October 8, 2008
| Webcast of the press briefing |
Mr. MURRAY: Good day. I'm William Murray, Chief of the Media Relations Division at the IMF, and this is the October 2008 World Economic Outlook Press Briefing. Let me quickly introduce our panel. Olivier Blanchard, Economic Counselor and Director of Research at the IMF; Charles Collyns, Deputy Director of Research; and Jörg Decressin, Chief of the World Economic Studies Division. Mr. Blanchard will have some brief opening remarks. We will make them available in the pressroom and on the media briefing center afterwards. Mr. Blanchard.
Mr. BLANCHARD: Let me start by stating what has become obvious in the past few weeks: The world economy is facing a major downturn. While there is exceptional uncertainty at this point, our best forecast is that world growth will be around 3 percent in 2009. Now, that number may not sound so bad. It hides, however, important differences between advanced countries, on the one hand, and emerging and developing countries on the other. We project that growth in advanced countries will be very close to zero or even negative until at least the middle of 2009, with a slow recovery during the rest of the year.
World growth will be instead driven by growth in emerging and developing economies. We predict that even they will grow at a substantially lower rate than they have in the recent past: 7 percent in 2008, 6 percent in 2009.
The growth slowdown means that inflation pressures will recede. In advanced economies the decline in oil and commodity prices will bring down inflation pressures, freeing room for macroeconomic policies. In many emerging and developing countries, headline inflation, which sometimes was high, is peaking. However, in some countries underlying inflation pressures are still a concern.
Our forecast is based on a number of assumptions. All forecasts always are. The main one is that actions will be taken by U.S. and European authorities, and will be successful in stabilizing financial conditions and avoiding further systemic events. I shall return to this assumption later. But, even once such concerted action is taken, the effects will take time, and it is clear that there will be tough economic times ahead.
In advanced countries the crisis is now being driven by downward spiral of loss of confidence on the part of households and firms, and trust in the financial sector. As we know too well by now, financial institutions continue to suffer from an overhang of distressed assets, capital shortages, and the breakdown of funding markets, and these effects are now spreading to consumers and to firms.
Now, consumers and firms have weathered the recent oil and commodity price increases surprisingly well, consumption, and investment demand remain quite strong, but what we see now is that demand is slowing very sharply. Under any realistic plan, the reestablishment of trust, or more formally the decline in counterparty risk between financial institutions, will take time. During that time, credit to the ultimate borrowers, namely you and me, households, firms, will be limited and expensive. Depressed confidence, which we have seen, and low credit growth will act as a drag on advanced economies.
Now, emerging countries will also feel the pain. The financial crisis started here, but it will have effects on them. All or nearly all will suffer from lower exports to the advanced economies and this will slow down their growth. Most will suffer from more expensive foreign credit, we have already seen this happen. Some may even suffer from sudden stops, the sudden reversal of capital flows. Those with high reserves and strong fiscal positions will be able to weather the storm. Others may face large decreases in growth.
Could things turn out worse than our baseline projections? The answer is, unfortunately, yes. If countries do not implement coherent systemic responses to the financial crisis soon, the hit to output could be much larger than under our baseline. And even if they do implement such responses, there is the risk of dangerous negative feedback loops between declining activity and strains in the financial sector.
This brings me to my most important point. Namely, the crucial role of both financial and macroeconomic policies at this juncture. It is clearly too late for these policies to avoid the slowdown, but they can be used to head off the risk of even more dire outcomes. Our belief that such policies will be implemented underlies our assessment that the slowdown can be limited, and that the recovery can start in the course of 2009, and strengthen in 2010.
Let me go a bit more into what we think the required policies are. On the financial side, and this was explained by Mr. Caruana in his GFSR presentation yesterday, this implies the design of comprehensive programs to deal with the systemic problems. Such programs must include at least three parts.
The first one is liquidity provision. We have seen this already be offered on a very large scale. The other two are purchases of troubled assets, and recapitalization with public funds, where needed. Piecemeal approaches leave open too many loose ends to inspire confidence, and have proven ineffectual to mitigate financial crisis. Countries should be ready to use public funds needed to support the stabilization of the financial system. This was on the financial side.
On the macroeconomic side, this implies the use of monetary and fiscal policies to support growth and break this negative feedback loops between the financial and the real sectors. With the stabilization of oil and commodity prices, the room for using monetary policy has substantially increased in most advanced economies. What happened this morning, namely the coordinated decrease in interest rates, is clearly a step in the right direction.
Fiscal initiatives can be very useful, and are likely to be most effective if they are focused on stabilizing financial conditions.
What about emerging economies? Well, they will need to tailor their policy responses to their particular circumstances. Countries faced with a sudden shortfall in capital flows will need to respond quickly and effectively, including by using reserves when such buffers exist. The purpose of intervention in that case should not be to defend a particular exchange rate, but to mitigate the adverse effects from the crisis on banks and firms.
Let me end this presentation by repeating the two major themes. The first one is, we are facing tough times ahead: Zero or negative growth in advanced countries, and low world growth for some time to come. But, second, and I think as important in the environment in which we operate today, with the right macroeconomic and financial policies in place, and these policies are available, we can ride out the storm and expect the recovery to start in the course of 2009. Thank you.
QUESTIONER: You said about today's rate cuts that they are a step in the right direction. Should we assume that you think that more is needed on that front?
Mr. BLANCHARD: More may be needed. If so, we hope that it is done. Clearly, 50 basis points is not nothing. I think where most of the effort has to be is not so much on the monetary side than on the financial solution And there, more is needed, in particular in Europe at this point.
QUESTIONER: How do you see the situation in Europe, especially in Germany?
Mr. DECRESSIN: We see a significant slowdown in growth in Germany with growth around zero. Even though Germany has not experienced the same run up in house prices as other advanced economies, it has been an economy that has been flying pretty much on one engine and that engine was exports, and with world growth now slowing, that engine is now running out of gas. That is why we see growth diminishing appreciably to around zero.
In terms of policies, there is much debate about a second stimulus package in Germany. In our view, there is already stimulus in the pipeline for this year, and the remaining fiscal powder is better kept dry for addressing financial sector problems as they arise.
QUESTIONER: Do you think the United States should have a proposal, a program to actually recapitalize the financial sector and the banks, as opposed to simply buying troubled assets?
Mr. BLANCHARD: As you know, we do not like to make specific comments on specific policies of particular countries. But the general point is that I think it is important in a program of that kind to separate quickly, and fairly clearly, the purchase of assets, which basically is there to reduce the uncertainty, and possibly increase their market price, and recapitalization; and that programs which are not clear about the related role of the two components are not best.
QUESTIONER: Two quick questions. Would any useful purpose be served by an increase in the issue of Special Drawing Rights in order to increase global liquidity? And secondly, if those countries with large foreign exchange reserves should begin to run down some of those reserves in order to buttress their domestic economies, what would be the impact on the U.S. debt market?
Mr. DECRESSIN: Well, we think that a number of emerging countries have built up major reserves, and you do build them up for a purpose, which is to be able to use them as a buffer when bad times strike. And, that is certainly what they should be considering to do, if they are subject to bigger pressures from financial markets. We do not believe that such action will have a major detrimental impact on the U.S. debt market.
Mr. MURRAY: On the SDR question, it is probably better left to the Managing Director, who is here at 9 o'clock tomorrow, 1300 GMT.
QUESTIONER: Two quick questions, first on Mexico. Among Latin American countries, Mexico is going to be one of the countries with lowest growth this year, only Venezuela is going to be growing lower than Mexico. The question is: What should Mexican authorities do in order to reboot growth next year? And the second one is for Mr. Blanchard. You said that the cut in rates announced today by the Federal Reserve is a step in the right direction. At the same tame time, you said credit will be limited and expensive. So the question is: How much effect is this action going to have, and how soon?
Mr. COLLYNS: To the question on Mexico, indeed you are right: Mexico is one of the slowest growing countries in Latin America, not surprising given its very close trade links with the U.S. But nevertheless, Mexico, as other countries in Latin America, is proving resilient. We are not seeing any major stress or anything like a crisis situation that occurred in previous episodes of stress. Mexican authorities will need to ride out the storm. Growth has certainly slowed, but they are also aware of the higher rates of inflation in Mexico. We do see those rates of inflation coming down, and that will provide space for monetary policy action as needed. And if the outlook really deteriorates, then there is a possibility of looking at the fiscal front, given the reasonably prudent record with fiscal policy in Mexico.
Mr. BLANCHARD: On the second half of your question, monetary policy still works, even in the environment such as the one we are in. That is the first point. The second point is, and this was discussed yesterday at the GFSR presentation, that monetary policy is hard to use, less reliable, because the fairly stable relation between the policy weight and the weight which affect consumers and firms is less reliable in the kind of environment in which we are. So, we can still use it. It is a bit harder to use. You should, therefore, use it. The third point is that monetary policy is not the end or the solution to this crisis. It is one of the components of a much larger package, which has a monetary component, a fiscal component, and a financial component. By itself, it cannot solve the problem, but it is part of the solution.
QUESTIONER: You recommend that taxpayers inject large amounts of public money into the banks to rescue them from their foolish decisions. What do you think the taxpayers should ask for in return? What does the Fund think should be done in order to prevent the banks from acting in such a foolish way in the future?
Mr. BLANCHARD: It may be too late this time. But, clearly, it forces us, all of us, at the Fund, and in the various countries, to rethink the architecture of the financial system, the type of regulation that has to be put in place. Indeed, God willing, once the crisis, the financial crisis slows down, our next item of business is to basically think very hard about the way the financial system should be reconstructed and the type of regulation that we want to put in place.
QUESTIONER: You talked about the emerging markets, how the economic outlook is comparatively good next year. What is your projection for China, and what is your comment on the renminbi's appreciation pressure next year?
Mr. COLLYNS: China has been growing very rapidly, as you know, in recent years. We are expecting growth to slow in China, in part because of the slowdown in export growth to the rest of the world. And in part because of a slowdown in investment, particularly in the real estate sector. Nevertheless, we do expect growth to remain very strong in China, around 9 1/4 percent next year, and in part our confidence is due to the fact that the government has plenty of room to respond to the worsening global situation, for example through fiscal policy. In the past China has been successful in responding quite quickly to increase spending, particularly on infrastructure, to offset the decline in export growth. And, we would hope that on this occasion they are also able to move toward building up social programs and safety net programs which we have been recommending for sometime as a means to achieve the shift from external demand to domestic demand that the Chinese government wants to achieve.
QUESTIONER: And on the second question?
Mr. COLLYNS: We don't comment on likely exchange rate movements.
QUESTIONER: You forecast 3.5 percent growth for Brazil next year, but the real, our currency, is pretty much under pressure now. Do you see a rise in the risk of inflation because of the dollar and the need to pick up interest rates there?
Mr. COLLYNS: Certainly, the Brazilian economy is faced by a number of shocks that are likely to lower growth next year. External financial conditions are tightening. The liquidity positions are tightening. That, I think, explains why there has been pressure on the exchange rate. Brazil is also a commodity exporter and is facing lower receipts from that side. So, there will be lower growth.
The weakening of the exchange rate by itself would tend to add to inflation pressures. On the other hand, however, slower growth will reduce pressures on excess capacity, which will have an opposite effect. Brazil is also a large, relatively closed economy, so the dominant effect is more likely to be the impact of the slower growth rather than the exchange rate. So, that may provide the central bank with room to shift away from its tightening bias that it has had over the past year are on so, depending on the balance of risks shift in the period ahead.
QUESTIONER: You mentioned in your opening statement, Mr. Blanchard, the commodity and oil shocks that have impacted the world economy. I'm just wondering if the IMF has considered perhaps calling on the IEA and other nations that have strategic petroleum reserves to perhaps do a coordinated release of their reserves to in a way to jump start the economy as oil prices have come down, but are still very high. Also, perhaps, if the IMF has considered pushing other countries like China and India to stop subsidizing fuel prices in order to perhaps lessen demand.
Mr. BLANCHARD: I think these are very good questions, but at least the first one should probably be left to the Managing Director tomorrow. On the second one, our position has been that overall we understand the distribution impacts of high food and other commodity prices. We're not in favor of long-lasting subsidies. However, we understand the desirability of having domestic prices adjust to world prices over time.
QUESTIONER: The IMF has previously described the 3 percent growth rate, or below that level, as a global recession. And, you guys are forecasting 3 percent for next year. I'm just curious, do you consider that a global recession? What is the risk that the world will fall into it?
Mr. BLANCHARD: We have discussed that issue, and the semantics associated with it at some length. Our position is that it is not useful to use the word "recession" when the world is growing at 3 percent. In the normal definition of things, recession is a negative number, and that is not the case. This being said, 3 percent is a very low number for world growth, and in the past, indeed, this might have been defined as on the borderline of a global recession. I think the words, "global downturn with still positive growth," are a better description of what we are facing.
QUESTIONER: How great is the danger of a global liquidity trap, and how long should we wait, or do you recommend we wait, for the monetary stimulus announced by central banks today before there is a real shift toward fiscal stimulus?
Mr. BLANCHARD: We think the risk of a world liquidity trap is not zero. However, it is not high. And that, indeed, this means that fiscal means should play an important role in boosting aggregate demand. And that, therefore, the right package has both monetary policy, which is going to potentially reach limits in the future, and fiscal expansion.
QUESTIONER: Why do you think Italy will grow less than other European countries? What are the reasons for Italy's slowdown?
Mr. DECRESSIN: Italy will be hit by tightening credit conditions as well. Italian banks will be hit by such conditions. Also, Italy has been struggling with low growth for a while already, so there are structural challenges that also weigh on the Italian growth rate going forward. In this regard, we have been advocating more structural reforms, especially liberalization of product markets as well as labor markets in order to raise productivity growth. This will not do much in the current slowdown, but with respect to fiscal policy, the options for Italy are limited because of the failure to significantly adjust during the good times. So, in the current circumstances, we don't see room for stimulus in Italy, and to the extent fiscal resources are available, they are better used for supporting the financial sector, if and when needed, although this does not seem to be a major issue in Italy for the moment.
QUESTIONER: What impact do you think the world economic crisis will have on India, and what are your projections for the country?
Mr. COLLYNS: Like all other countries, India will be affected by the global slowdown. We are projecting that the growth in India will come down from 8 percent in 2008 to 7 percent in 2009. But 7 percent is still a strong rate of growth. That reflects the fact that India is still largely a closed economy, has strong internal growth dynamics, from rapid productivity growth, from its process of integration into the global economy that is still continuing. There is some impact from tighter global liquidity conditions, but again we don't see major drag from this impact on India. So overall, we see the Indian economy continuing to perform well.
Mr. MURRAY: A question from the Media Briefing Center. "Do you think emerging economies, particularly the Philippines and other ASEAN economies, have enough flexibility to cut their rates following the Fed and other central bank moves, and also now that inflation is easing?"
Mr. COLLYNS: Certainly inflation has been an issue within ASEAN. Across the economies, central banks have been in a tightening mood in recent months. But as the question indicates, these pressures are now receding and the risks are increasingly moving to the downside on outlook. Central banks will need to watch the situation very carefully and to balance these two risks, the inflation risks that are still there, although moderating, and the output risk that is increasing. If things continue to deteriorate on the global outlook, then there would indeed be a developing case for cuts in interest rates within ASEAN as elsewhere.
QUESTIONER: In recent times we have heard from top officials of the IMF talking about defensive lines, talking about the financial turmoil, and referring to monetary policy, fiscal policy, a third, and I guess a final, line: Direct intervention of the government. My question is, is this the real final line? First. And second, what is next if that does not work?
Mr. BLANCHARD: I think we clearly have come to the third line. It seems to me now we are using all three lines together. I am convinced that together these lines will be enough to limit the effect of the financial crisis on the real economy. The experience we have from the past is that eventually they work. The faster they are put in place, the more aggressively they are used, the more coherent the set of policies, the smaller the output cost, the smaller the fiscal cost. But they work. But they have to be used together.
QUESTIONER: You forecast for Spain a recession next year. I would like to know if this country is going to recover as the rest of the world in 2009, and if the government has any fiscal room to operate and manage the crisis?
Mr. DECRESSIN: Yes, indeed, we are forecasting a recession for Spain. Spain will be harder hit than other European countries because of the boom in the housing sector that the country has experienced. Fortunately, during the good times the Spanish government has put in place strong policies, notably strong fiscal policies, that have given it the room to maneuver and support the economy, and that is what they have already done. Looking forward, as for other European governments, our advice is to use available fiscal room for supporting the financial and housing sectors as needed. And indeed, plans in this direction have been announced yesterday or the day before yesterday in Spain.
QUESTIONER: On the scale 0 to 10, where would you put the risk of a new global depression today?
Mr. BLANCHARD: I would put it very low. Again, that comes from the strong belief that if the right policies are put in place, then the probability of a Great Depression is extremely small. So then it comes down to the probability that the right measures are being put in place. I think what we have seen over time is some improvisation, some difficulty, for example, in Europe in agreeing on a general approach to the problem. The issue was still there last week, at the Saturday meeting in Paris. My sense is that the sense of urgency that markets are basically making extremely clear is going to force governments to basically adopt fairly coherent plans in the very near future. Under that assumption, I believe that the risk of a Great Depression is nearly nil.
QUESTIONER: I would like to know what Africa should do facing these challenges, and what will be the impact of the crisis on efforts to eradicate poverty on the continent?
Mr. DECRESSIN: We see Africa not heavily affected by the global financial turmoil. Certainly risks have risen on two fronts. First, there could be weakening commodity prices, that would act to reduce growth in a number of African countries. And second, there are some African countries that are fairly plugged into international capital markets. And, for them, of course, the situation is going to be a more difficult to manage than in the past. But, on the whole, we see growth in Africa not weakening appreciably. We see it around 6 percent in 2008 and 2009. These would be good numbers. Of course, the risks are now heavily on the downside. The main challenge that we see in many countries in Africa is dealing with the still high food prices that have pushed some countries close to a tipping point and that could jeopardize hard-won social and macroeconomic gains.
And, our message here is that in these difficult times, donors need to keep up their effort to support these countries. These efforts should not fall victim to demands on national budgets from other quarters, including the financial system.
Mr. MURRAY: A question from the Media Briefing Center."How do you assess the effects of the global slowdown on Arab countries, particularly the UAE and the GCC?"
Mr. DECRESSIN: I think the effect will mainly be felt through the oil prices, so it remains to be seen what is happening to oil prices. They have stayed at their pretty high level, and thus, in our forecasts, growth in the Middle Eastern countries is not slowing much. It is basically moving sideways in 2008 and 2009; although, of course, on account of the global slowdown, the risks are to the downside, again mainly because of the potential ramifications of slower growth for oil prices.
QUESTIONER: In the United States, although the House passed the US$700 billion rescue plan, and yesterday the Federal Reserve announced they will buy commercial paper directly, the stock market continued to fall. So, what is your interpretation of the market response to these policies?
Mr. BLANCHARD: This is clearly a question to which we do not know the answer with certainty. I have the impression that two things have happened over the recent past, the realization that the economic implications of the financial crisis were going to be bigger than had been assumed until now, so just bad news, a confidence effect which basically would have led to a large decline in the stock market in any case. I think the effect of the policy measures which have been taken probably made the fall smaller than it otherwise would have been.
At this stage, I think there is still skepticism in the markets as to whether the measures taken will be sufficient. I think, again, here, as more measures are taken and people just understand that they will eventually work, then they will realize that these were the first set of policies of a larger set which is coming.
QUESTIONER: What are your views on emerging markets like the Philippines with very large amounts of remittances? The local output is shrinking significantly, for instance.
Mr. COLLYNS: Certainly you are correct that remittances will also be affected by the slowdown in the advanced economies. Economies like the Philippines, and also in Central America, the Caribbean, perhaps in emerging Europe as well, will be affected by slowing inflows from remittances, in a similar way to slowing demand for their export goods. But, overall, as we have said, we nevertheless believe that the outlook for emerging economies is for a significant slowdown, but still leaving growth at fairly robust rates. These economies will not suffer the sort of major downturn and even recessions that have occurred during previous global business cycles.
QUESTIONER: I have a question concerning Switzerland. Can you assess the situation there a little bit, because it is a huge banking place, a lot of exports into other countries, and not a member of the European Union. Is there something special there?
Mr. DECRESSIN: Switzerland, as you said, is a very open economy, with a major export sector. It is very open, also, because of its financial linkages with the rest of the world. And, therefore, not surprisingly, as in other European countries, we see growth slowing considerably in the course of 2008 and 2009, to close to a half a percent in 2009. Of course, it remains to be seen how the effects of this financial crisis will affect the sector over the medium run. This sector has played a very important role in the Swiss economy, and there will undoubtedly be medium-run ramifications from the crisis, and probably these will act to hold back potential growth going forward. However, this effet is difficult to determine at this moment.
QUESTIONER: You are talking about very bad figures for the advanced countries. Are there any exceptions among those?
Mr. COLLYNS: I think there are variations across the group of economies. The advanced economies that are commodity exporters are tending to do somewhat better, Canada being one example. We are expecting Canada's growth to recover faster than any of the other G-7 economies next year, in part because of the strong resource base of the Canadian economy. Australia and New Zealand are other commodity exporters across the advanced economies. All three of these economies also have plenty of macroeconomic space, very strong fiscal positions, room to also adjust monetary policy. So both on the grounds of their buoyancy of their commodity exports and also the room for macroeconomic policy responses, the prospects for these economies is somewhat brighter than the others.
QUESTIONER: A question about Latin America now that slower growth obviously means less tax revenues. And, it doesn't seem that too many Latin American governments are ready to cut public spending. So, are we going to have any debt issues again? And is the IMF going to be able to respond to that?
Mr. COLLYNS: You are right that the public spending has risen quite rapidly in Latin America. But, tax revenues have increased. These economies have been able to reduce their deficits and have been able to reduce their debt. They have been able to strengthen their public sector balance sheets quite significantly. This does provide them with more room than in the past to allow the automatic stabilizers to work in the context of a downturn. So we do not see the major pressures on the fiscal position that we have seen in previous downturns, and in fact it is encouraging that there is more fiscal room in these economies to help cushion the impact of the global economy on their economies.
Mr. BLANCHARD: I feel that there is one question which deserves a longer answer, a better answer than the one I gave, the question about the cost to the taxpayers. Here, I think the important point is to understand that the measures which have to be taken imply in many cases very large outlays up front, but may have relatively small cost, or even we can hope no cost to the taxpayer over time. If you think about the three dimensions, the first one is liquidity provision. As long as liquidity is provided against good collateral, this is not something which would cost money to the taxpayers.
The second is purchases of assets. And here, many assets are selling at prices which are much lower than their intrinsic value, namely the present value of the claims that the asset represents. In which case, if the government, treasury, state goes in and buys these assets at slightly higher than the market price, but lower than the fundamental value and keeps them long enough, it is quite conceivable it may actually make a profit, although the amount will be limited.
On the recapitalization, once the assets have been purchased and we have a good sense of the balance sheets of the various institutions, then clearly some of the recapitalization can be done by the private sector, in this case it does not involve taxpayer money. But if it needs to be done by the public sector in part, then the public sector can basically get claims in the form of shares of some form, and basically, again, pay for itself with future benefits. So I think there we have to realize that this program is not a program to increase the debt of governments by enormous amounts, but it implies a very large outlay at the beginning, with a reasonable hope that much of it will be reimbursed. I think that is an important point to make.
Mr. MURRAY: Thanks to everybody for joining us. Again, thanks Mr. Blanchard, Mr. Collyns, Mr. Decressin. If you have any follow-up questions, please send an e-mail to media@imf.org and we will help you out as much as we can.
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