Transcript of the Press Conference on the Release of the World Economic Outlook Update

January 19, 2016

London, The U.K.
January 19, 2016


MAURICE OBSTFELD, Economic Counsellor and Director of Research Department,

GIAN MARIA MILESI-FERRETTI, Deputy Director, Research Department, and

OLGA STANKOVA, Senior Communications Officer, Communications Department

Webcast of the press briefing Webcast

MS. STANKOVA: Good morning and good afternoon to those who are joining us watching live webcast from all regions of the world. Welcome to the press conference on the release of the World Economic Outlook Update entitled “Subdued Demand, Diminished Prospects.” I’m Olga Stankova with the IMF communications department.

Let me introduce our speakers today. To my right is Maurice Obstfeld economic counselor and director of research at the IMF. To Mr. Obstfeld’s right is Gian Maria Milesi-Ferretti, Deputy Director in the IMF’s Research Department. Mr. Milesi-Ferretti is in charge of the production fo the World Economic Outlook.

With that I will pass the microphone to Maurice Obstfeld for his opening remarks. After that we will take your questions, including those that we receive online from our global audience.

MR. OBSTFELD: Thank you, Olga, and good morning everyone, thanks for being here. At the start of 2016, turbulence in financial markets has returned amid renewed concern about risks to global economic growth. The fundamental forces underlying our October World Economic Outlook projections have not dissipated and in some respects have intensified, leading us to trim our expectations for future medium term growth of the world economy. We still, however, expect growth to pick up this year in most countries. Despite the modesty of the reduction we see in general growth prospects and the promise of improvement in coming years downside risks to our central scenario have intensified.

In our view, a focus on these risks is the main factor driving recent developments in financial markets. We may be in for a bumpy ride this year, especially in the emerging and developing economies. Fundamental to the current global conjuncture are the same three forces we highlighted last October: China’s slower growth and rising financial market risks, amid a process of macroeconomic rebalancing away from traditional industry and construction towards services and consumption. The fall in commodity prices, notably the price of oil and asynchronous trends in monetary policy mainly between the U.S. and most other advanced economies. The effects continue to play out. Even since mid-October for example we’ve seen the price of base metals fall by 15 percent while the price of oil has fallen more than 40 percent.

Paradoxically while risk-averse investors have focused on the potential negative impacts of these developments each of them is two sided and carries a silver lining that should make the adverse effects on total world growth less dire than the markets now seem to expect, especially over the longer term. China’s rebalancing is essential for its transition to a more sustainable and resilient consumption based growth model. Lower commodity prices benefit consumers and they lower production costs. And the Fed’s well communicated interest rate increase of December reflects the relatively strong performance of the U.S. economy, which is still the world’s largest economy. Yet, these changes also pose big adjustment challenges for many countries.

What are the specific numbers? Without going into too much detail we project that global economic growth of 3.1 percent in 2015 will accelerate to 3.4 percent in 2016 and 3.6 in 2017. These figures for 2016 and ’17 are both .2 percentage point below what we projected in October. While emerging markets and developing economies account for more than two thirds of this downward revision, we project they will accelerate moderately this year and next compared to last year and advanced economies too will accelerate slightly in both 2016 and 2017. But likewise to growth rates below those we would have hoped for in our October WIO projections.

As always aggregate averages conceal considerable diversity. The small downgrade in our projection of advanced economy growth is driven mainly by less optimism about the U.S. while growth prospects for the U.K. the euro area and Japan remain broadly unchanged.

Looming large in the emerging and developing group are countries facing especially severe multiple challenges and strongly negative 2015 growth. For example, Brazil and Russia. Their sharp contractions this year should decelerate over the coming two year period.

We should note however that while reduced from earlier years growth looks better in some other Latin American economies and in emerging and developing Europe. Growth prospects in parts of Asia have diminished somewhat as a result of the unexpectedly big spillovers from China. In contrast India continues to grow at the fastest pace among large emerging economies and in fact among all large economies.

Let me flag a number of specific downside risks in our scenario. As always events in an important stressed economy can spill over to others through effects on trade, commodity prices and confidence. A downside risk is that China’s economy could encounter rough patches where growth slows more than expected directly effecting trade partners while disturbing foreign exchange and other asset markets worldwide. We’ve maintained our 2016 and 2017 growth assessments for China in light of the robust developments of its service and new economy sectors as well as fiscal policy actions and of support and demand, but the picture could change farther down the road.

Continued strong growth in China is dependent on its authorities’ prompt decisive actions to address remaining imbalances in the economy and the legacies of past imbalances. In addition, clear communication of a coherent overall policy strategy including with respect to the yuan’s rate is critical both for domestic stability and stability abroad.

Depreciating currencies have been useful shock absorbers for many emerging and developing economies, but could eventually expose corporate balance sheet weaknesses in particular where there are foreign currency exposures and this is another downside risk. Related to this are private capital inflows which have fallen to emerging markets, with China accounting for most of the fall certainly in the data that we have to date. The acceleration and broadening of this trend is a potential threat despite the enhanced buffers provided by international reserves. Another stress indicator is the general increase in sovereign spreads in Latin America and Africa. Further increase in global risk aversion for whatever reason could lead to even tighter financial conditions for vulnerable economies.

Finally, political and geopolitical risks have intensified, not receded in recent months. Prominent among these, refugee outflows from Syria and Iraq are imposing extreme burdens on neighboring countries and have spilled over into Europe sparking political discord within the European Union and threatening its current framework for free labor mobility.

Rapid absorption of refugees into labor markets will ultimately lift output but will place upfront demands on national public budgets. As difficult as are the challenges for the receiving countries we must not lose sight of the source countries security concerns (inaudible) advised to both internal and external displacements of people. These impose immense costs, first of all on the refugees themselves.

Let me conclude with a couple of remarks on the need of policy action. In the advanced economies currently projected growth rates are too low rapidly to produce high unemployment and other legacies of recent crises or to spark strong growth in real wages. In emerging and developing economies currently projected growth rates substantially slow convergence to higher incomes.

Action is needed. Policy recommendations must be country specific of course, but at a general level we can see three priorities:

First, to support aggregate demand in the face of subdued activity and in some countries continuing deflationary pressures.

Second, to support economic efficiency and long term potential economic growth in the face of evidence that potential growth rates have fallen worldwide over the past decade. An important element here is obviously structural reform and in our April 2016 World Economic Outlook we’ll be focusing in a fairly granular way on structural reform and its effects and potential.

A final need is to further strengthen and widen the international financial safety net bolstering global resilience to whatever might lie ahead. We now invite your questions.

MS. STANKOVA: Thank you. Please identify yourself and your affiliation when asking questions.

QUESTIONER: There was a bit of (inaudible) -- for Brazil in October in the Outlook so what happened in detail and also what else can the country adopt to react to?

MR. OBSTFELD: In Brazil, the political configuration there has obviously not improved, in fact, it’s gotten worse with the beginning of impeachment proceedings and the growing reach of corruption allegations. This has undermined confidence as has the continuing deterioration of the budgetary outlook there which is sapping confidence and also greater depreciation and greater inflation which is in part a response to these fundamental factors, but also is having a negative effect.

Just looking at those and the actual data coming in have lead us to sharply revise our projections downward in Brazil’s case.

QUESTIONER: Any suggestion?

MR. OBSTFELD: For going forward? Well, the resolution of the political problems is going to depend on the political process there. We really can’t suggest how to move that forward. We could say a bright spot might be that to the extent that there is an appreciation of the need in Brazil to improve governance broadly, that if that does happen, that will be a big positive for Brazil down the road, but first, there is the transition that has to be navigated.

QUESTIONER: (Inaudible) What is your position -- it seems like you have not taken into account the political pressures to stop increasing the quantitative easing program from most political parties in Germany, and how the refugee crisis will affect in addition to stopping the quantitative easing program?

MR. OBSTFELD: Europe deflationary pressures clearly remain. The ECB is cognizant of those. It has been taking action, and it has announced that it stands ready to take further action to stabilize expectations and prevent their de-anchoring.

So, we would anticipate that happens as data comes in, there would be noted there is some dissention about the diagnosis within the ECB governing board, but we would expect policy broadly to respond in a positive way to growing evidence of deflationary pressures.

How the refugee crisis will affect ECB policy is very hard to say. Broadly speaking, the refugee crisis should require some additional fiscal expenditures on the part of recipient countries as they deal with incoming refugees and take the appropriate measures to absorb them into their labor forces, very unclear how this will affect aggregate budgets at this stage.

Our view is that flexibility should be needed on a case by case basis for countries that are absorbing refugees, but it's hard to believe that will be a first order of influence over the ECB's policy stance.

MS. STANKOVA: Just to take note that we just published a discussion of the refugee situation in Europe. It's on the IMF Website.

QUESTIONER: You described the Fed's decision to raise rates last month was well communicated, but now sadly less optimistic about the outlook for the U.S. Do you think the Fed made a policy mistake in December, and do you think it would be a mistake for the U.K. to follow suit with higher interest rates this year?

MR. OBSTFELD: The Fed responded based on their best forecasts that the U.S. was growing strongly, which it is relative to pretty much all other industrial countries, and their expectation that inflation was rising toward their target level at a sufficient pace, and we wouldn't presume to second guess their diagnosis at the time.

It's certainly true, however, that if we look at incoming data, the U.S. economy might appear to be marginally weaker, and inflation expectations longer term marginally weaker as well.

The Fed will be making a data dependent decision, and I would expect this to feed into their deliberations on how quickly to raise interest rates next year. Obviously, if the economy disappoints their expectations, as of their last meeting, they will be going for a smaller rate of increase, fewer increases in 2016 than one might have thought otherwise.

The U.K. is in a somewhat similar situation with relatively robust growth, not quite as fast as in the U.S., but also inflation below target, slow pace of wage increases. I would expect their calculus to be fairly similar.

Again, I don't want to second guess Governor Carney's decisions, especially since I'm a guest in his home. I would expect that without strong evidence of a tightening labor market, there won't be a rush to raise interest rates.

QUESTIONER: (Inaudible) Your predecessor as Chief Economist, Olivier Blanchard, has written a blog saying he finds the moves in share price are quite puzzling, they don't seem to be proportionate to the actual economic data. Do you find them puzzling as well, and do you think they are in any way proportionate to what we're seeing in the economy, or is this irrational market behavior?

MR. OBSTFELD: Well, I think financial markets have been known to overreact in the past, and it's not a stretch to suggest that they may be reacting very strongly to rather small bits of evidence in an environment of heightened volatility and risk aversion.

The two big features of recent data that markets seem to be reacting to is what is going on in China, what is going on in the oil markets. Of course, when one sees big changes in the oil markets, one wonders.

As I indicated in my remarks, these oil price movements certainly impose stresses on oil exporters, especially countries where the government budget depends on oil revenues, but there is a silver lining in terms of effects on consumers. They are not an unmitigated negative.

My view is the reactions are very extreme. For China, there is risk, as I said, but the recent data release is pretty much in line with our expectations. There are challenges for the authorities to navigate, but we don't see some of the extreme downside scenario's that the market seems to be keying off of. I'll stop there.

QUESTIONER: Hello. (Inaudible) Spain has quite a good forecast for the next two years, and in comparison with the Euro zone. I was wondering if you see any risks to those forecasts, for example, the political situation and instability in Spain right now or any other risks for the economy? Thank you.

MR. OBSTFELD: Spain has done a lot in terms of domestic reform. It's been reaping the benefits of that. There is political uncertainty right now which could weigh on the economy. Quick resolution and I think a continuation of the basically positive policy thrust of recent years would be a positive for Spain.

QUESTIONER: A short question on oil. You lowered the forecast for Saudi Arabia; do you think that was enough? Or, what is the perspective there for the rest of the year and beyond?

MR. OBSTFELD: Saudi Arabia faces a very difficult adjustment; they’ve been using their copious buffers, in terms of reserves, sovereign wealth fund to adjust. They also have announced substantial fiscal adjustment. Given the high oil dependence of the economy, oil prices which were lower for longer than we forecasted at the time we did the growth forecast would pose a risk. Since we formulated that forecast oil prices have come down, so if this is a rather long-life phenomenon we would have to revise the forecast further.

MS. STANKOVA: Thank you. Let me take a couple of questions from online from our audience, (inaudible) live webcast. The first one is: “What is the IMF advice to OPEC members as oil prices continue to plum?"

MR. OBSTFELD: I think the advice would have to apply to all oil exporters, not just members of OPEC, but clearly there is a fiscal challenge, budgets will have to be adjusted to be put on a sustainable basis. We would recommend that to the extent it's possible to shield the most vulnerable in the population in making these adjustments. That would be a good thing. That might call for thinking about using this as an opportunity for tax reform. You know, one obvious area of reform would be where fuel subsidy still exists, to think about cutting those.

MS. STANKOVA: Thank you. Another question from South Africa: "Which countries in Sub-Saharan Africa will display gradual lift in growth? South Africa is battling the worst growth indicates, rising inflation and weakened currency. What strategies will provide the best way forward to growth?"

MR. OBSTFELD: I think the remarks I just made about oil exporters apply to commodity exporters. Generally, Africa has many of those. South Africa is in that position, but if we look at Angola and Nigeria, among other very large African countries, they are in a similar situation. There's a small group of African countries, I think of Ethiopia, that actually benefit from commodity price falls, but given the commodity intensity of the Continent's exports there is a fiscal challenge there.

QUESTIONER: I'm Ling Jay Wong, from China Daily. What kind of spillover effects and knock-out effects will China's slowdown bring to the global economy in 2016?

MR. OBSTFELD: As noted, China has been transitioning to a model in which there's less of a dependence on exports, on investments, more on consumption, on services, you know, at the expense of traditional manufacturing industries. This has led to a precipitous fall in China's demand for commodities, and of course for some commodities such as base metals, China demands 50 or 60 percent of the world's supply.

So, it has created very large spillover effects, larger, frankly, than we would have anticipated a couple of years ago. And to the extent that China continues to rebalance and slow, these will continue. The fall in its international trade has also been surprisingly big, and this is another spillover on its trade partners, particularly those who have been selling it capital goods, those who are integrated into its supply chains.

The final spillover comes from expectations. As I said in my opening statement, currency management is an area where the Chinese authorities could be communicating more clearly with markets. It's obvious that events in the FX market have had an impact on market expectations and volatility, so there is room for improving the transparency, and the extent to which authorities explain to markets what their game plan is.

QUESTIONER: In addition to growth, you’ve also revised your forecast for emerging market and developing economies inflation. I was wondering if you could explain some of the reasons of that, and the risk to your outlook that you see now.

MR. OBSTFELD: Yes. Do you want to take that one?

MR. MILESI-FERRETTI: Oh, sure. Well, two factors that go in opposite directions. One is exchange rate depreciation, which clearly, primarily on a one-off basis, will tend to increase the rate of inflation, and of course we have seen this in countries ranging from, say, Russia to Brazil, experience very large depreciation of their currencies.

At the same time though, you have a weakening of domestic demand in a number of emerging economies as the economy slows. And that, together with the decline in commodity prices, tends to put downward pressure on inflation. Which of the two dominates, really depends on the country. If you are a commodity importer with a fairly stable currency, as the case of India, for instance, inflation will tend to decline, and in other cases where you may have larger exchange or depreciation you may be a commodity exporter under more stress, inflation may temporarily rise.

MS. STANKOVA: And we have time maybe for two more questions. Let me take one question from online, and one question from the room. And question from our online audience is taking us back to Europe. "Why has France GDP been revised downwards?"

MR. OBSTFELD: Gian Maria might want to expand on this. But essentially, you know, we see a fall in global external demand somewhat less confident, somewhat lower outcomes, than we expected for 2015, but --

MR. MILESI-FERRETTI: That’s correct. So, you have a bit of a weaker external environment, and of course you have some impact on confidence coming from the tragic events in November.

QUESTIONER: And some observers are afraid of a new run of the RMB devaluations. What do you think about that?

MR. OBSTFELD: The authorities have expressed the view that the level of the RMB is broadly appropriate. Managing it with reference to a basket, this is an innovation they proposed in December. In fact, if you look at the data, the RMB's rate against -- you know, in effective terms against averages of trading partner currencies have been broadly constant for quite some time. Our assessment is that this is broadly appropriate also.

I mean, we don’t see the need for a large change. It's not clear that the currency in effective terms is over or under-valued at this point. Clearly, the market has fears about this, and I think these fears could be quelled to some degree by just a clear communication from the Chinese authorities about the nature of the basket they are looking at, and how they are trying to stabilize the rate relative to that basket.

QUESTIONER: I know that in the last forecast you did not include the possibility of Britain leaving the EU. I was wondering if you did this time, and what were the expectations for the economic effects are in that case?

MR. OBSTFELD: You know, it's hard to factor in something that is very speculative at this point, and whose economic effects are also very uncertain, which we haven't done and analysis yet of economic impact. So, it's premature to factor this in at this time. Once we have a better idea of what kind of deal is on the table, what's actually being voted on, what might be the consequences in terms of Britain's relationship with the EU post any hypothetical exit from the EU, we'll be better able to incorporate that into forecast, but at this time we don't feel very confident doing that.

MS. STANKOVA: If we don't have any more questions we will conclude our press conference for today. Thank you to our speakers, and see you next time.


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