Powell: 'Global economic outlook is deteriorating'

[00:00:00] Speaker 1: We also have the Federal Reserve Chairman Jerome Powell speaking at Jackson Hole today, noting the global outlook has been deteriorating and that there is no rulebook for the current U.S.-China trade war. Yahoo! Finances' Brian Chung has been on the ground the last few days really with speaking to a number of speakers there. Brian, you could argue that there's also no real rulebook for dealing with the president's tweets, but you've got a special [00:00:28] Speaker 2: guest right there with you. Hi, Kiko. Yes, we are sitting down here with IMF chief economist Gitek Obina. Thank you so much for joining us today. Plenty to talk about happening this morning. First, I want to kick it off with Jerome Powell's speech this morning talking about the U.S. economic outlook, and I think what we're realizing is that it's a lot of global factors that are playing into that. From someone that has a vantage point from the IMF, what is the weight of what's happening in Europe, in China, on what's happening in the U.S. right now? Indeed. I mean, Chairman Powell [00:01:00] Speaker 3: highlighted two things which he said mattered for what was going to happen with rates. One was the global outlook, and the second was what would happen with U.S. inflation. And the global outlook at this point, you know, is sluggish. Its growth is sluggish. It's fragile and it's precarious. So, these are quite uncertain times. And the data that's coming in, especially on the trade front, on manufacturing and industrial production, remains very weak. Now, services are still holding up. And so, that provides some respect. But, you know, that said, I think that these factors are weighing on what monetary policy is going to do going forward. And you mentioned trade. So, Chairman Powell is [00:01:39] Speaker 2: saying that's a really difficult thing to model in monetary policy. So, when we talk about all the tension that's going on between the U.S. and China, between other parties around the world, what is the proper way to think about what the proper risk is as we kind of have these fears about a recession in the U.S. and in other corners like Germany as well? So, indeed, I mean, so first we have to think [00:02:00] Speaker 3: about just the direct effects of what happens when countries impose tariffs on each other and the implications of that for trade. Now, that has a reasonable effect. But the bigger effects come through the prolonged uncertainty about where trade policy is headed. And I think there wasn't sense in which that would be resolved this year. And maybe there would be an agreement between the U.S. and China. But increasingly, as we saw even today, that doesn't seem to be the case. And that's weighing on business confidence. And that's part of the reason we see this divergence between what's happening with investment, where you see investment being very weak, as opposed to consumer spending, which is much healthier. [00:02:35] Speaker 2: So, the IMF publishes outlooks going forward. And it seems like the outlook would be for slower growth in this coming year. When we talk about the risk of trade, right? I mean, there's one thing, there's a difference between a headline that threatens a new round of tariffs and then actually implementing them. But even just given the developments we've seen in the last few weeks, how much would that weigh on future [00:02:53] Speaker 3: growth prospects in the world? So, we ran the numbers on this. We looked at what the implications are for global growth of the tariffs that were put in place in 2018 and those that were threatened, including retaliation from China. And our projections were that it would shave off about half a percent on the level of GDP in 2020. And given that there are already a lot of factors weighing on global growth, some of it is not trade related, because some of this is coming from weaknesses in emerging markets, which depend upon their own country-specific factors. But that combined with the trade tension, you know, that really weighs on [00:03:28] Speaker 2: the outlook. So, switching gears, one of your favorite topics, I know, being currency exchange. So, we've seen that the U.S. dollar has strengthened. That's something that even President Donald Trump has pointed to as a negative. He would prefer the dollar being weaker and wants the Fed to actually lever interest rates so that it does get weaker. What is the current impact of the strength of the U.S. dollar in the global flows? And how does that affect not just other advanced economies, [00:03:51] Speaker 3: but emerging countries as well? So, I'm going to make two points here. So, first, is to recognize that when you think about what's happening to the dollar, some part of it has to do with monetary policy, but there's many other factors that impact the level of the dollar. So, the strengthening of the dollar also has to do with the fact that the U.S. economy is growing at much more healthier pace than most other advanced economies are. Whenever there is an increased appetite for safety, investors move towards dollar assets, and that's causing the dollar to strengthen. So, it's not a direct recipe that if you were – if the Fed was to do more by cutting rates, that that would actually necessarily weaken the dollar. Then the question is about what the impact would be. And, I mean, the estimates that we have on the impact on trade balances are small, and so one has to be – one has to recognize that it's not as if this is going to be a game changer for trade policy. So, we really have to look at the most important factors that matter for growth. One is on the trade side, trade policy, trade uncertainty. There are countries that have space on the fiscal side that could use it, and they should, and those factors would be much more [00:04:53] Speaker 2: important for growth. And then lastly, there have been – there was a laundry list of concerns around the world that Jay Powell pointed to in his speech this morning, one of them being Brexit, another one being the U.S.-China trade negotiation, and then there are a slew of things that he didn't mention, like the Argentinian debt crisis. When we talk about worries in the United States about a recession, how likely is it that it could be something globally that ends up pulling the U.S. down? And is that a serious concern, as people around the world kind of wonder if, you know, the good times in this low-rate [00:05:22] Speaker 3: environment might come to an end at some point? I mean, the U.S. – if you look at the fundamentals in the U.S. economy, and given that it's quite a consumption-driven economy, that looks healthy and strong. So, the headwinds that are going to come will come from what's happening with global growth. And there is plenty to worry over there. And it's – there's the trade side of it, but there's also, like I said, an important part of the weakness comes from what's happening in emerging markets. And that has to do with their own domestic fundamentals and their domestic policies. [00:05:51] Speaker 2: Which markets – like, for those that maybe don't know what emerging market constitutes? [00:05:54] Speaker 3: So, I mean, one of our biggest downgrades has been for countries in Latin America. So, if you look at Mexico and Brazil, we've had significant downgrades. But then there's also Argentina. There are many stressed economies, like Iran and Venezuela. And all of those do matter for what's happening to oil growth. [00:06:12] Speaker 2: All right. Well, plenty of things to pay attention to as the Jackson Hole conference continues today through Saturday. We'll have more updates for you here on Yahoo Finance. But IMF Chief Economist, Gita Gopinat, thank you so much for joining us here today in this beautiful backdrop behind us. [00:06:24] Speaker 3: Thank you, Brian. It was great. Thanks.