The IMF’s Chief Economist on Lessons From the "Great Lockdown"

all of normal life on hold. The answer we thought was it would reduce global output, but deprived of all that networking and speechifying, the productivity of the participants would surely go up. I thought of that this week because one fixed point in the international calendar that hasn't moved to the date of the spring meetings of the International

Monetary Fund and the World Bank. They've all been happening this week online, and they might turn out to be more important than usual as finance ministers and central bank governors think about how best to help the world economy

come out. The other side was spending most of this week's episode talking about that with the I m S Chief economist Peter gop Enough, but first, I wanted quickly to bring your attention to one other feature of the economic landscape that hasn't budged, and that's German policymaker's conviction that they are always right. Well. Europe Economy reporter Katherine

Boseley will tell us more. Sitting in Zurich, Catherine, many of us, looking at the way that Germany has responded to this crisis might have thought that they had seen the light on running budget deficits to support the economy. But they don't see it that way, do they. No.

I think quite the contrary. I think many people in the country will see it as a confirmation of their their approach of their frugality, where you essentially, to use the words of the I M F, repair the roof when the sun is shining and then you have reserves for a rainy day. In the piece that you wrote earlier this week, you talked about this is the black

zero policy. It's that that every any anyone who wants to be a finance minister in Germany basically has to sign up to the idea that you really never run a deficit unless you absolutely have to. Um but it's uh. Many would say that they've gone beyond just mending the roof. They've sort of refused to invest in things that they maybe should have invested in. So there's certainly that's been the criticism for many years from the likes of the I m F, that they actually could be spending more,

particularly on public investment. That is indeed the case the Germany has lagged other European countries, other advanced economies in public investment. The infrastructure is not what it used to be. The train services a catastrophe, Wireless internet reception is very patchy, so there are indeed issues which they could have addressed

and possibly haven't addressed. And there are definitely economists in Germany who say that this, this penny penny pinching approach has essentially thwarted the economy in the long term by giving it enough enough infrastructure to actually support economic activity, and it is I was very struck just looking at the numbers a while ago that the public investment is a share of GDPs even less than the US, and we think of the US as being a great, huge,

the most greatest example of a place that doesn't invest enough in its roads and other things. I guess the German response would be, and has been in fact in the last week or so, that the fact that they were so frugal in the past has now given them the capacity to really open the floodgates when it comes to supporting the economy now, and we worry that countries like Italy for example, maybe don't have that same capacity.

That is exactly right. The Germany Germans have unveiled some of the biggest fiscals simulus programs of any advanced economy, and then of course there is also the additional Pan European package announced in Brussels last week. Italy obviously has less firepower because it's public finances are in a more precurious place, which is exactly why, of course there are now calls for um jointly issued debt to help rebuild economies.

I mean, if we step back, I guess if you think about six months or nine months ago, where Mario drug left the European Central Bank, one of his final salvos was to have again a call for looser fiscal policy in the Eurozone, particularly the likes of Germany, who had strong public finances. You know, one way or another, we have got that, and indeed at active fiscal policy in Europe is helping to supplement what the European Central Bank can do. So I guess we have sort ended

up in the right place. Even if we were that maybe Germans are going to be drawing different lessons from it than maybe others might do. That is exactly right in the sense that there there you know, work halls to spend there. Obviously there is a big analysis and in terms of the fiscal spillovers, exactly how big they would be from German investment into other countries is a

matter of the late among economists. But we definitely do have the the big, big spending now and there are indeed calls in Germany for more spending down the road as part of this new green deal that you know that has been proposed by the EU. Well, it's going to be interesting. I just I can't help thinking there are so many things that will get changed by this crisis,

but I can't help thinking we will have this. We're having all the same conversations about Germany needing to have LUCI policy for many is to come, despite what we've seen in the last few weeks. Catherine Bosby, thanks very much. Well. I'm delighted to be joined now by Geter Goppenough, the chief economist of the International Monetary Fund, sitting in Washington, D C. Geter, You've just produced the Funds new forecast

for the global economy this week. Obviously it's a big change from the last time when you went through that process at the beginning of the year. What I found particularly striking looking at these forecasts was that your baseline scenario for the world was also the most optimistic one, when often with forecasts you have a baseline and then you have how things have might go well or things might go badly. But right now you're really only looking

at how things could go badly. Stephanie, I think what you can say is that you should be struck by the uncertainty around the forecast more than anything else. We started constructing this over the last level weeks and as you know are the I m F it's get gets built both bottom up and then top down. So this is a very elaborate process with a hundred and eighty nine member countries. So this estimate reflects that. So another question is you know what kinds of scenarios should we

be constructing. And yes, there are some upside risks and we could see that coming about, especially if we have good positive news and therapies and vaccines, But right now, we do think that most of the risks of the downside, and so we elaborate on three scenarios where things can

get much voice. And some of those alternative scenarios for the global economy involve the return of the virus in countries after lockdown measures potentially have been lifted or or partially lifted in countries maybe maybe later in the year. Is that something I wonder that you thought more and

more about as you've been finalizing these forecasts. So we are you know, our baseline assumes that the pandemic and the containment measures will peak in the second whatever for most countries in the world and then come off gradually in the second half, but clearly that's not given and talking to epidemiologists and public health officials, there's certainly no

certainty that will happen. Now, there are some countries where you are seeing containment measures working, and there is you know, flattening of the curve and the number of new cases are coming down, but it's still too early to say, which is why we look into these other scenarios where the containment measures need to go into the second half of this year and even into and if that happens, then it will be uh, you know, doubling of the of the downturn, which is from three percent a negative

three percent to negative six percent in twenty and almost no recovery than in one. So it would be much much worse. And what we're looking at is of course already extremely bad. I mean, this new forecast shows a declining global output greater than any in our lifetimes, and

certainly greater than the global financial crisis. We should remember that, I guess this week is when you would usually have finance ministers and central bank governors around the world gathered in Washington for the I m F and the World Bank Spring meetings. In fact, you and I were supposed to be doing this interview in person at the Bloomberg Bureau there, but the meetings are happening virtually and I

was struck. One of our reporters, Rich Miller, wrote this week the world's ability to check the coronavirus contagion and fully recover from the worst recession since the Great Depression might depend on what international economic policymakers decide this week. Do you agree that there's that much resting on the meetings happening this week and those conversations. I think it it really makes a big difference of the international community steps up and and does even more than what they've

been doing. Now. You know, there are many advanced economies of the world that have put in a lot of stimulus or fiscal and monetary policy. So we the global economy as a whole, we have about eight trillion dollars of goal stimulus, discretionary physical stimulus in the system, but it's almost all coming from richer countries and advanced economies. If you look at emerging markets, developing economies, low income countries,

they're in a really much more difficult situation. I mean, if there's a health crisis, which they have to deal with UH, you know, with worse health systems, and then on the on top of that is the financial crisis with rapid capital outflows, if your commodity explot as a commodity price collapse and you have high levels of debt. So their abilities to do the kind of spending that's needed at this point, given the high dead burdens that

they have UH is a major issue. And I think the meetings this time around, how you know, would be addressing those would would be addressing that particular concern and how countries and how the international community can step up to provide consertual financing, death relief and aid. There is already what we would normally consider to be a pretty large hot for you to tap into to help countries

through this. But when we look at what advanced economies have done, I mean, their governments are having to take much bigger steps, much faster than they might previously had to consider, are you going to need even more to give emerging economies and developing countries the help they need? They so, how are you going to get it? So with you know, advanced economies, they have put a lot

in the system. I think one of these things about this crisis is because of so much of uncertainty, you know, you have to have the ability to speedly recalibrate what you're what you're going to spend, and what even the design of the policies. So again I think you know, to tell you what a number for them would be difficult at this point. But the plus side is that you see monetary policy and physical policy now working together

in many countries. In the US, you have you know, monetary policy that's providing support that's being back stopped by the Treasury, and you see that in other parts of the world too, So this kind of coordination is absolutely helpful. I mean, interest rates are still very low in many parts of the world now. I think for other countries, we've estimated that if you're looking at emerging marketing developing economies, they would need about two and half trillion dollars to

deal with their bounds of payments needs. And that's not something that they can entirely meet on their own. They have a significant amount of reserves and those would help, but they will need its support from the international community here well, often you make new policy in moments of crisis.

I was at the U. S. Treasury during the Asia financial crisis in the late nineties and there were some new facilities that came out of that, for example, a new contingent credit line for countries to get support through the quidity crisis without the usual stigma of going to the I m F. Do you think we'll need that kind of innovation or new facility with this crisis or is it just about scale up very quickly what you and the World Bank already have. I think both of

it is happening. You need you need Uh, innovation here and you need scaling up. You know, you saw that. You know, some of the major central banks are extending swap lines to other countries to help with the dollar liquidity problems at the I m F. You know, we've had close to a hundred countries come to us for financing needs in the last four weeks. I mean a total of about a hundred. So it's a very large

number coming in a very shortly. I don't think we've had a hundred countries come to us before, so this is unprecedented. And then of course the speed of it is even more unprecedented. Uh. And what we've had to do is that to meet their needs, we figured that we need to increase their access to access to rapid financing facilities right as opposed to the ones for which there's a long process of review and long drawn program.

And so we have done That's one of the major stuffs we've taken easy who increase that access to levels where we think about now a hundred billion, which we think would be enough given the kinds of demands that we're seeing. And then the second piece, of course, is that we want countries, low income countries to be able to do the necessary spending on on health that's needed in this crisis, or kind of medical supplies and so one.

And you know, the last thing we want them is that instead of doing that, that they're actually servicing their death to the i MP. So we are also in the process of providing death service relief to many countries, and we just did that for twenty five low income countries. Many other facilities have been thought of this on on. We're thinking about newer short term liquidity lines for countries. That's another piece that would matter, maybe even more for

emerging markets. So there are the kinds of facilities that we are thinking about, and I think it will be important more generally for the for the even for other creditors and other international institutions to do the same. Now, I wonder if we could step back to what you might be writing about in your world economic outlook in

maybe a year or two time. I mean, one of the debates that the i m F had highlighted recently and we've thought about a lot on this program, is whether the exceptional measures taken during and since the global financial crisis had left governments with enough ammunition to respond to the next crisis. We talked about the lack of policy space, but now we're in that next crisis. Of course, we didn't know what it was going to look like, and governments in advanced economies have been able to do

a lot with monetary and fiscal policy. So do you think we've learned that there was more policy space than we thought or is it just that these extraordinary circumstances have kind of created space for governments to undertake a level of spending we wouldn't have previously thought they could do.

But it's definitely I think when we were flagging, um, you know, not so long oh, was that you know, monetary policy cannot be the only game in town, and next time something goes wrong, fiscal policy will have to play a bigger role. I don't think we predicted that that would be even more the case because this time around, in terms of targeting the measures and getting it to the right people, fiscal policy really has to play a

big role. And that's what we've seen this time around, which is we have seen fiscal policy stepping up in many parts of the world. Uh and and working with monetary policy to have the biggest impact. So I so I, you know, so that is in line with what we had expected. I think a second lesson we should probably learn is the importance of automatic stabilizers, which is, countries that have much you know, better built in automatic stabilizers can respond to these crisis much more fastly because the

speed with which all of this happens. If you don't have the infrastructure in places, you don't have the systems in place to deliver income support to people, then you know you have a harder time getting out of the crazies. And so automatic civilizers, I think are another big factor. So I guess we should just explain more automatic stabilizers there. That's the bit of fiscal policy that works without government's

having to do anything. So if you if you enter a recession, your economy shrinks, your tax revenues automatically go down, and your public spending on things like unemployment benefits automatically

goes up. That's the automatic stabilizers. But all of the fiscal policy support, at least in advanced economies, has been about trying to prevent their being permanent costs from this shutdown in economies, so preventing companies that are otherwise viable from going bust and stopping people going into unemployment who might otherwise have just been able to stay in work

and whose jobs are viable. But at this point, do you think advanced economies have done as much as they can do to minimize that long term damage from this crisis? How optimistic are you? I think there is a substantial risk in that. You know, this is a crisis that's helped and that's affecting small and medium enterprises along with some of the big ones. Uh, and getting to them is much harder when you have a deep procession of

this kind. He tends to leave scars, you know, in terms of job losses, in terms of firms that go out of business and take much longer to come back. There are gonna be issues with you know, private sector balance sheets, public sector balance sheet. So I think there

is a lot to be concerned about here. I mean, another thing I would like to want to flag is that while in the past, when there's been a crisis and you have all the stimulus in the system, it is a stimulus, which is you want people to go out and spend, you want firms to invest now, But that's not what the other side of this crisis is, which is the health crisis, and so at the same time,

all of the stimulus is in the system. We want people to stay at home and not exactly lot and spend, So it's a very different transmission channel this time around. The hope is that you will keep people with sufficient income so that they can meet their needs, that farms and businesses can stay afloat that once we get past this period of lockdown, that that things would would recover much faster. But I mean, the economic landscape will look very different once we come out of this lockdown. And

I think there's from medicine certainty, I wonder. I mean, you're right that this is a different kind of stimulus because a lot of the money being spent isn't by definition, can't stimulate the economy right now, We're not people can't spend it necessarily. It can only hend hold the economy and suspended animation. Do you think that when the economy does come back and people can go out and spend, but we might actually see some of inflation Finally, as

a result of all this fiscal spending. I think the money that's being handed out, though the overall number looks large, it's for an individual household. It's a small amount. I think this is more of US sustainments as opposed to having excess of funding. No. You know, based on our projections, we are looking at economic activity being below potential for several quarters, and with that we you know, cannot expect

to see inflationary pressures um any time soon. It's one final subject I wanted to touch on that the I m F has put a lot of more focus on over the last few years, and that's the relationship between inequality and the economy and the economic damage that comes from inequality as well as the social damage. I think a lot of those costs have been brought home very

dramatically in this crisis. I mean, we've seen such a difference between the situation of people working for large companies or traditional companies and the situation of people at the fringes of the labor market, for example, who are not only on low incomes but potentially in the gig economy

with no job security and now no income. Do you think we might see a rare evaluation of the role of the state coming out of this, and maybe a greater focus on providing rights, providing a safety net for those parts of the workforce that turned out to be so vulnerable to this crisis. I mean, for countries to come out of this really grim situation, and this is

true for all countries in the world. It's going to be important to get everybody to be able to survive this crisis and to come out whold at the other end. And so, you know, having this kind of inequality which leads to permanent losses of income people coming up saying out of the labor force where they can't maintain basic livelihoods doesn't help anybody. It doesn't help. It doesn't help

even from a just a pure growth perspective. So I think absolutely, I think it's very important for the world to ensure that there are again I would just automatic systems in place that get triggered whenever something like this happens to ensure that people get the support that they need and also to make sure that in normal times that there is an equitable distribution of income in the world.

I'm sorry I said that was the last one, but actually I do have one other question because I realized I'm talking to you and I'm also reading the analysis of our India economist Abishek Gupta about the impact of the lockdown in India. As someone who is very familiar with the Indian economy, I'm just thinking about the kind of lockdown that's now being attempted there, what that means for the economy. Do you feel that there's enough understanding of the implications of that for a country such as

India with its enormous slum population and informal economy. Are there enough programs there to prevent this kind of shutdown being cataclysmic for a big chunk of the Indian population. Well, it is essential to do what we're seeing there, and I think it's the Indian government was right to UH to move speedily and put these kinds of lockdowns in place, you know, who have to make sure that this crisis

doesn't spiral out of control. Now, this has unfortunately had a big effect on UH daily wage workers, and you've seen this with migrant laborers who are going back to the villages. And you know, this requires at the same time as you're putting this containment in place, it requires that the government supplies food transfers in kind, but also cash transfers, and they they are doing several things in

this dimension. They are providing a relief to a lot of workers, and I expect that they will do more going forward. Enough, Chief Economists of the I m F, thank you very much, Thank you, Sethny, thanks for listening to Stephanomics. We'll be back next week with more on how COVID nineteen is affecting the global economy. And remember you can always find us on the Bloomberg terminal, website,

app or wherever you get your podcasts. For more news and analysis during the week from Bloomberg Economics, you can follow as Economics on Twitter. You can also find me on at my Stephanomics. This episode was produced by Magnus Hendrickson, with special thanks to get Gopinath and Katherine Bosley. Scott Lamman is the executive producer of Stephanomics and the head of Bloomberg Podcasts is Francesca Levi.