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The global economy is not near a stagflation environment at the moment: IMF research director

Gita Gopinath, Economic Counsellor and Director of the Research Department at the International Monetary Fund, joins Yahoo Finance Live to discuss the latest World Economic Report and the state of the global economy.

Video Transcript

BRIAN SOZZI: In its latest World Economic report out today, the IMF takes a more subdued outlook for global economic growth, in large part because of the ongoing delta variant and supply chain bottlenecks. Gita Gopinath is the Economic Counselor and Director of the Research Department at the International Monetary Fund and joins us now for a look into the report. Yahoo Finance's Brian Cheung is here as well. Gita, always good to see you here. A more sobering outlook by the IMF for global growth. What made you go down that path?

GITA GOPINATH: So we have-- I mean, firstly, hi. A real pleasure to join you. We have a slight downgrade for this year, only about minus 0.1 percentage point downgrade. The main reason for that has been delta, the pandemic, and supply side disruptions. And that's weighed on recoveries in, for instance, in advanced economies of the US, Germany, Japan, where we all have downgrades. And it's also weighed on recoveries in low income and developing countries, whether the pandemic just has resurged. So these are kind of the two important factors that have led to our downgrade.

BRIAN CHEUNG: Hey, Gita. It's Brian Cheung here. What I did notice was that the United States got a downgrade for 2021 as well, from 7%, as you had originally forecast it earlier in the year, to 6% for this year. I guess, I'm wondering what's weighing on that specifically. How much do supply chain disruptions factor into that, when we know that a lot of these exporting countries that are such big trade partners with the United States, like Vietnam, are also seeing downgrades in this report as well?

GITA GOPINATH: So, Brian, in the case of the US, if you look at the third quarter and the months of July and August, you saw that consumption just flatlined. And that's one of the reasons for the decline in our projection for the US, for this particular year. And one particular sector that was affected, for instance, was motor vehicles and parts. And supply side disruptions have been quite severe over there. So, again, the combination of delta holding back kind of a strong return to contact services sectors, the supply disruptions, especially in the car industry, all of that has led to a downgrade for the US.

BRIAN CHEUNG: So I want to ask about the global picture on inflation because this is more a story now than it was the last time you had an update to the World Economic outlook, because of the reasons that you just outlined with supply chain disruptions. And but something we're feeling here in the United States, but it's something that I imagine other countries are feeling as well, maybe even those that are in countries that have central banks that might be tightening policy right now to get ahead of inflation. What is the picture for price increases, not just in the United States, but globally as a result of these pressures?

GITA GOPINATH: We are seeing lasting price pressures. And we are seeing inflation go up in many parts of the world. However, I do want to emphasize that if you look at 190 member countries, as we do, it is not a common phenomenon. And it's not like every country has the same kinds of inflation problems. There is a lot of heterogeneity. There are parts of the world, including China, Thailand, Malaysia, where you aren't really seeing much in terms of inflation pressures. And you're seeing other parts of the world, Latin America, North America, where we are seeing more stronger inflation pressures. So it's not a "one size fits all" kind of story.

What is true is that at this point in time, we are seeing more supply side pressures than demand side pressures because of much more lasting effects of the pandemic, the port disruptions, the energy crisis that we are seeing with prices shooting up. Half of that is also weather related. So all of that affects your headline inflation numbers. The question is, how much of that seeps through into core inflation?

And so far, for many parts of the world, we see that to be relatively well behaved, though for some emerging markets, of course, you have bigger concerns. And you've seen Brazil aggressively raise interest rates. And some other countries do that, too. So there is variation, but for the advanced economy world, for many of them, I would say at this point, the pressures are high. There are upside risks. But again, overall, in terms of our model forecast, is for inflation to come back to more normal ranges by the middle to the second half of next year.

JULIE HYMAN: Gita, here in the United States, the word "stagflation" keeps going up. And forgive me if I sound a little over it because, as you say, your view is, obviously, that inflation is going to moderate to some extent. And also, we've got views that growth is going to continue for this year and next. Is that a concern of yours, though, at all that there could be stagflation in developed economies?

GITA GOPINATH: You know, I share your reaction to this, which is the fact that if you look at how much the global economy has recovered from the depth of the recession last year, the fact that we have still growth of 5.9% for this year and then 4.9% for next year in the global economy, the US, 6% this year-- and it comes down somewhat, but still high growth next year-- and similarly, for the euro area, these are not any kind of stagnation numbers. I mean, these are healthy growth numbers.

At the same time, there are the risks. The risks come in the form of supply side shocks, which both reduce economic activity and then put inflationary pressures. So I think that kind of a direction qualitatively is correct. But we are nowhere near any kind of a stagflationary environment at this point.

BRIAN CHEUNG: What about other types of dark horse risks, if you want to call them that, things like a default of the United States, as we saw with the debt ceiling negotiations, which we expect to crop up again towards the end of the year, or even leveraging the Chinese system, as we saw with the Evergrande issue that's still unfolding? Do you feel like those could be threats to global growth?

GITA GOPINATH: I think policy accidents would certainly be one way to move towards stagflation. And we certainly don't want that to happen. You know, policy accidents either because of the US not raising its debt ceiling or dealing with its debt ceiling problem in a-- very quickly, or accidents in terms of not having a proper restructuring process-- for instance, in China. Those are important concerns.

I mean, all I'm going to say is that when it comes to the US, you know, it's highly unproductive brinkmanship that we are seeing in Congress. And it is important, I would say, to address the problem now, but also to reform this whole issue with the debt ceiling going forward and maybe replace it with more of a medium-term fiscal target or just automatically, whenever Congress agrees to a certain set of taxes and appropriations, the debt ceiling moves along with it. This kind of brinkmanship is not helpful at all.

BRIAN CHEUNG: And then Gita, lastly here, I just wanted to ask about just the methodology behind putting together the World Economic Outlook. We know that there have been these reports and the concerns about the possible data irregularities associated with the World Bank's Doing Business Report. We know the outcome of the review from the IMF. But can you just kind of assure us that there aren't any sort of political considerations that are part of the data sets that we look at when we get these World Economic Outlook updates?

GITA GOPINATH: I mean, Brian, data integrity is hugely important for us at the IMF. It is our bread and butter in putting out forecasts and putting out data and putting out analysis and reports. So we pay great attention to it. And because of that, we have many checks and balances in place. We have a pretty thorough review process.

Every time we put out a report or a number, multiple departments will get it. Multiple economists look at it. There is a trail of commentary and questions being asked. Why are you making this particular set of assumptions, and so on. We have the independent evaluation office that on a regular basis, also looks in and makes sure that the shop is running well.

So, yes, I mean, you know, we are constantly also looking for feedback and ways to further strengthen this process. But there are lots of checks and balances in here. And again, like you said, the data issue had nothing to do with the IMF at all. This had to do with the World Bank's Doing Business Report.

BRIAN SOZZI: All right, we'll leave it there. Gita Gopinath, Economic Counselor and Director of the Research Department at the International Monetary Fund, always good to see you. And our thank you to Brian Cheung as well.