April 5, 2007
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MR. MURRAY: Good day. My name is William Murray. I am Chief of Media Relations at the IMF. Welcome to the Spring 2007 press briefing on the World Economic Outlook Analytic Chapters. On behalf of the Media Relations team at the IMF, I want to welcome Simon Johnson, the Economic Counselor and Director of Research who will be providing some brief opening remarks before we take questions. Joining Simon today is Charles Collyns, the Deputy Director of Research here at the IMF, and Timothy Callen, the Chief of the IMF's World Economic Studies Division. Simon?
MR. JOHNSON: Good morning, and thanks everyone for attending in person or online. This is my first press conference since taking over as Economic Counselor and Director of the IMF's Research Department.
As you probably know, the Research Department plays an integral part of the Fund's mission. With a lead role in the area of multinational surveillance looking across countries at worldwide issues, the Research Department has been at the forefront of the Fund's work on a wide-ranging set of issues. The analytical work of this department is instrumental in maintaining the quality and relevance of the Fund's policy advice, and this remains important as the global economic landscape changes over time.
As the global economy changes, we will continue to follow the details closely and find ways to shed new insights on key developments through our research. We aim to be both topical and rigorous, looking for data, ideas, and results that will help guide anyone interested in serious policy analysis and careful recommendations.
In addition, and this is an important personal priority for me, we will work hard to communicate our findings to a broad audience. Some of the work we do is highly technical, but I strongly believe that if an idea cannot be communicated persuasively to a non-technical audience, then that idea needs more work. I think that everything we do here is or should be of interest to you and your readers or viewers, and I am very glad to see you all here today.
The global economy often seems like an abstract concept to many people and it may be hard for readers and viewers to understand exactly how global macroeconomic fluctuations feed through into their daily lives. At the same time, many or perhaps most people in the world today understand at some level in some way that wherever you live, your opportunities, hopes, risks, and fears, your lives and your children's lives are very much shaped by what happens globally. Sometimes people become fearful of this global economy and the many changes that are loosely or broadly termed globalization. A big part of what we do in the Fund is to try and explain carefully what drives the global economy and how it impacts you and the people who read your newspapers, watch your television programs, and listen to your radio programs.
There is much that needs close attention by individuals themselves, and many of these issues also need close attention from policymakers. Well-crafted policy can deal with the issues raised by the global economy and it really is possible to share widely the benefits of rising prosperity around the world. But policies have to be updated continually and they have to be forward looking in order to be effective. It is not a good idea for any individual or any government to bury their head in the sand and just hope the global economy goes well or goes away. The global economy is here to stay. It is complex and always changing, sometimes rapidly. We all need to watch it and study it carefully.
A centerpiece of the Fund's and the Research Department's research and communication efforts is the World Economic Outlook, often called the WEO for short, which aims to use high-caliber economic analysis to provide insight on current issues related to the global economy. In this issue of the WEO, our team has again done an outstanding job integrating both all you need to know about the latest global macroeconomic developments and three analytical issues that are highly relevant for accurately reading the current environment. We will return next Wednesday for a press conference on a detailed discussion of our views for the global outlook. Please do not ask me about global growth today. I want to save those questions until next week.
Today's press conference is going to focus on these three analytical chapters, and let me briefly tell you the main points of each. Chapter 3 of this current WEO reassesses the role of exchange rates for unwinding or reducing global imbalances. Global imbalances is the term that is used for today's situation in which the U.S. has a large current account deficit and some other countries have large current account surpluses. Exchange rate adjustment is certainly not a panacea. By itself it will not eliminate imbalances. But this chapter shows that it can definitely help to lower the output costs that would otherwise be involved in narrowing current imbalances. The chapter confirms that market-led real appreciations and depreciations can be helpful. Specifically, they support macroeconomic policy changes and the private-sector saving and investment decisions by facilitating the reallocation of resources across sectors. Thus, macroeconomic policy changes help to reduce imbalances without large fluctuations in output. In particular, the chapter pours cold water on the so-called exchange rate pessimism story in which exchange rates move but do not contribute to current account adjustment. There is also little reason to believe that elasticities or other technical parameters have declined recently for key countries such as the United States. If anything, standard models that are used widely may well underestimate how much U.S. trade volumes are likely to respond to changes in relative prices, meaning the real exchange rate.
At the same time, we should not lose sight of the need to increase domestic demand in surplus countries, as well as to boost savings in the United States. At the end of the day, both demand rebalancing and exchange rate channels are important and necessary to help unwind global imbalances in a manner supportive of and consistent with continued global growth.
Chapter 4 tackles a very timely question. If the U.S. sneezes, does the rest of the world catch a cold? In more technical terms, what would be the spillovers to the other countries if economic activity in the United States slows down? With the well-publicized issues of the U.S. housing sector in the news almost every day, the U.S. growth slowdown has taken center stage. So far, the impact on the rest of the world has been mild, I'll give you the numbers next week, not today, but it has been mild. But it would be wise always to keep in mind we should not dismiss the potential wider impact from specific problems in the U.S. economy, and these housing market developments reasonably draw our attention to the important issue of how the United States affects the broader global economy.
Chapter 4 finds that major global growth slowdowns are generally not due to country-specific developments even if the country in question is the world's largest economy, which is the United States, as you know. Global growth typically declines sharply only when there are synchronized adverse events that affect many countries at the same time. That said, the chapter finds that the increasing trade and financial integration of the global economy has increased the potential impact for spillovers across economies, and these would become larger if the current U.S. slowdown were to intensify. But even if the U.S. economy were to slow further, the scale of such spillovers should be manageable and can be handled by prompt policy responses elsewhere, especially recognizing the strengthening of macroeconomic policy management around the world.
Let me go back to my analogy. If the United States sneezes, you should worry about other parts of the world catching cold, but at the moment, other countries are mostly healthy. They also take their vitamins and take other sensible precautions, so the chance of serious colds elsewhere is quite small.
Chapter 5 deals with globalization, and it shows there have been remarkable gains for both advanced countries and for developing countries over the past 20 to 30 years as the global labor supply has expanded. However, it also emphasizes that there have been important changes in the distribution. In particular, the share of labor has declined in advanced countries, at the same time as real labor compensation has increased. This emphasizes that we have to be quite careful in thinking hard about the adjustment costs associated with globalization, and the chapter takes up a number of important policy issues that require more attention if we are to help workers deal with globalization.
It also stresses that many of the changes which we have seen over the last 20 to 30 years are due more to technology than to globalization of trade. The two things are related, but the impact that we have seen on unskilled workers that has caused the most difficulties probably comes from new technology. Again, policies are needed in order to address this. In particular, there needs to be more attention paid to training and to the provision of life-long education, but there also needs to be greater attention paid to allowing labor market flexibility so workers can move from one sector that is declining to another sector that is expanding.
In conclusion, I would say this chapter and the whole WEO emphasizes that it really is not a good idea for individuals or for governments to put their heads in the sand and to pretend that globalization and the global economy do not have a big impact on everybody's lives. It does have a big impact, it can be managed and handled at the individual level and by the government, if you pay close attention and you think hard about appropriate policy responses.
That is the end of my remarks. We will turn now to questions. I would say that I am happy to take the more general questions, but I would also very much like to bring in chapter authors so you can talk directly to the people who have done all the really hard work that lies behind this World Economic Outlook.
MR. MURRAY: I would like to remind journalists who are submitting questions that this briefing is focused on Chapters 3, 4, and 5 of the World Economic Outlook and not on global forecasts. I have received one question, for instance, from India which touches directly on the global forecast chapters that will be released next week, so we will have to take a pass on that question. Anyway, let me turn the floor over to the press here in IMF headquarters and to the online Media Briefing Center.
QUESTIONER: I have a question regarding the issue of the housing market in the United States and so forth. What you said in the chapter is that that problem in that sector has not moved to other areas of the U.S. economy and I was wondering whether that is something that is happening in other countries as well. I was thinking of Spain, for example, which has had a boom in the housing market and I wonder if that analysis of the United States can be applied to other countries and whether the housing issue is such a threat or not in other countries as well.
MR. JOHNSON: The question is about the U.S. housing sector and whether we can think of this as having some implications or lessons for other countries. We are going to talk about other countries next week, including Spain, and I want to defer that. I want to focus our attention on the housing sector and on the spillovers chapter which is what we have in the WEO. You were right to bring the question up in the context of housing, housing has limited spillovers in part because of the import content of housing in most economies, not everywhere, but in most economies, and certainly in the United States. The import content of housing is fairly limited.
You can see a slowdown in residential construction, that's not news today, we have seen that, and you can worry about whether that would spill over to broader business confidence in the United States. That is something we are watching carefully. At the moment we think that that is okay and we do not see that spillover within the United States.
So at the moment in the United States the weakness seems limited to residential construction. Commercial construction looks okay, and we do not think that this U.S. decline, slowdown in housing, is going to spill over. It is spilling over a little bit to Canada and to Mexico, but it will not spill over to the broader global economy. And we will return to Spain next week.
QUESTIONER: You spoke of the world economy being healthy, taking their vitamins, things are going well. How much further would the U.S. economy have to slow down before you would start to see ramifications, larger global ramifications?
MR. JOHNSON: That is a good question. How much would a large slowdown in the U.S. affect the global economy? The estimates in that chapter are if you have a 1 percent slowdown in U.S. growth, that will knock 0.16 percentage points off global growth. It is actually a pretty small effect, to be honest. Actually 1 percent is not what we are saying is going to happen, that is actually far beyond what we think is a likely scenario. But again I am being drawn into the growth numbers and I have tried to stay away from that. But I think that even if you have a fairly large effect from the housing sector and some other things happen in the United States, it does not actually have a big effect on the global economy.
This is a little bit counter to what people usually suppose. They usually suppose that the U.S. gets a little bit sick and that spreads to everyone else, maybe it makes other places even worse off. But that is not what we are seeing in the recent data on these kinds of spillovers and it is not what we are expecting going forward precisely because most other economies in the world are in rather good shape right now and macroeconomic policy has become better managed and more forward looking in almost all parts of the world, so that is good. To answer your question, the rest of the world has become more insulated from what happens in the United States compared with some previous experiences.
MR. MURRAY: Let me take a question from the Media Briefing Center. It's from Leslie Wroughton from Reuters. Her question is: With the rising strength of China and India's economies, is the global economy more insulated than in the past from a slowdown in the United States because the U.S. economy is simply less dominant than previously?
MR. JOHNSON: The question is whether the rise of some emerging markets, in particular China and India, has changed the distribution of economic production and income around the world in ways that are broadly stabilizing. I think that the chapter has some very detailed specific numbers on how much the U.S. produces. The U.S. is still the largest economy in the world and we should definitely pay attention to the effects of the U.S. on the rest of the world, but it is certainly true the strong performance in China and India, and the Euro area, and I would also emphasize that the Japanese economy has been showing some robust growth of late. So if you put all of this together, this is very much part of what stabilizes the world economy. So the U.S. is a significant part of the world economy, between a quarter and a third, depending on how you do the calculation, but it is by no means the whole story. At the moment, the U.S. has got some pressures, a little bit of a slowdown, but we think the U.S. is going to rebound numbers next week and the contribution of China and India and other emerging markets to global growth is definitely positive.
QUESTIONER: I have to go back a second about the U.S. I understand the numbers will come next week, but are you worried about the direction of the U.S. economy? And also, you just said that European performance is strong. Could you develop on that without numbers?
MR. JOHNSON: I did say in my introductory remarks I want to emphasize openness and communication with the media, and now of course I am stonewalling, but it is only in the interest of keeping your attention on the analytic chapters for today. We will discuss all the numbers, honestly, next Wednesday. I am not hiding anything.
Let's just say at this point that we are paying close attention to what is happening in the U.S. economy and some of the key reasons are outlined in the chapter on spillovers. We do not think this is going to have a big effect on the global economy, and we also think that the U.S. is going to bounce back pretty quickly for reasons I will explain next week.
QUESTIONER: I was asking something about European performance. I think I heard you say that it is a strong performance, if you could articulate about that a moment.
MR. JOHNSON: Next Wednesday.
QUESTIONER: We heard from your answer that one of the main topics at the upcoming Spring Meetings of the IMF and World Bank will be the U.S. economic slowdown. Are there major issues you think might be the theme of the whole meetings, generally speaking, I mean?
MR. MURRAY: We had a briefing last Thursday where we previewed some of the issues. Managing Director Rodrigo de Rato will be speaking on Monday, April 9, at the Institute of International Economics here in Washington where he will preview key issues that will be before the International Monetary and Financial Committee on April 14, so I would direct you to the transcript from last Thursday and to the Managing Director's speech on April 9 on that.
Let me turn again to the Media Briefing Center. We have a question from Italy. The question is: How much should the dollar depreciate in order to contribute to narrow global imbalances?
MR. JOHNSON: This is a question about Chapter 3 of the WEO. The question which we think is important and timely is the relative role of exchange rate changes both in the U.S. dollar and in other currencies around the world, the relative role of those exchange rate changes in addressing global imbalances. What the chapter shows is that actually two things are important. I want to make sure I stress both and hopefully you will be able to report both. One is that a depreciation in the U.S. dollar has a greater impact on global imbalances than sometimes supposed, but remember, one country's depreciation is another country's appreciation. Surplus countries, countries with current account surpluses, would also experience positive effects and easier adjustments were their currencies to appreciate in real terms. For the technical numbers, we will turn to Roberto Cardarelli in a moment and he can talk to you about the parameter estimates.
So, on the one side, we're saying that changing the exchange rates would be helpful for the United States, and there has already been some depreciation of the United States dollar that is already helpful and already working its way through, for example, into strong exports for capital goods from the United States. Surplus countries should read the chapter as encouraging them to see exchange rate adjustments there as facilitating the reallocation of resources in a way that helps the global imbalances. But remember, the second message is very important, these exchange rates are only helping the broader picture, which is so-called rebalancing of demand. Demand has to go up in surplus countries, and savings rates in the medium term have to go up in some other countries, such as the United States. So that is very important to get right because that rebalancing in demand means that you unwind the global imbalances without slowing the global economy, and that is what we are aiming to get and where we think we are heading with the current alignment of policies.
Let me turn to Roberto Cardarelli for the parameter estimates.
MR. CARDARELLI: My name is Roberto Cardarelli. I am a senior economist at the IMF. What the chapter shows is that while an estimate that is quoted pretty widely is that the real depreciation of the U.S. dollar of between 10 and 20 percent is going to be needed to reduce the trade deficit of the U.S. ratio to GDP by 1 percentage point, we find that there are reasons to believe that the required depreciation of the U.S. dollar to get the same adjustment of the U.S. trade deficit to GDP ratio is smaller than that. We actually believe that the range is more between 5 and 10 percent. I will leave it to you basically to figure it out how much is going to be needed for an adjustment of the U.S. trade deficit to GDP.
MR. JOHNSON: So let me just be very clear. Roberto is telling you about an elasticity of response. We are not saying any particular currency has to move by this amount of that amount. He is telling you that there is more reaction, more responsiveness than is commonly supposed.
MR. CARDARELLI: Yes, that is correct.
QUESTIONER: You mentioned that you expect the U.S. to bounce back quickly. Why do you think that is the case? And also, you mentioned that if there is a 1 percent reduction in GDP in the United States, the impact on the global economy is, what is the number again?
MR. JOHNSON: Let me take the number. Again I want to be careful. We are presenting both on the exchange rates and on the spillovers the responsiveness. We are not saying it is a 1 percent decline. I think it is less than that. But if you had a 1 percent decline in U.S. growth, 0.16 percent is the effect on global growth, and the chapter breaks it out by regions. 0.16 of course is an average. If you had a full-blown recession, which is absolutely not the situation we are expecting, then you might have a bigger effect than that. So 0.16 is the average response.
Why do we think the U.S. economy is going to bounce back? I will go into much more detail next Wednesday, but basically we think that the U.S. economy has also been taking its vitamins. It is healthy, and while there are problems in one important sector and there are problems in a couple of regions in the United States, overall the economy is very healthy. I would make the link also to the chapter on globalization. This process of globalization from which many people have benefited has also enabled the U.S. to grow at a rapid pace of over the last 5 years and has sustained good growth of incomes over the past 20 years on average. This is an important part of the overall healthiness of the U.S. economy, and the reason the U.S. is able to withstand this slowdown in one sector.
MR. MURRAY: We have another question from the Media Briefing Center. It is from Brazil. The question is: With Brazil having a flexible exchange rate and inflation targeting, how would Brazil react to a higher U.S. slowdown?
MR. JOHNSON: I will ask Charles Collyns to handle that question.
MR. COLLYNS: The chapter on spillovers does have some interesting results showing how the impact of spillovers from the U.S. and from other economies do vary depending upon region. And certainly we find that spillovers from the U.S. to Latin America are larger, relatively higher than the impact more generally. The size of the spillovers depends on the trade share and on financial linkages. Probably Mexico would be the most affected, having the closest connection with the U.S. economy. Brazil certainly has substantial exports to the U.S. But I would emphasize that Brazil has a very diversified export base. It exports just as much to Europe and also to Asian economies. It also has a very diversified set of products that it exports, not just commodities, but also manufacturing products. So we do not see Brazil as being particularly susceptible to a U.S. slowdown. If would be more affected if there were to be a global slowdown. That is not what we see on the cards by any means at this point. But even if there were to be a more general global slowdown, the Brazilian authorities have a well-developed policy framework in place now, that will be well placed to handle the effects of slower export demand in the context of their inflation targeting framework and their flexible exchange rate regime.
QUESTIONER: I actually have a follow-up question on the exchange rate issue. So we need to reduce the current account deficit of the United States, but does it have to disappear? Maybe not to resolve the problem. So what is the level that you think is sustainable for the current account deficit in the United States?
MR. JOHNSON: That is a very good question. Does the United States current account have to disappear or go to zero? The answer to that is definitely, no, it does not. What of course would worry anybody from any country is if you see a current account deficit that is increasing over time. Anything that increases without limit is not sustainable.
What we have seen in the United States, though, is not that. What we see in the United States is a that the nonoil-trade deficit is improving, the current account has improved. We will tell you our exact projections on that next Wednesday. But it looks like that part of global imbalances has turned the corner. It is very hard to know exactly the level of current account deficit that would be sustainable. That depends on exactly how much of U.S. assets other people want to hold, and I do not think anybody is in a position to give you a precise estimate on that.
I think what people are looking for is for global imbalances to contract. What we are hoping to see is also that surplus countries begin to experience a fall in their current account surpluses. Obviously, the surpluses and deficits are two sides of the same coin. Some of the surplus countries have not yet seen a decline in their current account surpluses.
So again, you cannot have a current account surplus that keeps growing forever either, that would clearly be a strange thing and an unsustainable thing. So the global imbalance is moving in the right direction and it is being handled quite well through this combination of policy changes and market responses. We are paying a lot of attention to it, as are the key policymakers who are involved.
QUESTIONER: Two quick questions here. One, it seems that financial and business links to the United States are more important for economic growth and trade these days. Is that something that you anticipate to continue or will the importance of trade become more important?
Second, you have said a couple of times that the U.S. is not headed toward a recession, but something that former Chairman Greenspan has warned about is that the economy looked like it was heading in that direction. Are you disagreeing with the former Chairman's opinions on the economy?
MR. JOHNSON: On the linkages, I am going to refer that question to Thomas Helbling in a moment. We have tried to update our view of linkages as the world economy changes.
To take the second part of your question, I think I said before that the message here is reassuring. We do not think that the U.S. is heading toward a recession. The technical term that is often used is "mid-cycle correction". It means that the economy slows down a little bit and then goes back to its potential growth rate which we think is still around 3 percent. We are not saying that the slowdown is nothing. We are paying very close attention to it, as I think you could tell from our previous answers and from the WEO. But we are not seeing it spreading beyond residential construction. We do think that it will take a little bit of time to work out, but the rest of the economy looks pretty good and the spillovers to the global economy are quite limited at this point.
Our messages on the U.S. economy and on the global economy are really quite positive. We absolutely do not downplay risks, that is not our business, we worry a lot about all kinds of things, that is an important thing to do, but in this instance we feel quite positive and we are quite reassured on the U.S. economy and on the global economy. Let me turn to Thomas Helbling to handle the management of various kinds of linkages.
MR. HELBLING: Regarding the linkages, if I understood your question correctly, let me make three points. It is true that if you look at trade linkages, there has been a trend of interregional trade linkages growing much faster than extraregional trade linkages. In this sense, you may have the impression that trade linkages with the U.S. have become less important. The only caveat I would emphasize here is that it's not only the relative trade linkages that matter, but it is also the absolute level of the export exposure. What we highlight in the chapter is that in general we have not seen declines in the absolute export exposure.
Regarding financial linkages, you are absolutely correct. I think that over the last 10 to 15 years that is the area where we have seen most change. Unlike trade linkages, where you have more segmentation of markets, where the regional differentiation matters, you have more linkages across all financial markets. So in a sense of which asset prices are affected, it does not really matter whether you hold an asset in Europe, in Asia, or in the United States. If an asset price changes because of more global factors, this will have ripple effects through all financial markets.
MR. MURRAY: We have a question here from London. His question is: How do you see the adjustment of the dollar led by the market when some of the currencies that should be involved, like the yuan, are not responding to market forces, and others, like the yen, are responding to market forces and are weakening and not strengthening?
MR. JOHNSON: The question, if I understand it, is about various exchange rate changes we see around the world and whether these are helpful and moving in the right direction. As Chapter 3 emphasizes, for countries that have current account deficits, it is helpful, when combined with the right demand rebalancing policies, to have a real depreciation of the exchange rate. This makes exporters more competitive, it makes it easier to compete against imports, and that is what we have seen in the United States over the past year or two. So that is a positive development, and the chapter shows that this could actually have more impact on a current account than is commonly supposed.
In terms of the surplus countries, as I said in answering a question a little while ago, I think there should be less worry about the effects of exchange rate changes. For those countries it would be an appreciation which would make their exports a little less competitive and make it a little easier to sell imports to them. That would be consistent with other measures taken to increase demand in those countries. There is a symmetry needed to these global adjustments and it is obviously a process. It is not something one would expect to happen overnight, it happens gradually, and it is happening so far quite smoothly. This is encouraging, but we should see more movement in the same direction if this process is to stay on track.
QUESTIONER: You mentioned earlier when we were talking about the impact of the U.S. economy on the rest of the world and you said that the U.S. is one-fourth to one-third depending on how you do the calculation. Can you just remind us what it is in the WEO? Is it one-fourth or one-third, and what's the difference?
MR. JOHNSON: Let me turn to Tim Callen, who is the expert on this issue.
MR. CALLEN: In the WEO we use purchasing power parity weights. On that basis the U.S. is about 20 percent of the global economy. If you use market-based exchange rates, then the weight is higher, at around a third.
MR. MURRAY: The World Economic Outlook press conference on Chapters 1 and 2, which is the global forecast chapter, will be at 9:00 on April 11 here at IMF headquarters. Those of you who are not in Washington will be able to participate in the press briefing on April 11 via the Media Briefing Center. Thank you for coming today and I look forward to seeing you in a week.
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