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'We are still in a very severe economic downturn:’ IMF official

Yahoo Finance's Akikom Fujita and Brian Cheung and Tobias Adrian, Financial Counsellor and Director of the IMF's Monetary and Capital Markets Department, discuss the IMF's latest projections.

Video Transcript

AKIKO FUJITA: Well, the IMF says the global economic outlook isn't as bad as once feared, but the situation is about to get worse in emerging markets. The fund now projects a 4.4% decline in global growth this year. That's a 0.8% improvement from its previous projections in June. Let's bring in Tobias Adrian. He's a financial counselor and director of the IMF's Monetary and Capital Markets Department. We've also got our very own Brian Cheung joining in on the conversation. Tobias, always good to talk to you.

Let's start with the positives here, because there are some positives. The picture is still grim, but this is certainly much better than what the IMF projected earlier this year. You've talked about the $12 trillion in fiscal support and the monetary policy certainly being very supportive of the recovery. To what extent have we already realized all of the benefits coming from that stimulus in monetary policy? I guess the other way to ask the question would be is this as good as it gets without additional stimulus coming from governments?

TOBIAS ADRIAN: Well, I think we have seen a recovery that is somewhat faster than what we had expected three months ago. But we are still in a very severe economic downturn, right? I mean, this is the most severe crisis we have had at least since the Great Depression nearly a hundred years ago. So this is a terrible crisis, but you're right in pointing out that policy support has been large, timely, and very appropriate. And in our view, we-- we see a continued necessity for this policy support, both from central banks and from the finance ministries.

So the G10 central banks alone have expanded their balance sheets by $7.5 trillion since the start of the pandemic. In the US, the Federal Reserve has bought $3 trillion of assets. And that has really helped markets to come back. And so funding conditions for corporations, but also for individuals have remained accessible. So that has really helped the economy to come back, and it's needed going forward.

BRIAN CHEUNG: Hey, Tobias. It's Brian Cheung. Thanks so much for joining us here today. I know that you have a focus on financial stability. And the IMF ultimately released a financial stability report noting that the near-term global financial stability risks have been, quote, "contained for now." At the same time though, there is a concern about where we're going to go from this point on. Could there be a double-dip recession, for example, in the United States? Based off of what you've been seeing across the world, do you feel that global bank capital levels are sufficient, that we can make sure that this doesn't evolve into a 2008, 2009, 2010-like banking crisis?

TOBIAS ADRIAN: Yeah. We have ended this crisis with much more capital in the banking system due to 10 years of reforms of banking regulations. And as a result, we have assessed the global banking system as being resilient, even if further adverse shock's realized. So even if the pandemic was to last longer and the economic slump was going to last longer than is currently expected, than the baseline, we do assess that overall the banking system is globally safe. Having said that, there are pockets of vulnerabilities. There are some countries that have entered the crisis with a weak banking system. And certainly, in the emerging markets, we see some weaknesses in the banks.

BRIAN CHEUNG: So here in the United States-- and this is kind of interesting with the context of that roadmap that you had in that financial stability report today, noting that you might want to require banks during this time to gradually rebuild capital and liquidity buffers. So does that mean that even though things look OK based on the summary of the report, that there are things that policymakers could do even further to make sure that banks can sustain it, like maybe suspend dividends, which has not been case here, at least with the Federal Reserve in the United States?

TOBIAS ADRIAN: Well, many regulators and policy institutions around the world have stopped payouts for banks, including both share repurchases and dividend payouts. And actually, the Federal Reserve does have some degree of restraint on the payouts. And those have been extended through 2021. That is the right policy move. Remember, when payings are not paying out, that doesn't mean that this is money that is lost somehow. It just means that the money is retained on the balance sheet of the bank. Capital is built up. And if all goes well, that capital is going to be paid out to the shareholders in the future. So it's not like it's lost in some way.

AKIKO FUJITA: Tobias, two quick questions here on China, because that-- that does seem to be the bright spot here, the only economy that's projected to show positive growth this year. To what extent can China help support the-- the global economic recovery? And to what extent has China benefited from the massive stimulus that we've seen from governments outside of Asia?

TOBIAS ADRIAN: Yeah. So China is the only major economy that has significant positive growth. And it's actually in terms of activity back close to the levels of activity that we saw pre-crisis. So it's quite unusual. The pandemic measures have been very effective in China. And so the virus has been contained very quickly and very effectively. China, of course, is an exporter, but also a big importer for products.

And so the overall demand from China can help the rest of the world. And it's certainly an engine of growth in Asia. More generally, you know, the global economy is tightly intertwined. And so the easing of monetary policy has helped many countries around the world, in particular emerging markets, in terms of accessing funding for the future. And so, you know, when the-- when the world is doing better, every country is better off.

AKIKO FUJITA: Tobias Adrian, the financial counselor and director of the IMF's Monetary and Capital Markets Department joining us there. I really appreciate your ti-- appreciate your time. And our thanks to Brian Cheung, as well, for joining on the conversation.