Transcript of a Press Briefing on the April 2015 World Economic Outlook (WEO)
April 14, 2015Washington, D.C.
Tuesday, April 14, 2015
IMF Economic Counsellor and Director of Research Department
Research Department, IMF
Research Department, IMF
Gian Maria Milesi-Ferretti
Research Department, IMF
Communications Department, IMF
MR. DIENG: Good morning, everyone ... Welcome to the launch of the 2015 World Economic Outlook. I’m Ismaila Dieng form the Communications Department here at the Fund. Good morning, everyone. Welcome to the launch of the April 2015 World Economic Outlook. I am Ismaila DIENG from the Communications Department here at the IMF.
Joining us today:
Olivier Blanchard, Economic Counselor and Director of the Research Department,
Thomas Helbling Head of the World Economic Studies Division
Gian Maria Milesi-Ferretti, Deputy Director of the Research Department.
Oya Celasun, Deputy Division Chief in the Research Department
As usual, Mr. Blanchard will make some opening remarks and then we will open the floor for questions.
MR. BLANCHARD - Let me start with the number you typically focus on: We forecast global growth to be roughly the same this year as last year, 3.5% versus 3.4%. This global number reflects an increase in growth in advanced economies, 2.4% versus 1.8%, offset by a decrease in growth in emerging market and developing economies, 4.3% versus 4.6% last year. In short, to repeat the words used by the Managing Director last week, we see growth as “moderate and uneven”.
Behind these numbers lies an unusually complex set of forces shaping the world economy. Some, such as the decline in the price of oil and the evolution of exchange rates, are highly visible. Some, from crisis legacies to lower potential growth, play more of a role behind the scene but are important nevertheless. Let me briefly review them.
So, let me take the first, legacies. Legacies from both the financial crisis, which affected directly most advanced economies, and the euro crisis, which affected Europe, are still highly visible to different degrees in different countries, weak banks and high debt, and by high debt it can be high debt of households, it can be high debt of corporations, it can be public debt obviously, still slow down spending and growth. So, they slowed down spending and growth, but at the same time low growth is making deleveraging, the decrease in debt of these various actors slower, more difficult.
So, I think what we have learned is that these legacies go away very slowly. Deleveraging is a very slow process and, while it lasts, it really slows down growth. That is the first force at work. Again, it works differently in different countries, but it is clearly there in most.
The second is potential growth. Here we are building on one of the analytical chapters of the WEO but it is directly relevant to our way, our view of what is going on. Potential growth, just to define it, is the way at which the economy can grow if the factors of production are fully employed, so it basically tries to attract away from cyclical movements.
What we have seen and established in that chapter is that potential growth in advanced economies has been declining. The interesting fact is that it was already declining before the crisis, probably from the early 2000s it was declining. What was behind it, aging surely, which decreases the growth of the labor force, and a slowdown in total factor productivity were both at work. Then the crisis made it worse because of decrease in output, the decrease in investment, capital growth, growth in the capital stock itself slowed down, adding to lower potential growth.
When we look forward, we think capital growth, maybe investment will recover, but the other factors will still be there, so that in the end we still have, looking forward, in advanced economies, potential growth at about 0.5 percent less than in the early 2000s, and that is a factor which is important.
If you turn to emerging markets, the decrease in potential growth is even more visible and it comes from, again, aging in a number of countries, in many countries, and a decrease in total factor productivity. What we do not see is the decrease pre-crisis, but since the crisis, and probably coincidentally, rather than due to the crisis, we see a decrease in potential growth. It is very visible in countries such as China, but it is much more general and applies to emerging markets.
I wish I could say more about what happens in low-income countries. Unfortunately, data issues are more [?]; it is more difficult to be sure. If I had to guess based on what we know, they would also show lower potential growth than they did 10 years ago.
Now, why does it matter? It matters clearly because this is where we are going if we are able to eliminate the output gaps, the cyclical fluctuations, but we think in a number of countries it has an effect outstanding today, which is that if you expect growth to be lower in the future, your sales growth to be less, you are going to invest as if you think your income is going to grow less, you consume less. So, it has an effect, we think, on activity today and, therefore, growth today.
So, these are the two deep forces that are at work. Let me now turn to the two visible ones and the ones which make the news. The first is the oil price. The decline in the price of oil has led to a large reallocation of real income from oil exporters to oil importers. Although it is a bit early to say, the evidence we have suggests that this increase in real income is leading to an increase in spending. If you look at the big oil importers, the U.S., the Eurozone, China, India, consumption spending is fairly strong and it is very plausible that that comes partly from the increase in real income coming from the decrease in the price that people have to pay for oil.
Now, this is clearly good news for the oil importers, which are most major countries. For the oil exporters, it is clearly not very good news. They are suffering from the other side, the decrease in real income coming from the decrease in the price of oil. Many of them have financial resources that they have accumulated when the price was relatively high and so can accommodate and decrease spending only marginally. Some of them, as you know, are in more serious trouble. But overall, looking again at the effect on the world economy, I think there is no question that the decline in the price of oil is a very good thing for the world economy.
Let me turn to the last one, which is exchange rate movements. They have been, as you know, unusually large, not exceptionally large, this happens once in a while, but fairly large. Among the major currencies, the dollar has appreciated. The yen and the euro have seen fairly large depreciations.
Now, where do they come from? We think that it comes fairly straightforwardly from the difference in monetary policies, the fact that in the U.S. we are not very far from the exit from the zero lower bound, maybe an increase in interest rates where in the Eurozone and in Japan were clearly very far away from it. Indeed, the ECB has started on a fairly large scale quantitative easing.
So, we think this divergence in monetary policies explains most of the movement in exchange rates, and we think that these monetary policies are appropriate given the state of the U.S., on the one hand, and the Eurozone and Japan, on the other.
Now, is it good news? Yes, I think it is good news. Clearly, for the Eurozone and Japan, it is going to help being more competitive, will eventually increase exports. What we have learned is that the process is a fairly slow one, but it typically happens. We are starting to see it in Japan.
Now, is it bad news for the U.S.? Well, there is the usual effect that it basically leads to an appreciation of the dollar which might have an effect on U.S. exports, but we think here that the U.S. has more margin of adjustment in terms of policies and, therefore, can offset most of the effects of an appreciation. So, again, on net, we think that this adjustment of exchange rates is justified and will help the world economy.
So, let me now put all these forces together, and that is a very different puzzle. You have some countries which suffer from adverse legacies and you have some countries which basically do not. You have some countries which suffer from clear declines in potential growth and you have countries where the effect is very small. You have countries which benefit from the decrease in the price of oil and you have countries which suffer from the decrease in the price of oil. You have countries which move with the dollar mostly and, therefore, is seeing an appreciation, and then there are countries which move more with the euro or the yen which are seeing a depreciation.
So, you have all these effects. You have to add to this a number of country-specific developments. I will cite two: Russia, which clearly there is serious economic trouble, and Brazil, where there is, again, a serious slowdown. So, the picture is a very complex one.
On net, as I have said, basically in our baseline forecast we have an increase in growth in advanced economies and a decrease in growth in emerging markets and low-income countries, but as I have made clear, these aggregate numbers do not give you a good sense of the granularity, of the specificity of what happens in each country.
Let me turn to risks. As always, there are risks to the forecasts. I think the good news is that the macroeconomic risks have, in our opinion, decreased. The main one last year when we met in October was the risk of a recession in the euro area and possibly in Japan. I think based on the numbers that we now have, the probability of a recession has not gone to zero but it has decreased substantially. So, what we saw as the major world macroeconomic risk from a systemic point of view probably is less likely to happen than it was, and it is good news.
At the same time, other risks have increased. Financial risks, geopolitical risks have increased. Much of the presentation of the GFSR tomorrow will be on the financial risks, but let me just mention a few, which is that whenever you have large movements in relative prices, and it can be the price of oil, it can be the exchange rate, you are going to have winners and losers. It may well be that the losers find themselves in very difficult positions. They may go bankrupt if they are companies. They may have serious problems if they are countries.
So, we are seeing some of this around the world. I mean, the world in which you have large movements in exchange rates or in relative prices is a more risky world from a financial point of view and, therefore, there is some risk there.
There are other risks. Let me just mention the political and geopolitical side and the obvious one is the risk of an intensified Greek crisis, which could well unsettle financial markets; that is fairly obvious. Then you have turmoil which continues in Ukraine, in parts of the Middle East. So far, this is very sad. It is not systemic, but this is something which could, again, get worse.
Let me turn finally to policy recommendations. Given the diversity of situations, it is obvious that one line does not fit all, that you have to have granular policy advice. But it is still the case that there are some general principles which applies, so I am just going to summarize those. There is still the demand deficit and, as I have said, there is the worry that growth in the future is not going to be as strong as it was in the past. So, you need measures to sustain growth both in the short run mostly for demand policies and in the longer run through supply policies, and both continue to be needed.
On the demand policy side, with the introduction of the very successful program of quantitative easing in the euro area, we think that monetary policy now has in major countries done more or less everything it can. On the fiscal side, the decrease in the price of oil gives some room for some countries to adjust. In particular, there is a set of measures which may not have an effect on the deficit itself but on the composition of spending. The decrease in the price of oil is a golden opportunity to decrease energy subsidies in countries which have large ones and maybe to increase energy taxes in countries in which these taxes are too low. They are extremely good arguments for moving energy subsidies, replacing them by better targeted programs toward the poor, and for increasing energy taxes around the world.
The case we made for infrastructure investment, which I pushed rather strongly at the October meeting, remains. We think that in many countries, public investment, public capital is too low, that there is room for more public investment. Given the current very low rates at which many governments can borrow, we think that it makes sense to have high infrastructure investment. So, that advice very much remains.
Last, but not least, structural reforms. I think one has to be very clear that structural reforms are not a miracle cure. They are hard to get through; the effects are very often uncertain. But given the future that I have described, it is very important to try. Some structural reforms can clearly make a difference, maybe not to the growth rate permanently but at least to the level of output, which means that for some time there will be higher growth. I think given the short-term political costs associated with structural reforms, which is the main reason why you do not see them happening very quickly, I think the challenge is to choose them very carefully rather than have a long list and deliver on none of them.
So, let me stop here. We will take questions. Thank you very much.
QUESTIONNER: On page 9 you have an analysis of the global implications of exchange rate movements in which I guess you see a peak of the strengthening of the dollar and the yuan against the euro and the yen. You say that ultimately it will have a positive impact on global growth, as it boosts exports in Japan and Europe.
But in here you also say that the real GDP impact on China and the U.S. will be negative over 2-3 years—those are the two world’s largest economies—and exchange rate movements perhaps have not finished their trend. Given the risks that those exchange rate movements can have on the global economy, the dollar debt denomination and asset bubbles, is it not a pretty big gamble to be making?
MR. BLANCHARD: First, we are not making gambles. Markets determine exchange rates. We just observe and interpret. But let me take your various points.
So, the first one is, you know, a depreciation of a country is an appreciation of another one, so it is clear that indeed the Eurozone and Japan benefit from the exchange rate depreciation, which they need, given the situation in which they are. It is clear also that the U.S. is adversely affected; again, we do not know by how much. To the extent that China decides to move with the dollar, which is a decision that they can take or not, it will also be adversely affected.
Why do we think that, on net, this is a good thing? Because we think that both the U.S. and China are in a much stronger cyclical position and they have the tools, and if it turned out that the effect on exports was fairly large, to offset that effect through monetary policy, fiscal policy, or other measures. So, on net, we think it is a good thing because of the asymmetry in the position of these countries.
On the risks, you are absolutely right, and that is the point I just made, which is that movements in the exchange rate mean that if you borrowed in the currency which is appreciating, you are going to be worse off. A number of countries and a number of firms have done so, and this is something that has to be taken into account. We have taken it into account. Again, Jose Viñals tomorrow will give you a more detailed assessment of this, but we have concluded that it is not going to be a major issue, that basically the world is in a better situation from the point of view of foreign exchange exposure than it was in the past. So, this is clearly the side effects, but, again, on net, the main thing is I think a positive development.
QUESTIONNER: You spoke extensively in this report about the effect of the U.S. dollar on the global economy and the way in which it is redistributing growth. Given that, I am wondering if you can speak to what your base case is for the Federal Reserve in terms of raising rates, both the timing and the pace of that path.
MR. BLANCHARD: So, here we think that the Fed has been very explicit in the way it thinks about when to exit. It has made clear that it is data-contingent. We think that this is the right approach to it. This means that there is complete clarity as to the role that the Fed or principles that the Fed will follow when it takes a decision, but there is uncertainty about the timing because, by definition, we do not know exactly what the data will bear, whether the
U.S. expansion will strengthen or weaken. We think the approach they take is the right one. We agree with the general consensus that it will probably happen this year. Whether it happens in June or September will depend on the data that come between now and then, but we think that they are doing exactly the right thing.
QUESTIONNER: My question is on Russia and Ukraine. Basically, the biggest mistake in the forecasts that were made by the IMF was after the 1998 crisis, when you did not expect a rapid resumption of growth in Russia. So, the question is, are you maybe selling Russia short a little bit in your new forecast, and alternatively, how confident are you that growth will resume in Ukraine in 2016?
MR. BLANCHARD: So, your point is exactly right, the IMF and others actually got it wrong in 1998, and the Russian economy did much better than had been forecast. The question is, why? I think retrospectively what happened is that the effect of the depreciation of the ruble had much more of an effect on exports than had been anticipated, and that helped. The question is will this happen again, given that there has been a large depreciation of the ruble? We are very skeptical and that shows in our forecast because we think that the Russian economy is subject to many other problems than just that. We think that the business climate is not good. We think that the price of oil has major adverse effects. So, this is why we are forecasting a recession.
QUESTIONNER: ... inaudible)
MR. BLANCHARD: - ... levels are very high and it would be desirable to decrease them. I think the speed at which this should be done depends on the strength of private demand and has to be done case by case. I think the general direction is clear. We have to try to decrease the ratios of debt-to-GDP and we should do it at a prudent pace. In general, we think that the current pace is about right.
QUESTIONNER: I have a question regarding China. You mentioned that your growth projection on China this year is 6.8 and next year is 6.3 and it is after the China government lowered its growth target 7 percent. I wonder if you can elaborate more on your projection on China. Also, are you confident that they can carry on with structural reform and stabilize growth at the same time?
MR. MILESI-FERRETTI: As you have noted, our forecast is quite close to the authorities’ target. We think it is a good slowdown for China. It is associated with a more balanced pattern of growth and with a reduction in vulnerabilities. Our basic assumption is that policies will do less to push growth at all costs, and this is going to have some short-run negative effect on the level of growth but positive medium-run effects because you have slower growth of credit, slower buildup in imbalances, and ultimately you are heading toward a place where you have a more balanced structure of the macro economy.
We think it is extremely important to carry out financial sector reforms, social security reforms, reforms of monetary policy that will ensure that the set of tools that the authorities have is fully modernized and appropriate to ensure a stable and solid growth rate for China in the future.
QUESTIONNER: [THROUGH INTERPRETER] - Good morning to everyone. I would like to know if you have any anticipation of the 3.8 level for this year and 5 percent for next year. So, in your report you say that the different concerted policies and the appearance of new mining operations will consolidate that growth. The Ministry of Economy has said that it should be 4.2 for this year and 5 for next year. What we would like to know is if you could explain to us a bit what these concerted policies are meant to be, what is the line that is meant to be taken. Do you expect that there will be a consolidation of that 3.8 and that we will reach that level this year or do you consider that there is a downward trend to be expected?
Ms. CELASUN - My channel still gave me the question in Spanish but I will answer your question if I understood it. Peru’s growth rate decelerated sharply last year from close to 6 percent in 2013 to around between 2 1/2 and 3 percent last year. Much of that was related to the slowdown in metal prices but there were some domestic factors as well. Those domestic factors—supply side constraints, lower production in some mines temporarily, some issues and slowdown in investment and sub-nationals—are going to go away next year. The government has introduced a stimulus program in view of the slowdown in growth, around 2 percentage points of GDP, and there has been monetary easing as well. So, these are the factors why we expect growth to be closer to 4 percent in the next year.
The authorities have slightly higher estimates. What is important is that both us and them see this as a temporary setback and growth picking up in the years ahead, maybe not to the height of the last decade but closer to 4 1/2 percent.
QUESTIONNER: My question will be about North Africa, because I think that you do not mention anything about North Africa, about the situation there, especially about Tunisia, because Tunisia is still waiting for the third part IMF credit and I do not know why the IMF does not let Tunisia accept the last part. Can we have anything about the situation in Tunisia?
MR. HELBLING: The situation in North Africa reflects generally the difficult situation in the Middle East more generally. I think it has been a difficult few years with the transition and new political regimes, and the European economy overall that was decelerating, the main trading partner, which has not helped. So, countries like Tunisia have made important progress in terms of economic reforms, established governments under the IMF program. Looking forward, the fact that Europe is recovering should help. Program negotiations are ongoing and we expect the review to be completed sometime this year.
QUESTIONNER: I wonder if you could compare how Italy and the other three major Eurozone countries will take advantage of factors like the oil price decrease and quantitative easing, and in a comparative fashion, please.
Mr. HELBLING: I think we already see the benefits of lower oil prices in Europe. This is one reason why we have generally upgraded the forecast, the real income effect from lower oil prices. Similarly, as Mr. Blanchard mentioned, QE has been very successful. The asset price transmission has worked out. Borrowing costs have decreased. We now expect the transmission to the real economy.
One factor that distinguishes in this cross-section of the European countries which will lead probably to some distinction is the transmission to the real sector through the banking system. As our colleagues from the Global Financial Stability Report will elaborate upon tomorrow, there is the point that nonperforming assets, weak banking sectors are handicapped in the transmission of the impulse from QE in general, but overall I think one general theme as far as Europe, the euro area is concerned is growth and the recovery are strengthening and it is due, in particular, also to a change in policy to boost oil and we hope, going forward, also from continued further reform implementation.
MR. BLANCHARD: Let me just add, given that you asked for a comparative assessment, that clearly one of the problems of Italy is still its banking system, the ability of banks to actually supply credit, which is probably worse than in the other countries you mentioned.
QUESTIONNER: Brazil had almost no growth in 2014. You forecast a contraction of 1 percent this year and a very modest recovery in 2016. What explains such a weak performance in a three-year period?
MS. CELASUN: You are right, the Brazilian economy stalled in 2014. Our forecast for next year is a contraction of 1 percent before there is a modest recovery in 2016 of 1 percent. What explains this deceleration this year, we have observed data coming in quite weak at the end of 2014 and early 2015, weaker than expected, and that slow momentum coming into the year is going to weigh on this year’s growth. Our forecast also incorporates a policy adjustment, as announced by the authorities, quite some correction in the primary surplus this year. That is going to have a negative effect on growth early in the year, but we believe that it will actually boost credibility and confidence later in the year and set the stage for a return to positive growth next year.
MR. BLANCHARD: Let me add here that there is a silver lining, I think, to the Brazilian story. Clearly the problem of the past few years is the problem of business confidence primarily leading to very low investment. It is still there, but the government clearly is taking measures to re-establish full credibility of fiscal policy. Monetary policy is responsible. But we are in a situation in which confidence has not come back yet while at the same time there is a fairly strong fiscal consolidation. So, the two effects are working in the same direction for the moment of making things worse, but if confidence comes back because of the measures which have been taken, things will turn around and one can be more optimistic about the future.
QUESTIONNER: A number of low-income countries, especially in Africa, are caught between a strong U.S. with currency issues and a weaker Europe. What would you recommend will be the way forward, because these two forces are affecting growth going forward?
Mr. Milesi-Ferretti - I can see two sets of effects. A lot depends on whether the exchange rate in these countries is floating or is tied, more tied to the dollar or more tied to the euro. Clearly, currencies that have depreciated, say, together with the euro will imply some boost to competitiveness for the countries. On the other hand, if a currency depreciates and the country has access to international financial markets, maybe for the first time borrowing in dollars, this, of course, raises the cost of external finance.
I think that, more generally, it is important to monitor foreign exchange exposures, particularly in the financial system, given these rapid currency movements. Overall, I would say that the growth outlook in a number of these economies remains quite favorable. Particularly low-income countries in Africa are seeing their growth forecasts for this year above 6 percent. They are actually doing much better than the middle-income ones and better than the oil exporters that are being affected by the decrease in the oil price.
Mr. BLANCHARD: Your point raises a more general issue which echoes what I have said earlier, which is that the divergence of monetary policies and, therefore, the divergence of exchange rates complicates the life of countries which have both trade and financial relations both with the dollar zone and the Eurozone. So, if you take, for example, the example of Turkey, on the one hand, clearly U.S. rates are going to be more attractive to go from Turkey to the U.S., but the very low euro rates are going to make it more attractive to go from the euro to Turkey. So, what happens to Turkey depends on what determines the capital flows to Turkey, whether they are more sensitive to the euro or more sensitive to the dollar. That is just one example. It is much more general than that. That clearly leads to an environment which is harder to manage than one in which all monetary policies are going in the same direction, but that is the world in which we are.
QUESTIONNER: If the measures taken in Brazil to increase confidence are not enough, what other sets of economic tools are available for the government of Brazil to be taken to increase and to reach growth again next year?
MS. CELASUN: Olivier highlighted the importance of weak confidence in what is happening there right now. So, I think it is really of the essence that they press ahead with these measures in normalizing fiscal policy. Monetary policy has to also be calibrated well to the circumstances. We have seen inflation pressures. Regulated prices have caught up with more normal levels. So, in terms of building confidence again, some normalization of these policy frameworks and settings will be the most helpful.
MR. BLANCHARD: Let me just add, we think that on the macro front, the measures which had been taken are the right ones, but clearly Brazil has problems beyond just macro. It has a problem of corruption, which we know, which hopefully will be solved. There are all kinds of structural reforms which are needed as well. So, we focused on the macro, but there is clearly more than just that.
MR. DIENG This will bring an end to our press conference today. We will see you tomorrow for the launch of the GFSR.
QUESTIONNER (Microphone not on)... is there a reason why you are ending early ...
MR. BLANCHARD : We will take one more question. Please, one more question.
QUESTIONNER? You mentioned Greece and the risk that is still going on in Greece. Unlike foreign exchange markets, you are a player in Greece. Is it not time to restructure Greece’s debt?
MR. BLANCHARD: Look, you understand why we try to finish before the—
MR. BLANCHARD - We are clearly in the middle of negotiations with the Greeks. We very much want to come to an agreement and we hope we will. Now, what happens if no agreement were reached? I think that a number of things are fairly clear. The first one is that, say, an exit from the euro would be extremely costly for Greece. It would be extremely painful.
The second point is that, looking at the rest of the Eurozone, the rest of the Eurozone is in a better position to deal with the Greek exit. Some of the firewalls which were not there earlier are there. Still, it will not be smooth sailing, but it could probably be done. The third is that if that were to happen, I think the way to reassure markets and make progress is actually go further, use the opportunity to make progress in terms of the fiscal union and the political union. This would be clearly the right moment to do it.
Mr. DIENG - Now this will bring end to our press conference. We will see you tomorrow for the GFSR.