(Yicai) Jan. 19 -- The global gross domestic product can lose up to 7 percent if the geo-economic fragmentation continues to deepen, according to the first deputy managing director of the International Monetary Fund.
In case of a very severe form of fragmentation, the GDP will probably lose 7 percent, which is like losing the economies of Japan and Germany, Gita Gopinath told Yicai at the World Economic Forum. If the fragmentation is mild, then the loss would be of between 0.5 percent and 1 percent, she added.
“The threat of geo-economic fragmentation is increasingly a reality,” Gopinath noted. Around 3,000 new trade restrictions were put in place in each of the past two years, which is very problematic for the global economy, she pointed out.
Political leaders surely need to build resilience in their supply chain and worry about national security concerns, but they also need to be careful that in doing so, they do not disrupt the global trading system, Gopinath said about how political leaders can prevent the worst fragmentation case from happening.
When discussing China’s strategy of not seeking short-term growth but instead accumulating long-term risks, Gopinath noted that it is correct in the sense that it is very important not to have a credit boom-driven growth because it usually ends up with financial sector problems that take a very long time to unwind.
“However, there is also a need for more momentum on structural reforms,” she pointed out, adding that it is not about pursuing a bigger growth number, but more importantly about addressing existing problems.
China is really advanced when it comes to climate-related sectors and artificial intelligence, but they still account for a small share of the economy, which is not enough to have investment in these sectors, Gopinath said.
“You need broader level investment in the property sector and local government financing, as well as more structural reforms, market-based reforms, and reforms of state-owned enterprises need to achieve more broad-based growth,” she pointed out.
Moreover, Gopinath suggested that the Chinese government should invest more in the social safety net so households would not have such a high level of savings.
Editor: Futura Costaglione