Transcript of a Press Conference on the Updates of the International Monetary Fund’s World Economic Outlook and Global Financial Stability ReportWith Olivier Blanchard, Economic Counselor and Director of Research; and José Viñals, Financial Counselor and Director of the Monetary and Capital Markets Department
Wednesday, July 8, 2009
|Webcast of the press briefing|
MR. MURRAY: All right, good day. My name's William Murray. I'm Chief of Media Relations at the IMF. This is a joint briefing on the latest updates of the World Economic Outlook and the Global Financial Stability Report. Joining me today is Olivier Blanchard, Economic Counselor and Director of the Research Department, and José Viñals, Financial Counselor and Director of the Monetary and Capital Markets Department. In addition, with me is Jörg Decressin, Chief of the Research Department's World Economic Studies Division, and Jan Brockmeier, Deputy Director of the Monetary and Capital Markets Department.
The press and the public by now should have copies of the WEO and Global Financial Stability Report updates. Additionally, we have released today to the press and the public our latest Group of 20 economic surveillance note. That is now on our public website. Our briefers will be happy to touch on the note if you have any questions.
Before we take questions from the press here at IMF headquarters, and remotely from the Media Briefing Center, we'll have some brief opening remarks from José Viñals and then from Olivier Blanchard.
MR. VIÑALS: Thank you very much, Bill, and good morning to you all.
What I would like to do in my introductory remarks is basically to cover the following three topics. First I will start by providing an overall assessment of the current state of the global financial system, and I anticipate that this is going to be mainly good news. Then I will turn to some of the key concerns and vulnerabilities that remain to be addressed. And last I will conclude with some of the risks that are still ahead and the policies to address them.
Our overall message is that we are still at a critical stage in emerging from the crisis, and that we need to guard against slipping backwards and be ready to do whatever is needed to address any remaining problems in the financial system, because this is an indispensable condition for ensuring a sustained economic recovery.
Now, let me go into the assessment in more detail.
The good news that I get to report is that since our latest April GFSR, the risks confronting the financial system have abated, and the reason has been the unprecedented policy response on both the financial and macroeconomic domain, which have reduced the risk of systemic collapse and begun to restore market confidence. In particular, the actions undertaken by governments and central banks have succeeded in doing something which is very important, mainly in stabilizing banks' financial condition, in reducing funding pressures and counterparty risk concerns; and, in addition, they have provided support to aggregate demand. And as a result of this more favorable environment, risk appetite has returned and we have seen a shift out of safe havens to riskier, cyclical assets, and in capital market we are seeing a renewed interest in higher quality corporates, and finally markets in general have begun to improve. And this has also been reflected in the compression of credit spreads across a variety of credit markets. As far as emerging markets are concerned, they have benefited from the rebound in global commodity prices and also from their improved growth prospects, and thus capital inflows have started to bounce back, equities have recovered significantly since end February, and the sovereign spreads have more than halved since their October highs.
But so far for the good news. While progress has been made, as I have reported, in stabilizing the financial system and diminishing systemic risks, concerns remain, and I would outline what we think are the main concerns.
Although the situation in financial markets has improved, we need to remember that they remain dependent on public support. And indeed what the public interventions have done has been to transfer risk from the private sector to the public sector.
Another concern has to do with the health of banks in mature economies. Improved earning results and capital raisings have benefited both U.S. and European banks, but fully addressing the problem of impaired assets and bank balance sheets remains an outstanding issue on both sides of the Atlantic. In this situation, overall bank credit growth has continued to contract despite the unconventional policies targeted at expending lending to end users, and securitization markets remain impaired except in those cases where there is official support. And as far as emerging markets are concerned, despite positive developments, they remain vulnerable to downward revisions of global growth prospects and to constrained international bank lending.
And, last, sovereign yield curves have steepened considerably in the recent past, reflecting in part also concerns about fiscal sustainability.
Clearly, the financial crisis has been of an extraordinary magnitude and requires extraordinary measures to emerge from it with a sound and safe financial system. But there are risks ahead, and policy efforts are still needed to prevent recent gains from being eroded. So, let me turn to what we view as the key risks ahead, and then I will say something about policies.
And there are basically four key risks that we see in the future. The first is the risk that we could fall into complacency after the good news that I had just mentioned, both in the financial markets and those that Olivier will talk about later on in the real economy. But we have to remember that we had stepped back from a situation of extreme uncertainty to a situation of still high uncertainty and that I had mentioned before. Banks and markets still continue to rely a lot on public support, so we should not fall into complacency. This is the first risk.
The second risk is that there could be more intense deleveraging or a resurgence of systemic risks in the future if remaining problems are not addressed effectively in the banking system, and there is also the risk of a reversal in market confidence if financial markets get too far ahead of the economic recovery.
The third risk is that sovereign debt markets may be destabilized if the burden on public sector balance sheets begins to be perceived as unsustainable by markets, which could also damage market sentiment more generally.
And the fourth and final risks is that if the concerns that I have just mentioned and the risks that I have just mentioned materialize, then there could be a slowing or cessation of capital flows from emerging markets, and these could have very detrimental effects for their economies.
So, in view of these risks, it's clear that policies must be put in place to address the problems of banks in financial markets in addition to the macroeconomic policies report that continues.
And as regard banks, credible stress testing exercises can serve as a foundation for ensuring that banks are properly capitalized. Private, and if necessary public capital injections should be required to ensure bank soundness. In addition, effort should continue to fully address the problems of impaired assets, and on the market side a priority would be to restart securitization markets.
And, finally, exit strategies will be needed for the substantial official interventions that have taken place. Although exiting now would be premature, I think it's fundamental that we devise credible plans that map where we're going in the medium term and how we're going to get there. In that respect, price stability, a sound financial system, and fiscal sustainability should be the foundation of these strategies, as this is crucial for maintaining and strengthening confidence. And, moreover, exit strategies across the various policy domains -- monetary, fiscal, and financial -- must be consistent with each other not only within countries, but they must also be consistent internationally to avoid undesirable effects. And this is certainly not a minor challenge that will require careful policy design going forward.
This ends my formal remarks, and then after Olivier finishes speaking I will be very happy to answer any questions that you have together with other colleagues at the table. Thank you.
MR. BLANCHARD: Thank you, José. Thank you, Bill. Good morning to all of you.
When I gave the assessment of the World Economic Outlook last April, I described the world economy as being pulled by two strong forces, one pulling the economy down and the other pulling the economy up. I think it's still the right way to think about where the world economy is today.
The good news is that the forces pulling the economy down are decreasing in intensity. The bad news is that the forces pulling the economy up are still very weak. The balance between the two is slowly shifting, and so this leads us to predict that while the world economy is still in recession, the recovery is coming. But it is likely to be a weak recovery.
To give you the basic numbers of the update, our forecast for world output is for a decline of 1.4 percent in 2009 and for an increase of 2.5 percent for the world as a whole in 2010. Now, 2.5 percent, the number that we have for 2010, presents a positive revision of about .6 percent relative to what we had forecast last April, and that's clearly good news. But 2.5 percent is also substantially less than the rate of growth that would keep unemployment constant so that our forecast implies further increases in unemployment probably all the way to the end of 2010.
Now, before giving you a few more details about the numbers, let me say a bit more about the two underlying forces at work.
So, the forces pulling the economy down originate in the financial crisis and the collapse of confidence that took place at the end of 2008, decreases in demand that led to decreases in production to decreases in unemployment, to further decreases in demand and so on and so on. And these dynamic effects were so strong that in most countries the decrease in output in the first quarter of 2009 was nearly as large as the decrease in output in the last quarter in 2008. The good news is that these forces are abating. The financial sector is stabilizing. As José Viñals described, liquidity has returned, risk appetite has increased, capital flows across countries have partly recovered. Banks, however, are still not in great shape and continue to retrench and tighten lending standards.
Now, let me turn to the forces pulling the economy up.
In a traditional recession, there are a number of stabilizing mechanisms which eventually come into play. The demand for housing eventually picks up, as does the demand for cars and the demand for durables in general, and this pulls demand and the economy up. Firms having depleted inventories try to rebuild them. This increases production.
What we see today is that these forces are still very weak, and much of the pulling up is done by fiscal policy and by the efforts by central banks to ease tight credit conditions. The sustained recovery will require that the pulling comes largely from private spending other than from the actions of the state, and that's a point to which I shall return later.
Now, I've given you a global view, but as always this general description hides important differences across countries. For example, if you distinguish between advanced and emerging countries, output in advanced countries is forecast to decline by 3.8 percent in 2009 before growing at a low 0.6 percent in 2010. By contrast, output in emerging market countries is instead forecast to grow at 1.5 percent in 2009 and 4.7 percent in 2010. The two types of economies are evolving in parallel, but one has a higher underlying growth rate on average, and that explains the difference in the numbers. But even this distinction between advanced and emerging markets hides further differences within each of the groups.
Let me focus in particular on Asia. After a tough first quarter, Asia is now set for a stronger performance than we had anticipated earlier. This is due in no small part to strong fiscal stimulus, notably in China and India where we had revised our forecast up by nearly 1 percent for both 2009 and 2010. Asia's performance in the recent past has rekindled talk of Asia decoupling and recovering on its own. We do not believe that this will be the case. The links between Asia and the rest of the world economy are too strong, and the full recovery in Asia will require the full recovery from the world as a whole.
In short, and returning to the global economy, the worst is behind us and the recovery is coming. The recovery is fragile, however, and policymakers face four main challenges, and here my presentation is, to a large extent, going to parallel the points that José made at the end of his own presentation.
First, policymakers must continue the strong monetary, fiscal, and financial policies that they have put in place in the last nine months. If they do not, there is a great risk that the recovery actually falters. In some advanced countries, continuing with a fiscal stimulus requires parallel fiscal reforms to strengthen medium-term prospects to contain in particular the rising costs of retirement and health care; otherwise, debt sustainability will be put into question and this would have very strong adverse effect on the world economy and on the recovery.
Second, policymakers must continue their efforts to restore financial sector health. Clarification of balance sheets and, if needed, recapitalization of banks is needed to raise confidence, stop deleveraging, and increase credit growth. This, again, has been discussed at more length by José.
Third, policymakers must ensure that as the fiscal stimulus is progressively phased out, private demand is sufficiently strong to return activity levels to potential. In the U.S., this is likely to require a major improvement in their exports, and by implication this may require the corresponding decrease in exports in the rest of the world, in particular in Asia. This may well be needed to sustain recovery.
Fourth and last, policymakers must start preparing exit policies, be it on the fiscal, the monetary or the financial fronts. Public debt levels will have to be decreased, the balance sheets of central banks will have to be pared down, the role of the state in the financial sector will have to be reduced and redefined. It is too early to implement these exit policies, the point that José has insisted on already, but it is not too early to design them so as to have them ready when the time comes.
Thank you very much.
MR. MURRAY: Thanks, Olivier. Thanks, José.
We'll take some questions here in the room, and then I'll turn to the Media Briefing Center.
QUESTION: In view of your comments about governments requiring stimulus policies to continue, there's starting to be talk in this country about need for an additional stimulus because unemployment has risen higher than the administration originally forecast. Would you give us your view on whether, as you see it, additional stimulus may be necessary on the part of the United States Congress.
MR. BLANCHARD: Let me not go into the specifics of what is needed for a particular country to achieve an upturn, but give you an answer which gets to the core of your question, which is that it may be that private demand is going to be very weak for longer than we anticipated, in which case a fiscal stimulus in some form will have to be continued. This being said, many countries where just more fiscal stimulus without any other fiscal measure would lead markets to worry very much, and therefore I think it's essential that further fiscal stimulus – if it comes, as I said, be accompanied by reforms which make the medium run more sustainable, including reforms on the retirement, or in the case of the U.S. largely the health care fund.
QUESTION: Question primarily for Mr. Viñals. First, I didn't see any update of assessments of losses on assets in this publication. Could you just clarify if you changed your assessment in any way since the last published assessments of losses falling on a different financial institution -- U.S., European, and so forth?
And, secondly, more broadly, when I heard a presentation scan through the update, it looked to me in some sense as if it was written a few weeks ago in the sense that in the last three or for weeks, this seems to have been, at least to some degree, a little bit of risk aversion coming back in financial markets. We've obviously seen a retreat in equity markets. We've also some other indicators of risk aversion increasing a little again in the latest few weeks -- some concerns about the sustainability of the recovery. And I just wondered whether in some sense this was kind of a natural time lag in the production of reports and so forth or whether in stating what you've stated today you're essentially not too concerned about this latest last few weeks of sentiment in the market. Could you speak a little bit to how you think about these latest developments -- the slight increase, again, in risk aversion?
MR. VIÑALS: Let me answer both of your questions. I'll answer first the last one.
I think that you're right that we have seen a sort of partial retrenchment in risk appetite, but overall risk appetite has recovered, when compare the situation today to that we had in the April GFSR. During this period, there has been a significant return of risk appetite. So, I think that is not that our update is outdated but that overall the situation is significantly less risky than before. And you have seen that, for example, in the shift out of safe havens, like the dollar or certain treasuries and going into equity markets in both mature and emerging markets and also into commodities. So, I think that overall -- our assessment remains up to date, and correct.
QUESTION: Could you just then -- I take your point entirely things are better now than they were in April, but could you comment a little bit on the developments of the last few weeks and whether you think this is just noise in terms of the general process of improvement or whether we may be perhaps seeing something significant in real time in terms of a, you know, a reversal of some of these improvement trends that we observe in the preceding couple of months.
MR. VIÑALS: I think, first of all, it's too early to tell. I mean, it's difficult to assess the meaning of market changes over a few months' time. It's even more difficult to assess whether you have some transitory or more permanent component if you look only at two or three weeks. So, I think it's really too early to tell. But if you look at the concerns that I have just examined, I think something which is very important is that financial markets don't get too far ahead of economic reality, and I think that this is something which is a welcome reminder.
MR. BLANCHARD: Can I add something on this. And you say it was an increase in risk aversion. I'm not sure that's really the case. I think it may be a revision of expectations down, not a change in risk aversion. I think that markets anticipated that the recovery could be strong or relatively strong. I think they are learning that it's likely to be weak, and I think we're seeing that kind of adjustment rather than an increase in risk aversion.
MR. VIÑALS: And on the update of the losses on financial institutions that you referred to initially, this is something that we do not always do in our update between one publication and the next. This is something that we are still working on and that we will be reporting on by the time of the next GFSR at the end of September.
QUESTION: Should we assume that for the moment we can cite these estimates as being current IMF thinking, or are they -- you know, are you -- so, in other words, are these still valid, the estimates that you made last time. Have you -- should you guide us away from these estimates at all at the moment, or can we assume that this is still the IMF view?
MR. VIÑALS: Well, I think that although we have not, as I mentioned, finished the process of revising these estimates, it would be reasonable to think that because there has been a significant rebound in financial markets, many of the marked-to-market losses that the banks had on both sides of the Atlantic would now be smaller, so that these overall write-downs should be somewhat smaller than the ones we had in April. But, as I said, you do not only have securities losses, but also you have loan charge-offs, and this is something that we are still in the process of verifying. This is why I'm hesitant to provide now any numbers other than to say that things likely would be slightly better now than they were before.
QUESTION: I must agree with both you (inaudible) that this is good news you are bringing in this room in the (inaudible), so (inaudible). But you also add to that that these improvements are varying from one region to another. Of course you see Asia is picking up a little bit. I'm interested in knowing which regions are still not improving and what are the reasons thereof. And, finally, I've seen a trend, for instance in African countries, where the (inaudible) differences are increasing quite (inaudible). Recently the Minister of Finances of Africa announced that South Africa will be having project differences of close to $10 billion U.S. Is this significant, or is just part of the trend that can be sustained in the long run?
MR. BLANCHARD: It's difficult to answer your question without going continent by continent or country by country. I focused on Asia because I felt that there were important points to make. If you look around the world among advanced countries, we have revised our forecast for Europe down a little bit, and it is clear that some countries in emerging Europe are struggling. But even there, there is enormous differences from country to country, and the outside world has a tendency to put all of them in the same basket when in fact some countries are facing genuine difficulties and some are doing fine. When it comes to Africa or the Middle East, I think the main determinant is often whether you're a commodity price exporter or not. Clearly as commodity prices have recovered somewhat, then commodity price exporters are doing relatively better, and commodity price importers are doing worse So, it is difficult to give you a general view. There is clearly a lot of diversity across countries. In general we can explain them by their openness, by the type of commodities they produce, by their integration in the world financial system. But it's difficult to give you a complete assessment country by country.
QUESTION: In April, Mr. Blanchard, you said that -- the WEO said that fiscal stimulus in '09 would have to be sustained if not increased in 2010. You're not suggesting that now. And in the context of Europe where your downgrade has been significant it seems, there hasn't been a great deal of fiscal stimulus. Presumably, you suggested in April more needs to be done there. Is that the case? And in the United States for fiscal stimulus, would there be some validity to looking at tax cuts in addition to increases in spending, given the worries about debt sustainability?
MR. BLANCHARD: Let me make three points in answer to your question.
First, between Europe and the U.S., it is true that there has been more discretionary fiscal stimulus in the U.S., but in the end fiscal stimulus depends both from the discretionary part and on the automatic stabilizers. When you do that computation Europe and the U.S. come out with roughly the same strength of fiscal stimulus for 2009 and given current plans for 2010.
The second is that it's one thing to pass a fiscal stimulus bill; it's another to actually spend it. Some of the spending which is there in the bills, hasn't been spent yet and is going to be spent over time. So, for example, in the U.S. only between 10 and 15 percent of the spending part of the fiscal stimulus package has been spent until now. The rest is still to come and therefore is going to have an effect for a number of quarters to come.
The third is that it may well be that the recovery turns out to be very weak, a bit weaker than we forecast. Governments may actually have to continue the fiscal stimulus in 2010 and even 2011. These are options that they have to be thinking about that they have to prepare for. Whether they need to do it or not we'll see.
QUESTION: Mr. Blanchard, I was wondering if you could talk about when specifically do you expect the global economy to return to positive growth? Do you still see it happening in early 2010?
Also, for Mr. Viñals, if you could address the loan charge-offs. Do you expect that estimate to also be reduced?
MR. BLANCHARD: Thank you.
Okay, so just got the answers from the man to my left who knows all the numbers.
So, for the world as a whole, this should happen in the second half of 2009. This reflects the fact that growth is higher in emerging market countries than in advanced economies. For advanced economies we have projected a return to growth at some time in early or middle of 2010, with variations across countries again.
MR. VIÑALS: On the issue of loan charge-offs, this is very conditional on economic prospects in the different areas, and to what extent these prospects finally follow the baseline projections, or you have some upside or some downside risks materializing. As I mentioned before, this is something which we are still working on, but insofar as we foresee an improvement in the economic scenario -- let's say going into 2010 -- one would expect that these loan charge-offs would be somewhat smaller than those that were published in the past GFSRs.
MR. MURRAY: Thanks, José.
Here is a China specific question [via the Media Briefing Center]: “Growth projections for China have been revised upwards. So many people have said that China's economy is bottoming out. What kind of challenges will China face now?”
MR. BLANCHARD: And China, indeed, has done extremely well. There was some skepticism at the beginning as to whether the fiscal package would be sufficient. It's clear that it has been very strong. It has been largely based on investment spending, which was the right thing to do, given that the money had to be disbursed quickly. I think over the coming years, the issue will be to shift from investment to consumption, and that's a major challenge I think that China is facing.
QUESTION: [Question on need for further spending increases, or tax cuts, to spur growth globally].
MR. BLANCHARD: On this, our position has been that, at least until now, doing it on the spending side was more efficient in the sense that what we are trying to get at this stage is bang for the buck, and when it goes to the spending side, at least the first dollar is spent right away. And then you may have further effects, further multiplier effects, but this is in addition. When you do tax cuts which are not effectively targeted to people who are very likely to spend it, it may be largely saved and not very useful from the point of view of increasing demand. Now, as time evolves, it may be the propensity to propensity to save may change, and there may be more of an argument for tax cuts, but the attitude throughout has been that to the extent that the idea was to push demand up, it was probably a better thing to do on the spending side rather than on the tax side.
MR. MURRAY: All right. I think we'll wrap this up now. I want to thank everyone for joining us today. This is Olivier Blanchard, José Viñals, Jan Brockmeier, and Jorg Decressin. If there are any follow-up questions regarding the WEO and GFSR updates, please send an email to firstname.lastname@example.org and we'll get back to you with an answer as soon as possible. Again, thanks for joining us for the WEO and GFSR updates.