it continues to contract, but at a much smaller rate. And it's very closely tied with the middle graph shows you is that this drop in services is very closely tied to the decline in mobility in different countries. Another sharp feature of this crisis is the speed with which employment has dropped in many parts of the world. And you can see that for the US and you start seeing signs of recovery at this point. So that's the first kind of unique imprint of this crisis, the service sector being hit hard, employment collapsing in a rapid, in a speed and scale that's not been seen before. If you look at the recovery, what you see if you look at the leftmost graph, is that the recovery is uneven, which means that some sectors are recovering much faster than the others. So the left graph shows you China, and you see that there was a steep fall across the board, and especially in some sectors like catering services. And they are also the ones that are taking longer to come back into positive territory. The middle graph shows you the same thing for the US, and you have a big drop in restaurant bookings that happened. And while you've seen the sharp recoveries in retail sales, restaurant bookings still remain well below. So this is a sense in which you have an uneven recovery. Also, we saw a big collapse in trade, and now some early signs of recovery. So that's the second feature of this crisis, the uneven nature of the recovery. Now, the third is a question that came up was because this crisis has both big supply and demand shock components to it. There was a question of whether we would see increasing inflation or disinflation. And what you see is that you did have an increase in food price inflation in many parts of the world. But if you look at consumer price inflation, that came down, and that's also because of the drop in commodity prices. But even core inflation has stayed, has come down in many parts of the world. Commodity prices have recovered from their deep lows, but you have countries in the world that are big commodity exporters that are getting hit very hard by this commodity crisis. Now, what has happened in a positive and an unprecedented way is the dramatic monitoring fiscal policy supports. The left graph shows you the amount of fiscal measures that have been announced. They now stand at close to 11 trillion dollars in the world. The vast majority of it is in advanced economies. But there has been also substantial support in emerging market and developing economies. What the middle graph tells you is that many of these schemes have been very successful, especially in advanced economies, in replacing lost income for people. You've just had replacement rates have been very high in terms of the income that was lost. And the right-hand side graph shows you that monetary policy measures have been, you know, have there been ambitious monetary policy steps that have been taken around the world, not just in terms of policy rate cuts, but providing liquidity. And for the first time, many emerging markets have delved into quantitative easing, which was something that we did not see before. Now, because of that massive policy support, there was one positive surprise that happened in the last few months, which is the easing of financial conditions everywhere. And so you could see in the left graph that in the beginning there was a big collapse in capital flows to emerging markets, but then that stabilized relatively quickly. And most recently, you can see them recovering, for instance, if you look at emerging Asia. Another feature that you saw was that countries that had very large depreciations of their currencies in the first few months of this crisis have now seen some reversal, and now you're seeing some appreciation in their exchange rates. So this was one positive surprise that we came out over the last few months. So now if you step back and ask the question about, if you look at the cross section of countries around the world, what do we see in terms of the relationship between economic losses and the severity of the pandemic? Well, the left-hand graph shows you is that there is a weak relationship in the sense that countries that had higher death rates per capita took a bigger hit to their GDP, but the relationship is still weak, and this is a relationship that needs to be continued to be explored. The relationship that's stronger is the one that leads to mobility, which is that in parts of the world where you saw the biggest drop in mobility, that's where you've seen the biggest drop in GDP, looking at first quarter GDP numbers. So now I'm gonna jump into what our projections are, and we, of course, given this environment we live in, we have to be very clear about what our assumptions are. I've listed the assumptions here, and I'm not going to read everyone out. But the question, of course, is what have we assumed about a recurrence of infections in the second half of this year? So what we are assuming is that there will likely be a recurrence of infections, which means that people will voluntarily social distance for much longer. However, we are not projecting that there will be the same kind of stringent lockdowns that were put in the first half of this year. So clearly that is an assumption. So let's look at the real projections. These were the numbers we have for the different countries of the world, advanced economies of the world. For the globe as a whole, we have growth at minus 4.9%, and then it's rebounding to 5.4%, but that's still only a partial recovery. Very large negative growth numbers across all the different countries. Similarly, you see that for emerging and developing economies. I could have flagged Japan in there, or minus 5.8% is a projection for 2020, and then 2.4% recovery. For emerging market and low-income countries, similarly, very large negative growth reductions. So some of these numbers look smaller than advanced economies, but that's just because many of these countries are projected normal times to grow at much higher rates than advanced economies are. If you look at the whole path of GDP, you can see from the blue line that for advanced economies, we have a recovery where even by the end of 2021, they're below the pre-crisis level. Similarly, that's true for emerging and developing economies if you exclude China. China is the country for which we have the, we have a more stronger recovery going forward. Overall, for emerging market and developing countries excluding China, we are projecting a bigger hit from this crisis as compared to advanced economies. Now, there are other possibilities. I think there could be, there are upside risks, which means you could have better outcomes. So if you have better news on the, on the treatments or vaccines, you could see a recovery much faster and that's a green line. But if there is a serious second wave that brings down activity to the same way it was in the first half of this year, then we are basically looking at an L-shaped recovery, which is basically no growth in 2021. Now, let me quickly walk through the risks. Among the major risks, the number one risk is one of, again, the fact that this is the health crisis is still ongoing. And so the risk of second major, second and third waves and rising infection rates. And what we see is that countries that reopened at the same time that the number of cases were growing is where you're actually seeing the biggest uptick in the number of cases. A second risk is the middle graph. It says that, you know, financial market conditions have improved substantially, but if there's worse news that could change and that could trigger much more distress. And the geopolitical risk index is still, it's going, it's going up. And so the risks are there on that front too. A second important factor to keep in mind is that, given the very large fiscal stimulus that has been put in place and given the collapse in economic activity that's been projected, global public debt levels are projected to be at the highest level since the Great Depression. So you can see that there. It's even higher than the post-World War II peaks. So obviously this has implications. Countries are going to come out of this crisis with large amounts of public debt, and they will have to find ways to bring that level of debt down. The right-hand side graph tells you that all this exposure also in terms of fiscal support and weak activity has meant that many emerging markets are also now in a high, have high or medium vulnerabilities on the fiscal front and on the external front. Lastly, I think it's important to think about what will happen going forward in the sense of what kind of a world will this end, will we end up with. On the left-hand graph, what you see is that there are countries that would rely, that rely on tourism for whom this hit, you know, is almost an existential crisis because you can see, for instance, 2020 daily inbound flights to the Caribbean that plummeted and that has stayed low. The middle graph shows you that, in the absence of government support, we could see a large-scale increase in bankruptcy rates. And that obviously has implications for the strength of the recovery. And the third graph tells you, right-most graph shows you that this crisis is likely to lead to an increase in global poverty after it's been declining. So this would be the first in over 20 years, which these are World Bank projections. Now, of course, I want to end with something a little more positive, which is that, these are, there are also opportunities as countries rethink how to invest in public goods coming out of this crisis. And on the left-hand side graph, what it shows you is global carbon dioxide emissions. They came down during this crisis, but they are projected to go back up as economic activity recovers. This is an opportunity to bring about a green recovery in economies. Similarly, investing in digital infrastructures, digital transformation would also be a very promising path for economies around the world. My last two slides goes into policy recommendations. There is a lot of detail in there. I am not going to go into every part of it. The recommendations tell you depend upon the phase you're in. Which is the first phase was when we had the strict containment measures in place. And at that time, governments needed to support workers and firms directly, make sure that there was income support for people and firms were supported through wage subsidies and through credit guarantees and so on. Over time, as the recovery gains strength, you would see a gradual shift from protecting jobs, but as opposed to encouraging a reallocation of workers towards sectors that are growing. You will continue to need to spend on healthcare capacity. Timely testing, tracing, isolation would be required. And you will continue to need central bank support. To ensure that financial systems remain sound and can support the recovery. And again, seize opportunities to make recovery green, more equal and digitally friendly. Lastly, this is a truly global crisis. And if there was ever a time for international cooperation, this is it. International coordination and support will be essential. We need to guarantee adequate health supplies, data sharing, remove trade restrictions and essential medical supplies. Make sure that there is sufficient production and delivery of vaccines when available. Ensure that developing countries can finance critical spending and international liquidity needs are met. And countries need to work together to improve the rules-based global trading system. And at the IMF, we are actively working to support our member countries. So with that, I will stop and hand it back to you, Shutomo. [00:24:19] Tutomo Watanabe: Shutomo Shutomo: Okay. Thank you very much, Geeta. [00:24:21] Geeta Gopinas: I'm going to stop sharing my screen. Okay. [00:24:24] Tutomo Watanabe: Shutomo Shutomo Shutomo: Thank you very much, Geeta. Let's move on to the second part of the webinar. I'd like to use my privilege as a moderator to ask a question to you, Geeta. So now you are a student and I'm a kind of a teacher to you, okay? And I have prepared a couple of questions and let me share my slides. Can you see the screen? [00:25:01] Geeta Gopinas: Geeta- Yes. [00:25:03] Tutomo Watanabe: Shutomo Shutomo Shutomo Shutomo: So you are now in -- physically now in Japan. So I'm going to start with a question about the Asian economy. And after that, I'm going to talk about -- I'm going to ask about inflation deprivation, which is a very popular topic here in Japan because we are suffering from long period of deprivation here in Japan. And the third one is about the zombie lending. I'm going to talk about -- I'm going to explain what it is. And finally, I will talk about real-time data. So let me start with the Asian economy. So here -- the first thing I would like to show is this figure, which is very similar to the figure you showed in your presentation. I'm going to talk about the vertical axis. So the vertical axis is the real GDP growth, which is taken from the World Economic Outlook. And the horizontal axis is this per 1 million population. So what we are looking for is a negative correlation between the two. And there is some negative correlation between the two. So which means that if the health condition, health shock is stronger and more people die, in that country, their GDP growth is lower, that's the meaning of negative correlation. However, this negative correlation is not so strong, and it's actually very weak. And so, for example, in particular, it is so for Asian countries. I hear red squares represent Asian countries, and the blue one are the rest of the world. And he suggested that very important things. First thing is that the number of deaths in Asian countries, including Japan, is very, very small, much smaller than the number in Europe and North and South America. However, growth rates in Asia are almost as bad as those in the rest of the world. For example, if you look at Thailand, so this is Thailand, and the number of deaths is only 0.83, so it's very small. However, the growth rate is almost minus 8 percent. Here, you have the U.S., so the number of growth is almost the same as in Thailand. However, the death is more than 300, so the big difference between Thailand and the U.S. in terms of the deaths. However, in terms of the growth rate, those two countries are almost the same. So there's a huge asymmetry between Asia and other parts of the world. So my question is why this is so. So in summary, health shock in the Asian countries is much smaller in terms of magnitude than the rest of the world. However, economic damage in Asian countries are almost the same as in the rest of the world. So I can think of several possibilities. The first possibility is a sort of spillover effect. Maybe if you remember the global financial crisis, spillover through financial linkage or spillover through trade linkage were very important in the global financial crisis. However, as Geeta emphasized, the crisis this time is quite different from the financial crisis in the sense that shocks happen almost entirely in the service sector rather than goods sector, which means that, of course, the service sector is non-trailable, so it's hard to imagine that the spillover effect is playing a very important role in this spillover process. So I don't think this is a good explanation to the phenomenon. And the second explanation, which may be very important, is sort of an overreaction by Asian countries, overreaction by Asian consumers, overreaction by Asian governments, including Japan, which means that, you know, we look at what's going on in Europe, what's going on in the US, and some very, very bad things are going on, and the media, mass media and the SNS always say that similar things could happen in Japan and Asian countries. So Asian consumers are very much aware of what's going on in the rest of the world, so they became very, very precautionary, so they consumed less than usual. Also, the government, in those Asian countries, reacted very, very aggressively to contain, to contain the outbreak of the virus. So these sorts of overreaction by consumers and overreaction by government could be another explanation to the phenomenon which has happened in Asian countries. So my question to Gita is, do you have any thoughts on the Asian situation, in particular, why growth rate in Asian countries, including Japan, as so low in spite of the health condition is not that much, is not that bad as in the rest of the world of ours. Oh, your microphone is mute. [00:31:20] Geeta Gopinas: Yes, thank you. Yes, that is a great question, and it is indeed quite closely linked to the figure that I showed you in my own slides, where I looked at the relationship between the decline in real GDP growth, the surprise component of it, and related to the death rates per capita. And what we also see is a weak relationship, so the relationship has the right sign, which is places where you see a worse health crisis, the economic activity is bigger. But I think we have to still wait to confirm that relationship. I think it is a weak relationship, and it is confirmed. Now, I think what we are seeing from the cross-section of countries is that in many places, it is not necessarily the actual containment measure or the actual intensity of the health crisis, but the fear associated with it. And that has led to a lot of holding back of activity. So one variable where you actually see a very strong relationship is when you look at the relationship between mobility and economic activity. There you can see exactly a very strong relationship, which is places where mobility fell by the most, economic activity was hit by the most. So the question is, what explains why mobility falls so much in one country versus another? We know it's not just about how much, how strict the containment measure is, and it's not just about the health factor. Secondly, I agree with you that this is a crisis where mostly what's being hit is domestic consumption. But one sector that's been very badly hit is tourism and travel. So if you look at Thailand, for instance, a great example, it was 20% of GDP is tourism in Thailand. And so this crisis has had a very big hit on countries that rely on tourism, which is why you've seen a big negative effect. Then there are other countries where this crisis has also been a big hit to commodity prices and their commodity exporters, and you've had a big hit come from that. There are some countries that rely much more on international financial market conditions. They've been hit badly. And then you also have countries differing in the amount of policy space they have. So everybody can get hit by the same crisis, but then because they have less policy tools to use to respond to the crisis, you have a differential effect on economic activity. So I think all these variables matter. The question is, we will need to keep looking at the data going forward, and this will probably be a fuel for research for many years to come in trying to understand what this relationship was. But I think a common thread going forward is that when countries have to deal with future waves of this crisis, that doing so in a more targeted manner is beneficial, which means that you start early, as soon as there's an eruption, target the local area. That's one. Second, better targeting in terms of some groups are much more vulnerable to this virus. So you have differential isolation. Contact tracing is very helpful. And very strong communication so that you can assure people that if there is another outbreak, it will be handled well. Because that, as we just discussed, seems to be a number one factor in how much people decide to go out and engage in economic activity. [00:34:51] Tutomo Watanabe: Thank you, Minister, for a very good answer to my question. Yeah. Actually, it's true that Thailand is kind of relying heavily on tourism, and that's one reason why Thailand growth rate is much lower. However, think about Japan. And of course, we rely much on tourism, but still we export many other things. And so we are not relying singly on tourism. However, growth rate is very low right now. And your prediction also suggesting that growth is very low here in Japan. So, I like your explanation about fear and people fear about what's going on. There's a huge uncertainty about the virus. And even Japan, people are very much afraid of what's going on in the future. So, they try to stay at home so that they cannot get the virus in the town. So, that kind of fear played a very important role in their consumption behavior. I agree with that. However, if you think about the future, let's think about the second wave, okay? Probably in some near future, we will face a second wave. But now, we already, Japanese and the Asian people already know that health shocks is quite different across Asia and other parts of the world. So, maybe Japanese or Asian people think that we should not upgrade risks as you do in the U.S. or European countries. So, as far as the second wave is concerned, maybe our behavior could be different from the rest of the world. Do you think that, again, economic growth would not be that much bad as it would be in the rest of the world? [00:37:03] Geeta Gopinas: I think there is certainly reason to believe that countries who have been able to keep the number of cases low, the number of deaths per capita low, that they will have, you know, that people will feel more confident about going on their work. So, for instance, if you look at different places that have reopened and you look at how, you know, how much of activity has come back, you see that places where there was, the number of cases came down quite substantially, you actually see reopening and you see an increase in mobility. But in places where you reopen, but the number of cases are continuing to go up, you don't really see that increase. So, people obviously care about how the health crisis is being managed. And if it's managed, if it's, you know, people see that it can be managed well. And then, of course, in the case of Japan, also people have very good personal practices in terms of, you know, social distancing, wearing masks. I mean, those are, those have also helped, which while the rest of the world had to learn how to do it. [00:38:08] Tutomo Watanabe: Do you think that this is a stupid idea, if, say, IMF says that, yes, the Asian country is kind of very strong in terms of health condition, so you should work very hard. However, in Europe or maybe in the North and South America, in those countries, people are very, very vulnerable to the shock, so you should stay at home. So, that kind of, you know, coordination among countries in terms of reopening, do you think that IMF can be, can play some role in that kind of coordination? [00:38:46] Geeta Gopinas: Firstly, I'm not sure we should be giving that particular advice. I think, I think all countries, I think all countries will have to get to a point where, you know, yes, in the first, first half, they were not prepared. People were not used to, you know, were not taking these kinds of precautions. The lockdowns were very widespread and generalized. But I think now we have the health capacity. Doctors know how to treat this virus better than they did in the beginning. So I think every country is now in a better place going forward and they should continue to, to improve that. [00:39:27] Tutomo Watanabe: So let me move on to the, my second question and I have to share again, which is about inflation or depression. Okay. So here you, so this is the, I'd like to share two slides, two figures with you. One is about Spanish flu, which is coming from paper by Robert Barrow and so on. And so it was 100 years ago, there was something like a pandemic and the inflation rate increased significantly during that period. So this suggests that the shock at the time, but the kind of driven by supply side. And also supply shortage was a very serious, which, which give a very strong upward pressure on prices and wages. And another figure I'd like to share with you is this one. This is coming from the, from Japan and this is the inflation rate at the daily frequency. This, and this is estimated using scanner data. And can you see this, this, this green part represent a state of emergency. So it was, so the blue bars represent the degree of stay at home for the, for Japanese people. And the red line is the inflation rate at the, at the daily frequency. And you can see that you are in this, um, emergency area, people, of course, people stay at home. And also people buy something at supermarket. And so the demand for the supermarket was very, very strong. And so the inflation rate actually increased significantly and we reached almost 2%, 2% is kind of a target level for the bank of Japan. So it, it increased a lot during this period. So as far as good, good prices are concerned, prices went up, which is again, uh, consistent with, with, with, with your side. And of course, um, um, um, um, service prices declined substantially even in Japan. So I'm, I'm not saying that the similar thing, uh, we observed during the Spanish flu is actually happening in Japan, but I have to emphasize that, uh, um, good prices and the service prices behave quite differently in, in, in Japan. And probably the same thing is doing in, in the other part of the world. So my question is, um, is it likely or unlikely that prices will go up sometime in the future? Um, not only good prices, but also service prices will go up sometime in the future and probably due to supply shortage. And another, uh, related, another related question is some people in Japan worry that imports of food and raw material from countries like, let's say, Brazil will likely to rise substantially, uh, due to, um, um, accelerated outbreak of the coronavirus in those countries. So that imported prices will rise, ending, ending up with high inflation in Japan. Do you think that this is kind of, kind of like this scenario in the future? So this is all about, uh, inflation, uh, inflation question. [00:43:02] Geeta Gopinas: Uh, yes, um, uh, happy to, happy to answer that. So, um, so yeah, so your, the slide that you have on inflation shows you that during those years of the Spanish flu, you had this spike in inflation, but, uh, my reading of that paper by Barrow and co-authors, uh, is that if you look at what was real meaningful for inflation, it was less the flu and more the world war. Uh, so, you know, the first world war was, was, you know, around the same time. And you had the consequences of it, which was much stronger. That was, that had a much bigger, uh, role to play in explaining the high inflation that followed, uh, as opposed to the, uh, pandemic itself. So what's different between the wars and the pandemic, of course, in the wars, you had a big destruction of physical capital, uh, and you saw that in, uh, uh, the, you know, and that's something that's not happening, obviously this time around. So we don't have a big destruction of physical capital, so that big supply shock is not there. Uh, what we have seen this time is, you know, that fact that food inflation did go up, uh, in several parts of the world, it was an increase in demand for food inflation that went up. But on the other hand, other sectors that are kind of the non-essential sectors, there you started seeing, uh, uh, price inflation come down. And now because the consumption bundle is also much more skewed towards these non-essential, I guess, uh, spending as opposed to food, you know, the effect on overall, uh, consumer prices is, is much weaker. Now to your question about going forward, what do we expect to see? I think our overall expectation is that yes, there can be pockets where prices go up. Like the example you gave of Brazil, you know, if there is big supply chain disruption, certain, certain materials and food could spike up. But overall, we think that inflation is going to stay low because if you look at the effect on job markets and if you look at employment, we don't really expect to see wage price inflation coming anytime soon. That's one. Second, and this is also an important difference between now and in the time of the Spanish flu, uh, is that we have central bank policy that has been quite successful in anchoring inflation expectations, unlike in the past. And so now you might have a spike in food price inflation, but people don't then extrapolate that to overall CPI inflation. And so, uh, so, you know, putting the two together, I would say that at this point, we probably have more of concern of inflation going too low as opposed to inflation going, overall inflation going too high. [00:45:44] Tutomo Watanabe: Okay. Thank you very much. Um, it seems that, uh, we are running, running out for time. So, I will, um, move on to the, um, um, uh, to the questions, uh, from the floor and, um, uh, I'd like to, um, share the question with Gita and the Gita will, uh, uh, say something to the question. So, the first question is coming from, um, um, uh, Hiroshi Ugai, uh, JP Morgan. And the question is about, uh, about, uh, uh, policy economics and policy space. Okay. So, um, um, um, let me read, um, um, um, growth rating in advanced economies are just bottomed up out, but the expected partial recovery into 2021 mean that output gap will continue to be in the negative, negative territory, indicating that the deflationary or disinflationary pressure will not fade out. And credit costs may increase as firms' balances or, um, uh, which are expanding. Um, in this environment, policy support should gradually shift from being targeted to being more broad-based, but the government should run, uh, should turn to the fiscal tightening eventually, and the central bank's monetary policy is, is closer to the limit. What do you recommend in general the appropriate choice or combination of accommodative macroeconomic policy under such condition after exiting the emergency situation? That's a question from Mugaisa. [00:47:20] Geeta Gopinas: Uh, yes, uh, thank you. Uh, so again, in terms of the stance of fiscal policy and monetary policy, I think we are still in a crisis. We're not out of the woods, and so support will be needed on both fronts. Now the question is what phase of the crisis are we in? Are we, are we now, which is that we are reopening, but still the health crisis is not over. That's going to be a different set of recommendations as opposed to when the crisis is completely over. I think all, uh, governments around the world are dealing with the following issue. One, because this is a massive real shock, the issue is more about solvency as opposed to liquidity, which is that we have a problem where we're going to see firms, uh, running, you know, get to becoming insolvent because they go through many months of loss of revenue, uh, as the longer this crisis gets. That's one. Second, governments have to deal with the fact that there is tremendous uncertainty because you just don't know when to pull the policy off because you don't know what, which state of the crisis you're in. And the third is the more longer this gets, the more governments need to encourage reallocation of workers. And the question is, when do you do that? I think in terms of the policy response, what it means is that because there's a bigger insolvency issue here, government support will have to more shift more towards, uh, being equity-like as opposed to debt-like because otherwise you will end up with a lot of firms that exit this crisis with huge amounts of debt overhang and you don't want that. The uncertainty means that you're going to have to put policies in place on a temporary basis for like a few months and then reassess as things improve. And the reallocation aspect means that yes, in the first phase, the, you know, you, you, you, a lot of the support was to keep workers and firms matched, but gradually you're going to have to, uh, recognize that some sectors are never going to come back to their pre-crisis level. So you want to separate workers and firms at that point and shift them towards growing sectors. How do you do that? Well, you want to still protect people. So you still give them something like unemployment insurance, or if you're in informal sectors, you give them cash transfers. But if you are, uh, from the firm perspective, you give them, you give firms hiring subsidies so that they can, uh, hire workers, especially the young workers and older workers who tend to have much harder time finding jobs after a crisis. Uh, and also reskilling for workers so that they can adapt to new sectors. So those kinds of measures will be needed. So the policy mix has to change. And then eventually you go to much more, you know, what we call a broad based support, which is basically a tool like, uh, public investment, which is then going to stimulate activity. And there, uh, we think that it's important for this to be a green recovery and to be a digital recovery. And that would, that would be the next step in, in the support. Yes. Uh, so, you know, if you, if you, if the support takes the form of giving, uh, loans, uh, then, you, then of course you come out of this crisis and you have this debt and then regardless of whether things are getting better or worse, you have to repay this debt. And that's like a big tax on you. And that prevents you from investing. Uh, but on the other hand, if the lending takes the form of being more equity, like, which is that you get paid when the, when there's a good state of the world and you don't get paid when there's a bad state of the world, then that's less onerous on firms. Uh, and you know, that would make it easier for firms to also recover from this crisis. [00:51:21] Tutomo Watanabe: Um, second question is from, uh, Taesuke Nakata. He's my, my colleague at the University of Tokyo. And this is about, uh, Nakata-san's question is about the low inflation and policy choices. And he's, he asked, uh, so, uh, in ni-, 2019, IMF, uh, recommended to, to the Japanese government that the BOJ should introduce, uh, inflation range rather than inflation, pinpoint target rather than, rather than target, but, uh, range, inflation range to increase policy flexibility. That's the recommendation made by the, by, by IMF in 2019. And, uh, I see a non-trivial chance that in the post-COVID-19 world, other advanced economies, including Euro area and the United States, will eventually look like Japan last year, with a strong labor market, uh, and with inflation below target, and the policy rate at, uh, at, uh, the low, the lower bound. If so, do you think it is sensible for the ECB and the Fed to consider introducing inflation range, as you recommended, uh, last year to the, to the project? [00:52:35] Geeta Gopinas: Yeah, uh, thank you. Great question. Uh, so, uh, as you know, the ECB and the U.S. Fed is also going into, and they're, they're re-examining the monetary policy frameworks, uh, to figure out how to best do, uh, you know, satisfy their mandate. The way I think about it is that monetary policy has a mandate of, of, uh, meeting an inflation target. In the Fed, of course, it's, it's dual mandate, it's price stability and the full employment. But let's say, let's say that countries have a mandate of meeting a particular inflation target. And the question is, in the attempt to meet that inflation target, can you end up creating large amounts of financial instability, right? And that is a concern. Now, uh, one, uh, channel through which you can deal with both is that monetary policy focuses on the inflation target and you have regulatory policy, what's so-called macro prudential policy that focuses on financial stability. So to the question of what's the advice for the different countries, I would say that it matters, one, on where you think the real rates are going to be for these different countries, the real interest rates are. Now, Japan has aging demographics, which weighs heavily on the real interest rate, pushes it down. That's not so much the case in the U.S. The Europe is somewhere in the middle. Uh, so these countries differ in terms of those fundamentals about where we think the real interest rate is going to be. Second, countries can differ in terms of the strength of the macro prudential setup and how many different tools they have. So the, ultimately, the advice is going to depend on these particular features. Uh, I think what is probably more true for many, most central banks is to have a much more symmetric target, which is that it's not just that you want inflation to meet the target from below, but you, you don't want it to, you're okay with it going above target slightly too, right? That it's not just, it's not that you want a ceiling, but you want that inflation can actually go above, uh, above target too. And you share that, I mean, the U.S. Fed, when it's been in its commentary, when it's been talking about this monetary policy review, it's talked about, you know, catching up, which suggests that they would let inflation go above a target for some time. So I think that that's the, that's the mix. But again, what exactly is the advice will depend upon these other factors I talked about. [00:54:59] Tutomo Watanabe: Uh, I think I, I'd like to take one more question. Uh, this is from, uh, Takaji, Takaji Kawamoto, uh, from the Bank of Japan. And this is about, uh, again, policy issue, but from a very long time, longer term, uh, perspective. And he said, um, um, and so, uh, the corona virus shock will presumably result, uh, result in hysteresis, uh, with, uh, especially with regard to effect to potential growth rate. On one hand, measures taken to prevent infection, such as social distancing, will inevitably mean lower productivity for tourism and other services such as hotels and restaurants. On the other hand, the pandemic has, uh, in a way, uh, uh, acted as a, as a trigger to, for digital transformation. And this has the potential to increase the overall productivity. So there are two, uh, different, two opposite, uh, two different, uh, factors, and, and to, to, to, to potential growth, um, but, um, with, with the opposite direction. And his question is, um, his question is, um, uh, you'd like to hear your view on the hysteresis aspect of the crisis. How persistent, uh, uh, effect will remain even after the shock, uh, ends. [00:56:27] Geeta Gopinas: : Yes, this is another very good question. The, uh, I don't think I can say quantitatively, I know the answer to it, which is that what exactly is potential growth rate going to be coming out of this crisis. We don't have a projection for it right now, for the simple reason that it's also uncertain how long this crisis is going to last. And the effect on potential output is going to depend on how long this crisis lasts. Uh, we know that potential growth is going to be affected because one, we are seeing weak investment around the world, which means that the capital stock coming out of this crisis is not going to grow as much as it would have in the absence of it. So that has an effect on, uh, on a, on a group, potential growth. Second, we are seeing for sure, uh, in terms of productivity, the, the fact that you mentioned, which is that because you need to make your workspace safer to protect against a pandemic, you can, you can have a drop in, uh, productivity. We're also seeing, of course, hit the human capital because you've seen schools being pressured down and there is remote learning going on, but it's not perfect. And this is particularly a big concern in, uh, lower income countries where they don't have access to the internet. And for them, there's that's just lost, uh, schooling days. Uh, and there's a negative effect that comes from that. So, uh, and then we have the balance sheet concerns, which is that we're going to see firms that come out of this crisis. Some of them which have damaged balance sheets that takes a long time to online. Labor market history is there. So there are many, many factors in there. Yes. On the plus side, we have the digital aspect, uh, of investment that can come about and the productivity can come from that. Uh, and that's a positive, but I think there are, uh, many, many other aspects that push productivity towards the lower end. Uh, and again, how, how big an effect this is going to be depends upon how long this, uh, crisis is going to last. So in our October world economic outlook, we're actually going to have more of an analysis on this, uh, on this particular question. Okay. Thank you. Um, we have, um, um, [00:58:38] Tutomo Watanabe: received many, many questions from the audience, uh, but I'm, I'm very sorry that we are not able to cover all those questions. However, um, I strongly hope that, uh, uh, we will be able to repeat this kind of, uh, uh, event, uh, in particular, uh, uh, with Gita and, uh, uh, sometime in the future so that the discussion will continue, uh, uh, F and Gita. And finally, I'd like to thank, uh, Gita for attending the webinar and, uh, I sincerely hope that, uh, we will be able to have, uh, have you on, on our campus, not, uh, not a cyber campus, but on the physical campus sometime in the near future. Thank you very much for attending this seminar webinar. And also I'd like to thank the audience for, for coming to this [00:59:29] Geeta Gopinas: webinar. Uh, thank you Sosomo. I really appreciate this interaction. I felt like we could have continued with this conversation for much longer. The great questions and, uh, uh, and the audience was great too. The questions that came were fantastic. So thank you. And I really hope I can come to Japan. Never been to Japan before, but I hope I can do so. Okay. Thank you. Bye. Bye. Thank you.