Transcript

Wednesday, January 23, 2013
Washington DC

Olivier Blanchard, IMF Economic Counselor and Director, Research Department, IMF
Jörg Decressin, Deputy Director, Research Department
Thomas Helbling, Division Chief, Research Department
Gita Bhatt, External Relations Department, IMF

MS. BHATT: Good day. Thank you to those of you in this room and those online for joining this press conference--the January 2013 update of the World Economic Outlook. I also want to remind everyone that this is an update of key WEO projections, which is limited in scope and ambition. The publication of the full report, the WEO report, together with our other flagship publications, the Global Financial Stability Report and the Fiscal Monitor, will be as usual on a biannual basis with the next one coming up in April.

With that, let me introduce the panel. We have Olivier Blanchard who is the IMF's Economic Counselor and Director of the Research Department; Jorg Decressin, Deputy Director of the IMF's Research Department; and Thomas Helbing, Division Chief in charge of the World Economic Studies Division in the Research Department. Mr. Blanchard will make some brief opening remarks after which we will take your questions. We have many questions online and I hope to get to all of you. Olivier?

MR. BLANCHARD: Gita, thank you. Good morning all. Good afternoon to those who are on line. Optimism is in the air, particularly in financial markets, and some cautious optimism indeed could be justified. Compared to where we were at the same time last year, acute risks have decreased. The fiscal cliff in the United States and the euro explosion in Europe have both been avoided and uncertainty is lower. But we should be under no illusions. There remains considerable challenges ahead and the recovery, as will be clear when you see the numbers, continues to be slow, indeed, much too slow. Put poetically, we may have avoided the cliffs, but we still face high mountains is one way of thinking about where the world is today.

Let me develop that theme. A year ago we were worried about two short-term risks. We were worried that gridlock might lead to excess fiscal consolidation in the United States, the fiscal cliff, and we were worried that firewalls in Europe may not be strong enough to prevent a major crisis in Spain or in Italy. Now when we look today, there has been progress on both fronts. The agreement reached at the end of the year in the United States in 2012 does not solve the fiscal problems by any means, but the extent of fiscal consolidation in 2013 should be roughly appropriate. In Europe, progress on a number of fronts from the OMT program put in place by the ECB to the start of a banking union has convinced financial markets, and I think other observers as well, that the firewall was indeed there and that Europe was committed to the euro.

Still we have not yet turned the page. The world recovery continues to be hampered by the need for fiscal consolidation and by a still weak financial system. Let me at this stage take on a brief tour of the world starting from where things are not going very well to where things are in better shape. The challenges clearly remain highest in the European periphery. We forecast for European countries another year of recession with -1 percent for Italy, -1.5 percent for Spain. The adjustment process is truly at work and competitiveness is starting to improve, export markets shares are starting to increase, sovereign spreads have considerably deceased, cross-border imbalances and these things known as Target Two imbalances have stabilized in some cases, and in some cases actually have started to reverse. Yet interest rates are still too high, the required fiscal adjustment is still large and uncertainty is still very much present and all of these factors lead to low demand and low output.

Let me turn to core European countries. They are doing better but only a bit better, and the forecasts we have are for positive but anemic growth, 0.6 percent for Germany and 0.3 percent for France for 2013. Some of this slow growth is due to fiscal consolidation, some to the lingering effects of uncertainty which was very high in the past year and some from weaknesses in the European periphery affecting exports in particular. Some of it may be due to what economists call depressed animal spirits, namely, that after many years of crisis and the difficulty of building Europe, consumers and firms might be waiting for stronger signs of growth to start spending, but by doing so are delaying the recovery. Financial conditions are improving, however, and the low numbers I've given you for France and Germany hide a gradual strengthening of growth over the course of the year.

Now let me turn to Japan. Japan fell into recession in 2012. Thanks in part to the new measures that have been announced by the government and the central bank this month, growth should positive in 2013. Our forecast is for 1.2 percent growth in 2013. In terms of policies, the high inflation target and more ambitious growth from monetary policies are very much welcome. The fiscal package has led us to increase our growth forecast for 2013 by about 0.5 percent, but that comes with a very large caveat which is that given the initial level of debt and given the absence of a medium run fiscal consolidation plan, it also comes with large increase in fiscal risks.

Let me turn to the biggest advanced country, the U.S. The U.S. is in better shape than Europe or Japan. The main issue, as you well know, remains the need for a clear medium-term fiscal consolidation plan, but even in the absence of such a plan, fiscal consolidation is likely to proceed at a reasonable pace in 2013. If you leave aside the fiscal path, the rest of the economy shows signs of improving health. Housing investment is definitely on the rise and wealth to disposable income ratios are back to historical averages so that consumption should be fairly strong from here on. Even fixed investment which had been surprisingly weak in recent times shows some signs of strengthening. We forecast 2 percent for 2013, but again with a gradual strengthening of the growth rate over the course of the year.

Finally, let me turn to emerging markets and developing economies. They are forecast to sustain strong growth, although not the high rates that some of them experienced before the crisis. Growth forecast for the group as a whole is for 5.5 percent for 2013. This is up from 5.1 percent in 2012. A few more specific forecasts, for example, for China, we forecast China's growth at 8.2 percent in 2013; India at 5.9 percent; and Brazil at 3.5 percent which is a major improvement on the 1 percent that they had in 2012. Weak investment in India and Brazil are a source of concern, but in general most emerging market and developing countries have been able to offset the decrease in external demand coming from the weakness in advanced countries with high internal demand and they have been able to handle the volatility of the capital flows which is clearly an issue which has continued to be an important one.

Let me conclude. Overall these developments lead us to forecast 3.5 percent world growth for 2013. This is compared to 3.2 percent in 2012, so this is better, but it is not great. And in particular the growth numbers are not enough to make a dent in the unemployment rate in advanced economies which is going to remain we think at 8 percent in 2013, the same number roughly as in 2012.

What is our policy advice? It's largely the same. Financial market optimism should not lead to policy complacency--I think would be the main message. We've seen this problem in the past and we always worry that it comes back again. Now that clear plans have been laid, implementation remains key for the Euro Area. Medium-term fiscal consolidation plans are still very much needed in Japan and in the U.S. And financial reform still has a very long way to go. To conclude, with progress on these fronts--going back to the theme at the beginning--cautious optimism may indeed be justified. Thank you.

QUESTION: In your projections in October you called for implementation by policymakers of policy actions. How would you grade their performance over the last 3 months in implementing what you had called for? And secondly, the disconnect between financial conditions and the real economy seems to have intensified in the last 3 months. Do you think the optimism in financial markets is justified given what we're seeing in real economies?

MR. DECRESSIN: On policies we believe that good progress has been made. We are seeing steps forward with respect to banking union and fiscal integration in the Euro Area. Proposals are being made and debated. Specific measures are being taken. The fiscal adjustment programs in the Euro Area economies are also moving ahead. Fiscal outcomes have been broadly in line with what we expected. In the United States, the fiscal cliff has largely been defused which is good for the economy in terms of bringing down uncertainty and helping investment going forward. And Japan threatened to slide into a longer recession, which we had not expected in the October 2012 WEO, but they have now taken measures on the monetary policy front with the adoption of the 2% inflation target. This is also a good step forward although it still needs to be backed up with a more expansionary monetary policy stance. On the whole we think that good progress has been made.

We would say the same things are also true about the emerging economies. We've seen that in China, for example, the cautious approach to stimulus has been validated. The economy is turning. On the whole we think that policies have progressed relatively well.

MR. BLANCHARD: On the disconnect part, it's clear that financial markets are ahead of the real economy. The question whether they are too much ahead or not, whether we're seeing a bubble or we're seeing them seeing things which are truly good. I think at this stage it's difficult to say. What we know is that it always takes some time for financial market optimism to feed to the real economy and at this stage there are still obstacles to it. The banking system, which is one of the transmission mechanisms, is not in great shape. But I think there is a reasonable argument for thinking that, whilee the financial markets are a bit too optimistic, they are seeing good things in the future and that the real economy will pick up and that consumers and firms will start investing and spending more.

QUESTION: Mr. Blanchard, on the euro, is it your view and of your colleagues that to really put this problem behind it, that the Euro Zone has to move toward full banking union and debt mutualization?

MR. DECRESSIN: We think that banking union is absolutely critical and it has to have three components, not only the single supervisory mechanism on which work is ongoing, but also a common resolution framework and common deposit insurance. Furthermore, you also need some fiscal integration, and for us what is critical here is to have a fiscal backstop for this banking union. Debt mutualization we don't believe is needed to get out of this crisis.

QUESTION: Also in the Euro Zone and Europe in general, today's announcement by the British government to renegotiate its relationship with the E.U., is that reflected at some point in your considerations? Do you think that this is increasing the downside risks for the Euro Zone? Or do you think of the contrary, that this is a good thing because it will sort of clear the relationship between Britain and the core Europe of the Euro Zone?

MR. BLANCHARD: I think we'll punt on this because the announcement is too recent and we haven't thought deeply about its implications. . This referendum is far in the future and it is ultimately a decision for the British people to take. I'll leave it at that.

QUESTION: To follow-up on this here, there's not only the British position, there are also political uncertainties regarding the outcome of the elections in Italy and in Germany later this year. How do you assess these uncertainties?

MR. BLANCHARD: Again we are not going to go into specifics about politics. After 4 years of crisis I think one understands the dynamics and the challenges of Euro integration. It is a very complex process in which governments have different ideas, different political constraints, and so an election here or an election there may delay the implementation of a measure. I think what we have learned, and I would say that's one of the main lessons of last year, is that in the end it's kind of two steps ahead, one step back, but it ends up delivering. It's a messy process. It's a difficult process. But it is happening, and so I think one has to think about the implications of the German elections in that light.

MS. BHATT: Let me take one online: "Do you fear that with the unlimited monetary easing in Japan and in the U.S. the works is heading toward new currency wars? How should the emerging markets react?"

MR. BLANCHARD: I think this increasing talk of currency wars is very much overblown. Countries have to take the right measures to get their own economies back to health. This implies a combination of fiscal policy, monetary policy and other measures, and this has implications for the exchange rate. So to the extent that we think the policies are appropriate, then the implications in terms of exchange rates are also appropriate. Two more points. There is this notion that capital flows to a number of emerging market countries have been gigantic in the recent past. That's not true. They have continued to be volatile but there is no sea change in the recent past. The last point relates to the work that we have done at the Fund, the advice we have given, which is that sometimes indeed capital flows induced by policies elsewhere in the world may just be too large for an economy to handle for macro reasons or financial stability reasons, in which case macro prudential measures more generally can be used to control the adverse effects of these flows. So, again, the talk of currency wars is just inappropriate at this point.

QUESTION: In the report you were urging the peripheral countries of the Eurozone to maintain and continue their fiscal consolidation program. But in your recent paper, you indicated that the negative impact of austerity on growth may have been underestimated. Is there any kind of a contradiction?

MR. BLANCHARD: I hope not. What has happened overtime, as you know from the controversy about multipliers, is that we have revised overtime our assessment of what average multipliers might be. And this has led us to actually rethink our programs, and there are a number of examples in which we’ve come to the conclusion that fiscal consolidation should be modified in some way. I’ll mention two aspects. The first one is that we have recommended that countries shift from nominal targets to structural targets. Or another way of saying we have suggested that the countries allow automatic stabilizers to work, accepting the fact that fiscal outcome will not be quite what was hoped for. So this is a very important shift, and I think very much the result of our reassessment of the effects of fiscal consolidation. In a number of countries we have also moved the date by which some targets should be reached byr, which again implies slower fiscal consolidation.

I think we’ve responded to what we’ve learned overtime in the proper way. At the same time multipliers are not the only element which determines the speed of adjustment. The slower you go, the more financing is needed, and there’s not infinite financing. And so the financing constraint may force you to go faster than you would want. The results suggest that the pain of going fast may be fairly substantial. But again, it doesn’t mean that we should just stop, and so we continue to advocate fiscal consolidation.

QUESTION: And continuing on multipliers and fiscal consolidation, for us it’s essential to understand this. In advance of the economic crisis, countries like Italy, usually the IMF is always promoting cuts in spending, public spending and in taxes, but your discoveries about the multipliers are somehow putting discussion on the European prevailing economies. And so is there something wrong in the way we choose to fight the crisis?

MS. BHATT: I have another question on Italy here, if I may, as well. “Does Italy need another round of fiscal tightening in 2013 as GDP contraction, according to your projections, will be greater than expected?”

MR. BLANCHARD: So let me try to answer both questions. I think there’s little question that fiscal adjustment, which was put in place both under the Berlusconi government and then later on by the Monti government, have had adverse effects on activity. And indeed, if our assessment of multipliers was, in fact, higher than we had assumed, then the effect was probably more adverse. The question is whether there was an alternative to it. I think if you go back to where Italy was not very long ago, there was enormous market pressure for Italy to actually do fiscal consolidation. There were questions as to what would happen if Italy didn’t do it. I think Italy is one of these countries in which there was little choice about the need and the pace of fiscal consolidation. And if we look at where Italy is now, clearly the adjustment has been painful. There’s no question. But markets have regained confidence. Sovereign spreads have decreased. It has e a primary surplus, the largest primary surplus, in Europe. So, yes, there was pain, but there was not much choice.

QUESTION: I’m from Japan, so how serious do you think in the long term this fiscal sustainability as a result of the recent stimulus package of the fiscal on the month? Also, I just want to know the reason of the downward revision of 2014 of Japan.

MR. BLANCHARD: When the country starts with a ratio of debt to GDP of much more than 100 percent -- and whether we talk about net debt or gross debt, in both cases it’s much above -- and without a clear plan for fiscal consolidation over the next 5, 10 years, it seems to me to be quite dangerous to increase the fiscal deficit. The direct effect is still to increase spending, but it must make the markets wary about the ability of the government to actually achieve debt sustainability.

MR. HELBLING: A relatively small downward revision to growth in 2014 reflects a complex pattern in fiscal policy in 2013-14. The fiscal stimulus package is frontloaded, so most of the expenditure will fall into 2013. Expenditure growth shoots up and then declines in 2014. At the same time, we assume in the baseline that the consumption tax rate will be raised in that year, as planned. Morever, we have some further unwinding of construction spending. So the combined effect is a small downward revision in growth in 2014 because there will be a reduction in fiscal stimulus.

MS. BHATT: Let me turn to a question on emerging markets here, and then I’ll go back to the floor. “Emerging Asia has been swamped by a large amount of capital flows last year. Do you expect that to continue this year? How do you think the region should respond to these inflows so that they are maximized and will not start inflation or asset bubble formation?”

MR. BLANCHARD: I’ll repeat things that I’ve already said, which is first I think the word “swamped” may not be right. Many of the macro policies are more competitive in advanced economies. Investors look for other places to go. That’s not specific to quantitative easing. It happens even when interest rates are positive and the central bank decreases the interest rate. So the flows have not been enormous, but they have been volatile, and that indeed creates complications for the countries which are at the receiving end.

Now, as we know some of these flows are actually desirable, some of them less, because they may come and go. And again, we have argued that there are tools to deal with these capital flows -- that’s called macro prudential tools -- which allow the countries to accept the flows that they think are useful and smooth the others.

QUESTION: We have in the projections the economic growth for Brazil of 1 percent last year to 3.5 percent this year. I wanted to know, how do you explain this change and what kind of recommendations would you give to Brazilian authorities, especially regarding the fiscal issues and the inflation?

MR. HELBLING: If you look at the growth in Brazil, there’s indeed an increase in growth to 3.5 percent. This must be seen against two backgrounds. On the one hand, investment disappointed in 2012. A critical factor here, we think, are infrastructure bottlenecks that discourage investment, To the extent that the government has started with measures, concessions to the private sector to relieve this infrastructure bottlenecks in particular, this will help to foster business confidence and a turnaround in investment.

I think when you look at policies, an important issue for Brazil as well as for some of the other emerging economies is that there is a sense that potential growth is a bit lower than has been assumed until recently. One indication is that core inflation has remained relatively stable despite the slowing growth and that headline inflation is close to the upper range of the band. So, it will be important to be careful with further stimulus. In fact, the appropriate policy might well be to unwind fiscal stimulus and to normalize monetary policy.

MS. BHATT: I take will take one question online. This is on the U.S. “The update addresses the U.S. debt crisis in much less detail than the euro crisis. Does this reflect the belief that credible fiscal consolidation in the U.S. is politically not feasible? And how serious are the global risks of the U.S. crisis?”

MR. HELBLING: If you look at the U.S. fiscal situation, debt has increased over the past years as a result of the global financial crisis, the recession, and the slow recovery. But if you look at our forecast, there is a steady fiscal consolidation of about -- in structural terms -- of about 1.25 percent over the next few years. And if you look at the structure of the U.S. fiscal problem, it’s really a long-term problem. With population aging and increased health care costs, there’s a steady increase in Medicare and Medicaid costs. That is a steady increase, but that will hit the budget later on in 2020 and later.

So if you look at the adjustment needed for the U.S. to stabilize and then lower debt ratios, be it for the general government or the federal government, the additional fiscal adjustment needed relative to what is already incorporated in our baseline is of a magnitude that’s seems doable. I think one calculation suggests that additional adjustment of about 5 percentage points of GDP is needed, and that could be distributed over several years. So in that sense, I think our Update rather reflects our view that the U.S. fiscal problem is manageable and that the needed fiscal adjustment is doable. The political costs should be lower than in some of the other economies that face much larger fiscal adjustment problems.

QUESTION: I noticed in the updated report you don’t make any revision to China’s growth forecast for this year and next year. Does it mean that both the progress and the challenges related with China are exactly what you had expected? Thank you.

MR. HELBLING: Yes, the Chinese economy is on track. There are no revisions to the forecast. I think the policy support has turned around the economy as expected. The big medium-term challenge is to rebalance the economy from investment-driven growth to more consumption-driven growth. Measures have been implemented, but more measures need to be undertaken to meet this goal. It is assumed in our baseline forecast that these measures – for example in terms of strengthening social safety nets, reducing some of the distortions favoring investment at the expense of consumption -- they’ll be implemented, and that’s the basis for the forecast.

MS. BHATT: I’ll just take a couple more questions. Let me take one online. “What does Mr. Blanchard consider are the major unfinished chores for financial reform? Do regulators have the knowledge base to address these issues, or is it necessarily trial by error? And what are the implications of a British EU exit on this process and on the economy overall?” I think the last part we’ve already addressed, but if Olivier can respond to the first part?

MR. BLANCHARD: Financial reform is going to take many years partly because it’s conceptually very difficult, partly because it is politically very difficult. If I were to list the main issues which are clearly not solved, I would list two. The first one is too big to fail, which is not yet satisfactorily addressed. The other is cross-border resolutions, which also hasn’t made much progress. The one where the path has been made much clearer, but where progress still has to be made, is the banking union part in Europe.

QUESTION: You said that some integration, fiscal integration, of the Eurozone is needed. Do you think an idea of Eurozone budget that was rejected by the last December European Council Summit should be considered?

MR. DECRESSIN: As far as fiscal integration is concerned, there are many ways forward and it’s really a question of taking a political decision as to how the euro member states want the euro area to look. The one point, which we believe absolutely must be addressed over the medium term is that of a fiscal backstop for the banking union.

MR. BLANCHARD: Let me just add to this. One can be more ambitious. Even if the Europeans want to put in place a a system which would distribute resources to the countries which need it, it need not involve a very, very large budget for Brussels. Basically what it needs is when enough resources are committed to Brussels that they can be redistributed to the states which need it. So it’s not as if you need to move ministries to Brussels and increase the spending and the revenue responsibilities of Brussels. It can be done in a smaller way.

QUESTION: This is a question on India. In your opening remarks you expressed concern about the weak investment in India and Brazil as cause of concern. Are there any other issues that are cause of concern in these emerging markets in regards to India? And what role can -- the government came up with new liberalized economic policies like foreign investment and deals with how these factors are playing into the growth rate that you are projecting for next year?

MR. HELBLING: If you look at India, fixed investment has slowed down considerably after the global financial crisis. This has led to a slowing in growth. It has also led to concerns about growth going forward. If you look at the reasons that have been identified, it has been policy and regulatory uncertainty, infrastructure bottlenecks, and energy supply bottlenecks. In addition, in 2012, there was also a temporary factor, namely the below average monsoon rain and the declining agricultural output. Going forward, we think that these problems on the infrastructure and the investment area are being addressed. There’s now a Cabinet Commission on Investment that looks to speed up approvals of investment projects. We think that infrastructure projects approval and implementation will increase, and this should pave the way for a gradual increase in growth. And then the liberalization of foreign direct investment should help to improve investor confidence and lead to higher investment growth.

MS. BHATT: On last question online. The question is, “Why are the Euro-wide policy responses to the Euro crisis, which the IMF commends, still not translating into stronger economic growth?”

MR. BLANCHARD: Well, I think that goes back to the discussion we had about financial markets and the real economy, which is that it takes a while for these things to work. We’ve seen, for example, that some of these measures have decreased the sovereign spreads in periphery countries. But the effect on the real activity takes a while, and again, that is a source of cautious optimism. These measures will eventually have an effect on the real economy, but it would be great if they came faster.