Transcript

Washington, D.C.
Tuesday, April 08, 2014

SPEAKERS:
Olivier Blanchard
IMF Economic Counsellor and Director of Research Department
Gian Maria Milesi-Ferretti
Deputy Director, Research Department, IMF
Thomas Helbling
Chief of the World Economic Studies Division, Research Department, IMF
Samya Beidas-Strom
Senior Economist in the World Economic Studies Division
Conny Lotze
Chief of Media Relations Division, Communications Department, IMF

MS. LOTZE: Good morning. Welcome to the press conference on the first two chapters of the WEO. I'm Conny Lotze of the IMF’s Media Relations team.

Let me introduce the speakers. In the middle we have Olivier Blanchard, Economic Counsellor and Director of the Research Department. Next to him is Mr. Gian Maria Milesi-Ferretti, Deputy Director of the Research Department. To Mr. Blanchard's right is Thomas Helbling, the Chief of the World Economic Outlook Studies Division. And to his right is Samya Beidas-Strom, Senior Economist in the World Economic Studies Division.

Mr. Blanchard will begin with some opening remarks and then we'll open the floor to your questions. Let me remind those who are watching on line to send some questions if they wish. Thank you very much.

MR. BLANCHARD: Thank you, Conny. Good morning, good afternoon to those of you who are online in a way.

The dynamics that were emerging at the time of the last WEO in October are becoming more visible. Put simply, the recovery is strengthening. We forecast world growth to be 3.6 percent this year, 2014, 3.9 percent next year, up from 3.3 percent in 2013. So, a substantial improvement.

Let me do the usual quick tour of the world, starting with advanced economies. In advanced economies we forecast growth to reach 2.2 percent in 2014, again up from 1.3 percent in 2013. So a substantial improvement. The recovery which was starting to take hold in October is becoming not only stronger, but also broader. The various brakes which limited growth are being slowly loosened. Fiscal consolidation is slowing, and investors are clearly less worried about debt sustainability in most of the advanced economies. Banks are becoming stronger, and although we are far from a full recovery, the normalization of monetary policy, both conventional and unconventional is now on the agenda.

Now, the other point to make is that although these brakes are loosened, they're loosened at different paces across different countries, and so the recovery remains uneven, which is another theme of this WEO report. The recovery is strongest in the United States, without much question, where growth is forecast to be 2.8 percent in 2014. It is also strong in the U.K., in Germany, where some imbalances persist, but where we forecast growth to be 2.9 percent for the United Kingdom, and 1.7 percent for Germany. In Japan, where we forecast 1.4 percent growth in 2014, fiscal stimulus has played a large role. And the strength of the recovery depends in large part on whether private demand, private domestic demand, and exports will take the relay.

And going back, finally, for advanced economies, going back to the euro area, the good news is that for the first time in two years, southern periphery countries are forecast to have positive, if admittedly low, growth. But while their exports are generally strong, internal demand is still weak. It has to become stronger if the recovery is to be sustained in those countries.

Let me turn to emerging and developing economies. I think the first point to make is that these economies will continue to have strong growth, lower than pre-crisis, but high nevertheless. We forecast their growth to be 4.9 percent this year, slightly up from 4.7 percent in 2013. In particular, we forecast growth for China of 7.5 percent and for India of 5.4 percent. And, of particular note is the performance of Sub-Saharan Africa, where we forecast growth of 5.4 percent. Now, strength, yes, but these economies have to perform, operate in a changing world environment due to the recovery in advanced countries and there are two aspects to it. Stronger growth in advanced economies implies increased demand for their exports, and that is clearly very good for them. But the normalization of monetary policy in the United States, however, implies tighter financial conditions and what can be described as a tougher financial environment. So stronger exports on one hand, and tougher environment, financial environment on the other.

Foreign investors are becoming less forgiving and so macroeconomic weaknesses, even if they're not worse than before, are becoming more costly. And, the last point on this is that I think we can expect the kind of bumps that we saw earlier this year and in May, June of last year to happen again, so that the environment will be more bumpy looking forward.

Let me turn to risks. Acute risks have decreased, but risks have not disappeared. A few points:

Japan will need all of its three arrows if it is to both sustain growth and maintain fiscal sustainability.

Turning to southern Europe, adjustment and recovery in southern Europe cannot be taken for granted, especially if Euro Area-wide inflation remains low, or even turns into deflation. This would make the task of reestablishing competitiveness in the south even harder than it is.

The risk, as discussed in the Global Financial Stability Report, financial reform is incomplete, and the financial system remains in various dimensions at risk.

On risks, geopolitical risks have risen, but for the moment they haven't had global macroeconomic implications. Now, looking ahead, again, as this recovery strengthens, the focus must be increasingly turning to the supply side, and I want to make three points here.

First, potential growth in many advanced economies is very low. Now, this is bad on its own, but it also makes fiscal adjustments that most countries have to do much more difficult. So, in this context, measures to increase potential growth are becoming more important. These range from rethinking the shape of labor market institutions to increasing competition and productivity in a number of nontradable sectors, to rethinking the size of the government in some countries, to reexamining-examining the role of public investment.

Second point. Although the evidence is not yet clear, potential growth in many emerging market economies also appears to have decreased. In some countries, such as China, lower growth may be in part a desirable by-product of more balanced growth, but in others there is clearly scope for a number of structural reforms which could help increase the underlying growth rate.

Third and finally, as the effects of the financial crisis slowly diminish, another trend may well come to dominate the scene, namely rising inequality, although inequality has always been perceived as a central issue, not only in economic turns, but in social turns, political turns. Until recently it was not seen as having major implications for macroeconomic developments. I think this belief is increasingly called into question. How inequality affects both the macroeconomy and the design of macroeconomic policy will likely be increasingly important items on our agenda for a long time to come.

Let me end here, and then turn to your questions.

QUESTIONER: You have urged the ECB many times to adopt a more accommodative stance, which seems to have mildly irritated the President of the ECB. Could you tell us which form this accommodation should take, in terms of cutting rates more, or adopting sort of European QE-style form of accommodation?

The other question is on Italy, which is at once again the bottom of the G-7 growth table. What are your suggestions there?

MR. BLANCHARD: Let me take the first question. One reason to worry about the eurozone is deflation. As you know, our baseline has positive but low inflation, far below 2 percent, but we think there is also a risk of deflation, negative inflation. And we think that if this were to happen this would make the adjustment both at the euro level, and even more so for the countries in the periphery, very difficult. So, we think that everything should be done to try to avoid it. How is it avoided? It is basically avoided by making sure we push healthy demand up so as to increase output, decrease unemployment, decrease the downward pressure on prices. To do this one has to understand that it is not just the job of the ECB. It will take many measures, and each of them is essential. So, for example, I think that what is being done to assess, clean, and recapitalize, if needed, the banking system is at least as important as anything the ECB can do on the monetary front.

Turning to the ECB, the ECB is aware of the fact that inflation is lower than their target and they are considering a number of measures. I will not go into which ones they should choose. It is largely a set of technical issues. Among the choices are negative interest rates, QE, securitization programs of various sorts. They should all be looked at, and I know the ECB is looking at them. And we hope they will implement those as soon as they are technically ready to do so. I would say in general, sooner is better than later.

MR. HELBLING: On Italy, growth has improved. Italy is back into recovery. Low potential growth remains a concern. There is a well-defined set of structural reforms that the IMF and others have advocated that includes labor market reform, in particular a recommendation to have a single labor contract, lower labor taxes, judicial reform, and more efficient public administration.

QUESTIONER: You referred to Britain's strong growth being at 2.9 percent. One of the concerns which is taking place in the U.K. at the moment is that some of this might be rather bubbly based on low interest rates, QE, the help to the housing market. I just wonder if you could comment on that. Do you feel the housing market in the U.K. has become rather dangerously unexposed?
MR. HELBLING: In the first instance, the turnaround in the housing market has helped the recovery, which is welcome. House prices have increased, in particular in London. So it is an issue of macroprudential policies and Bank of England to review the financial stability implications of the rising housing prices. But at this point, the turnaround in the economy is a reflection that monetary policy has worked in conjunction with great foreign investor interest.

QUESTIONER: From the report we see that you have lowered the forecast of most of the emerging countries, except developing Asia. One main reason you mention is the tightening financial environment. I wonder if you can elaborate more on that? Should we be worried about the emerging countries more than advanced countries, and why?
MR. HELBLING: I think one concern, and one that is emphasized in the WEO, is subsumed in the reference to the changing external environment. For a long time emerging markets were the stars of the global economy, experiencing robust growth, offering better return prospects. What has changed recently is that we are seeing better return prospects in advanced economies, better growth but also prospects of monetary policy normalization. This is a more difficult environment, in the sense that investors have become less tolerant to emerging market risk. That is where the issue of macro weaknesses, as Olivier Blanchard mentioned earlier. But many emerging markets are in a stronger position to withstand capital flow reversals. They have more flexible exchange rates. They have greater buffers in terms of foreign exchange reserves. Their policy frameworks have changed. And as you can see over the past few months, countries that were relatively more under pressure, if they responded, they were able to control the situation and return to stability. So overall we think under our baseline forecast where we would expect some bumps, that emerging markets can manage the situation and the risks.

MR. BLANCHARD: Just to follow-up on this, I think you have to distinguish between two evolutions. The first one is what is happening to potential growth, and I think in general, in many countries, and in Asia in particular, potential growth is probably lower than it was before the crisis. So, this is not a cyclical development, but a trend evolution, which reflects change in the composition of growth, a change in the environment. And then country by country you have deviations from potential. And then indeed as Thomas has said, the environment is a bit more challenging, and most countries seem to be adjusting to it, but it is clearly harder than it was before.

QUESTIONER: My questions are about Russia and Ukraine. First, has the IMF tried to assess the potential impact of sanctions against Russia, both announced and anticipated? And, for the record, because not everyone understands this, can the IMF itself join any sanctions, announce any sanctions like that? On the Ukraine, simply, how confident are you that they will be able to pay their debt?

MR. BLANCHARD: On Ukraine, we're not going to discuss it in any detail because we're still in the process of finalizing the program. We think we have potentially a very good program, and we’re quite confident that it is sustainable, and that the program will help achieve that result.

On Russia, events are moving, so one has to decide where they are and where they are going. Based on what has happened so far, I would say the main effect of what has happened there is clearly on Ukraine first, but then on Russia. And there are probably two main channels through which this is affecting Russia, from an economic point of view, the first one is an investment climate which was not perfect to start with, and is probably a bit worse. And more hesitation on the part of investors to either put their money in Russia or leave it in Russia, so that one can expect fairly substantial capital outflows. Russia has large reserves, and therefore it can almost surely face those outflows, but it may well have to decide to increase the interest rate. For all these reasons we think this will lead to lower growth in Russia. I'm reluctant to give you a number, but surely based on what has happened, growth in Russia will be lower than it otherwise would have been.

QUESTIONER: I would like to touch on the Arab turmoil, so-called Arab Spring. Where are the negotiations with Egypt, and other countries that have been affected by their economies being affected after the revolutions? And at the same time I would emphasize more on the Ukrainian/Russian issue. What is the outlook of the World Bank and IMF in case there is no more gas from Russia to Europe?

MR. BLANCHARD: On the last part, again, as I have said, you can speculate as to various scenarios which could take place, and there are surely exercises we do in-house, but at this stage I will limit my remarks to what has happened and the implications of what has happened to the economy today.

MR. HELBLING: On the Arab countries in transition, the situation for many of these economies remains difficult. Economic and political regimes are still changing, and the countries have not yet returned to a state of more normal, stable conditions. That being said, Egypt has been helped by financing from Gulf countries, whereas many other countries, including Tunisia and Jordan have IMF programs which have helped or contributed to stabilizing the situation. Hopefully, as Europe is recovering, that will also help the Arab countries in transition in the Mediterranean basin.

MR. BLANCHARD: Let me again make a more general remark. What is very striking is that political transitions create very difficult macroeconomic problems and fiscal problems, and there is a very large number of political transitions happening in the world. It is part of the job of the IMF to help these countries achieve that transition, but it is far from obvious.

QUESTIONER: (Interpreted: A question on the outlook for Bolvia).

MR. MILESI-FERRETTI: I can tell you in general our growth forecast for Bolivia is quite strong, 5.1 percent for 2014. In general it is true that perspectives for commodity exporting countries in Latin America have become a little bit more uncertain on the commodity side, given the possibility of a slowdown in China, which as you know is a source of a sizable fraction of global demand for copper, for iron ore, and for other commodities. But, overall you have had sound macroeconomic management in a number of the commodity exporters in Latin America, and prospects for growth, for example, in other countries in the region that rely heavily on commodities, like Peru or Colombia, or Chile, are still quite strong. Peru is forecast to grow at close to 6 percent, I think it is 5.5 percent for this year, Colombia 4.5 percent. So overall the prospects are good. The challenges are for countries to be able to adjust quickly to shocks that may be associated with declines in commodity prices. In that sense, the possibility of having the exchange rate absorb those shocks is helpful. It is also helpful to build fiscal buffers, so that when commodity prices decline, given the heavy reliance of some of these countries on commodity-based revenues, the government is in a fiscal situation which remains stable and able to retain the confidence of investors.

QUESTIONER: My question refers to China. I notice that the IMF prediction of China's economic growth remains the same for 2014, which is 7.5 percent. However, in between the last and current WEO reports the third plenum took place. So far have the reforms reached your expectations? And do you support the Prime Minister's placement of himself at the center of China's makeover?

MR. HELBLING: On China and the forecast and the reforms after the third plenum, overall the reforms are welcome, a rebalancing of the economy and bringing the economy to a state of more sustainable, less investment, less credit growth is clearly needed. We think that the proposed reforms go in the right direction. Financial sector liberalization, interest rate liberalization, some opening up of state-owned enterprises to more competition, but we expect these reforms to be gradual, and mainly affect medium-term growth rather than growth in 2014/15.

QUESTIONER: Mr. Blanchard, this time last year you singled out the U.K. as one of those countries that needed to change course from a fiscal perspective. Now, it is the strongest growing economy in the G-7. I'm curious as to whether, did they change course, or were you just wrong in the first place?

MR. BLANCHARD: I think it is fair to say that our forecast was too pessimistic, and indeed growth has been much stronger than we had forecast. This being said, we're in the business of forecasting. Forecasting is an imperfect science and sometimes we overpredict and sometimes we underpredict. In this case we clearly underpredicted, and the fact that consumption increased so much was very good news. As was discussed earlier, consumption and residential investment looked like a rather unbalanced way of growing, but I think that looking forward investment seems to be coming back and growth is going to be more balanced, so indeed that's very good news.

Part of our job is also to think about risks and warn when we see risks. Fortunately, most risks don't materialize, and this was again a case in which it didn't. Again, that is very good news for the U.K.

QUESTIONER: I'm asking about the Middle East growth rate that is projected for 2014 and 2015. It looks like an average between 2 and 4 percent, which is also what is going to happen in the United States and Australia. Despite all the prospective violence and the transition, is this growth rate only because of the financial help from the Gulf countries, or are there any other elements that put the growth rate at that particular figure?

MR. HELBLING: On Egypt, the financing from the Gulf countries certainly helped. It helped to reduce the need for fiscal adjustment and precarious external conditions for Egypt. But, then there is another element to the forecast. There is the assumption that the political situation will stabilize after the elections, and that the government can embark on a program of economic reforms to raise growth and return to macroeconomic stability.

QUESTIONER: According to recent reports from the Independent Evaluation Office from the IMF, it seems that the Fund has been too optimistic in its growth forecasts for countries that receive a huge amount of financial assistance from the Fund, like Greece or Ukraine. How do you explain that? Does it have anything to do with the political pressure that the Fund is facing when it has to decide whether or not to help a country?

MR. BLANCHARD: On forecasting, you are only citing part of the report, which basically indicated that on average our forecasts are not biased and are as good as or better than other forecasts. I want to reiterate that point. But it found indeed that typically the forecasts associated with the first year of some programs had been optimistic. I think that is something that we have to look at, indeed.

QUESTIONER: My question is about China. Because, from the beginning of this year we see China's currency unexpectedly depreciate, and based on your research how do you explain the unexpected deflation, depreciation of China's currency? And also, what is your forecast of the Chinese currency in this year?
MR. HELBLING: On the forecast for the currency, we don't make forecasts for currencies. But more fundamentally, on the exchange rate policy, I think the Fund has long advocated more exchange rate flexibility in China, so widening the band around the peg from 1 to 2 percent was a helpful step in that direction. And then within a widening of the band, market forces played a role, and in that sense in this case that led to some depreciation.

QUESTIONER: I have a question on Slovenia. The IMF improved the outlook for our country. In October last year you expected our GDP to shrink more than 1 percent. Now you expect slow growth. What are the main reasons for the improvement and where do you see the challenges for our country?
MR. HELBLING: I think the context for the improvement in the growth prospects for Slovenia is the recovery in the Euro Area, which has turned around from recession to recovery. Tough challenges for Slovenia are still present though. If you look at our growth forecasts, they're relatively moderate and that reflects in particular the ongoing challenges from financial sector reform, bank balance sheet repair, and recapitalization.

MS. LOTZE: Thank you very much. We're closing the press conference here. Thank you.