April 21, 2010
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MR. MURRAY: Good day. I'm William Murray, Chief of Media Relation at the IMF, and this is a live, on-the-record press conference on the latest World Economic Outlook from the IMF.
Joining me today is Olivier Blanchard, Economic Counsellor and Director of the Research Department; Jörg Decressin, Assistant Director of Research; Petya Koeva Brooks, the Chief of the World Economic Studies Division; and Abdul Abiad of the World Economic Studies Division.
Mr. Blanchard will have some brief opening remarks, which we will make available at the conclusion today, and then we will take your questions.
MR. BLANCHARD: Good morning.
Let me begin with some good news.
Global recovery has evolved better than we expected. We now forecast global growth to reach 4.2 percent in 2010, which is an upward revision of .3 percent from our January forecast, and to reach 4.3 percent in 2011.
Alongside growth, global trade has also shown a strong rebound, and so have capital flows. As discussed in the newly released Global Financial Stability Report, financial market conditions and stability have improved.
These good global numbers hide, however, a more complex reality; namely, a tepid recovery in many advanced countries and a much stronger one in most emerging and developing economies. Let me discuss each group in turn.
So, when it comes to advanced economies we forecast growth to be 2.3 percent for 2010, and 2.4 percent for 2011, and this is just not enough to make up for the ground lost during the recession. Output for these countries is now 7 percent below its precrisis trend, and this output gap is expected to remain large for many years to come.
Associated with this prolonged output gap is persistent high unemployment. We forecast the unemployment rate in advanced economies to reach 8.4 percent in 2010, and to decline to only 8 percent in 2011.
What is the main factor behind this weak performance and this prolonged output gap? We think it is weak private demand. In the U.S., consumers, who were the drivers of the economy before the crisis, are being more prudent. In Europe, where banks play a central role in the financial intermediation, the weak banking sector limits credit supply. In Japan, deflation has reappeared, leading to higher real interest rates and putting in danger an already weak recovery.
Let me now turn to emerging and developing economies. There, the contrast is fairly striking.
Growth is forecast to be much stronger, 6.3 percent in 2010, 6.4 percent in 2011. Developing Asia is in the lead, with forecasts of 8.7 percent in 2010, 8.6 percent in 2011. And, growth appears not only to be strong, but to be sustainable. While fiscal policy often played a central role in supporting activity in 2009, private demand is strengthening and can sustain growth in the future.
The asymmetric nature of the recovery creates, however, serious challenges, both for advanced and for developing and emerging market economies. Let me talk about those.
In advanced countries the main challenge is one of, obviously, fiscal consolidation. A year ago the risk was that private demand would collapse, leading to another Great Depression scenario, so the priority was to implement fiscal stimulus programs and avoid this catastrophic scenario. This, we did.
Thanks, in part, to the stimulus programs demand did not collapse and has indeed started to grow again, if only weakly. One year later, however, the risk has shifted location. The loss in fiscal revenues associated with the loss in output from the crisis, is threatening to lead, if it is not contained, to a debt explosion. In most countries, fiscal consolidation is increasingly become the priority.
Turning again to emerging and developing countries, they face a different set of challenges. One of them is large capital inflows. Higher growth prospects and higher interest rates are attracting large capital inflows. Such inflows, especially when driven by growth prospects, are fundamentally good news. But, we have learned from experience that they can also lead to booms and busts. Thus, the main policy issue facing recipient countries is how to best accommodate these flows, how much to let the currency appreciate, how to use macroeconomic policy, how to use macroprudential tools, reserves, and capital controls so as to avoid the excesses and maintain stable growth.
Interestingly, and importantly, the solution to the challenges facing advanced and emerging market countries are closely linked. In advanced economies, fiscal consolidation is needed, but is likely to have an adverse effect on demand, and thus on growth. To offset the adverse effects and maintain growth, advanced countries, as a whole, may need to depreciate their currency so as to increase their net exports.
This in turn implies that emerging and developing countries, again as a whole, do the reverse, namely let their currency appreciate and reduce their net exports. It is in their global interest to do so as this adjustment may be needed to sustain growth in advanced countries, and by implication strong growth in the rest of the world.
In many countries, maybe in most countries, it is also clearly in their own direct interest to do so. In China, for example, a shift away from exports toward domestic consumption, a shift that requires both structural measures to decrease saving, and an appreciation of the currency, appears highly desirable on its own.
Let me conclude.
We find ourselves at an important new stage of the crisis. A global depression has been averted, the global economy is recovering and recovering better than we had previously thought likely. This is certainly welcome news.
But, new and no less formidable challenges have presented themselves. Achieving strong, sustained, and balanced growth will not be easy. It will require more work. Namely, fiscal consolidation in advanced countries, exchange rate adjustments, a rebalancing of demand across the world. These are the tasks facing policy makers over the next few years.
Thank you.
MR. MURRAY: We're going to take questions from the room and from the Media Briefing Center. For journalists in the room, please wait for the mic so our viewers can hear you. And when the mic is delivered to you, please identify yourself, name and affiliation.
Take this gentleman in the front row here on the right.
QUESTION: Thank you. I have a question on Mexico.
The WEO states that global economic growth in Mexico will rebound this year to 4 percent, helped actually by the recovery in the U.S. I wonder if you can elaborate on the other aspects that will help this growth?
Also, could you explain how is that? While you are saying that growth is going to be helped by the recovery in the U.S., next year the recovery in the U.S. is predicted to be lower than this year, while recovery in Mexico will be a little bit higher than this year.
MS. KOEVA BROOKS: Growth rates of GDP in Mexico this year is projected to be 4.2, which is an upward revision of .2 relative to our previous forecasts in January. And underpinning that revision is indeed the stronger external demand mostly from the U.S. That said, domestic demand, the growth of consumption and investment, is still projected to be somewhat subdued in the current year.
And, also, looking into 2011 we see only a modest improvement in growth to 4.5, and at that time domestic factors also help pick up that growth.
QUESTION: Where I'm from, China. Of all the challenges you mentioned the emerging economies are facing, what is the most prominent one in your opinion? And, in your opinion, what is your advice for the emerging economies to cope with this most prominent challenge?
MR. BLANCHARD: I think there are two types of challenges. There is the challenge, which is largely specific to China, which is whether to reallocate demand from external to internal. There, I think China is, actually, pursuing the right policies. It has a saving rate which is probably too high. It is trying to decrease it, and increase internal demand.
In the process of doing so, it may find that in order to reallocate resources to the domestic sector, as well as to avoid overheating, it may be useful to have an appreciation of the currency.
A problem faced by a number of other economies is, as I said in my remarks, an increase in capital flows. And there again, we know that capital flows are fundamentally good, but they can be excessive, and they can be volatile. At this stage, what we see is capital flows which are largely driven by what we can think of as fundamentals, which is good growth prospects of the countries in which these flows are going. They tend to go into equity, in large part. We think that these are, if I may say so, healthy flows, and these should be accommodated by macroeconomic policy rather than be resisted.
Countries should, however, be aware that flows can lead to bubbles, can lead to disruptions in the domestic markets, and must be ready to take macroprudential measures, or use reserves in order to slow down these flows if it turns out to be needed.
QUESTION: I would like to know the role of the fiscal policy in emerging markets like Brazil…[inaudible].
MR. DECRESSIN: Fiscal policy in many emerging economies has played an important stabilizing role during this crisis. If you go back to previous external crises, oftentimes emerging economies didn't have enough policy space in order to loosen their fiscal policies in order to support demand when they were hit. This time, it was different thanks to the strong policies that had been implemented ahead of the crisis, and moved their combined fiscal balances pretty close to balance, which was quite an achievement over the decade preceding this crisis.
So, in the end, the stimulus has been very useful in order to limit the damage the external crisis has caused to their economies. Their debt has increased, but their growth prospects are also so strong that the debt as a ratio of GDP is projected to decline again over the medium term. And for most of these economies, is in a pretty low range of 30 to 40 percent of GDP.
QUESTION: Growth has weakened in Europe. Maybe you can just say why Europe is doing worse than the rest of the world, or many other parts of the world. And, when do you expect this to change and improve?
MR. DECRESSIN: There are several reasons why the recovery in Europe is lagging behind what we see elsewhere in advanced economies. The first is that the European economy relies very heavily on bank credit. Most of the investment in Europe is done with bank credit, while in the U.S., corporate bond markets are playing a big role. And the corporate bond market has recovered much faster than the market for bank credit because many banks are still struggling with recapitalization.
The second reason is that the policy response in Europe came somewhat later and was somewhat less strong than in the United States. The monetary policy began easing somewhat later, but then moved very aggressively. Fiscal policy also was eased and there was significant stimulus, but less stimulus than the United States.
The third reason is that Europe is undergoing important internal adjustment for the moment that are weighing on growth and confidence. Now, we expect growth in Europe to gradually strengthen over the next quartersand to reach about 1 percent for this year, and 1.5 percent next year.
QUESTION: You mentioned in the report that sometimes you see in Europe, they need to move fast to address the concerns regarding debt sustainability. Do you think Spain is doing enough? Spain is one of the countries that you think has to act on that front, are they moving fast enough?
MR. DECRESSIN: Spain faces two important challenges. One is to move from growth that was largely driven by domestic demand and real estate to growth that is driven to large extent by external demand; secondly, to gradually roll back the large fiscal deficit that has arisen, mainly as a result of this crisis. I would again reiterate that the strong response in terms of fiscal stimulus was the right one, and that this has only contributed to a limited extent to the increase in debt in the Spanish economy. What has mainly contributed is the very weak growth as a result of this crisis.
Now, looking ahead, the deficit has to be rolled back. The measures that are in train right now are the right ones, in our view, for 2010. But the challenge is to devise, like in many other advanced economies, a medium-term fiscal plan that anchors expectations and targets measures that are growth friendly. That is to say, for example, cutting back expenditures that are unproductive, or raising retirement ages in line with life expectancy, or leveling the playing field in the tax code. These are measures that can help growth, but will also be contributors to redressing the fiscal imbalances.
QUESTION: Could you please briefly address the situation in the Middle East, and to what extent is the oil and gas demand playing a role in the upcoming growth? And could you also please briefly talk to us, after what we saw in the Dubai Holding company, how much does that warn of any upcoming financial problems or risks in this area?
MR. DECRESSIN: As elsewhere in the world, we see an acceleration of activity in the Middle East. Growth in 2009 was around 2.5 percent and we see it in the 4 to 5 percent range for 2010 and 2011, and there are several factors that are contributing to this.
More generally, there was a pickup in global demand for the exports of the Middle East, which makes a very big difference for the countries that are not exporting oil. Those that are exporting oil, in addition, are benefiting from the recovery of oil and energy prices in general.
The third is also that financial conditions are easing, and this is helping support activity within these economies.
You asked about Dubai. It is clear that there are still vulnerabilities in various countries of the Middle East with respect to the banking systems, and that these will need to be addressed forcefully in order to make sure that strengthened banking systems emerge from this crisis, and risks such as those surrounding Dubai do not derail what is otherwise a good growth performance during this crisis and in the recovery.
MR. MURRAY: I will turn very briefly to a question that is germane to the region on the Media Briefing Center, from “The National” newspaper in Abu Dhabi.
"Please, can you confirm whether the UAE's GDP forecast has been updated?"
MR. DECRESSIN: Yes, it has been updated. For 2010 we see growth of 1.3 percent in the UAE, then accelerating to 3.1 percent in 2011, which is somewhat smaller than the average for the Middle East and also takes account of the developments that we see in their financial sector.
QUESTION: Building on these questions about the Middle East, your projections assume oil prices of 80 dollars a barrel this year, up nearly 30 percent from 2009. How are these higher oil prices affecting the global recovery?
MR. DECRESSIN: Oil prices have increased from lows of around 40 dollars per barrel not too long ago to 80 dollars, so basically doubled. The reasons they increased are twofold. First, the strong economic recovery that we have seen. In that sense, the oil prices are mainly a reflection of the recovery. And, the second factor is that we went into this recession with very limited excess capacity. This capacity has now increased, but it has increased much less and remains much lower than what it has been during previous crises. And therefore, we're seeing a recovery of oil prices that is a bit earlier than what we normally expect.
Looking ahead, we are still of the view that oil prices will over the near term not present a major downside risk to growth because plenty of excess capacity remains. The risks are different over the medium term. As this recovery will gain strength and we move out two or three years, then the downside risks to growth from high oil prices will again become more prevalent.
MR. MURRAY: Turning to the Media Briefing Center.
“I detect a note of increased urgency in this WEO on issues like the need for fiscal consolidation, rebalancing growth, and currency appreciation especially in China. Is the IMF more concerned these issues aren't being addressed seriously?”
MR. DECRESSIN: There clearly is now a much bigger emphasis on fiscal consolidation. Why? We are coming out of this crisis. While we were in the crisis we had to support demand, avert a meltdown, and fiscal stimulus played an important role in this. But now with the meltdown having been averted, confidence returning, and growth picking up, it is clear that fiscal consolidation deserves much more emphasis.
Rebalancing growth in that regard, again, becomes an issue that deserves more emphasis. Why? Fiscal consolidation is a challenge mainly for the advanced economies. So, growth in these economies may be held back by fiscal adjustment. But then for global growth to be sustained, other economies will have to have stronger domestic demand and these are mainly the emerging economies, and that is what we mean by rebalancing demand from the advanced to the emerging economies, and we put more emphasis on this.
I don't think there is more emphasis on the currency issue with respect to China. China is one of these emerging economies with a large external surplus that has during this crisis boosted its domestic demand with various measures, including a very strong fiscal stimulus and what we believe is that this needs to be carried forward in order to help the global economy to rebalance. It needs to be supplemented with structural reforms that reduce savings rates. And in the end it would also be useful to support it with an appreciation of the exchange rate, which could also help combat overheating that is taking place in some sectors of that economy.
QUESTION: How would you comment on Russia's strong dependence on oil and gas prices? Maybe it is government anticrisis policy?
MR. DECRESSIN; Russia was badly affected by the crisis. It was basically hit by two shocks, the sharp drop in oil prices and the financial shock to the economy. The response of the government to these shocks was strong and the right one, which was to deploy significant stimulus to allow reserves to be run down and adjust the currency.
The decline in activity was still severe, however, around 8 percent, but we are now seeing a recovery, and we expect growth of around 4 percent in 2010.
What are the challenges that are remaining? The first is that the banking system needs to be strengthened further. There is fundamental restructuring that still needs to be done. For the moment there is a lot of reliance on forbearance, but this is not good over the medium run. That is challenge No. 1.
Challenge No. 2 is that the programs that have been put in place as part of the fiscal stimulus, the increased spending, does not become permanent. The deficit will have to be rolled back at some stage.
QUESTION: The U.K. economy is still forecast to be going below trend next year. I wonder if you could talk about why that is, and particularly the pace of fiscal consolidation given the political uncertainty, the upcoming general election, and also if the volcano ash cloud will have any impact on economic growth this year?
MR. DECRESSIN: On the one hand, the U.K. economy is being helped by the global recovery as well as the depreciation of the pound, which are boosting exports. And, you can see how the recovery is spreading already from manufacturing into services. Nonetheless, we expect this to be a performance that is relatively subdued for next year, 1.3 percent growth, and there are various reasons for that. The key reason is of course that the financial shock has been very severe.
The second is that the fiscal stimulus will have to be broadly rolled back, and that is weighing on demand.
The third is that unemployment is still high and will be weighing on consumer confidence.
You wonder about the volcano. The impact of that is very difficult to assess. When natural disasters strike advanced economies, oftentimes we found that the fallout for the economy just in terms of measured GDP has been fairly limited. The human toll can be terrible, not in this case, but in other natural disasters. But the economic fallout has generally been limited.
We would expect the same for this ash cloud and the volcano: if this is something short-lived, the economic fallout will be fairly limited. If it lasts longer, it is a different story. According to some estimates, air transport accounts for around 15-20 percent of all cross-border trade in Europe. That is a fair chunk. You can substitute away from air transport to other modes of transport, you can even substitute the goods that you are getting by air transport, for example by buying flesh flowers locally rather than exotic flowers that are flown in. Substitituon limits the fallout from the volcano.
Overall, we believe that for as long as this is of limited duration, the fallout will be limited. If it lasts longer, it becomes a more complex question to which we don't yet have a firm answer.
QUESTION: Just wanted to come back to the point Mr. Blanchard mentioned about advanced economies who benefit from weaker currency. Do you include the dollar in that scenario?
My other question is regarding recommendations that some countries may need to withdraw fiscal stimulus in 2010 given risk premiums going up. Can you specify which countries you have in mind.
MR. BLANCHARD: No, I don't think I can specify countries, either in the first or second case. I can repeat the logic of the argument, which is that if fiscal consolidation takes place in advanced countries, demand may be weak, and therefore net exports have to be stronger. So this implies in general an appreciation of emerging market currencies relative to advanced countries' currencies. The exact set of adjustments depends on the details of each country and how large the current account surplus the country has or how large the current account deficit is. But, it is a scenario associated with a depreciation of the dollar relative to e emerging market currencies for sure.
The other question about fiscal consolidation?
Well, it is clear that countries are in different positions, with respect to how fast they have to consolidate. And, it may be that as much as we would want fiscal stimulus to continue, there are countries which basically don't have that choice. As Mr. Decressin said, the important things for these countries is they have to do it in such a way so as to not undermine demand and stop the recovery in their countries. This can be done in various ways. For example, a phased increase in the retirement age is a very good example in the sense that it leads to more fiscal sustainability in the medium run, but in the short run it doesn't have adverse effects on demand. If people know that they have to work longer, they may actually save less and consume more. This is the example of the policy which will improve things in the medium run, which can be taken now, or started to implement now, and would not kill private demand.
QUESTION: My question is, how do you think that rising inflation in Southeast Asia is affecting recovery, and how do you see the prospects of the southeast region?
MR. ABAID: I can talk about the prospects for India, and I will speak briefly about Nepal.
In India, growth is projected to be 8.8 percent in 2010, and 8.4 percent in 2011, supported by rising private domestic demand. Consumption will strengthen as the labor market improves, and investment is expected to be boosted by strong profitability, rising business confidence, and favorable financing conditions.
India is relatively more closed, and has relied on stimulus to support growth. The main challenge will be to ensure durable fiscal consolidation, including by implementing fiscal and other structural reforms.
Relative to other countries in the Asian region, India has relatively high inflation, and the tightening of monetary policy currently under way is appropriate.
In Nepal, real GDP growth is expected to slow to 3 percent in 2009/10 from 4.7 percent in 2008/09 due to the poor monsoon and softer remittances. Growth is anticipated to strengthen again in 2010/11, and the current account is expected to improve.
MR. MURRAY: I am going to go to the Media Briefing Center and take a question on Asia and the Philippines from Business World.
“The IMF projected the Philippines to grow the slowest among the ASEAN 5. What are the reasons for the slower expansion of the Philippines compared to its neighbors? What should the government do to try to narrow the gap?”
MR. ABIAD: On the Philippines, I would refer you to the Regional Economic Outlook on Asia, which will be rolled out in the next few weeks.
QUESTION: What are Sri Lanka's prospects and challenges coming out from a 30-year war, and there is some political instability? What are the prospects?
MR. ABIAD: For Sri Lanka we're projecting an acceleration in growth from 3.5 percent last year to 5.5 percent this year. There is currently an IMF program which we can't comment on the details, the key priority in Sri Lanka is basically to obtain a credible and sustainable reduction in the fiscal deficit going forward. That is the main vulnerability there right now.
QUESTION: One quick question in French for Mr. Blanchard. Should we be worried about inflation?
MR. BLANCHAD: I think there is not much reason to worry about inflation.
QUESTION: In your analysis about recovery in Europe, Italy is not mentioned; is not interesting? Why? Italy's situation, Italy is with Germany and France, or with Greece, Ireland, Portugal and Spain?
The second question, what is your scenario for euro in the future?
MR. DECRESSIN: We would say that Italy is between France and Germany on the one hand, and Portugal, Greece, on the other. Let me explain.
Italy has a high debt ratio, and in that sense one might see it closer to Greece. On the other hand, it has a much lower fiscal deficit. It also has a much lower current account deficit, actually, a very small current account deficit. And, Italy has a much lower level of external indebtedness than Greece, Portugal. In that sense it is in a different category. It is not in the same category of Germany, because it does have the same low debt as Germany, and that puts it in a different light; it is the same vis-à-vis France.
You asked about the situation in Europe in general. As we said, we see the recovery gaining traction in Europe. It is spreading from manufacturing to services, which is a good sign. It is also spreading across countries. But on the other hand, it will be a subdued recovery, because Europe very much relies on bank financing, and banks still need to rebuild capital and deleverage. The unemployment rates are high and this will be weighing on consumer confidence. And, finally, as you are aware, there is some internal adjustments going on in Europe that are weighing on confidence.
QUESTION: You have been talking about the currency, appreciation and depreciation, and we're wondering where do you see the euro in the new scenario?
MR. DECRESSIN: Initially in the crisis the euro appreciated very strongly, but lately it has been depreciating again. And, where we see it right now is somewhat on the strong side, relative to the medium-term fundamentals, and on a multilateral basis.
MR. BLANCHARD: I think the major exchange rate adjustment we want to see in the world is an exchange rate adjustment between the currencies affected by these countries, and the currencies of a number of emerging market countries, rather than adjustments within advanced countries. So, we do not think that the major change in the dollar-euro rate, for example, would make much sense in terms of what the world needs
MR. MURRAY: A question from the Media Briefing Center.
“Does the IMF consider the fiscal situation in Greece and Portugal a problem for growth in the euro zone in the next few years? And additionally to that, are more bailouts needed in the euro zone?”
MR. DECRESSIN: If you look at the importance of Greece and Portugal for the trade of its partners in the euro area, it is much smaller than that of the rest of the world. So, Europe's fate will be much more closely linked to what happens in the rest of the world than what happens in Greece and Portugal. Here, I would add, however, for as long as what is happening in Greece and Portugal is handled appropriately. And that is what we expect.
In terms of what is needed, both of these countries face a challenge to significantly adjust their growth from domestic to external demand, and to roll back large fiscal deficits. And, the plans for that are being put in place. And therefore, we don't see major risks for the euro area from these two countries in our forecast.
QUESTION: Just a brief question regarding Germany. Downward revisions for 2010/11, and at the same time you predict a higher unemployment rate. Can you elaborate?
MR. DECRESSIN: The fourth quarter of 2009 turned out much weaker than what we had expected. And that has a carryover effect in 2010. So, that is what explains our lower growth rate in 2010. The adjustments, however, are very minor. For Germany, we are seeing a growth at 1.2 and 1.7 percent respectively, following small downward revisions.
We have marked up unemployment, but still see a remarkable performance in the German labor market: unemployment has remained quite low during this crisis, and we think it is a testimony to the successful reforms that have been implemented in Germany on this side.
QUESTION: I would like to have your assessments on why, Mr. Blanchard, the prospects for Brazil are being reduced from 5.5 this year to 4.1 next year? Are you worried about inflation that is too high, or what explains that?
MR. BLANCHARD: I'm going to turn to the specialist on Brazil to give you the answer.
MS. KOEVA BROOKS: Indeed, we do see a slowdown in growth from about 5.5 this year to a little bit over 4 percent next year. But I should also say in both cases these represent significant upward revisions from where we were in January.
In terms of what explains the slowdown, I think one aspect is that in many ways, the Brazilian economy is very cyclically advanced stage compared to other economies in the region. Demand, there is much less economic slack, and the economy is much closer to capacity. And, therefore, the stimulus, the very large stimulus provided by both monetary and fiscal policies, is expected to be withdrawn, and that is one of the reasons for this slowdown in growth
MR. MURRAY: Thank you everyone for joining us today. If you do have any follow-up questions, send an e-mail to media@IMF.org.
Thank you, Mr. Blanchard, and the team, for this briefing.
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