Transcript of a Press Conference on the Release of World Economic Outlook UpdateJuly 9, 2013
Olivier Blanchard, Economic Counsellor and Chief Economist, IMF Research Department
Thomas Helbing, Division Chief, World Economic Studies, IMF Research Department
Rupa Duttagupta, Deputy Division Chief, Research Department
Gita Bhatt, Moderator, Communications Department
|Webcast of the press conference|
MS. BHATT: Good morning, all of you, and a warm welcome to those of you who are here and to those online for this press conference on the update of the World Economic Outlook, one of the IMF's flagship publications. I also want to remind everyone that this is an update of the key forecasts for some countries and regions, and is limited in scope and ambition. The publication of the full year report with a fuller and comprehensive analysis will be, as usual, on a biannual basis, with the next one coming up in October.
With that, let me introduce the panel: We have Olivier Blanchard, who is the IMF's Economic Counselor and Director of the Research Department; we have Thomas Helbling to my immediate right, who is a Division Chief in charge of the World Economic Studies Division in the Research Department; and Rupa Duttagupta, who is the Deputy Division Chief in the Research Department.
Olivier, will make some brief opening remarks, and then we'll take your questions.
MR. BLANCHARD: Gita, thank you. Good morning, all. The world economy remains in a three speed mode, emerging markets are still growing rapidly, the U.S. recovery is steady, but much of Europe continues to struggle.
There is, however, a twist to that story, which is that growth almost everywhere is a bit weaker than we forecast last April, and the downward revisions are particularly noticeable in emerging market countries. After years of strong growth, the emerging market economies—the BRICS, to call them that way, are beginning to run into speed bumps. This means that the focus of policies will increasingly need to turn to boosting potential output growth or, in the case of China, to achieving more sustainable and balanced growth.
Let me, as I typically do, start with first some numbers. Growth in emerging markets and developing economies is forecast to be 5.0 percent in 2013. This is 0.3 percent less than what we had forecast last April. Now, it is forecast to increase to 5.4 percent in 2014, which is better, but it's still downward revision relative to our April forecast of 0.3 percent. Here, I think it's interesting to actually give you numbers for some of the main countries.
Growth in China is forecast to be 7.8 percent in 2013, that's a downward revision of .3 percent; growth in India is forecast to be 5.6 percent, down 0.2 percent; growth in Brazil is forecast to be 2.5 percent, that's down 0.5 percent; and growth in Russia is forecast to be 2.5 percent, down 0.9 percent from our April forecast, so clear downward revisions. In addition, in all four cases, we have also revised down our earlier forecasts for 2014, by similar or even larger amounts.
Turning to advanced economies, growth in the U.S. is forecast to be 1.7 percent in 2013, that's a downward revision of 0.2 percent, but we expect growth to actually rebound, and we're predicting a 2.7 percent in 2014.
Now, turning to Europe, we continue to predict negative growth in the euro zone in 2013, -0.6 percent, and that's another downward revision of about 0.2 percent. This reflects not only negative growth in Spain and Italy, but also lower growth in the core. We think the growth in the euro will turn positive in 2014, but it will remain very low.
So these are the numbers, but what's the story behind these numbers? Let me, again, start with emerging market economies. The slowdown in the major emerging market economies appears to have both cyclical and, more importantly, structural components. On the demand side, what's common to all these countries is a slowdown in exports due to the fact that the advanced economies are not doing great. But this only explains part of the slow down, there are also slowdowns in consumption, slowdowns in investment, in domestic demand.
What's even more striking, on the supply side, the slowdown in growth has not come with much of the decreasing inflation, and this, together with other evidence, suggests to us that potential output has slowed down in line with actual output. This has an important implication which is that growth in emerging market economies will remain high, much higher than in the advanced economies, but may be substantially lower than it was before the crisis.
Again, turning to advanced economies, the U.S., the slowdown in the U.S., this 0.2 percent revision, is not particularly worrisome. What it hides is a robust recovery in private demand.
What has happened is that that stronger than expected, and stronger than desirable, fiscal consolidation has been only partly offset by good performance of the housing market, with the net result being a small downward revision. If fiscal consolidation had been weaker, then growth in the U.S. would be substantially higher.
Now, let me turn to Europe and to the euro zone. In the southern Euro periphery, improvements in relative costs, in competitiveness, are indeed leading to increases in export shares. But this is not enough to offset a very weak internal demand with a result that these countries have negative growth this year. High interest rates and fiscal consolidation are clearly playing a role.
Now, if you look at the core countries, we also have revised the forecast down. In Germany, it is largely a story of lower exports and the induced effects on investment which depends very much on exports. In France, there is a very large fiscal consolidation, which is clearly playing a role, but there seems to be more at work than these factors. There is at least, in France, and to some extent in Germany, I think, a general lack of confidence in the future, which, if it doesn't turn around, it may end up being partly self-fulfilling, which is worrisome.
Now, I've talked about three speeds, but, in fact, as was clear at the last press conference in April as well, it’s really 3-1/2 speeds, because you have an odd country out, which is Japan. And here we actually have revised our growth forecast up. It’s too early to tell whether this stronger growth reflects Abenomics, but it has been stronger than expected, and it's clear the confidence is building up. So we forecast 2 percent growth for 2013, which is an upward revision of 0.5 percent, but only, actually, 1.2 percent for 2014, which is a downward revision of 0.3 percent.
Let me turn to the risks. The old risks are still very much present, the main one being the state of Europe and things which can go wrong there. We have discussed it in the past. I will focus on what we see as three main new risks.
The first is risk to growth in China. After a very large increase in investments since the beginning of the crisis, an increase which was largely financed through the shadow banking system, Chinese policymakers face a difficult choice: either letting investment remain high at the risk of increasingly unproductive investment at the margin, and the buildup of credit risks; or tightening credit, slowing investment and risking a decrease in growth because consumption is unlikely to increase fast enough to compensate for the decreasing investment. As a result, this is a difficult path to negotiate, and we see potential downside risks to growth in China.
The second risk is Japan's Abenomics, namely whether Japan will be able to use or to develop the three arrows of fiscal stimulus, aggressive monetary easing, and structural reforms. On this, unless the second arrow, which is the fiscal stimulus, is soon complemented by credible medium-run fiscal plan, and the third arrow, which is the structural reforms, reflects substantial reforms, I think the risk is that investors will become worried about that sustainability and then ask for higher interest rate on Japanese government bonds. And this clearly would make it difficult for Japan to maintain that sustainability and put Abenomics in trouble.
The third risk is the one associated with exit from quantitative easing in the U.S. We attribute the high volatility of financial markets in the recent past, not so much to news from the Fed, but to the sudden realization by investors that quantitative easing would eventually come to an end. As they tried simultaneously to rebalance their portfolios both in the U.S. and abroad, the result was some overshooting, isolated dislocations in some markets, and high volatility. Going forward, we expect volatility to decrease, maybe not back to the levels of a few months ago, but to decrease relative to the highs of the recent past, but one cannot rule further attacks of nerves along the way.
Let me end with policy recommendations, which very much follow from what I've said so far. In emerging market economies, the focus should be on boosting potential growth while dealing with the capital outflows, which may well follow from the exit of the U.S. from quantitative easing. In both the U.S. and Japan, the fiscal plan, medium-run fiscal plan remains of the essence, and in Europe, various measures must nurse the timid recovery. This includes gradual fiscal adjustment, the assessment and the repair of bank balance sheets and progress on the banking union.
QUESTIONER: I was wondering if you could just elaborate about some of the risks you see for emerging markets? You mentioned a whole list of different things that you’re worried about. Which do you see as the biggest risk and how do you evaluate the risk from quantitative easing the exit for emerging markets?
MR. BLANCHARD: I will give a general answer and then I’ll ask Rupa to be more specific on countries. The country where there’s the largest risk, in terms of a large decrease in growth, is China. The other countries I think are more facing a slowdown and have to take measures to try to increase the underlying output growth. For example, Brazil has a very low investment rate and that’s clearly an issue both from the demand side and in the medium run on the supply side. Whether you call this a risk or just the fact that if they don’t do something their growth will remain low, is a semantic issue.
MS. DUTTAGUPTA: Just to the extent that the deceleration in China is a risk, that has implications for commodity prices and, therefore, other regions, especially commodity exporters, also face spillover risks from a slowdown in China.
QUESTIONER: Spain shows one of the biggest drops, especially in 2014. I wanted to ask what are the reasons behind that fall. What has happened in the last three months for such a downgrade? Thank you.
MR. HELBLING: If you look at our Spanish forecast -- let me also mention that there was indeed a downward revision in our growth forecast for next year, but there are two changes. On the one hand I think if you just look at underlying growth, I think we actually would have had some improvement relative to April. And as Olivier Blanchard mentioned earlier, there has been some improvement in competitiveness in the euro area periphery. And what we have seen in Spain that actually exports have expanded and that Spanish firms have been able to expand market shares and that is expected to continue. But the major change, and that explains the downward revision, is that in April we assumed for fiscal policy what we call current policy; that is no further adjustment because measures were not identified. The implication is that in our April forecast the fiscal deficit was actually, rather than improving as envisaged under the government’s plan, it was forecast to improve. In the meantime there are now fiscal measures to bring down the fiscal deficit by 0.8 percentage points and that explains most of the downward revision to growth. And note, though, since underlying growth is expected to be a bit improved, the downward revision is not to the full extent of the end of the fiscal consolidation measures that are now incorporated in the forecast.
QUESTIONER: Mr. Blanchard, o how do you think we should interpret the slowdown of Chinese economy? Should we take it as something that we should be worried or concerned about or do you think this is just normal for a better future economic growth? And also policy wise, do you have any suggestions for Chinese economic policymakers in order to be better prepared for the possible exit of quantitative easing that might start later this year? And also how can China regain its economic growth momentum? Thank you.
MR. BLANCHARD: For a while it has been clear, to both Chinese policymakers and to outsiders that growth was unbalanced and there was too much investment and too little consumption. And the explicit plan is to move from investment to consumption. It is not easy to do, and the question is whether it can be done in a smooth way. I think the risk is that the slowdown in investment comes first, and there is just not the increase in consumption fast enough to compensate. The Chinese policymakers are very aware of the issues and, therefore, have no desire to tighten credit more than is needed and do not want to see growth go too low. So I’m not too worried about policy decisions. The Chinese policymakers understand exactly what the tradeoff is. Whether they succeed in exactly getting the goal that they hope for is where the risk is.
QUESTIONER: Two questions: One, is there anything that the Fed should be doing or communicating differently or more clearly? And secondly, I believe -- I need to check this, but I believe it’s the fifth time that the IMF has downgraded its global growth forecast. Regardless of whether my exact math is off or not, the trend is there. I’m wondering: Is the IMF being too optimistic? Is the IMF talking up, trying to talk up markets? Or what’s going on there?
MR. BLANCHARD: Let me take both questions in turn. In the case of the Fed, the Fed policy has two legs, the policy rate and quantitative easing. I think on the first, there was 15 years of refining communication so that when the policy rate was moved, it was well understood what it meant. . We are now dealing with a new policy, and exit from that policy hasn’t been tried before. So we’re going to see the same initial learning about how best to communicate. I think the Fed is doing a relatively good job of it, but I’m sure that they’ll improve their communication overtime as they learn how markets react. They probably learned something from the last three weeks.
On the IMF forecast, well, we sometimes are off on the other side. If you go back to the beginning of the crisis, we actually were more pessimistic in 2009 than things turned out to be. Since then indeed we have been more optimistic. I think the reason is that you have underlying trends, which are difficult to identify in real time, and it just takes time to actually identify them. And that leads after the fact to a series of mistakes or forecast errors in the same direction. But we do the best we can. We’re not trying to talk the markets up or down.
MS. BHATT: Let me take a question online. “Should ECB and other central banks try to compensate the monetary stimulus reduction resulting from the downsizing of the federal reserve’s asset purchases?”
MS. DUTTAGUPTA: The euro area growth projections are, as Mr. Blanchard said before, still pretty grim. The growth numbers for this year is still a recession of about -0.6 percent with growth picking up to about 0.9 percent next year. Given this situation, we still think that continued monetary policy easing, is the right way to deal with supporting demand. And there is scope for further interest rate cuts and more unconventional measures to that extent.
QUESTIONER: You briefly mentioned on your World Economic Outlook update the need for rebalancing of global economy. And could you please elaborate on why this is important? And in relation to what you mentioned for the Eurozone that the increase in competitiveness in the periphery countries doesn’t really offset the fall in domestic demand, do you see a need of rebalancing within the Eurozone as well? Thank you.
MR. BLANCHARD: Rebalancing is still needed in the sense that a number of countries that had current account deficits before the crisis need to reduce them. Now, many of them have done so, but largely by having large output contractions and decreases in imports, and that’s clearly not desirable. It’s much better to have the adjustment happen through an increase in exports. So these countries cannot return to health without a substantial adjustment in their competitiveness and in their current account. This is true for the U.S. Although the U.S. is doing well, it probably needs to rely more on demand than it has so far. Because the sum of the current account balances in the world has to be equal to zero, then this implies that some countries have to accept a decrease in their current account surplus. This has indeed happened in a number of countries, particularly in China. The question is whether this will continue to be the case, or whether we’ll see current account surpluses in China increase again. But clearly external rebalancing is an essential part of what is needed for the world economy to go back to health.
QUESTIONER: The Brazilian growth in 2012 was very weak, less than 1 percent, and now we’ll have a 2.5 percent this year. First thing, why the Brazilian growth is so low in the last two years? And the second question is do you think Brazil has policy tools to deal with this or do we have monetary and fiscal constraints to boost growth at this moment?
MR. HELBLING: Growth in Brazil has indeed been slow. We expect some improvement this year actually also based on what has already happened in the first quarter and what we have seen from indicators so far. If you look at the policy tools to influence growth, I think we very much think as I indicated earlier that part of the problem in Brazil is speed bumps in the sense that after a decade of very rapid growth, growth has reached capacity constraints in the infrastructure area, also in labor markets. So in terms of macroeconomic policy stimulus, you have to be careful. We think actually Brazil is at the moment close to potential. Inflation is currently above, current inflation above the bend. So at this point to use additional monetary stimulus would in our view be wrong. I think on the fiscal front, we also think the government should broadly stick to the target for government primary balance. There has been some easing through tax relief last year. The government also this year expected to be below target, which seems right as long as they will go back. And the most crucial thing will actually be measures to stimulate supply to potential output. There have been private-public partnerships in the infrastructure area, which will be crucial to accelerate growth.
MS. BHATT: Let me take a question from the Media Briefing. “Under what circumstances do you foresee additional capital outflows in key emerging markets?” “What are the ramifications in the medium term?”
MR. BLANCHARD: We have to accept the fact that as monetary policy normalizes in the U.S., whether it’s tapering of quantitative easing, or an increase in the policy rate itself, this will make U.S. bonds more attractive and, therefore, some of the investors which had gone to emerging market countries in particular will want to repatriate their funds. So I have no doubt that the trend, although there will be a lot of volatility around it, the trend will be for some of the capital to return to the U.S.
The question is whether all the capital which went to emerging market countries will return to the U.S., and my sense is no. I think much of the capital which went to emerging market countries went there because their growth prospects, their profit prospects, are actually better than those of advanced economies. So a lot of capital will remain there. But yes, we can expect a trend towards capital outflows from emerging market countries.
QUESTIONER: Still a question on China. So we see most of the countries are growth -- their growth is higher in 2014, but you lowered China’s economic growth in 2014 .6 percent. I wonder if you can provide more reasoning on that.
And also, as you mentioned that China is facing a difficult choice at this moment. As we see, the China government is also trying to curb its credit issues and trying to tighten the liquidity. Do you think it’s a good timing to do that given the Fund is expected to withdraw the QE later this year? Thank you.
MR. HELBLING: Starting with the latter part of the question in terms of QE, China has an extensive set of capital controls, so by that it’s less effective by the withdrawal of QE -- the expected withdrawal of QE, I should say, than other emerging market economies. Now, to the extent that the U.S. economy is expected to improve, that will help China on the external demand. But if, coming then to the main point of your question, the downward revision next year, I think it very much reflects the recognition, and that’s not in the forecast, that it will be very difficult to go above about 7-1/2 percent or 8 percent growth without increasing risks, financial risks in the economy and further sort of widen imbalances in the sense that growth is too much to even buy investment, which increasingly is at risk of being inefficient. So the recognitions of the limits to growth also in China, I think, is what underpins the revision to the forecast next year.
MR. BLANCHARD: There’s a striking number here which is worth remembering, which is that the ratio of investment to GDP for China before the crisis was 39 percent. It is now 45 percent. So when you say when is a good time to try to change the trend, this may be the good time.
QUESTIONER: I have two questions. We just saw (inaudible) social tensions in Turkey and Brazil. How do you read that? Do you think that it means that growth is not enough and that those countries should address their social inequality issues? And on Greece, there have been new tensions during the last review. How do you see the ballot program playing out there? How do you see the outlook in the country? Thank you very much.
MS. BHATT: On Greece, you know, it was not part of the update, so we’ll defer that unless, Thomas, you want to say something more, but you can speak to the first question.
MR. HELBLING: On Greece, we have the same forecast as in April. And I think as far as the program is concerned, the press conference on Thursday by Gerry Rice will be the right place to ask questions.
On social unrest in various countries, we have not, as far as Brazil is concerned, we have not yet reassessed the forecast. There is, so far, no reason for that. The social unrest reflects a number of factors. And in Brazil, for example, I think discontent about some public services was voiced and President Rousseff has promised to address that. In Turkey, conditions on factors behind the unrest are yet different and have not yet factored in the forecast.
MS. BHATT: I have two questions here on the UK, and I’ll take one. Why was the UK upgraded as the rest of the world was downgraded? Does this affect the Article IV recommendations? .
MR. HELBLING: On the UK, there has indeed been a small upward revision, let me just -- by .2 percent for growth this year; no upward revision for next year. The main reason is actual data in Q1 where domestic demand has been a bit stronger and also first indicators suggest that Q2 will be a little bit better than expected. If you look back in terms of revisions, I think .2 percent at this point in the year, so around midyear based on the information, is sort of a usual revision to the forecast, nothing exceptional. And we also don’t think that it changes the big picture for the UK, namely that the recovery is weak and that policymakers should be still concerned that the recovery is ensured and will actually improve.
QUESTIONER: I have three questions. One of them is do you think there is some risk of complacency in the euro zone right now? The second one is do you consider the ECB monetary policy supportive enough at this time? And the third one is the Spanish government is saying that fundamentally their quarter-on-quarter growth in Spain is close to zero right now. So, I mean, it’s like we are having quarterly zero growth. Based on your numbers -- well, I mean, it doesn’t match with your numbers. Do you think that actually the numbers right now are maybe worse than estimated or that we will go through a deeper recession in this half of the year or next year?
MR. BLANCHARD: I’ll take the first two questions. Complacency may be too strong, but it would be good to see more progress in the development of Euro institutions. Banking union is really of the essence. There are doubts about the state of banks and whether these doubts are justified or not, it is clear that there is a need for an assessment of the quality of the balance sheets. When this is done, it should be done with a parachute, which is that if it’s found out that some banks are not as healthy as one hoped, there has to be money to recapitalize them. All this is essential, so the faster, the better.
On the ECB, one has to say that the ECB is doing a whole lot. . A program which would involve the ECB, but also the national authorities, which would basically try to increase the credit flows to small- and medium-sized enterprises, is clearly something which could make a difference at this point to the euro growth.
MR. HELBLING: On Spain, I think we have to consider current conditions versus next year. And let me just emphasize the downward revision to growth from .7 to 0 is for 2014. Indeed, in the euro area, including the periphery, recent indicators suggest some stabilization. And as I mentioned before, there is indeed a sense that competitiveness has improved throughout the euro area periphery and that exports have strengthened in a number of countries, including Spain.
Now, looking then into next year, I think when the fiscal adjustment measures of slightly less than 1 percentage point of GDP will be implemented, it will be hard to avoid some drag on the economy. So in the sense our downward revision to the projection for next year is not in contradiction to a stabilization or signs of some stabilization in current conditions in the euro area.
MS. BHATT: We’ve received a few questions on Italy. I just want to point to the concluding statement that was published on July 4th. We will take a question.
QUESTIONER: Could we just go back to China? Can you in any way quantify the downside risk for growth? Are we talking about a half a percentage point, a percentage point, or are we just talking about a few minor adjustments here?
MR. BLANCHARD: I’m not going to give you a number, but my sense is that the lower limit depends very much on the fact that the policymakers are very aware of the issue and have, to a large extent, the means to control things. If they tighten credit and the decrease in output is large, they have some fiscal space they can use. They can also choose the intensity with which they use the brakes to slow down credit. And they can use other measures to have direct effects on local governments, for example. So we’re talking about some risk, but, again, there’s enough policy space that I don’t expect the growth rate to drop very much.
MS. BHATT: I’m going to take one last question from the online. This is for you Thomas. It says the slowdown in Mexico is explained by weaker domestic factors. Is it explained by weaker documents factors or by the U.S. impact?
MR. HELBLING: If you look at the downward revision to growth in Mexico, it’s half a percent this year, slightly less than a quarter percentage point for next year. Most of the revisions are due to the downward revision to U.S. growth. If you look at growth in 2014, it’s almost a mechanical correction from the downward revision to the U.S. growth next year.
We also have included the latest data. In the Q1 there was government spending, government consumption was slightly weaker than expected. But otherwise, the main reasons for the downgrade are external U.S. factors.
MS. BHATT: I think we will wrap up now. Thank you very much for coming and thanks to you online. Thank you, Olivier, Rupa, and Thomas.