Transcript of a Conference Call on World Economic Outlook Update
Tuesday, January 21, 2014
Olivier Blanchard, Economic Counsellor and Director of the Research Department
Thomas Helbling, Chief of the World Economic Studies Division
Ismaila Dieng, Senior Communications Officer
MR. DIENG: Thank you very much. Good morning everybody and welcome to this press conference call on the World Economic Outlook Update. Joining us today, Olivier Blanchard, Chief Economic Counsellor here at the IMF, and Thomas Helbling, who is in charge of the World Economic Studies Division.
Mr. Blanchard will start with a few remarks, then we'll take your questions. Olivier, please.
MR. BLANCHARD: Thank you. Good morning, good afternoon from a not yet snowy Washington. Sorry that we had to turn the press conference into a conference call.
Before I open the press conference, I want to take a moment to remember our colleague Wabel Abdallah, who was our Resident Representative in Afghanistan and who, as many of you know, was killed in the terrorist attack in Kabul on Friday. We are mourning a colleague, a friend to many of us, above all a dedicated civil servant who gave his life in the line of duty, helping the Afghan people. Our hearts go out to his family and to the many victims of this brutal attack.
Let me now turn to the update and distill its three main messages. So, the first is the recovery is strengthening. We forecast world growth to increase from 3.3 percent in 2013 to 3.7 percent in 2014. In advanced economies we forecast growth to increase from 1.3 percent in 2013 to 2.2 percent in 2014. And in emerging market and developing economies to expect growth to increase from 4.7 percent in 2013 to 5.1 percent in 2014.
The second is that for the most part this is not news. The recovery was largely anticipated. And if you look at the revisions in our forecast, you'll see that we have revised our forecast for world growth in 2014 by just 0.1 percent relative to what we had forecast in October.
The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system is slowly healing. Uncertainty is decreasing.
The third message is that one should not be too happy. It is still a weak and uneven recovery. Among advanced economies, it is stronger in the United States than in Europe, stronger in the Euro core than in Southern Europe. In most advanced economies, unemployment remains much too high, and turning to risks, they are still very serious downside risks.
So these three sets of remarks in mind, let me now take you for the usual quick tour of the world starting with the U.S.
So here, U.S. growth appears to us to be increasingly solid. Private demand is strong. As a result of the December budget agreement, fiscal consolidation, which weighted on growth negatively in 2013, will be more limited in 2014. So these two factors, private demand less fiscal consolidation lead us to forecast 2.8 percent growth for 2014, compared to 1.9 percent in 2013. While monetary policy remains very accommodative, the focus is increasingly turning to monetary policy exit and our best guess at this point is we expect the policy rate to start rising some time in 2015.
Turning from the U.S. to Japan, Japan grew at 1.7 percent in 2013, and we forecast the same growth rate for 2014. This is obviously good news. But this growth has come largely from fiscal stimulus and from exports. For growth to be sustained, which it will need to be, consumption and investment have to take the relay. Investment so far has been weak. And the Japanese government will continue to face the challenge of achieving enough fiscal consolidation to reassure debt holders while not slowing down the recovery. And that's going to be for many years to come a difficult challenge.
Turning to Europe, conditions are increasingly favorable in the UK and in much of the Euro core. Public debts are on sustainable paths, fiscal consolidation is rightly slowing down. Credit conditions are favorable. So this leads us to predict growth of 2.4 percent for the UK, 1.6 percent for Germany, although only 0.9 percent for France, where confidence is still low and weighing on growth.
Now, I've talked about core Europe and the UK, but turning to southern Europe. Southern Europe continues to be the more worrisome part of the world economy. We forecast positive growth in nearly all countries for 2014, but this growth is fragile.
On the one hand, exports are strong. On the other hand, internal demand is weak, suffering from the loops between weak activity, weak banks, weak firms, and the need for fiscal consolidation. Sustained growth looking forward will require cutting those loops in various ways, and relying both on external adjustment which is taking place, but also on stronger internal demand.
Finally, turning to emerging market and developing economies. We forecast that growth in emerging market and developing economies, while lower than in the past, will remain high. On the one hand, these countries will benefit from higher advanced growth in advanced economies. On the other, as U.S. monetary policy normalizes, they will face tighter financial conditions. We believe that for most, if not all counties, the first effect is likely to dominate the second and therefore this will help growth in those countries.
On the internal front there are different challenges, but perhaps the main challenge is the one faced by China, which needs to contain the building of risks in the financial sector without excessively slowing growth and again, this is always a very a delicate balancing act.
Let me finally turn to risks. I shall focus on two. First, as the recovery takes hold in advanced economies, the main challenge will be to normalize monetary policy. While some of this expected normalization has already been priced in both long rates and exchange rates, we can expect complex capital movements across countries for some time to come.
In that environment, the evidence from last year is that emerging market economies with weak macro frameworks are likely to be the most affected. So what we need to decrease this risk is both clear communication by advanced economies’ central banks, in particular at the moment from the Fed, and stronger domestic policies in those emerging market economies which are under stress.
Let me turn to the second risk, while our baseline forecasts are for low but positive inflation in the Euro zone, the risk is that inflation turns into deflation. Now, there is nothing magical or catastrophic about the number zero when inflation turns to deflation. But what is true is that the lower the inflation rate in the future, the larger the deflation risk, the more dangerous it is for the Euro recovery. Deflation means higher real interest rates, higher public and private debt burdens, therefore, lower demand, lower growth, and further deflation pressure.
To avoid that risk, accommodative monetary policy by the ECB remains of the essence, and so is the strengthening of banks’ balance sheets. In this respect, carrying out the balance sheet assessment that is now underway may be the most important short term task facing the Eurozone today.
In short, recovery is indeed strengthening. But as we've said many times in the past, and we'll continue to say for some time, much work remains to be done. Thank you very much.
QUESTIONER: Yes, thank you for this call, and Happy New Year. Sorry that it had to start with the way it did in Afghanistan.
On the Fed exit, is the current guidance—it appears as though the current guidance is—does the IMF think it's broadly appropriate? Correct me if I'm wrong. Secondly, you and Madame Lagarde have mentioned the premature withdraw, what would a premature exit look like?
MR. BLANCHARD: Yes. We think that the current framework that the Fed is putting in place is reasonable and the timing as of today also seems reasonable. I think one has to understand that they may have to adjust all the time. I think the challenge will be hard to do this. For example, this labor market participation issue complicates the decision as to what employment rate should start triggering an increase in interest rate.
On the early exit, and we don't think that the Fed is biased in the direction of exiting too early, but there's a scenario which is worrisome. I don't think it's a high probability scenario in which the risks coming from low interest rates build up faster than they expect, that we expect, and they don't quite have the tools to take care of it—macroprudential tools to take care of it. And they have as a result, to tighten money faster. We don't think this is a high probability scenario, but it's a possibility.
QUESTIONER: Thank you. And can I just follow-up on the ECB, you outline a number of policies that it could be doing to consider additional measures. Do you think it needs to be doing that right now or are you just suggesting this as once part of the AQR is done?
MR. BLANCHARD: No, I don't think you can—if I understood your question—you cannot until the AQR is done. This has to proceed. If it proceeds in the pilot. This is monetary policy, not financial policy. And although there may not be a need to do it today, I think they should be ready to do it if the next few numbers on inflation turn out to be weaker than they expect.
QUESTIONER: Thank you. You're specifically talking about cutting rates?
MR. BLANCHARD: Well, they have talked about various things, including lending to small and medium size enterprises, possibly cutting rates. They may have other things on their mind. Anything that can help demand and avoid the risk of deflation is probably to be considered.
QUESTIONER: Thank you gentleman for doing call. I am interested, obviously, in Russia and in Ukraine. Basically my question is what can you tell us about the projections for the near future for those economies? Thank you.
MR. HELBLING: As for the projections on Ukraine, in the Update we focus on the larger economies that are explicitly in the table. But as far as Russia is concerned, our revised forecast build on developments in 2013 when investment was unexpectedly week. Going forward we think there are two aspects to the recovery in Russia. We expect growth to rise to 2 percent this year, and then 2.5 percent next year.
On the one hand, we think that some of the special factors that explain the decline in investment last year, in particular, the virtual absence of new energy sector investments and declining public sector investment. These special factors will will reverse, and that explains the strengthening of growth this year.
We also think that at the moment output in Russia is close to potential. That should in principle be an incentive for a very strong investment recovery, but as the Fund has emphasized, the current investment regime in Russia is weak, and does not favor investments strongly. So this explains the expectation of a relatively gradual increase in growth in the forecast.
QUESTIONER: If I may, another question on oil. You seem to suggest that the oil prices will be lower in the foreseeable future. How does this square with the projection for the growth in the world economy?
MR. HELBLING: As far as the oil price is concerned, it is expected to decline relatively mildly over the next year, by $5.00 or so. On the one hand, there is indeed a strengthening of global growth. To the extent that this growth is mainly carried by the advanced economies, the increase in oil demand will not be that strong because cyclical sensitivity of oil demand in these economies is weaker compared to that in emerging market economies.
On the other hand, we also expect relatively robust supply growth in the world oil market, largely on account of developments in North America.
QUESTIONER: How do you see the situation in Brazil? Do you include Brazil among the countries that have domestic weakness? How do you see the external sector and the effect of the tapering in the U.S. on Brazil and on inflation?
MR. HELBLING: Brazil is, at the moment, affected by a number of developments. I think on the external side the strengthening of global growth, in particular also the United States, should be helpful, and so we would expect the external sector and exports in general to strengthen. But there are two other factors that argue against expected too strong a growth revival.
On the one hand, though commodity prices are expected to remain relatively flat. So we don't expect a strengthening of global growth to come with a strong improvement in terms of trade.
On the other hand, I think the Brazilian economy will be held back a bit by domestic conditions, and there are two factors to that. On the one hand, there are cyclical conditions in the sense that inflation was at the upper end of the target band with some of the emerging market turmoil in 2013. The Central Bank raised interest rates quite strongly by over 300 basis points, which we think will weigh on investment and demand. Then going forward there are also some structural issues, notably supply, a bottleneck in the area of public investment, public infrastructure. I think we would see a need to address these issues before growth can pick up strongly in Brazil.
QUESTIONER: And how do you see the impact of tapering in the U.S. on Brazil?
MR. BLANCHARD: Well, I think the tapering so far was mostly the tapering announcement which led to a bout of investor concern about emerging markets. Brazil was affected there.
If you look at the tapering announcement in December and developments since then, you know, most of the development in Brazil is explained by domestic factors. Inflation still being relatively strong reflected exchange rate pass through and other factors. So I think for Brazil, as for others, the actual tapering hasn't had much of an effect.
QUESTIONER: I just wanted to know what you think of the Bank of England's forward guidance policy, and whether you think it's appropriate at the moment?
MR. HELBLING: Yes, we do think it's appropriate. It was helpful to clarify the forward guidance. As you know, the British economy is experiencing a strong momentum in activity than expected, so growth will be a back stronger than we expected. And clearly the pace of monetary policy will depend, on the one hand, on the expected slack in the economy, and to be more precise on what would be the trigger when changes in slack could lead the Bank of England to consider that changing its monetary policy was appropriate.
MR. BLANCHARD: I would add that what's attractive about the UK forward guidance is that it looks not only at macro factors but also at financial risk factors. That's going to be one of the very difficult decisions to be taken along the way by central banks as they try to normalize monetary policy. And in that respect, that aspect of their forward guidance is very attractive.
QUESTIONER: China said its slow growth is the result of a necessary adjustment to new, more sustainable long-term path. What is the IMF's view on this? And could you talk briefly about the financial sector, what we should watch for in China? What are the other aspects we should pay attention to?
Managing Director Lagarde last week at the National Press Club mentioned China. Is that some kind of indication? What's the difference between China's case and other emerging markets? Thank you.
MR. HELBLING: Coming to growth, the IMF has long said that growth was imbalanced in China in the sense it was very strongly driven by investment, with the investment-to-GDP ratio being very high, much higher than we think it is sustainable. It has also been driven by credit, so the efforts of the authority to achieve a soft landing to a more sustainable, healthier growth path is welcomed by the IMF.
I think as far as emerging markets are concerned, China is different from other emerging markets in a number of respects. China is on a path of convergence, with a very long period of very high, impressive growth.
It is different from other emerging markets in the sense that it has still a relatively complete set of capital controls, so it is exposed to some of the international market turbulence or international market factors more indirectly through developments in other economies rather than directly.
And third, I think the problem as far as the financial sector is concerned, is that China has experienced a period of very, very rapid growth, of very rapid and deepening financial markets. Much of the stimulus in 2008, 2009 has been credit-driven with a very marked increase in the credit-to-GDP ratio. And the issue is that when the economy's slowing, when the structure of growth is slowing there can be issues of nonperforming loans or of disappointed expectations in the sense that some investment projects will not yield the returns that were expected which in turn will affect the ability to repay. So in that sense the legacy effects of the rapid growth over the past few years are what we are broadly concerned in the financial sector.
MR. BLANCHARD: I would add two things. The first one is that if China is able to reorient towards domestic consumption and services then—because productivity growth is low in those sectors, growth will probably be a bit lower, but it can be high.
The other is that most of the measures which have been announced in the third plenum indeed helping this reorientation of the Chinese economy, and we support them very much.
QUESTIONER: Thanks for taking my question. I was wondering if you could elaborate more about the risks of deflation? In your remarks, Mr. Blanchard, you mention the Eurozone as an area that's particularly at risk for that. So how likely do you think inflation could--or disinflation could slip into deflation. And do you think central banks are considering this risk enough, not just Europe, but also the U.S.? Thank you.
MR. BLANCHARD: Thank you. So on deflation, I think there are two places in the world which are places where there's reason for concern. Again, we don't forecast deflation, we're talking about risk. The first one is Japan because it has a history of deflation. Over this stage, in the short run we're not very worried. We are not sure that they'll reach the 2-percent goal that they have set for themselves by the date they hope, but we think that inflation will remain positive.
The part of the world where we worry more is the Eurozone where you have nearly a recovery in the core, but you have very weak demand in the south. And when we are looking at inflation, inflation has been decreasing, and the question is where do we stabilize at a positive level or continue to decrease.
And again here, I think our baseline is that it will remain positive, but if we look at inflation swaps, they give a 10-percent to 20-percent probability to inflation turning negative. And if you look at the implicit probabilities in the Euro inflation swaps, what you find is that the markets also seem to think that there's a 10-percent or so probability of deflation.
Deflation comes largely from activity being too low and from expectations being revised down. So it's important to commit, for the central bank to commit to doing anything needed to maintain inflation, therefore anchor expectations, and to do anything it can to sustain demand. In that respect all the measures that we have talked about, be it a competitive monetary policy by the ECB or the Banking Union or in the short run, the bank balance sheet assessments, they're all essential ingredients to sustain demand and avoid deflation.
QUESTIONER: And do you think that the ECB is counting on that risk enough or do you think they're as worried about it as you are?
MR. BLANCHARD: I would not guess, but I suspect that it's something that they are looking at very closely, yes.
QUESTIONER: Hi, good morning. I'd like to ask a question about Brazil and if the IMF considers Brazil as one of the economies that has domestic weaknesses and a high (inaudible)? If that could be affected by capital flows' volatility? Thank you very much.
MR. HELBLING: Well, as far as domestic weaknesses are concerned, I think the IMF has for some time emphasized structural bottlenecks in the sense that the public infrastructure, public sector investment has not kept up with the rapidly growing economy.
Second, inflation has been at the upper band of the inflation target band, which has raised concerns about how clearly or how well the monetary policy framework was defined. I think developments over the past year or so when the central bank raised interest rates by more than 300 basis points, should have calmed such concerns.
And then third, Brazil like many emerging market economies which were faced with weak growth in advanced economies had stimulated their economy, rightly so, we thought, to foster domestic demand and keep output growing when advanced economies were in crisis.
With the changes in the global economy, the rotation of growth, a bit more to the advanced economies and prospects of monetary policy normalization, this has led to some tensions in the market, but I think is now under control. And the exchange rate depreciation, was a welcome development because it will help to alleviate the pressures from higher interest rates on the economy overall.
MR. BLANCHARD: So let me add to it. I think that the central bank has shown its commitment to control inflation. What the problem with Brazil is, is clearly low investment, and in that respect measures to increase either private or public investment are very welcome. The recent proposals for public/private partnerships on infrastructure projects are surely going the right direction.
QUESTIONER: I have two questions. One on Mexico: I wonder if you can explain a bit more, what are the reasons behind these drastic increases in the projections for the economic growth in Mexico this year and next year? I know these are associated with the improvement in the U.S., but I wonder if there are other domestic factors that will have an impact?
And the other also, the other question is on Latin America: the forecast of this update represents a decrease in projection of 1 percent in relation with the last report. And I was wondering, can you explain a little bit more? What are the reasons for this deceleration in growth that you are projecting for Latin America this year?
MR. HELBING: Starting with Mexico, I think the improvement in growth that is projected for this year is partly, as you said, improvement in the U.S. economy, but then also the assessment that part of what happened in 2013 when the growth was much lower than expected that has reflected special factors, and particularly the coming into office of a new government which led to some delays in public projects, some issues in the construction sector, and that these issues will be resolved. And then that growth will return to a more normal state.
Second, our forecasts, which I should point out have not been changed relative to October, factor in structural reforms which should boost investments.
So you have three factors: overall better global economy, better U.S. economy, reversal of the special factors in early 2013, and then important structural reforms in Mexico which should help to boost growth.
As far as Latin America is concerned, I should point out there was a mild growth deceleration last year to 2.6 percent. I think the reasons have been discussed extensively. There's nothing new.
While we think that growth in Latin America will strengthen, the increase will be small, reflecting the tension between two forces. On the one hand, I think there is a better global economy which helps the external sector and exports. But the impetus will not be a strong as it had been earlier, because it doesn't come with a strong improvement in the commodities terms of trades, so it comes mostly through export volumes.
On the other hand, you have the fact that the tightening of global financial market conditions has affected the many Latin American economies in the sense that the local currency bond rates have increased more than their advanced economy counterparts. In some cases, central banks had to raise policy rates, although, as you mentioned Mexico, Mexico was an exception because the central bank lowered the policy rate recently.
But as you recall when we discussed Brazil, Brazil has raised the policy rate quite dramatically by over 300 basis points over the past year or so. So this financial tightening will offset the boost from better global economic conditions.
In the net we think that the improving global economy, the commitment to policy regimes in countries like Brazil will help, but it will not be that much of a boost to growth. So we see a relatively slow increase in growth.
QUESTIONER: My question concerns the relatively rapid upgrade for the UK growth forecast, up from 1.5 percent from April last year. You coupled the Euro and UK recoveries together quite well, but the UK seems quite a lot faster. Is that a sustainable increase?
MR. BLANCHARD: We think so. We were worried about six months ago that the domestic spending was weak. Now the good news is that consumption really surprised us, and I think surprised most on the upside. So it is a very large part of demand and it can continue.
Investment is still not doing as well, and that has to come as well, but many signals are good, confidence is improving. So yes, we think that this growth can continue for some time.
QUESTIONER: I have a question on France. In your remarks, Mr. Blanchard, you said that policy uncertainty is weighing on growth in France. Could you elaborate on that? And have you taken into account the recent set of policies by President Hollande to cut public spending and a reduction corporate pay-roll charges. Thank you very much.
MR. BLANCHARD: I think if you tried to explain the difference in performance between Germany and France, some of it is due to export, but some of it seems to be due to lower confidence. And the question is where does this come from?
I think some of it can be traced to some uncertainty about policy. And while France has decreased its fiscal deficit quite substantially, especially last year, I think there has been some questions as to what the reforms on the expenditure side were going to be, and that maybe not enough would be done.
In that respect, what President Hollande has announced last week, and in fact, the responsibility and the decrease in a number of taxes as well as a decrease in expenditures is good news, and may indeed clarify the policy light which is going to be followed in the future.
MR. DIENG: Thank you, Olivier. This will bring an end to our conference call. Thank you very much for taking the time to attend, and thank you to Olivier and to Thomas for responding to the questions. thank you very much.