Interview with Brazil's EXAME

Original quotes from interview by Mr Agustin Carstens, General Manager of the BIS, with Exame, conducted by Mr Felipe Serrano on 9 October 2019 and published on 24 October 2019.

There is growing concern about a slowdown in the world economy. How do you see these concerns?

In late 2018 and early 2019, it was clear that this was a protracted slowdown. Part of it has to do with the consequences of the 2008 financial crisis that have not been fully resolved. However, the most important feature of the last two years has been the trade disputes. They have caused many distortions. They have had a direct impact on some countries, causing a reduction in exports. Trade volume is stagnant. And there is an indirect impact on global value chains and investment plans. Trade disputes cause a lot of uncertainty, and companies have been postponing investments. This has a considerable impact on growth.

Do you see a risk of a global recession?

The world has been moving towards low growth rates for some time. I would say it is too early to predict a recession. But as time goes on and more negative results appear, the likelihood of a recession increases. If there were a sufficiently large shock, the global economy would not be so resilient. A very negative shock, along with other weaknesses in the economy, could lead to a recession.

The slowdown in rich countries has prompted central banks to reactivate stimulus measures that were being phased out in recent years. How do you evaluate this change of direction?

In 2017, there was room for a normalisation of monetary policies. But as the recovery weakened, a change of course became necessary. Some additional accommodation was needed. The key issue here is that central banks continue to accommodate to sustain economic growth. But the effectiveness of monetary policy has become more limited. If we look into the future, the scope of monetary policy action is reduced.

Why have developed countries come to depend so much on the actions of their central banks?

The institutional regime is such that central banks can act quickly. They are agile. Other policies need to go through legislative processes and their response time is different. But I would say that, somehow, the fact that monetary policy is so agile has caused some authorities to freeride on it. Now is the time for the responsibility to migrate to other economic policy instruments. To have higher and sustainable growth rates again, the hard work must be done through fiscal policy and structural reforms.

What kind of reforms?

It depends on the country, but there are many reforms that could induce growth. In some countries, there are reforms that could improve labour market efficiency. Other countries could improve institutional arrangements to promote more investment. But an important structural reform would be to have a fair and transparent world trade policy. If there were more transparency and confidence in the world trade regime, this would help the global economy tremendously.

In this turbulent environment, what are the major challenges for emerging market economies like Brazil?

In recent years, capital flows have become more volatile. Therefore, it is important for emerging markets to be prepared for a potential sudden outflow of dollars. It is fair to say that Brazil in general is very well prepared. It has large amounts of international reserves, a prudent monetary and fiscal policy. Moreover, it has a healthy financial system. However, it must be careful about the financial risks.

Was this the case with Argentina and Turkey, which suffered from the devaluation of their currencies?

Yes. However, I would put them in a different category. Turkey and Argentina have problems that are not present in Brazil.

Is the global slowdown also a concern for emerging market economies?

Certainly. The slowdown in advanced economies is affecting emerging markets. The volume of trade has been reduced. And commodity prices have fallen. This implies additional pressure on them. For emerging markets and developing countries in general, it would be positive for trade disputes to dissipate.