Deputy Head of the International Monetary Fund "The Fight against Inflation May Take Somewhat Longer"

Whether it is Europe's inflation struggle, China's real estate crisis or global protectionism, Gita Gopinath is skeptical about the immediate future. In an interview, though, the deputy head of the IMF also sees small glimmers of hope.
Interview Conducted By Tim Bartz und David Böcking
IMF deputy head Gita Gopinath at the World Economic Forum in Davos

IMF deputy head Gita Gopinath at the World Economic Forum in Davos

Foto: Laurent Gillieron/ dpa

DER SPIEGEL: Ms. Gopinath, the International Monetary Fund (IMF) has just warned of "global economic fragmentation." Here in Davos, countries like the United States, China, Britain and France are only weakly represented this time. Are we already seeing fragmentation?

About Gita Gopinath

Gita Gopinath (born in 1971) has served as first deputy managing director of the International Monetary Fund since 2022; previously, she was the IMF's chief economist. The Indian-American economics professor is an expert in international trade relations and taught at Harvard University until her appointment at the IMF.

Gopinath: We don't have the same cooperation as before the Russian attack on Ukraine, that was a real turning point. The decoupling between the U.S. and China has been going on for several years. Now, many countries fear for their supply chains and national security because of the war and the corona pandemic. The danger is that production will be brought home and protectionism will result – as we are seeing now, for example, in some of the tensions between Europe and the U.S. over the Inflation Reduction Act (IRA).

DER SPIEGEL: Why are so few political leaders in Davos to talk about these problems?

Gopinath: Good question, but I would like to give a counterexample: At the G-20 summit in Bali in November, the presidents of the U.S. and China surprisingly stabilized their countries' relationship, which was under serious threat. And all G-20 countries, including Russia, adopted a declaration there that, among other things, rules out nuclear war. This meeting gave me hope that there is still such a thing as global cooperation.

DER SPIEGEL: China is just opening up to trade with the world again. That doesn't seem like fragmentation.

Gopinath: That is a positive sign that does not surprise me. After all, Chinese President Xi Jinping had already promoted free trade in Davos in 2017. With their zero-Covid policy, the Chinese have had little physical presence in the world for the last two years. By easing travel restrictions, they will now be able to exert more influence again.

DER SPIEGEL: In parallel, however, the number of coronavirus cases in China is rising steeply. Are we underestimating the degree to which a new wave of the pandemic in China could hit the global economy?

Gopinath: At the moment, there seem to be increases in many cities. It remains to be seen how badly rural regions and thus agriculture will be affected. Now, we expect a tough first quarter, after which Chinese growth should recover. However, China also has a real estate crisis, which is slowing down consumption; and as an exporting country, it is affected by the weakening global demand.

"There is a discrepancy."

DER SPIEGEL: Will China’s property crisis end up being a bigger factor than the opening up?

Gopinath: Not in the short term. But in the future, the real estate crisis will play a bigger role, as will demographics.

DER SPIEGEL: In the fight against inflation, Western central banks have raised key interest rates more often and significantly than ever before. Meanwhile, the U.S. Federal Reserve (Fed) has raised its key rate to 4.5 percent, and now inflationary pressures are clearly easing. Has the Fed finished the job?

Gopinath: No, absolutely not. It is true that it has already done a lot to push inflation down. But we expect that the U.S. key interest rate will remain high throughout 2023, around 5 percent. Even though the markets are betting that inflation will fall much faster and that the Fed will already be cutting rates again this year. There is a discrepancy between what the markets expect and what the Fed has communicated it plans to do. The fight against inflation is not over yet.

DER SPIEGEL: What about the European Central Bank (ECB)? The situation in the eurozone is much more fragile than in the U.S.

Gopinath: It's true, high-energy prices are a particular burden on countries like Germany, whose economy is very dependent on energy imports. At least the Federal Republic has done better than expected; we had expected GDP growth to have slowed to 1.5 percent in 2022. Measured against that, it has done better, up 1.9 percent. Now, it seems that overall inflation may have already peaked.

DER SPIEGEL: But?

Gopinath: But core inflation – i.e., price increases excluding energy and food prices – is stubbornly high and will probably only start to fall toward the end of the year. Whether the 2-percent inflation targeted by the ECB will be reached as early as 2024 is uncertain. The fight against inflation may take somewhat longer than in the U.S.

DER SPIEGEL: How great is the danger of a new sovereign debt crisis, in heavily indebted Italy, for example, if the ECB continues to raise interest rates?

Gopinath: The ECB must continue to raise interest rates. But with the Transmission Protection Instrument (TPI), it has a tool in its hand to be able to buy a country's government bonds, especially in the case of disorderly market conditions. Italy is also helped by the fact that they have extended the maturities of their bonds during the years of low interest rates combined with inflation. This keeps the interest burden on the budget under control. And the debt to GDP ratio has come down quite significantly. If Rome sticks to the fiscal framework, I don't see any risk in the foreseeable future.

DER SPIEGEL: How great is the risk of second-round effects still? So far, it seems to be less bad than feared.

Gopinath: Well, wages in the service sector have already risen, but the situation is not dramatic. Wages can rise somewhat without necessarily having overall prices go up as much because it can be absorbed in the mark-ups. In general, the expectation is that the low unemployment in Europe will increase wage pressure.

DER SPIEGEL: Cumbersome, bureaucratic Europe seems wedged between the U.S. and China. How dangerous is the situation?

Gopinath: Don't be so pessimistic. The European Union has handled the pandemic well overall, the solidarity with Ukraine is huge, the European Commission's Next Generation Fund is a strong signal. I am not that skeptical. But of course, many small countries in the EU, particularly, depend enormously on global trade, and it is naturally difficult to be caught between the U.S. and China. And the Europeans also have an issue with the U.S. because of the Inflation Reduction Act (IRA). It is becoming more difficult because the world is moving away from the rules-based system we have seen for so long. And then, suddenly, even your friends may not be that happy anymore.

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