Kenneth S. Rogoff
Kenneth S. Rogoff

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Brazil and the IMF

United Kingdom and the IMF

Japan and the IMF

United States and the IMF

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Transcript of a Press Briefing on the World Economic Outlook
By Kenneth Rogoff
Economic Counsellor and Director of the Research Department
International Monetary Fund
Thursday, September 27, 2001
London

Good afternoon. I'm Bill Murray from the IMF's Media Relations office. To my right is Ken Rogoff, Economic Counsellor and Director of Research, who's been on board now at the Fund since early August. Before we take questions, I would like to thank the Bank of England for arranging this today, and particularly the Press Office of the Bank for putting the arrangements together.

To explain why we're doing this, normally we have an Annual Meeting, and our World Economic Outlook press briefing typically takes place just prior to the Annual Meetings, which draws journalists from 30 odd countries. Because we have no Annual Meetings this coming weekend, we decided to come to London and provide you with an opportunity to ask some additional questions basis the latest World Economic Outlook.

If you could identify yourselves, and your affiliation when you ask questions, I'd appreciate it. Thanks.

Ken has some brief opening remarks.

MR. ROGOFF: Thank you very much. I just want to mention I've lived in London from time to time in the past. As a teenager for a year and then again two years ago when I was a visiting Centennial Professor at the London School of Economics, and spent many hours at the Bank of England talking with Mervyn King. So I'm glad to be back.

I first want to say that I think it's probably very well known to you now that I'm new at the IMF and this is my first term presenting the World Economic Outlook. The person I follow, Mike Mussa, has really done a terrific job. And in producing the WEO we've had an enormous amount of cooperation from the rest of the International Monetary Fund. The published projections in the WEO reflect data we've had up to September 11th. They do not incorporate any impact of the September 11th terrorist attack. We presented this note that you have in front of you, that gives a qualitative assessment, but we just think that it's really premature to try to give a quantitative assessment. I should say, some of the qualitative assessment is worked throughout the WEO. There's just tremendous uncertainty.

We think there are grounds to be optimistic; that the impact of the attack is not going to be that deep or long-lasting. We get some historical analogies. Nevertheless, I think one has to recognize that this is a time of more than usual economic and non-economic uncertainty. I think whenever Mike (Mussa) presented the WEO in the past he would always recognize that there are always a lot of uncertainties. It's simply the nature of the exercise and, it's probably fair to say that this is an unusual turn in the degree of uncertainties but they're not all one-sided uncertainties.

There are a lot of positive things that can happen in the sense that things can be very temporary. So I don't want to express uncertainties in saying that everything is for the worst, and I list a number of points in what's going to be Box 1—the opening remarks that you have—having to do with world inflation that's lower, fiscal balances are in check in many countries in the world; far fewer countries are on fixed exchange rates and many more emerging markets have lower external vulnerabilities than they did before. And all of that leaves the world in a better position to bounce back quickly. That said, I think it's certainly true that September 11th, whatever the impact was, it was certainly not positive. But I won't be able to give any quantitative assessment.

We are—given the delay of the IMFC meeting which had to be postponed—we are very seriously considering doing an interim WEO, and I may be coming back to you in the not so distant future with that. But I'm just not able to give you any specific numbers from that. I guess I can say that our current thinking is reflected in these comments: That is, our assessment that there's a fair chance that there'll be a good bounce back in 2002 and that that's something that's realistic. I think I'll stop there.

QUESTIONER: For those of us who weren't in Washington yesterday, sadly, can you perhaps clarify your statement on the US economy? Do you think that in the US economy, a recession is a done deal or not because it was a bit hard to assess from the reports we were getting back over the wire for instance?

MR. ROGOFF: Twenty, 25 years ago, I used to be a professional chess player and The Guardian (newspaper) was never too kind to me in their review of any blunders that I made in my game. Leonard [Garden] came to say "this most imaginative pro" for describing my mistake. But this was certainly a case where I mis-spoke. I did not intend to say what I said. I withdrew my remark at the end of the conference. If I had been quicker on my feet I would have withdrawn it immediately because the numbers are not in. We don't even know what Q2 is. There's still a revision coming in. I mis-spoke.

QUESTIONER: Can I ask you to define what you say is a world recession? It's often reported that the IMF definition of a world recession is 2.5% growth or below. Is that the case and does the new projection here of 2.6%; presumably the risk's there on the downside to that?

MR. ROGOFF: We don't have a definition of a world recession and it's not surprising because, if you look at figure 1.1, the world never goes into recession in the sense of having negative growth. All you can ever talk about in the global economy would be a growth recession, whatever that is. So we simply don't have a definition. What you can do is look for a frame of reference and past experiences. You could look at '82, 1991 where, and I'm giving a loose number because it's really not something we've looked at closely but, they clearly fell below 2% globally as we measure it with purchasing power parity. Now, we see virtually no chance, if you wanted to use 2% as a metric, of that happening in 2001; it's almost impossible. Too much of 2001 has passed for that to happen and, even in 2002, it is very unlikely. We emphasize downside risk but let's remember our baseline up to September 11th. I do not believe the IMF in recent years has had any kind of problem with being too optimistic compared to private forecasters, probably the other way. Our baseline was 3.5%. It takes a lot to go down from 3.5% to below 2%. So, again, it's a time of extraordinary uncertainty but we don't see that as likely that we go down to the frame of reference of '82 and 1991.

QUESTIONER: Let me just return to this business of a definition of a world recession. On Monday your colleague, Anne Krueger said, while the recession as was defined, the IMF has defined global recession as being less than 2.5% growth. She said this in a briefing on Monday. Has she or have you changed your mind since Monday?

MR. ROGOFF: I wasn't at that press conference but I tried to read the notes and it sort of looked like words were put in her mouth. Somebody said, `On Wall Street, people use 2.5% as the global recession. Do you see us going below 2.5%?' But we don't have it. We don't have at the IMF a definition of global recession. It is something maybe we should think about, but there certainly isn't one in the institution. There's not one informally in the institution, but I think all you can do is look at figure 1.1 and you can decide what you want to call a recession.

QUESTIONER: Can I ask you what is the UK's position in the current sphere of things in terms of international market?

MR. ROGOFF: I think the UK economy is a bit stronger than elsewhere in Europe and in the United States. For example, I gather there's been some mixed evidence of drop in consumption but, on the whole, the UK economy is stronger. Now, that said, we live in a global world and the UK's affected by that but it's definitely one of the stronger players.

QUESTIONER: So can I follow up and say, what's the future prospects for the UK then, given your outlook?

MR. ROGOFF: I think we have in the WEO for this year 2% and for next year 2.4%. I don't know what we're going to come back with when we rethink everything, if we do indeed go through with an interim WEO exercise. If everyone else has shaved down a bit it probably affects the UK a bit. It depends on policy response but it's one of the stronger spots in the world.

QUESTIONER: I believe yesterday you said that fiscal policy (in general) should be very carefully monitored with no binge cuts. Could you clarify that?

MR. ROGOFF: I just think it's very hard to tell what's going on at the moment and monetary policy itself is a very complex and uncertain instrument. We are all great admirers of Alan Greenspan and how he uses it. But there are long lags and how it affects output, how it affects inflation. Fiscal policy is more complex yet...Probably monetary policy should be regarded as the first line of defence, and fiscal policy is slower acting; it's much less clear. It depends on what you do. Does the public view it as temporary or permanent? That's a very important question. So our judgment is a wait-and-see attitude.

QUESTIONER: We also see in the notes that you've handed out it's view would suggest that financial markets can overreact to such shock. Does that mean you're expecting a downturn in the equity markets?

MR. ROGOFF: What I can guarantee is that markets are going to be more volatile for a little while with all the uncertainty but I can't predict the course of equity markets and I won't try to.

QUESTIONER: Just want to relate some of those questions specifically to UK policy. You talk about, again, in a speaking note, in terms of the room to maneuver on the country policy stuff. Does that apply to the Bank of England do you think? And also, on the fiscal side, in the past the IMF has been quite critical of the UK government's fiscal policy, and the big fiscal expense we're seeing at the moment. I was wondering whether that was a criticism which you shared and whether you think that, perhaps given the current circumstances, that the criticism is less justified.

MR. ROGOFF: Let me answer the general question about monetary policy. What we mean by room to maneuver is that if we get more bad news and inflation is low—and it's strikingly so in Japan—it clearly has the most room to maneuver. We show in our figures that they've had deflation in the past few years. That's an extremely undesirable state of events and it is important that Japan over the medium term restore a non-deflationary situation. I think with the ECB it's much harder to second guess the situation. I would fully endorse what they've done so far, and it's a close call at this point between trying to address the immediate needs to the situation and concerns about longer-term inflation. They always have to worry about that and ask themselves, `Well, how serious is this compared to long-term credibility?' The ECB states that this is not a problem initially so...I don't think it's clear cut, how to proceed.

QUESTIONER: What about the Bank of England in that context, and the fiscal policy in question in the UK?

MR. ROGOFF: I don't have any strong comments to make on those points really. The UK's doing well comparatively and there are many things, looking more deeply at the UK economy, that look good. The respectability of labor markets, for example, compared to Europe; there's a lot to admire in the UK economy. The emphasis in the WEO really is on these longer-term issues. We're not sure what you should do in the short run. That's a tough call. We're very sure that it's important to let the reforms make labor markets more flexible in Europe, for example. So the UK would be a positive example of that.

QUESTIONER: I'd like to know if you have an idea about the impact of these recent developments on liquidity, and what happened to emerging markets, particularly the ones in Latin America that depend on external finance?

MR. ROGOFF: I think it's a considerable concern that there's been in the short term a flight to quality...Whether this is temporary or permanent, one often sees the short-term shifts surrounding periods of high non-economic uncertainty, and if that proves temporary then it's effect may be short-lived. That's the most immediate threat to Latin America. If you look at Asia and Mexico, I think for them the concern is much more the slow down in growth in the United States.

QUESTIONER: You made some comments about the Stability and Growth Pact. I think it was on page 26 of the WEO. It says, it should maintain the credibility of the Pact. At the same time you suggest it should be able to fluctuate. And that is not, I think, in the original Pact. I was wondering if you were actually proposing the Pact should be revised and the objectives and the figures themselves in the Pact?

MR. ROGOFF: I think if we are speaking about if there is a significant downturn, tax revenues are going to go down, and to the extent there's flexibility, allowing these budget deficits to absorb that, if we are facing a recession. But specifically in answer to your question, I think it's something to think about but we're not proposing anything specific.

QUESTIONER: I would like to go back to emerging markets particularly in Brazil. There is a growing concern about the Brazil situation with pressure on the currency. Last night the Central Bank adopted some measures to try to diminish the speculation. There is also information circulating information in the market that Brazil would be negotiating with the IMF for additional support. Can you say anything about that?

MR. MURRAY: On country issues we're going to limit that to other presentations. Tomorrow for instance, in Washington, Tom Dawson, head of External Relations, my boss, has a regular press briefing where we take questions on country-specific issues. Paolo Sotero, your colleague in Washington, will probably be there. What I would recommend is you go to our external web site after the briefing. We post the transcript of the briefings on the web site. At some point we will have an arrangement where you can, here in London, pose questions to Washington. But the technology hasn't caught up with the initiative yet.

QUESTIONER: I'm wondering because the UK was treated as a specific here so I thought we could talk about Brazil too.

MR. MURRAY: If you want to get into some Brazil-specific forecasts I suppose we can if they are related to the WEO. But in terms of the Brazilian program, you're asking about a supplementation. That's really something that's not in Ken's bailiwick.

MR. ROGOFF: I wouldn't have been able to answer your question.

QUESTIONER: Economists are talking about a symmetrical shock to the world economy as a result of September 11th events. Is that how you see it, or do you see that there is potential here for Europe and the United States...to behave differently economically?

MR. ROGOFF: I think its impact was probably greater on the United States than on Europe. Exactly what the pass through is from growth in the United States to growth in the rest of the world really depends...

QUESTIONER: Are you expecting the same impact in the United States as in Europe on consumer confidence, on business confidence?

MR. ROGOFF: It's very speculative but I wouldn't expect the same effect. I think if you're close to the events as I am—I was in New York the day before—the emotional impact on me was much greater than if you're far away. I think it would be a greater effect on the United States, especially since one of the major channels is through business and consumer confidence.

If you look at the Kobe earthquake, which we looked at in the WEO, it was something that caused immensely more physical damage and was a huge toll on human life. They had $100 billion damage—2.5 % of Japanese GNP. It's hard to come up with a number anything like that here. The spill over effect to the rest of the world—you just can't measure them. And frankly we have trouble measuring the effects on Japanese growth.

QUESTIONER: You mention in your section, if we can come back to the UK, that monetary policy before these incidents was finely balanced, and you set out a case where the possibility of an increase in interest rates might be warranted. Presumably, in the wake of this and given the shock that you would expect to be transmitted to Britain, can you now say that you think an increase in interest rates is unlikely to be warranted? And to come back to the US, because that's two slightly related questions, first of all, given the upbeat statements that Mr. O'Neill and others have been making in the US, do you feel any pressure to be presenting a positive picture of the consequences of this and, particularly, in relation to your withdrawal of the remark about a done deal? It would be understandable if you did feel under those sorts of pressures but could you comment on that?

Lastly, related point, related to fiscal measures that you are urging a wait and see stance on, you also referred to the confidence you now have in Alan Greenspan. Mr. Greenspan seems to be in the lead on advocating a $100 billion stimulus in the US in terms of tax cuts and other measures. Could you reflect on that and say whether you think that may be an over-reaction in the short-term?

MR. ROGOFF: Let me talk about the interest rates first. We do see there being a quite reasonable chance of the significant bounce back in 2002 given that there were a lot of sharp interest cuts and possibly even if there are no further cuts. As the economy grows again, there may be a case looking ahead to 2002 where central banks are again happily raising their interest rates. That's totally consistent with our view. In the very short-term it would certainly seem harder to make the case for that than it was before September 11th.

Going back to your question about Mr. O'Neill. No, we are totally independent at the IMF and under no pressure in terms of what we say. Again, I mis-spoke, period.

QUESTIONER: And on the fiscal measures Mr. Greenspan...

MR. ROGOFF: I'll come back to it.

MR. MURRAY: He'll come back to it but let's just take a couple more questions and then we'll wrap up.

MR. ROGOFF: Mr. Greenspan's a leader in Washington. But I don't know his exact position when he is meeting behind closed doors so it's hard for me to speculate on that. It clearly is the situation in the United States there's a big difference, and in the rest of the world, reflecting that the September 11th events hit the United States more directly, just from an economic perspective. That said, I do think a wait-and-see attitude is appropriate. Now, information is pouring in so what's wait-and-see one week might not be in two weeks. Information's just coming in, very fast. There are a lot of uncertainties, a lot of things developing so I wouldn't want to lock myself in any position on that.

QUESTIONER: I just wanted to follow up on this done deal question, which you have tried to clarify. You have said that you mis-spoke. But I quote from your transcript.whether it will be a bit above zero or a bit below zero, there will be a drop in US growth...Is that the mis-spoke or do you still see that?

MR. ROGOFF: Q2 right now is 0.2. There's a revision coming. A short-term revision coming. There can be another revision in another year and then Q3. We don't have the numbers. We don't know yet but certainly it's well within the realms of possibility. That was not a mis-quote but fundamentally I don't know.

QUESTIONER: But the probability, what would you say the probability for a recession is then? You said done deal. That's...

MR. ROGOFF: People use a precise definition of recession. By recession they mean it leads to negative quarters. There is clearly a possibility of that just with Q2 and Q3. It's not a reference to the future. But I don't know what's happening. I certainly don't know Q3. I don't even know if Q2 (will be revised down).

QUESTIONER: You have said all the forecasts for different countries but the US is the country where you have said the least of forecasts, why is it particularly in the US that they'll keep the growth better than the other countries compared with your May projection?

MR. ROGOFF: I think the long-term, and I know none of you want to read Chapter 3 in the WEO, but I think there are some interesting points there and we paint a fairly rosy scenario of the longer-term that the IT revolution will continue to have positive effects streaming throughout the economy. The US economy before September 11th and after September 11th is very well positioned to take advantage of these effects and everything we said there in Chapter 3 remains true today.

QUESTIONER: Turning to the Euro zone, do you think that the Stability and Growth Pact is too much of a restriction on the government to be able to stimulate the economy? In other words, can you make any fiscal move that would be meaningful without the growth rate being jeopardized?

MR. ROGOFF: The European Union has been engaged in a bold experiment that has been very successful, despite the Americans being more skeptical; it's just been more successful than on my side of the Atlantic we had imagined. But I assume that over 10 and 20 years it's not a static process and re-thinking will take place.

QUESTIONER: Just bringing it back to the UK, in the light of your comments about the possible need medium-term for interest rate rises in the UK, I was wondering if you could comment on the wisdom of the government's current expansionary fiscal plans which go on to 2003 and beyond?

MR. ROGOFF: Let me be clear. When we're looking ahead to 2002, not to next Thursday, we could as easily find ourselves in a situation where the immediate recessionary problems had passed, the pressures had passed, and the global economy had growth of 3.5% or better. It's a very possible scenario. Then you would want to re-evaluate your policy. And by that I mean I don't know if you'd want interest rates to go up or to go down. So I'm not talking about next Thursday.

MR. MURRAY: Thanks. Just a quick footnote. The IMF press office, as you know, is headquartered in Washington. If you ever need to get in touch with the press office, the main number, and it's a 24-hour number, is 202 623 7100. We have a duty officer who is reachable 24-hours, 7 days a week. Again, tomorrow Tom Dawson, who does this every two weeks, will hold his regular press briefing. It's an anything goes briefing. The transcript of that will be on our external web site after the briefing wraps up.

Thanks for coming.