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00:00Help us understand the time frame in terms of these two sides the US and China. The tariffs have accelerated Of course. The negotiations are now going to continue. How much longer. How much time do they have before the trade tensions the trade war between the US and China ultimately tips the global economy into a recession. When Tom our view is that the sooner the better dealing with these with these tariffs the way we look at the world economy right now. Growth is sluggish and there are several downside risks to it. When we run the numbers for the impact on the global economy off the tariffs that have been put in place and the ones that have been announced going forward that shaves off about point 8 percent from the level of GDP in 2020. And you know our forecast for next year is 2.5 percent growth. Now of course we could have stimulus from other countries put in place on the fiscal and monetary side but it is these trade tensions are a big factor that's wing on growth going forward. So the sooner this can get done the better. And we now have tariffs on both sides over about 500 billion dollars worth of goods about 360 billion dollars of Chinese goods about 110 billion dollars of U.S. goods . So around that 500 billion dollar mark in terms of which of these two protagonists is most vulnerable at this stage. Which would you point to in terms of the impact on the US versus China the bigger impact is on China in our estimates at this point . That's just comes from the fact that the US is a much more closed economy relies much more on domestic demand while China has rely more on external trade. But again if these tensions continue and global growth were to say slow even at a faster pace than we think then that could change financial market sentiment that could change business confidence and that can slow down the global economy. Your growth forecasts for China for 2020 are still 6 percent. I believe many economists have now downgraded their forecasts for the Chinese economy including UBS which is looking at 5.5 percent in 2020. Do you need to reassess that view in light of the trade tensions. Well we are always looking at these numbers closely so our most recent numbers we will put out in October when we have the new world economic outlook our July numbers are four or six per cent for China. At this point. But again a lot depends upon these developments that we just seeing right now including whether there is going to be a positive sign of a trade agreement coming through. What other kinds of stimulus measures are put in place. Again depends on the data. China's cabinet has called for another triple lock up for the banking sector here as pressures mount on the economy . Has the response from China's policymakers been adequate. The stimulus both on the fiscal side and the monetary side have helped contain some of the effect of the external shocks that are coming from it from the trade tensions. So they have certainly provided the necessary support for for the economy going forward if things were to deteriorate further further if there was greater tensions for instance. Our view is that policies that are more on the fiscal space should be used as opposed to on the monetary policy space and in the fiscal space should be more of the kind that stimulates domestic consumption rather than kind of infrastructure investment led growth and the yuan of course is another tool. Depreciation of the currency to give the exporters here is something of a buffer. How much of a buffer does it provide that weak currency and at what point does it become a risk in terms of capital flight. So the flexibility of the renminbi is something that we welcome and we actually think is good for China's economy as opposed to trying to keep a very fixed level for the exchange rate that the renminbi if it's going to be market to tumble there's going to be effected by shocks coming outside and from within the country. So I don't think we can look at a particular depreciation and then say well this is about certain policy actions of the government. There is a double edged sword for for China on the one hand. If there were very sharp movements in the exchange rates and that of course has implications for capital flows and for financial market stability and you know there is a reason to for most emerging market for that matter to not want to have a very very volatile exchange rate. We've had some it seems optimism in terms of Hong Kong with the decision by Carrie Lam to remove this potential extradition Bill in terms of longer term for the Hong Kong economy which has of course been hit on a number of fronts now not just from the trade war but also from the protests have the Hong Kong policymakers done enough to try to put a floor under the slowdown there how much of a risk does Hong Kong pose to the broader global economy . Hong Kong has been hit significantly by the US China trade tensions because it's an important trading partner with China . And so. So if you look at the second quarter had very weak growth in Hong Kong. Now the social unrest that we've seen has also contributed to some of it. And that's going to affect what the three numbers are. So any resolution on that front would certainly help to your question of what the impact is off of what's happening in Hong Kong on the rest of the world. Again if it's quite contained it's not going to be very significant . I want to switch focus to Brexit which is another big story of course and has been through this week. We are getting different scenarios now and it's obviously a very complicated picture . How much of a benefit is there to the business environment if you do at least get some certainty even if it is a hard Brexit vs. kicking the can down the road until potentially the end of January or maybe even further out. How have your team been crunching the likely scenarios. So we've been crunching many scenarios in over the past year. The scenarios have changed quite a bit. Our estimates of the impact on the UK economy off a no deal Brexit which is lapsing to WTO rules is quite significant. I mean a long term impact of about six percent of the level of GDP. So that's quite significant. So I think trying to prevent a situation of that kind where you know you find yourself in an ideal situation. There are border disruptions. Those could be very costly. But again dragging on the uncertainty for a very long period of time is also affecting investment in the UK quite significantly and so that they should certainly be together is resolved sooner than later in the US . The growth picture seems to be souring now. When you look at certain datasets whether that's manufacturing or business sentiment or exports the one bright spot that everyone points to is the strength of the consumer. But for how long can the consumer continue to hold up the growth picture for the US at what point does that deterioration in manufacturing and exports start to hit the pockets of US consumers and change the outlook . So this dichotomy between manufacturing business sentiment vs. services and consumer spending is actually kind of more broadly true not just about the US. If you look at the global economy as a whole you see weaknesses in manufacturing because you see strengths in consumer spending and consumer sentiment. This is particularly strong in the US. Now again the US has had that fiscal stimulus and that has helped. Wages have been growing in the US and so we should expect purchasing power to go up and spending to go up. So so that is holding up quite well. This is these are some of the factors why when we look ahead we don't have a recession in our base but at some point one bleeds into the next. Doesn't it. Again it's going to depend upon how all of these risks that we have been talking about play out. I mean today was a good day in terms of a lot of announcements. But if many of these get resolved then we may be taking off some very important downside risks including what would happen to consumer spending. Right. A lot of people whether that's the president or others investors are banking on central banks coming to the rescue essentially. Do central banks now need to work more closely in terms of monetary policy but also with the fiscal side as well. Do we need a close relationship between monetary policy and fiscal policy. Monetary policy is certainly dealing with limited space as compared to what it had back in 2008. And so it certainly would require more support and fiscal policy would be one of those what tools. Now of course there are many countries in the world with debt levels are quite high. So it's not a physical space spaces that tremendously. There are some countries fiscal space and Germany would be an example. We're living in a world with incredibly low interest rates so this could be a good time. So so yes indeed I think that if there were more closely work together in monetary and fiscal policies that would help if and when things got really bad in the future is the risk to that kind of partnership or closer cooperation potentially eroding the independence of central banks. Well we have to make sure that that's not the case. I mean that can be a scenario where both parts of the other policy tool kit has been used and used to stimulate the economy and not working in cross purposes against each other at the same time. It is important to maintain the independence of the central bank in this environment with all of these risks. There is a temptation for policymakers to reach for currency depreciation as a tool to try and buffer their economies. There are countries of course like Japan which is very concerned about the strength of the yen . Of course as President Trump saying that he wants to see a weaker US dollar. Is this now a concern that is being factored in that this could translate into ethics rules given the limits in monetary policy space that exists. There is this concern that most of the effect of what central bankers are doing are basically going to play out in exchange rates. Now of course I mean if every single central bank were to do exact same policy the exchange rates are not going to move because it's after all a reckless price. Secondly you know most countries are worried about their trade deficits and the question is whether they can deal with their trade deficit problem by affecting the exchange rate and the work we've done basically shows that that seems like a second order phenomenon. What exchanges can do to deliver robust long lasting trade improvements in the trade balance is is not that great. But on the other hand reforms on the fiscal side on structural reforms of those those kinds can actually help with the trade balance is the stronger dollar though proving a drag at this point it's a small part of what what affects the U.S. economy. The U.S. economy depends much more on consumer spending it depends much more on fiscal policy. The exchange rate has been flexible . It moves with the markets. You know that being a big drag is a hard sell. Just negative yield 16 trillion dollars 17 trillion dollars of negative yields. Does the yield inversion Does that concern you. What does that telling you. So the yield inversion of course has been you know quite successful leading indicator of recessions going forward . But again you know I would view that as a mixed bag at this point in some sense is not so surprising that the yield curve keeps inverted because we're living in an environment that very low inflation which means that the term premium on it is going to be quite small. So we're going to be very close to zero in the first place. So the inversion is not a strong signal in my opinion as it was say when inflation was high. And you know central banks are raising interest rates which was causing the inversion to happen. So I think we have to be careful about reading those signals what it does tell you is that there still remains a tremendous appetite for very safe assets which is why people are willing to hold on to negative interest rate instruments at this point and that can be a single concern in terms of the inflation picture. There were many who will be arguing that this is a structural change. Now in terms of long term weak inflation is that what you're seeing from the data sets are there any areas of the global economy where inflation is starting to pick up significantly that would challenge that view. So inflation is certainly an important concern. I mean one of the reasons central banks everywhere in the world are more shifted towards cutting rates is because inflation rates are coming down and even in the US there's concern about whether expectations of inflation are too low. Now of course there's the exception the U.K. seems to have inflation closer to target. And you certainly see that but there is overall a concern about what's happening with inflation . Now of course it could be that a lot of corporations who were living with you know good markups of high markups or high profits are not passing through any cost increases into prices that consumers face. And that can change but we're not seeing that yet and we're not seeing any wage inflation it seems either . We are seeing wage inflation we do have wage inflation. I mean we are seeing wages go up in the U.S. we're seeing that go up in Germany in the U.K. So we are seeing it but the pass through of that into prices is still quite muted .

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IMF Chief Economist Gopinath on Trade War, Global Economy, Policies

International Monetary Fund Chief Economist Gita Gopinath talks about the trade war between the U.S. and China, the global economy and central banks' policies. She also discusses the economic impact of the anti-government protests in Hong Kong and the Brexit negotiations. She speaks with Tom Mackenzie on "Bloomberg Markets: Asia." (Source: Bloomberg)

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