[Podcast] Christine Lagarde’s call for action – IMF World Economic Outlook

In today’s podcast we are going to be speaking about the IMF World Economic Outlook, which is a publication that was release by the International Monetary Fund in October of 2018. I actually want to focus this conversation a little more on the press conference that was delivered in the World Economic Forum on January 21st of 2019, where a panel was held with directors of the IMF – the Managing Director Christine Lagarde, she is very well known, but she also had the support of an economic counselor, who is the director of their research department, in order to deliver the sort of information that we are going to review today. What I think was very interesting – the highlight of this study, of course – will be Lagarde’s message because she introduced us to the study. She gave us an overview of what is actually happening in the global economy. But she had a very strong call for action and, of course, when that comes from Christine Lagarde I think that we need to focus and pay attention. She is a powerful woman, she is running the IMF, and it was very interesting to see her out there and deliver this message.

In the beginning she tried to make this analogy between cross-country skiing with the global economy. It was quite interesting, it was kind of cute to see her – such a powerful woman – come down and say: “here,” – in a very educational manner – “this is what we expect from the economic environment. We want predictability, less risk. We want things to run smoothly, just kind of like cross-country skiing”, which is a personal practice. So that was quite interesting.

But Lagarde did not have a very exciting message to tell us. She actually had some unfortunate news for the global economic environment. She told us, here, we have to deliver this message that we are downgrading the growth forecast since october 2018, because risks are on the rise and we have some bad news on the trading front, so we have some threats in the trading environment which is sort of escalating all sorts of problems and risks in the global economy and for that reason they had to announce a further downward revision of the forecast that was published in October. This is pretty much because of the significantly higher risks.

Higher trade tariffs and rising uncertainty over future trade policies. That is a big issue that is one of the key sources of global economic risks. Lower asset prices, higher market volatility, which these three combined are tightening financing conditions and that is including for advanced economies. And this is in a scenario of high debt burden in both private and public sectors are carrying a high debt load right now.

But she does give us the message that we are not facing a global recession right around the corner. This does not mean that a major downturn is happening. But what is happening is that a sharper decline in global economic growth is happening, there are many issues, including geopolitical worries as well.

But she says that this scenario actually shows us a very clear message for policy-makers. One is that they need to address remaining vulnerabilities. And two, is that they need to be ready if a serious slow down were actually to materialize. So, if a recession is actually to materialize, policy-makers need to be ready. Third message is that policy-makers need to harness existing growth momentum, and she is very emphatic. She says, yes, there is growth momentum, so we need to take advantage of that and harness these sorts of opportunities.

Policy-makers also need to work on reducing high government debt, and she is making a point here that this opens space to fight future downturn in the global economy. So, economies need to be ready if that comes to take place.

As far as monetary policy, they should be data dependent and exchange rates should be allowed as shock absorbers, and I thought that that was kind of interesting because of the whole conversation behind exchange rate manipulation. Next message is about economic reforms. They need to be in place in order to push growth, specially in labour markets and infrastructure investments.

So, these were the messages that she believes that this risky scenario is showing us. But she also makes a point in saying that if we must deliver the promise of the digital revolution, it has to be inclusive to all people, including measures to help workers that are displaced because of the automation of work, and we also need to create opportunities for women and young people.

She has a very important point here on International Cooperation. She said that for efficient and effective collaboration in the international system we have to increase our efforts in resolving the shared problems and that meaning, we need to fix the global trading system. There is a call for action here for the G-20 saying that they have to deliver results. This is a call for the World Trade Organization reform. I think this took place in Buenos Aires. She says that we need to collaborate in fighting corruption and tax evasion, and also, collectively address climate change.

Now, one very interesting message, I think she nailed in closing her speech talking about something that she calls New Multilateralism. And that was brilliant, because she runs away from the term globalization. Because people have been feeling very uncomfortable about the globalization topic, and globalization issues. Countries are becoming more nationalist driven, and she puts this here that is not becoming a unit, it is staying multilateral but acting together. And I thought that that was quite brilliant. She gives us a new perspective on globalization. Kind of running away from the term, but still sticking to togetherness. Kind of nice. And that includes macroeconomic policies and structural reforms that need to be applied to many economies in the world.

Now, going back to the report. In October of 2018, the IMF had this projection of global growth at 3.7% in 2019 and they reduced that to 3.5% in 2019 and then they also reduced to 3.6% in 2020. Now this is for global growth. The growth in advanced economies is forecasted at 2% in 2019 and 1.7% in 2020. And then emerging markets and developing economies at 4.5% in 2019 and 4.9% in 2020.

Both in the report and the press conference, they really put emphasis on the rising trading tensions and then the policy uncertainty that raise concerns about the global economic prospects, because these factors could actually lead firms to postpone or forgo capital spending, and then hence slow down economic growth and investment and demand.

One very interesting point in the report – and this is where I am going to close this podcast with – is the point that the IMF is now keeping an eye on increasing market power. They also think that this is a risk for economic growth. They said that the concerns about corporate market power is growing pretty much for two reasons. One is because, in the past decades, there has been some macroeconomic trends that can be somewhat the fault of corporate behaviour. Low investments, despite of rising corporate profits, declining business dynamism, low productivity growth and falling labour income. This is quite interesting because they pretty much raise a flag here saying, here, we have to review the behaviour that is happening in the private environment, we have to follow up on actions that are going to change this sort of trending behaviour. And, I mean, if we are talking about Corporate Diplomacy, there is a lot to be talked about on here – activities and strategies that need to be built in order to respond to such a claim that corporate market power can actually account for these macroeconomic trends that are not so positive for the overall economy.

And then the second reason about the rising concern in the market power of corporations is that the rise of tech giants has raised questions about whether this trend – of the tech giants becoming more powerful – and if this trend continues, the IMF is saying that we need to rethink the policy that is needed in order to maintain fair and strong competition. I thought that it was very nice to put in the context of Corporate Diplomacy. So, there is a lot that could be explored in this report. This increasing market power session in this report itself is evidence that government is becoming aware and it actually wants to tackle the sort of increase in power for private environment. And all sorts of strategies that have to be built, not because the private environment needs to win in the game. We actually want a balanced governance strategy nowadays.

Economic rise of Brazil and segmentation of investment opportunities

Brazil has lived a unique economic situation in the past decades, after an economic boom at the end of the sixties and beginning of seventies (known as the economic miracle), when the country passed from an agricultural based economy to an industrial based economy. Such transformation and growth came with high inflation rates, and after the first and second oil crisis the country over went great period of stagnation at high inflation rates until the nineties, when many economic reforms brought inflation control and market opening.

Around 2000, Brazil started to grow more vigorously, maintaining its inflation rate under control. This scenario allowed the country to receive considerably economic indicators, such as the reduction of poverty of its population from 35.2% to 21.4%. Millions of people rose to middle class, creating with this a rise in consumption of goods as the primary factor of stimulation to the country’s growth, minimizing the impact of financial crisis from the developed world in its economy and, according to data published by the World Bank, managing to achieve economic growth at the rate of 7.49% in 2010.

Along with the economic growth and rise of the population to middle class, Brazil diversified its trading partners, establishing significant commercial relations in the Middle East and Asia, lessening its dependence on the US and European markets, and limiting the impacts of international crisis in its own economy.

Another relevant factor of today’s growing interest from international players in the Brazilian market is the upcoming international events to be hosted in the country such as the 2014 Worlds Cup and 2016 Olympic Games, attracting considerate investments, improvement in its infrastructure, stimulating economic dynamics and opening doors to international tourism. Such scenario brought many opportunities for entrepreneurs in many sectors. We have listed below the most significant ones:

Sectors connected to domestic consumption
Because of growing purchasing power and easier access to credit, Brazil shows higher consumption indicators and so increasing opportunities in retail.

Infrastructure, logistics and telecommunications
With growth of exports and of its economy, new opportunities are found in the concession of roadways, public transportation, and distribution logistics such as with current expansion and consolidation of national railroad systems in response to the need of transporting growing internal production from rural areas to cities and ports. Also, because of upcoming international events such as 2014 World Cup and 2016 Olympic Games, and also growing digital inclusion of lower income population, investment opportunities for expansion and implementation of necessary telecommunications infrastructure for growing access to broadband networks.

Renewable energy technology
Brazil is known for its majorly clean energy matrix due to favorable natural conditions for hydroelectric generation. However, in order to expand and diversify its energy matrix and technical capacity, recent public policies and governmental funding programs have stimulated market development for other renewable energy technology such as thermal and wind for the past decades and currently extending its policies to stimulate solar and ocean technology development.

Heavy machinery for manufacturing and civil construction
With easier access to credit and governmental incentives for industrial production and value-added exports, manufacturing units are increasingly undergoing infrastructural and technology improvements such as incrementing production growth through modernization of manufacturing facilities and expansion of production capacity. Much of current demand for heavy industrial machinery is being met with imports, because of scarce in-country machinery production.

Agribusiness
As world population grows especially in Asian countries such as China, incapable of meeting its internal food demand, and also considering the Brazilian historical capacity for agricultural production and commodities exporting, business opportunities in the food supply chain are found today with less technical barriers like the ones seen in European and North American markets. Also, ethanol production is attracting increasing investments because of current growth in the use of biofuels in Brazil and in the developed world, as it lowers the dependency of such countries in the oil industry.