Transcript

Washington DC
September 30, 2014

Panel:
Gian Maria Milesi-Ferretti, Deputy Director, IMF Research Department
Thomas Helbling, Division Chief, IMF Research Department
Abdul Abiad, Lead Author, Chapter 3
Marco Terrones, Lead Author, Chapter 4
Ismaila Dieng, Communications Department

Mr. DIENG: Good morning and welcome to the launch of the analytical chapters of the World Economic Outlook. This press briefing will focus on the analytical chapters. I will just remind you that the main chapter will be launched on October 7th. Joining us today, Gian Maria Milesi-Ferretti, Deputy Director of the Research Department here at the IMF; Thomas Helbling who heads the World Economic Studies Division, and the lead authors Abdul Abiad and Marco Terrones.

MR. ABIAD: Thanks very much. Chapter 3 of the World Economic Outlook is about public infrastructure investment. Infrastructure just refers to those basic structures that support economic activity such as transport networks, utilities, and communications' networks. In fact, there's no activity you can think of that doesn't rely on infrastructure in some form.

Over the past three decades, however, infrastructure stocks have not kept pace with growth, and this is true in advanced, emerging market, and developing economies. It suggests increasing infrastructure needs. Gaps in infrastructure provision are most glaring in the emerging and developing economies.

For example, power generation capacity per person in emerging markets is just one-eighth of what it is in advanced economies. In low income countries the ratio is one-fortieth. But even in some advanced economies aging infrastructure stocks and insufficient maintenance are leading to deterioration in the quality of the existing infrastructure stock.

So what our chapter does is we examine the macroeconomic effects of increased public infrastructure investment. What we find is that infrastructure investment helps to raise output in the short run by boosting demand. It also raises output in the long run by increasing productive capacity.

In a sample of advanced economies that we studied, for example, a 1 percentage point of GDP increase in public investment increases the level of output by 0.4 percent in the same year, and by 1.5 percent four years after the increase.

We also find that these positive effects are even stronger under certain conditions. First, the boost output is stronger during periods of economic slack and monetary policy accommodation because the increase in interest rates in response to the rising investment is more limited.

Second, the effects on GDP are also stronger when public investment efficiency is high. In other words, when waste is minimized and investments go to projects with high rates of return. Third, public investment that's financed by issuing debt has bigger output effects than when it's financed by raising taxes or by cutting other spending.

What these finding suggest is that in countries with infrastructure needs now is a good time for an infrastructure push. Borrowing costs are low and demand is weak in many advanced economies. There are infrastructure bottlenecks that are constraining growth in many emerging market and developing economies.

The increase in public investment would support demand in the short-term, something that is needed, and would also help raise potential output in the long term. Furthermore, debt-financed projects could have large output effects without increasing the public debt to GDP ratio, if clearly identified needs are met through efficient investment.

In other words, public infrastructure investment could pay for itself, if it does correctly. Countries shouldn't spend money on whatever project they want. They should consider investing only if they have documented needs, and projects with sufficiently higher returns. It's really critical that countries choose the right projects, and invest efficiently. Thank you.

MR. TERRONES: Thank you. Chapter four of the October World Economic Outlook examines the factors that lie behind the recent evolution of global imbalances. Let me briefly give you the highlights of this study.

As you know, global current account balances have narrowed significantly since their peaking in 2006, and the composition of the imbalances has changed markedly. The largest deficit, for instance, has fallen by two-thirds in terms of world GDP. Similarly the largest surpluses, those of China and Japan have shrunk by half or more. Some other surpluses, those of the European economies and oil exporters, remain relatively large. Other economies—some major emerging market economies and advanced commodity exporters--have moved to account for an important share of the world deficits. Current account imbalances, particularly deficits, have become less concentrated, and as a result the systemic risk of sudden reversal has diminished.

The chapter describes and analyzes these developments and considers the following questions. How has the narrowing of imbalances taken place? Is this likely to last? What has happened to creditor and debtor positions? Do external imbalances still pose global risks?

The chapter finds that much of the adjustment in current accounting imbalances was driven by a contraction in demand in deficit economies, which has compressed their imports. Moreover, it finds that changes in real exchange rates –also called demand switching, have played an important role in the adjustment of the largest deficit and surplus economies, namely the United States and China. However, these changes in real exchange rates generally explain a modest part of the global current account adjustment.

With regards to the durability of the adjustment, the chapter finds that the narrowing of current accounting balances is likely to be lasting. The reason is that output and demand are forecast to remain well below pre-crisis trends in most deficit economies, thus, resulting in lower imports, and a durable adjustment.

The chapter also finds that net creditor and debtor positions, relative to GDP, have widened further. The dynamics of these ratios can be examined by looking at their numerator and their denominator. In the numerator side, both net foreign assets and net foreign liabilities have increased as current account surpluses and deficits have narrowed but not reversed. In the denominator side, low growth in many advanced deficit economies, since the crisis, has not helped.

With regards to the last question, the risks of a disruptive adjustment in global current account balances are certainly reduced. However, some economies, for instance, large net debtor economies, remain vulnerable to changes in market sentiment. Moreover, some current account deficits and surpluses, while smaller, are still excessive relative to levels consistent to fundamentals and desirable policy settings.

We look forward to your questions.

MR DIENG: Thank you very much, Marco. Now, we'll open it up to questions for those who are in the room and those who are online. If you have a question please identify yourself and the organization you work for.

MS. JANG: This is Jia Jang with the Suhane News Agency. As we know, the U.S. and the UK they are trying to end their accommodative policy. Do you have an estimate of the spillover impact on emerging markets such as China or something like that?

MR. HELBLING: I think that's a question for next week for Chapter 1 when the outlook and policy assumptions for our global economic outlook will be discussed.

MR. MILESI-FERRETTI: Maybe let me just add one word. So the chapter really gets at this question indirectly in the sense that it takes into account what is likely to happen once the U.S. economy recovers. But it takes into account what is likely to happen through current account adjustment channels.

There the chapter highlights two forces on the side of the U.S. current account. On the one hand, faster economic growth and faster demand in the United States are going to tend to widen the U.S. current account deficit a bit. On the other hand, the increased production of energy in the United States tends to reduce the imports of oil and related products. The conclusion is that on balance, the U.S. current account deficit is going to remain broadly stable or widen only marginally.

But that is really the angle of the chapter. If you're more interested in the spillovers through, you know, interest rate changes and what could happen to economic activity in other countries in the short run that's a question that is better directed to us a week from now. Thank you.

ONLINE QUESTIONNER: Do you believe that the depreciation of the Euro will accelerate the creation of a surplus in the current account of the inducted Euro area countries?

MR. TERRONES: The depreciation of the Euro will certainly help to improve the current account balances in these economies, other things equal. But some deficit countries in Europe also need to rebalance their growth to help reduce their deficits and debtor positions.

ONLINE QUESTIONNER: Brazil was in 2013 the third largest deficit economy. How concerned is the Fund about the Brazilian external vulnerability and what were the forces driving the deficit?

MR. TERRONES: The case of Brazil is an important one. Brazil used to have a surplus in the year 2006 and has moved to a deficit since then. The levels of these deficits and net foreign liabilities are now close to what we have found to be threshold values associated with external crisis for emerging market economies. In that sense, one might be concerned about this country. For that reason Brazil will need to start reducing its external imbalances.

MR. MILESI-FERRETTI: Let me add a couple of words on this. From the overall angle of external vulnerabilities there is a more extensive discussion of the IMF assessment of countries in the pilot external sector report that was published during the summer.

You will have, also, a chance to discuss these issues more in detail during the press conference on the overall outlook for the global economy next week. Let me just say that compared to the imbalances pre-crisis what we see is that while you may have deficits in some advanced and emerging market economies that are relatively large compared to what we think are appropriate values based on economic fundamentals these deficits remain, in absolute terms, much smaller than those that we were seeing pre-crisis. This is the basis for our overall assessment that global risk of a sudden current account reversal has declined.

ONLINE QUESTIONNER: Do you worry that the narrowing of imbalances in deficit economies has come at the expense of lower demand and higher unemployment? Does it mean if deficit economies push through reforms and raise their potential outputs imbalances could widen again?

MR. TERRONES: Yes. One of the findings of the chapter is that global imbalances have mainly narrowed through a decline in the demand of the deficit economies. It's clear that if there is a recovery in the demand of these countries, some of the narrowing of imbalances is going to reverse partially.

MR. HELBLING: Let me add here. If you look at the deficit economies and the structural reforms part of the economic programs of these economies aim to strengthen not just potential growth, but also external competitiveness. The background is that within the context of the Euro Area, the role of exchange rate adjustment is limited, and so much of the adjustment has to come through improved prices relative to trading partners including within the Euro Area. So it is about making labor markets and product markets more flexible, and we think that these reforms will raise both potential growth and competiveness. And as such, when these economies go back to a state of full employment we don't expect a widening of the current accounting balances. These economies will, in fact, likely stay in surplus under our baseline projections.

MR. DIENG: Thank you, Tom. I don't have any other questions on line. Do we have other questions in the room? No more questions. I think that will bring an end to our press conference today. I want to thank our speakers, and just to note that the main press conference will be on October 7th for the global outlook. Thank you very much.