Transcript of a Press Briefing on the World Economic Outlook (WEO) Update
July 9, 2015Washington, D.C.
Thursday, July 9, 2015
|Webcast of the press briefing|
IMF Economic Counsellor and Director of Research Department
GIAN MARIA MILESI-FERRETTI
Deputy Director, Research Department, IMF
Director, Communications Department, IMF
MR. RICE: Well, good morning, everyone and welcome to this press conference on behalf of the International Monetary Fund. I am very pleased to welcome you here in the room and to our colleagues online. This, of course, is the World Economic Outlook update and we are on the record this morning. We’re delighted to have with us this morning our Economic Counselor, the Economic Counselor of the International Monetary Fund, Olivier Blanchard. We also have with us just immediately to Olivier’s right is Gian Maria Milesi-Ferretti who is the Deputy Director in our Research Department. So I will proceed and ask Olivier to make some opening remarks and then we will turn to your questions in the room and online. Thank you, Olivier.
MR. BLANCHARD: Thank you, Gerry. Good morning to all of you. First let me talk about the elephant in the room, namely Greece. I’m not sure the word “elephant” is actually the right one as dramatic as the events in Greece are. As you know Greece accounts for less than 2 percent -- Greece, as worrisome as it is, only represents less than 2 percent of the euro zone GDP, less than one-half of a percent of world GDP. Now, of course, we continue to hope and we’re working on an agreement, which would allow Greece to stay in the euro zone. There is little question that Greece has suffered, is suffering, and will probably suffer even more in the case of a euro exit.
But this being said, what’s important in the context of this conference, which is about the world economy, is what the effects are going to be or might be on the world economy. And what we know is that mechanical links between Greece and the rest of the world are limited, be it on the trade side or the finance side. That’s reassuring, but it’s not totally reassuring. What we have learned in episodes of this kind is that there can be contagion -- or to use the expression from Rumsfeld, there are unknown unknowns, things that we didn’t think about and turned out to be relevant when the event actually takes place.
Now, in this sense I think we can be somewhat reassured by what we have seen since Monday of last week because in effect what we have seen is a set of small stress tests clearly increased as a result of a decision by the Greek government, first by the announcement of the referendum and then later on by the results of the referendum. And low and behold, what happened was very much what most people had anticipated, a shift to risk of a decreasing stock market, some limited increase in spreads, but very few or even none of the so-called unknown unknowns that we worried about. So there is a sense in which the stress tests of the last ten days reassure us and make us think that if things go badly in Greece, which again we don’t want to happen, but if they did, the rest of the world would probably survive quite well.
There is still I think a larger lesson to be drawn, which is that the post-crisis world is a world of high debt. And it doesn’t take much. It just takes a bad shock for the dynamics to go wrong. We have seen it in the case of Greece, but we see it in various places. And I think we have to be ready to see other periods of that kind in which the debt dynamics of a country or the debt dynamics of financial institutions or firms go wrong. And this may just be a warning that more may well come.
Now, let me leave Greece aside and just look at the world economy as a whole. I think things are unfolding very much along the lines that we forecast last time we met, which was in April. What you have is that moderate growth continues. You have an improving recovery in advanced economies, and you have the forecast slowdown in emerging market and low income countries. As you know the forecast that we have is 3.3 percent for 2015 for this year and 3.8 percent for next year. This is where the word I think “moderate” comes in and captures more or less the nature of that number.
Now, let me go quickly around the world, picking and choosing. The main unexpected development was clearly the negative growth rate in the U.S. in the first quarter, initially fairly large and negative and revised to be smaller and negative. And when it happened, it clearly raised all kinds of issues as to whether this was just an accident or there was something that we had not seen about the fundamentals of the U.S. economy being weaker than we had thought before this number. And then I think the fog cleared and it actually cleared fairly quickly and I think the answer is ambiguous; that fog for the most part this was a set of accidents. It was poor strikes, weather, a faster adjustment of unrelated investment falling more than we had expected or faster than we had expected, consumers spending less of the increase in real income coming from the lower prices than we had expected, but again, we expect them to spend more in the future. So on that, I think the conclusion was this was an accident and the rest of the year should not be very much affected. In short I think the fundamentals of the U.S. economy are very strong.
Let me turn to other country developments. So if you look at other advanced economies, Europe and the euro zone in particular is doing better. The recovery is getting traction. That’s true of most countries. It’s even truer of some of the countries that have suffered the most. The growth rate of Spain is about 3 percent, which is clearly very good news given how much they have to grow to decrease unemployment. In Japan there was very good news, very good numbers in the first quarter, but we still think that growth is going to be a bit weaker over the year than we anticipated three months ago because of slightly more fiscal adjustment, slightly weaker consumption, but still there is growth in Japan. Our forecast for this year is .8 percent.
In emerging economies let me start with the country that you probably have most in mind. We have left unchanged our forecast for China. Our forecast is a bit lower than some others at 6.8 percent for 2015 with a bit more uncertainty around the forecast than in April.
Now let me look at two aspects of what’s happening in China. The first one is the puncture of what was obviously a stock market bubble. Stock markets had increased by 150 percent in less than a year. There was no evidence that this was justified by dividends or fundamentals and the bubble has burst. It has burst only in thought. We are nowhere close to the earlier levels, but it has burst and that’s potentially worrisome. How worrisome is it? We don’t think very much. We think that because it had gone up so fast, most people, most retail investors had not spent the capital gains so that on the way down they don’t have to undo something that they didn’t do. Also the role of stock markets in China, the capitalization of stock markets relative to GDP, is much smaller than say in the U.S. so movements in the stock market have less effect. So although it might have a small effect on consumption spending, we don’t see it as a major macroeconomic issue.
If you leave this aside, then what you see is an adjustment in China that is rather healthy. There is a predicted slowdown in growth. It comes largely from a decrease in real estate investment. There was as we all know too much construction, so this adjustment is desirable. We saw other signs of adjustment, smooth lending. The rate of credit growth has also decreased from its heights to reasonable numbers, so we saw an adjustment that strikes us as a healthy one and one that will continue.
In constructing the forecast about China, you always have to think very hard about what the Chinese authorities themselves want to do and we think that they will allow and they have been explicit about it, they will allow a moderate decrease in growth. And if the decrease was faster, substantially faster than they want, they would probably use moderate fiscal measures to maintain it, but allowing for decrease overtime. So our forecast for growth for China as I said this year is 6.8 percent, next year 6.3 percent, and then 6 percent in 2017.
Looking at other emerging market economies, we’ve revised Brazil’s growth down. We now forecast a recession. We already did, but the larger recession, -1.5 percent. What’s happening in Brazil is a combination of two forces. The first one is low business and consumer confidence to start, leading to low spending, low investment. And then measures taken by the government and by the central bank to increase the confidence through fiscal consolidation and a policy aimed at reducing the rate of inflation. Now, this is clearly the right set of policies, but in the short run you get the low confidence affecting spending and the measures destined or aimed at increasing confidence also decreasing spending in the short run. So this is why we think Brazil will go through a recession, but will turn around the year after.
The other country where the numbers are very bad is in Russia. We now forecast Russia’s growth to be negative at -3.4 percent. It’s a bit better than the forecast in April. That comes from a small improvement in commodity prices and a small increase in confidence, but that’s clearly a very large negative number that will lead to a very tough year in Russia.
So this was it for the quick tour of the world. Let me turn to risks. On this our sense is that the nature and the distribution of risks is roughly the same as it was in April in the World Economic Outlook. I think we can expect to see episodes of turmoil in financial markets, the most obvious candidate at looking forward is the exit from the zero law in the U.S., but this may actually be quite smooth and I wouldn’t be surprised if there were other sources of financial turmoil. In general our view is that these are likely to indeed create turmoil in financial markets without major macroeconomic implications, but it will clearly lead to some uncertainty for periods of time.
On the good news side in the risk section I think is the risk of deflation, which is the risk that we had emphasized in previous press conferences. It has not disappeared, but substantially decreased. What we have seen is that inflation in many cases headline inflation actually turned negative because of the decrease in the price of oil. It now has turned around, but much more importantly medium-term expectations have remained anchored. So while headline inflation was actually flirting with the deflation expectations remained anchored and we think looking forward that inflation will pick up, be it in Europe or in Japan. So this was a risk we worried quite a bit about and clearly this risk is now smaller.
Let me end these remarks with remarks not about the very short one, but issues which are going to be with us for I think years to come. And I’m going to make three sets of remarks.
I think the first issue that many economies are going to confront is the legacies of a crisis. In particular, what we have called the debt overhang, and here I’m just not talking about the debt overhang of states, but also of firms or households. And this is clearly still pulling back the recovery, which, you know, as I’ve indicated with the numbers, is a not a very strong one. And I think here Greece and Puerto Rico, to take another example, are reminders of the dangers of high debt. So this would be the first issue that I see as relevant for quite a bit of time to come. The second is about potential growth and whether advanced economies can significantly increase growth in the medium term.
What we see here is in a number of countries very low potential growth looking forward. And this is due to aging, but that we understand quite well; aging populations. But also due to a slowdown in total fact of productivity goals, which is more mysterious but seems to be affecting many of the advanced countries in a rather strong way. I think there is a challenge, which is that if you combine you potential growth together with an increase in inequality, which we continue to see, then this is a recipe for social, political, fiscal problems which may well have dire implications. So I think the challenge there is whether the structural reforms, which has become nearly a mantra of many institutions and many governments, can actually undo the trend. And I think on this we have to be realistic. They can probably not undo the trend but they can probably improve things. And challenge is to choose the right ones and then push them through. Politically many of them are difficult to pass and then to implement. But that’s clearly a challenge that many advanced economies have.
The third and final point is about the slowdown in growth; not in advanced economies but in emerging market economies. And what’s behind it? It is striking that for the last five years we have each revised the growth rate of Latin American down. And the question is should we read into this. I think we should read that the period of higher growth, which came before the crisis, was probably larger due to the increasing commodity prices which affected most of these countries, benefited most of these countries, and to very lax international financial conditions. And it probably could not go on, and these countries need to adapt to a new environment in which commodity prices are either flat or have decreased the number of cases, and where the financial conditions looking forward are going to be tighter as the Fed exists and eventually other major central banks do the same. And so there is clearly a challenge for these economies to adjust to this new environment. Looking at Latin America, some are doing it better than others, but that’s clearly a major challenge for them, I think, for many years to come.
So let me conclude: If I had to summarize, I would say please do not focus too much on the Greek events and China stock market events. They count, but they are epiphenomena in the larger picture. The important thing is moderate growth continues. In terms of policies, we still need policies to push demand in a number of countries, and to push supply in most countries. And that has to remain the major policy agenda. And then I’m going to finish on a more personal note. This will be my last WEO press conference. And I have enjoyed every single one of them and I’ve enjoyed interacting with you and I shall miss them and I shall miss. Thank you.
MR. RICE: Thank you very much, Olivier. Let’s turn to your questions in the room. If you could keep them brief we’ll try and get to as many as we possibly can.
QUESTIONER: Thank you, Olivier for your time here. We’ve enjoyed it as well. I’m going to miss the verbal jousting. So you said there were a number of other potential Greece’s in the world. Where in particular are you looking? Secondly, global growth is at its lowest rate since 2009, the financial crisis. Are we not already in the middle of the low growth rut that the IMF has warned about?
MR. BLANCHARD: So I don’t have in mind specific countries, and if I did I wouldn’t tell you. But I think what we have learned is that sometimes some institution is going to fail for some reason which we had not thought about, and for a few days at best, and maybe for a few weeks, we’ll see financial markets having to assess what the implications are. In some cases, we may learn that the reason why one institution failed was a reason which might be relevant for other institutions of the same kind, in which case we could see contagion. Again, this is purely a hypothetical, but in a world in which there is high debt to start, I think we have to be ready for episodes like this.
Again, let me go back to Greece. I mean Greece is a major event surely for Greece. But even in terms of what this implies for the eurozone and so far at least it hasn’t led to the type of Lehman type contagion that we might have worried about. So I think in most cases, this will be contained. I’m just warning that they will keep reappearing in some form, and I think we have to be ready for that. On the low growth, something I did not emphasize but I should have probably, is that indeed we have revised the growth forecast for 2015 by 0.2 percent.
This is nearly -- not nearly, but more than half of that comes from Q1 US, which as I said is very much an accident and not too much should be read into it. So, I think we’re basically on the same track. Now the same track is not indeed incredibly exciting. It is a growth rate around two percent for advanced economies or around four percent for emerging markets, and that gets me back to one of the last points I made, which is that’s probably where we’re going. And structural reforms may help a bit, but we may have entered a period of flawed growth, at least relative to what we had before the crisis.
QUESTIONER: Mr. Blanchard, in your recent blog on Greece, you call on all the parties to make difficult decisions. In your mind, does it also apply to the IMF itself?
As you know, the Fund could extend the Greek debt repayments and provide the country with some breathing room. Do you think it should do so, and maybe show the way to the Europeans or are you worried it could set a dangerous precedent?
MR. BLANCHARD: So there are two parts to your question. Yes, I think, and it’s still the case an agreement will require tough decisions on both sides. You know, there has to be movement on the fiscal and the structural side. And on the other side there has to be a clear financing plan which means more financing and debt relief. So on that part, no change what we said ten days ago; it’s still as relevant today as it was then.
On whether the IMF should do more than it has done, the IMF has rules. And in general I think we should always question rules. But in this case, I think the rules are very good ones, which is that the IMF is an institution which has 188 members, most of them being poorer than Greece and all of them having not had the kind of breaks that some people would like us to give to Greece. So given this, I think it’s absolutely essential to respect our rules. And the fact is that basically we have to go by the rules. And to the extent that they’re obvious, this has implications. We cannot extend just like this without a program.
QUESTIONER: You mentioned the stock market. The China Stock Market at the moment is not a big major economic issue. But it seems that the big moment is affecting the confidence towards Chinese economy. And will these big moments affect the real economy? And in the report you mentioned China is facing greater challenge in its rebalancing process. And so what are the greater challenges?
MR. BLANCHARD: So again, that’s a question about mechanical effects and psychological effects. So what I’ve argued is that the mechanical effects are probably likely to be small. Stock markets in China play a much smaller role in terms of size than they do in, say, a country like the US. It went up very quickly; it’s coming down very quickly. It may not have matched direct effects, mechanical effects. You’re raising a bigger question, which is: is this making people wonder and worry about larger issues in China. It’s too early to say. My sense is that Chinese people should be used to very wild gyrations of stock markets. This is not the first one. It may not be the last one. So I think that it is very much a side show. It doesn’t reflect on the fundamentals of China. And as I’ve said when we look at the fundamentals, China had an incredibly tough challenge in front of itself when there was the housing boom. And to a first approximation, this housing boom is turning into a housing slump.
But it is a relatively smooth landing with credit growth under control with the adjustment of construction more or less under control. So I think if you look at things beyond what’s happening in the stock market, there is no particular reason to have lost confidence as a result of what happened there.
QUESTIONER: About Brazil, the program of fiscal adjustment of Minister Levy in Brazil started in January. You revised downwards for the second time; April and now the growth projections for Brazil. Is the fiscal program, not having had the time for you to factor it in your calculations or, in your opinion, is it just not working?
MR. FERRETTI: Well, as Olivier has noted in his remarks, the impact of the fiscal adjustment plan on the economy is going to be in the short run negative because it will reduce domestic demand and will reduce spending. It has to exercise a positive impact through an increase in confidence. Now the evolution of confidence is going to reflect many factors. I think the fiscal adjustment plan is an important one; there are other ones at play.
So it is very difficult to single out fiscal adjustment as not having raised confidence efficiently when there are many other things going on, from Petrobras to consumer confidence more generally, to softening in commodity prices, inflationary pressures. So, I think it’s a combination of many factors that is weighing on business and consumer confidence.
We think we need to give time to the fiscal adjustment plan to set roots and exercise its positive effects on confidence in the Brazilian economy more generally. And the same goes for monetary tightening. Interest rates have risen quite significantly in the past few months.
Again, we think for very good reasons because inflationary pressures were really perking up. In the short run, this is going to have a negative impact on aggregate demand, but it should lower inflation expectations and set the stage for a healthier recovery down the road.
MR. BLANCHARD: And this is why we’re predicting positive growth in 2016. These factors should work in the right direction, but this year will be tough.
QUESTIONER: Just two questions, one on Greece. You talked about the impact of the recent bank holiday on the economy there. Can you quantify what that impact has been, and can you tell us what your current forecast is for the Greek economy this year, how bad is the crisis there from the IMF’s point of view. Secondly, on China, in terms of the government’s response to the market crisis, what have we learned to your mind about the future path of reform, might there be a slowing of the pace of financial sector reform there as a result of this, or do you worry about that possibility, and what might be the impact of this crisis and the government’s response on the case for including the RMB in the SDR basket.
MR. BLANCHARD: On the effect of recent events in Greece, at this stage, it is incredibly difficult to assess them, but there is no question closure of banks means the Greek numbers this year are going to be very bad, but I’m not going to give you a number. On China, what should a government do when there is a bursting of a bubble? I think it should accept the fact that it is a bursting of a bubble, that the price was too high, and it has to come down. At the same time, it may be a good thing to actually make the adjustment on the downside, go more slowly, so that intervention to slow down the decrease might actually be appropriate. At the same time, government should realize they cannot permanently achieve some level of stock prices that they want, so you have to allow for the adjustment to take place, but I think it is acceptable to take measures to make it happen a bit more slowly that it would otherwise.
QUESTIONER: and on the case for SDR inclusion?
BLANCHARD: I think it is largely orthogonal to the discussion of the RMB within the SDR.
QUESTIONER: Spain is an example now for recovery. However, how confident are you in its strength, and second, Latin America, do you see Latin America falling into a recession this year?
MR. BLANCHARD: On Spain, I am going to repeat something I said in the previous press conference, I am always a bit worried when people talk about the Spanish miracle or anything like this. Three percent is good, but we have to remember what the unemployment rate is, and there is a very long way up before we can declare any kind of victory. Along the way, there is a relatively narrow path. As long as growth is there, the fiscal situation can improve slowly, and various mechanisms, more investment, recovery of housing prices, can all take place. Again, we have to worry that when a patient has been that sick, the recovery may actually not be totally smooth. At this stage, we are fairly optimistic, but again, there are always risks when a country is in a situation like that one. Again, I also want to say this is very good news in terms of growth rates. On Latin America, we do not predict a recession. I think we don’t. Let Gian-Maria confirm that.
MR. MILESI-FERRETTI: Yes, we don’t. We have very, very moderate growth, 0.5 percent for this year. It reflects a general slowdown in the region but quite a bit of heterogeneity. We have already discussed the case of Brazil. Brazil is by far the largest economy in the region, so contraction in Brazil weighs on the region. We have some other smaller countries in the region with very deep recession, Venezuela. But, we also have other countries that while they are slowing, they are still growing at a respectable rate. Mexico is growing at a forecast around 2.5 percent. Chile, Columbia, Peru, they are slowing but still growing at rates that are quite a bit above recessionary levels. There is clearly an overall slowdown in the region, but not a recession.
QUESTIONER: Mr. Blanchard, since you are one of the architects of the two programs for Greece, since many people believe the program failed to save Greece, and since you are leaving the IMF soon, I am wondering if you are ready for self criticism.
MR. BLANCHARD: Sure, I am ready. I will be in touch.
QUESTIONER: On Mexico, the fact that because of the slow growth in the U.S. during the first quarter of this year, it has an impact on neighboring countries like Canada and Mexico, and also did you say this was one of the main factors why you reduced the projections for the global economy this year, and in this particular incident, you also say this will be a small setback. Going to Mexico, can you say a little bit more about what did you expect for Mexico for the coming months? Obviously, two percent may be good. What is your projection on how Mexico will be doing this year if this incident during the first quarter in the U.S. proves to be a small setback, a momentary setback?
MR. MILESI_FERRETTI: Mexico is very heavily affected by what happens north of the Border. It is a very open economy, trade flows, capital flows, and labor flows; the links with the U.S. economy and are extremely important. Our forecast is that growth is going to pick up, and let me distinguish for a moment the short run from the medium run. Over the short run, we think the pickup in U.S. activity is going to obviously help.. We think the depreciation of the peso in real effective terms is going to help the manufacturing sector.
Over the medium term, we have emphasized that Mexico has undertaken a very ambitious set of structural reforms, and we see those structural reforms as lifting potential growth. Of course, there are always uncertainties around these effects, but we think half a percent/one percent could come from these measures, and the channels are several. You should see higher investment in hydrocarbons following the energy reform; you should see a positive impact of lower electricity prices and faster growth in manufacturing. Our forecast is that growth is going to pick up a bit more strongly over the medium term for structural reasons, and we think in the short run you are going to see some strong pick up, more for cyclical reasons having to do with the U.S. and the exchange rate.
ONLINE QUESTIONER: What is the main challenge for emerging market countries in the year ahead, any worsening outlook for emerging market countries such as South Africa, Brazil, Turkey, or Russia from particularly monetary conditions in developed countries.
MR. BLANCHARD: Clearly, some countries which have to fight their own demons, we talked about Brazil, which is facing a very big challenge this year. We talked briefly about Russia, which again has its own specific problems. In general, I think for emerging markets this is going to be the year in which the interest rate in the U.S. is going to start increasing. The date by which the interest rate is expected to increase in Europe will also get closer, and so you are going to see tighter financial conditions, which means that capital will tend to go back to where the rates are attractive. So far, it hasn’t been happening on a very large scale.
I think we can expect some capital outflows from a number of these countries, and these always create some problems but they can handle, but that is a challenge they are going to have to face.
QUESTIONER: I wondered if you could give your thoughts on the U.S. economy, in particular, the path of the Fed. You and your team made a bold call recently that the Fed would likely hold off raising rates until the first half of next year. First of all, do you continue to see that happening, second, how do you see the Fed interpreting kind of the financial turbulence that you have talked about? You seem to be implying that in both the case of Greece and China, there is no major impact on the real economy. Do you see the Fed looking through both of those events, if you will, as it considers whether to raise rates?
MR. BLANCHARD: I think from what I read actually yesterday, it looks as if the Fed has more or less the same interpretation of the implications of the events in Greece and China as we do, which is they are not of major importance for the U.S. at this point, so it should not affect their choices in terms of monetary policy very much. In terms of what the Fed should do, the Article IV suggested that maybe the Fed could wait a bit longer to increase interest rates. I am not going to go back there. But, I am going to make a more general point, which is I am absolutely struck by the amount of time spent by commentators about whether the lift off will be in September or in December.
I understand why if you are in the markets it matters enormously or it may matter, depending on your position, but from a macroeconomic point of view, this is largely irrelevant and basically this will happen when it has to happen, and whether it happens in September or December, it doesn’t make much difference to anything in terms of growth of the U.S. for the next few years.
I am always amazed by the amount of time spent by people trying to guess whether it is going to be this time or next time. I don’t think it is very important. I think what is important from our point of view is the U.S. recovery is very strong. We are not very far from the natural rate. Inflation is still too low. For the moment, monetary policy should continue to be accommodating, and as things continue, at some stage it will be time to change.
MR. RICE: Thank you very much. We are going to end the press conference here.