June 20, 2008
| Webcast of the press briefing |
MR. MURRAY: I'm Bill Murray, Chief of Media Relations at the IMF, and this is the embargoed briefing on the latest U.S. Article IV staff mission's concluding findings. It is embargoed until 11:30 Washington time. That's 1530 GMT. Let me just briefly introduce who we have here at the briefing table before we have opening remarks and then take your questions. John Lipsky, First Deputy Managing Director, Anoop Singh, Director of our Western Hemisphere Department, Ranjit Teja, Deputy Director of Western Hemisphere, and Tamim Bayoumi, who is an Assistant Director and Chief of the North American Division of that department. And I will now turn the table over to Mr. Lipsky for some brief remarks.
MR. LIPSKY: Thanks, Bill, and thanks to all of you for joining us here today.
This is as Bill said a briefing on the 2008 U.S. Article IV Consultation. This is the IMF's annual report on U.S. economic policies and prospects and their implications for the global economy. The full report of the staff will be published after the Executive Board discussion of the Article IV, and that's scheduled for late July. In the interim, we have prepared a concluding statement summarizing staff views, which has already been distributed to you, and if I may, I'm just going to take a few minutes to highlight some of the main messages before turning to any of the questions that you might have.
It's probably worth remembering from the perspective of a year ago that consensus views at this time were for a continuation of the so-called `Goldilocks outlook' of a relatively soft landing for the U.S. economy and for the global economy. At this time a year ago there were already clear challenges for the U.S. economy in the form of the continuing weakness in the U.S. housing sector, but that of course was exacerbated by several major shocks that have hit financial markets and the global economy that are well known. It seems to my colleagues and myself with all considered that the U.S. economy has held up well. It seems to have avoided the sort of hard landing that generally has followed hard shocks. We expect growth to remain weak through 2008 and to recover gradually next year and that the slower path of growth that is often typical in recoveries, reflecting the impact of tightening credit conditions and financial turmoil in general, and oil and commodity prices, the full effect still has to flow through to the economy.
The response of policymakers who have put in place temporary monetary and fiscal stimulus has been relatively quick and decisive and we have supported these measures. We think these will help cushion the economic impact of the shocks and will provide some insurance against the formation of negative dynamics that could be put in place by asset price declines feeding through to real activity. It is also clear that headline inflation has been on a worrisome upward trend as a result of the run-up in oil and food and commodity prices in world markets. So far the evidence suggests this has not driven up medium-term inflation expectations here in the U.S. in any significant way and, importantly, wage growth has been slowing in response to widening economic slack rather than responding to inflation pressures. Given that it is exceedingly costly to reverse a deterioration in inflation expectations once they set in, so we do see the case for a vigorous response once the economy's recovery has firmly taken hold.
One of the key issues regarding the outlook in the U.S. economy is the ongoing interplay between asset prices, particularly housing prices, and the financial sector and their interrelation with the real economy. For sure, the sooner that the correction in housing prices is achieved and is behind us, the sooner the recovery will take hold in full. However, there is a risk that just as it is now consensus that house prices rose higher than was sustainable, in other words, they overshot on the upside, we have to be open to the risks and possibilities that they could overshoot on the downside as well, and such an outcome would create the risk of establishing a negative feedback from price declines to foreclosures to further price declines and so on and that that effect could be continually amplified through the financial sector. As a result, we support the initiatives that have been taken to limit avoidable foreclosures with appropriate loan modifications, including the proposals now in Congress to provide FHA guarantees for this purpose.
Although financial conditions are still far from normal, they certainly have improved in recent months, most encouragingly, banks have been forthcoming in taking write-offs and have been aggressive in seeking new capital, just what we would have wanted, and this should limit the risks of the emergence of a severe credit crunch. While the authorities need to be ready with contingencies in the event of another drying up of market liquidity such as occurred last March, the larger need is to set in train reforms that will restore confidence in the securitization model that will consolidate the still somewhat fragmented structure of regulation in the U.S., and to come to grips with the regulatory issues brought to the fore by the extension of the financial safety net here to major investment banks.
Turning to the external sector, despite the run-up in oil import costs, the U.S. current account deficit is coming down clearly and, in fact, is expected to fall below 5 percent of GDP this year. Of course, the relative slowdown in domestic demand growth in the U.S. is part of that story, but part of that story has also been the depreciation of the dollar, and more broadly that has been a clear part of the global adjustment process. It is often forgotten that in 2002 at its most recent peak, the dollar's broad trade-weighted valuation seemed to us clearly overvalued with respect to from a medium-term broad-based equilibrium point of view, so now we see the dollar has having moved much closer to a level consistent with medium-term fundamentals. From a multilateral perspective, however, it has to be said that the pattern of bilateral exchange rate adjustment has been quite uneven with too much of the burden falling on freely floating currencies such as the euro and the Canadian dollar. This certainly underscores the importance of a multilateral approach to the challenges of sustaining growth while reducing global imbalances and the policy formats that were included in the IMF's Multilateral Consultation on Global Imbalances that were laid out in April 2007 in broad terms still remain relevant, namely, the dual task of restoring growth and lowering global imbalances is a shared responsibility that will require policy adjustments on the part of all the major economies.
In these short remarks I have not elaborated on many important topics. We have had fruitful discussions with U.S. authorities, including things like the medium-term prospects in the U.S. and options for regulatory reform. You will find some recommendations on these and other areas in the concluding statement, and of course you will find much more detail in the staff report once it's published in late July or early August. I think I will just stop here and open the floor to questions.
MR. MURRAY: What we're going to try to do is take as many questions from the journalists in the room, but I would also encourage those on the Media Briefing Center to begin submitting questions.
QUESTIONER: I notice that the outlook for 2009 looks slightly brighter than when you last forecast it in April. Can you give us some idea of why the forecast has been increased slightly?
MR. LIPSKY: For?
QUESTIONER: For 2009.
MR. LIPSKY: 2009. I would say in broad terms that the changes in our forecast especially in the forward-looking aspects have been exceedingly modest. We've adjusted 2008 on the basis of the visible data, recognizing that quarterly data inevitably is subject to ex post revisions and these data will be revised several times before they are final. The broad points I think should be clear. By the second half of this year growth in the U.S. we expect to continue to slow, and when we look more broadly, we anticipate that in the second half of this year growth in all the major industrial economies will be below trend and clearly below trend for the first time since the opening of this decade.
We also think that the restoration of growth in the U.S. is going to be more gradual than may have been the case in the past even with both monetary and fiscal policies set for encouraging and stimulating recovery. This reflects our expectations that some of the headwinds facing growth will remain in place, that the healing in the financial sector will be gradual, that the challenge of higher energy and commodity prices is not expected to recede quickly and is still flowing through to the economy, and finally, that we expect that as we look forward that the sources of growth in the U.S. economy in the coming years are going to be somewhat distinct from those of the most recent past. The way I look to put it, for the past decade or so global growth has depended to an unusual degree on the strength of domestic demand growth in the U.S. In the coming five to 10 years, growth in the U.S. is going to depend to an usual degree on the strength of domestic demand growth among U.S.'s trading partners. As we anticipate, in a broad sense that the period of exceptional increases in household net worth in the U.S. that helped fuel a trend in the decline in household savings out of current income is in the process of a broad reversal, and we anticipate certainly more normal increases in household wealth and a gradual renormalization of household savings rates. That means that growth in the U.S.'s recovery is going to depend less on consumption and residential construction and more, relatively speaking, on business investment and improvements in net exports, and that's why we are optimistic about a return to trend growth in the U.S. and we expect it to be more gradual than may have been the case in the past and at the same time with a slightly different character than has occurred before.
MR. SINGH: Let me just add one thought to what John has said and that is clearly it will be more gradual than it has been in previous U.S. recoveries, but I would make the important point that we have looked at the international experience in recoveries from these kinds of housing busts and our forecast for the U.S. is for the recovery next year to be faster than the international experience. So while it may not be as rapid has it has been in the U.S. in the past, because of the measures taken, because of the flexibility that we know of in the U.S. economy, the recovery next year will still be faster than what would have been suggested by international experience in other OECD countries. And in fact, by the end of next year, clearly our forecast is that the economy should be back at potential.
QUESTIONER: I think I'm afraid I haven't understood very well your outlook for this year. Do you expect that in the second half there will be weaker growth than we are seeing now? It seems that the analysts are saying that there will be some kind of a pick-up in the second half. Also in April the IMF said that the U.S. economy will fall into recession at some point during the year. Have you changed that outlook?
MR. LIPSKY: Thanks for that. First of all, the recessions are in this country labeled officially by the Business Cycle Dating Committee of the National Bureau of Economic Research. What we thought is clear is we do not expect a significant recession, a deep recession. The data do not point to this and do not point to this as a critical risk. Previously we had a somewhat slower first quarter in our figures and therefore the adjustment for the 2008 basically more than anything accommodates the visible data that we now see. And as I said at the outset, quarterly data are always subject to backward revision and the first-quarter data so far has contained or appears to contain very favorable outcome on productivity and that that productivity data is particularly subject to backward revision. So we wouldn't want to be too categorical about interpreting quarterly figures.
The big point I think is that we've seen resilience in consumption spending and there is reason to think that the arrival of the fiscal stimulus has appeared early and appears to be working early. Our concern is that as we look into the second half of the year that income growth will remain sluggish reflecting the weak employment outlook, that the stimulus which has been a one-off fiscal stimulus will tend to wane somewhat and that in broad terms we expect some additional weakening of household consumer demand in the second half of the year. Hence, our guess is that growth in the second half will be relatively stagnant and into the beginning of next year before recovering. Do you want to add any further comments?
MR. TEJA: With the small reservation that the rationale for having a somewhat weaker second half or at least it not picking up dramatically is our sense that there are a lot of effects on credit and the effect of financial conditions on activity have yet to fully feed through into the economy and you will see when our staff report comes out that we have a fair bit of analysis looking at how those channels of transmission work, what kinds of lags there are an so on. So there is this weight out there and that's what's preventing an even earlier bounce back in the U.S. in our view.
QUESTIONER: I was just wondering if you could clarify what rate of growth do you see for 2008? It says roughly flat. Is that below the 0.5 percent growth rate you guys had in April? And how is that going to affect your global growth forecast?
MR. TEJA: Roughly flat refers to the fourth quarter of last year over the fourth quarter of 2008. That's what's flat. For the year as a whole the average growth rate I think we expect to be a little over 1 percent this year.But the fourth quarter on fourth quarter will be around zero. That's our current forecast.
QUESTIONER: Mr. Lipsky, I just want to talk about the monetary policy comments you made here. You seem to be saying that they are supporting growth and that currently it is your position that they should remain on hold. So do you think that markets are a little too optimistic in thinking that there are going to be several more increases in interest rates toward the end of the year? Are they getting ahead of themselves?
MR. LIPSKY: As we've indicated, the Federal Reserve acted decisively and pegging interest rates at, in broad terms you can discuss it, roughly zero in real terms. That's typical for the low point for interest rates in a recession. In other words, the Fed moved quickly to peg their interest rate policy as consistent with what they would do in a recession, so that was fairly aggressive.
What would lead to a reversal? In broad terms there is no simple answer, but our best guess is that the slack that we see emerging in the economy will tend to limit additional inflationary pressures, so we're relatively optimistic on that score. It's not completely clear to me, and again my colleagues may have further commentary, that what has driven forward in the U.S. that appears to be consistent with anticipation of multiple rate rises between now and the end of the year may reflect more concerns about inflation or perhaps a faster reversal of the broad policy stance. There are no hard and fast rules as I suggested previously, but it would be very unusual to see the Federal Reserve raising policy rates in an environment with the unemployment rate still tending to move higher as you would have to expect in a period of below-trend growth. So it's not completely clear whether market expectations are completely consistent with what we see in our own forecast.
MR. SINGH: Let me make just one point on what John has said. An important variable factor as one looks at the outlook is if some of these price shocks are feeding into wages and unit labor costs, and as we see the data, unit labor costs are basically flat. So there is no pressure from that side.
MR. MURRAY: I am going to start turning to the Media Briefing Center questions and then get back to the journalists in the room. This question is from Brazil, and the question is, Does the IMF support governmental actions to combat the rise in foreclosures?
MR. LIPSKY: The answer there is in general yes. That doesn't mean that we would be supportive of any and all measures, but it does seem to us a sensible idea that if there are risks of overshooting on the down side of house prices and asset prices in general that it may be sensible to act directly and in a limited way on the housing market in an attempt to provide some stability. Again as we suggested, rather than get into great details, that one way of approaching the housing market maybe through a limited focus on measures that would limit foreclosures.
It seems to me it's worth making a broad point here and that is it seems to me to often get lost in this discussion -- the housing sector in the United States is the beneficiary of massive tax expenditures. And we want to, it seems to me appropriate, to bring stability to that sector in this environment.
But some thought and care has to be given to the longer-term perspectives if additional tax support or fiscal support is added to the housing sector that implies permanent, additional subsidies for the sector.
This thing needs to be considered in a broader context, again, in which the public support in the form of tax expenditures and other forms of subsidies for the housing sector already are massive. I don't know if any of my colleagues want to add on that or anything?
MR. BAYOUMI: It's been a -- it's been a longstanding view of ours that the degree of support in the U.S., which is higher than in any other G-7 country could be brought down over time as part of tax reform. And we see the U.S. tax system as heavily favoring the housing market, and it's not entirely clear that that's a particularly helpful aspect.
MR. LIPSKY: Right. So the point should be clear: We think in the current context, targeted support for the housing sector in the interest of preventing asset price overshooting in a downward direction may be called for, may be justified in the current context, but we should be mindful of the broader implications about our long-term implications for the economy.
MR. MURRAY: This is a financial sector question. It's related to Bear Stearns and other issues. It says, "In light of yesterday's new developments on the Bear Stearns debacle, how deep should any reform of financial regulation and supervision go?"
MR. LIPSKY: We should have all the regulation we need, but no more. And often, this gets asked, do we need more regulation. And my response is typically I'm not sure what more regulation means. More pages of regulations? What is more?
What is clear is we need more effective regulation, where it's clear that weaknesses in regulatory, legal, supervisory structures have created systemic fragility.
We also have to be mindful of the possibility that markets actually work and that we don't have to necessarily interfere with the process; that markets can correct errors, and should be expected to correct errors. In other words, we need, as we've said very clearly, there are aspects where it is evident that the regulatory system in the U.S. requires a rethinking and reengineering, and we said that the Treasury's proposal represents, among others, a very worthy basis for further discussions.
And so the broad answer to the question is, yes. We need a re-examination and strengthening of the regulatory environment, but we need to do this in a thoughtful and effective way.
And I say that because many of the easy conclusions that seem to have been taken as a given from this recent period of turmoil strike me as counter to experience.
There's been claims that the difficulties show some essential failure of the move toward securitized finance, a conclusion that I would not share at all.
It has been claimed that this latest episode has shown a distinct failure of the originate-to-distribute model, when it's clear that the largest losses have occurred in institutions that exactly originated but did not distribute, and instead retained exposure on their books in one way or another. The claim that there needs to be more regulations to create more skin in the game should be treated with caution and rather than just taken as a home truth.
So the broad point is absolutely regulatory, supervisory, and legal changes are needed. I think there's broad agreement on that. There are -- I think there's even broad agreement on the kind of approaches and, but it needs to be done in a thoughtful, measured way.
MR. LIPSKY: I think Tam wanted to add a note.
MR. BAYOUMI: Just -- I wanted to emphasize, you know, a lot is being done, even now both internationally and through the Financial Stability Forum and ourselves, amongst others; and, of course, domestically. The SEC has just brought out new guidelines for rating agencies, for example.
I think the big thing to realize is that -- which will require quite a lot of change, as discussed by -- as discussed yesterday by Secretary Paulson, is that the investment banks are now being provided with access to the discount window of the Fed, and while it's a temporary measure, I think that that does require some rethinking of regulation, because traditionally it's been focused on depositories, and, of course, investment banks are not depositories, except for very small parts of it.
MR. LIPSKY: If I could just add -- thanks for that, Tam. Those are good points. And if you look back at our Global Financial Stability Reports or other commentary and market developments, one of our themes, consistent themes, have been a need to rethink what we've been calling the perimeter of regulation. One thing we've seen from this turmoil is the interrelationship between, for example, regulated and un-regulated institutions, especially as we see un-regulated in the same way as banks, the investment banks; the point being that there needs to be a careful thinking in regards to the interrelationships that have now grown up; whether the current perimeter of regulation is accurate and adequate. And we think that the answer is clearly no.
QUESTIONER: Can you give us your forecast for peak inflation in the United States over the next two years? And what you expect inflation -- I'm talking about CPI?
MR. LIPSKY: Headline?
QUESTIONER: Headline -- and what do you expect it to be by the end of 2009?
MR. SINGH: Well, I can maybe answer that. Well, I think we've seen headline inflation having moved up. But, as you see, core remains around 2.3. And it is the case that as you look ahead to medium-term expectations, through various measures and surveys, these are reasonably well anchored.
It is true that for the short-run, as you look ahead one year, expectations have moved up. But coming back to our own forecast, we do see that the headline inflation, assuming that commodity prices basically level out and there are no further big shocks, we do see the headline coming back closer to two by next year.
MR. BAYOUMI: Just more generally. You know, any forecast of where the peak would be would depend on what your forecast of commodity prices is. Now we tend to use futures prices, which have been predicting a leveling out of commodity prices, but they've been predicting that for a very long time.
I think that forecasting exactly where the peak will be is a somewhat imprecise exercise, given in particular, the extreme volatility in oil market prices and futures.
MR. LIPSKY: But as you probably see in our forecast on an annual average basis, we're looking for headline inflation of right around four percent, back to two percent next year.
QUESTIONER: Four percent for 2008 and 2 percent for 2009? Is that year over year or December over December?
MR. BAYOUMI: December over a December. It's basically three and a half for this year, and two for next year in round figures.
QUESTIONER: How is this IMF reversal in the forecast of the U.S. economy going to affect the economies or the forecast in the IMF forecasts in other regions, especially Latin America, where countries, like, Mexico heavily depends of its interaction with the U.S. economy?
MR. SINGH: Well, you know, we've been looking very closely at these linkages for Latin America, and we do see that, as you look at where Latin America currently is, growth remains generally strong, less strong perhaps in countries that are more closely tied to the U.S., like Mexico. But even in Mexico, growth is at a level that you would not have expected perhaps from historical experience.
So the main point I want to make is growth in Latin America is holding up much better than our models would have predicted from past experience, and to a significant extent this is because the reliance on the U.S. linkages have been declining over time in the reliance on Asia, on China, directly and indirectly through the impact of China on commodity prices has grown.
And so, we see that growth in Latin America will remain reasonably strong. It should remain almost close to trend or above trend this year. And the larger impact on the region is from the food and energy price shocks, which obviously are more important in their CPIs than food is for the U.S.
And so we do see that while growth is holding up reasonably well, we are a little bit concerned in Latin America that policies remain strong and expansionary. There's some degree of post-cyclical expenditures. And so the larger challenge in the short run is inflation rather than a slowdown in growth.
MR. LIPSKY: Let me make one bigger point that's probably so obvious that characterizes our forecast. As I said at the outset, we expect in the second half of the year to see growth in all the major industrial countries or advanced economies below trend.
We expect to see a reflection in part of that slowdown and in part a response to the same forces that caused a slowdown in the advanced economies to cause some degree of slowdown in the emerging, developing economies.
Nonetheless, in those economies in the aggregate, we expect to see growth remain above the 10- to 15-year average.
And since those economies now are not only account for a greater percentage, increasingly, a larger percentage of global growth, but also a larger percentage of global GDP, that resilience has added much greater stability to the global outlook, and is an element that will be, on the one hand, important in helping to keep the advanced economies away from any significant weakness, and, over time, will be conducive to a rebalancing of global imbalances -- or a reduction, sorry, in global imbalances.
In other words, this is an important fact of the global economy that differentiates this slowdown from advanced economies' slowdown from previous periods.
MR. MURRAY: Let me take one more question from the room and another from the Media Briefing Center, and then we're going to wrap it up. Lady on the right.
QUESTIONER: Just to stay with this -- to make sure that we're comparing apples and apples and oranges. On the forecast, what I remember from the WIO was only the year-over-year numbers, and I believe it was half a percentage point for the U.S. both 2008, 2009. Now it sounds like you're saying it's a little over one percent for this year. You didn't say what it was for next year.
And then on the Q4 to Q4, which you now have flat this year and two percent next year, I think it was a negative for this year, and so can you just give us the two numbers for both years? What you had before and what you have now?
MR. TEJA: Let me just give you the numbers straight. Straight up. Okay, what we had in the WEO was for 2008, 0.6 and for 2009 also 0.6. So it was kind of -- that was where we were in the WEO.
QUESTIONER: Right.
MR. TEJA: Where we are today on that same annual average basis would be around 1 percent in 2008 and 0.8 percent in 2009. And Q4 and Q4? In the WEO, previously we were slightly negative, around minus half a percent for 2008 before --
QUESTIONER: Minus what?
MR. TEJA: Half [of a percentage point].
QUESTIONER: Minus half?
MR. TEJA: Minus half. And now we are at zero for 2008. For 2009, on that same Q4 on Q4 basis, we're now just a shade under 2 percent. We used to be a little over one and a half, so that's just -- those are the straight up numbers and they imply, you know, this sort of a longish recovery of the economy reflecting the time it takes for the economy to absorb the hits to household and financial institution balance sheets.
MR. MURRAY: Okay. This is a -- I think we're going to close on a financial sector question. "How do you see the financial sector healing when all banks and investment firms have assets on the books that are overvalued. Please also discuss the threat to the system from bond insurers?"
MR. LIPSKY: There's a premise in the question that I'm not sure that is evidently true, self evidently true, and that is that balance sheets contain mispriced assets or that they reflect mispricing of assets. We don't know.
And, of course, that will depend, to some degree; there will be an important interaction, for example, with the performance of the housing sector.
The markdown of assets, housing-related assets, and other securitized assets has created a two-way debate between those who think it's gone too far and over discounted the outlook, and others who would claim the opposite.
The avenue toward healing is very clear cut and that has been the view persistently of authorities as -- and that one we share -- is the focus has to be on accurate valuation of assets on financial sector balance sheets and an aggressive recapitalization that will leave these institutions in a sound basis and able to provide the credit needed to promote a healthy recovery reacceleration.
Relative to consensus expectations, I would say that the record indicates that U.S. institutions, especially banks, have been quite aggressive in writing down assets and in particular much more aggressive and successful in seeking and obtaining new capital. As you're probably well aware of the numbers, the write-downs exceed $300 billion and the new capital exceeds $200 billion.
So far, that has been one of the elements that will enhance -- helped to keep the U.S. away from a more serious outlook. Nonetheless, it's clear from the data that perceptions of risk remained elevated relative to previous measures; spreads are wider; the lending officers' surveys suggest tightening.
So the question going forward is the one that was left implicit in that question: When is enough enough? Have the spreads accurately reflected the risks? Have the write-downs accurately reflected the outlook? Has the re-capitalization been sufficient to provide a basis for a gradual recovery?
Our views on this, I would characterize as cautiously optimistic, but cognizant of the potential for additional risks. And we think it's important the authorities remain vigilant to the potential for additional problems, but I certainly don't want to suggest by that, that that's any kind of commentary on what's occurring.
It seems to me that authorities, in a broad sense, from the monetary authorities to regulators, have been proactive seeking out the sources of weakness and attempting to provide innovative responses where necessary.
And when you think back just over the last few months of the actions that have been taken that are, in some way or another, unprecedented and have shown both an innovative approach and a decisive one has certainly been helpful here.
That does not obviate the persistence of risks, but that's a view, as I say, that I think is shared with the authorities. I don't know if my colleagues want to make any additional comments?
MR. BAYOUMI: Maybe it's worth stressing one point, which is that the strains on capital come from two sources. One is the write-downs, which we've been talking about.
But the other is that a lot of the lending -- previous lending boom -- involved lending through relatively lightly capitalized non-bank affiliates of banks. So that -- and as those come back onto the balance sheet, you get further demand for capital, even of some of the loans that you've already made. So there is a sort of two-fold shock to bank capital.
I think that that's a fundamental point which needs to be sort of understood.
MR. MURRAY: Great. Thank you very much. I want to thank everybody for joining us today, including Messrs. Lipsky, Singh, Teja, and Bayoumi. Again, the embargo expires at 11:30, 15:30 GMT.
If you have any follow-up questions, please drop me an e-mail at media@imf.org. Thanks for joining us.
MR. LIPSKY: Thank you all.
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