Transcript

April 17, 2012

Olivier Blanchard, IMF Economic Counselor and Director, Research Department, IMF
Jörg Decressin, Deputy Director, Research Department
Thomas Helbling, Division Chief, Research Department
Abdul de Guia Abiad, Deputy Division Chief, Research Department
Gita Bhatt, External Relations Department, IMF

Ms. Bhatt - Good morning, everyone. Welcome to the press conference on the latest World Economic Outlook, one of the IMF's flagship publications. I'm Gita Bhatt, from the External Relations Department. This is a live, on-the-record press briefing. Let me introduce the panel. We have today with us Mr. Olivier Blanchard, Economic Counselor and Director of the Research Department. Next to me is Jörg Decressin, Deputy Director of the Research Department. Next to Mr. Blanchard is Mr. Thomas Helbling, Chief of the World Economic Studies Division. And next to him is Mr. Abdul de Guia Abiad of the World Economic Studies Division. Without much ado, I hand over to Mr. Blanchard who will give some opening remarks, and then we'll open the floor to questions.

MR BLANCHARD: Thank you, and good morning to all of you. I hope my voice will last for the duration of the this press conference. I apologize to you if it doesn't.

For the last six months the world economy has been on what is best described as a roller coaster. In the fall, a simmering European crisis became acute, threatening another Lehman-size event and the end of a recovery. Strong policy measures were taken. New governments came to power in Italy and Spain. The European Union adopted a tough fiscal pact, and the European Central Bank injected badly needed liquidity. Things have quieted down since, but an uneasy calm remains. One has the feeling that at any moment things could well get very bad again.

So, this very much shapes our forecast. Our baseline forecast, as you will see in a minute, is for low growth in advanced countries, especially in Europe, but with downside risks being extremely present. Now, our baseline is constructed on the assumption that another European flare-up will be avoided, but that uncertainty, especially in Europe, will linger on.

It recognizes that even in this case, even in the absence of another flare-up, there are still very strong breaks to growth in advanced economies. Let me talk about those briefly.

Fiscal consolidation. It is needed. It is proceeding. But, it is clearly weighing on growth.

Bank deleveraging. It is also needed. But it is leading, especially in Europe, not to a credit crunch, but to tight credit. In many countries also, in particular in the United States, some households, not all, but some households are burdened with very high debt. This leads them to have low consumption, low demand. Foreclosures are weighing on housing prices and housing investment.

So how are these various breaks to growth reflected in our forecast? Let me give you a few numbers. For advanced countries as a whole, we forecast growth of 1.4 percent in 2012, and 2 percent in 2013. These are low numbers. A bit more detail. For the United States, the numbers are 2.1 percent for 2012, and 2.4 percent for 2013. Where things are worse is for the euro area, where the numbers are -.3 percent for 2012 and .9 percent for 2013. This negative number for the euro, for 2012, reflects negative growth of around 2 percent, in countries such as Italy and Spain, and positive growth in Germany and France, but the German and French numbers are still very low.

Let me, within the baseline, turn to emerging and developing economies. Our forecasts are there for continued strong growth although somewhat lower than they have been in the past. For many countries the challenges come mainly from the outside in the form of lower exports to advanced countries, because of the low growth there; of the volatility of commodity prices, which affects both of the exporters and importers; and the high volatility of capital flows, which we have seen and continue to see. Now, our forecasts for those economies reflect our belief that they will be able to handle these challenges by using the monetary, the fiscal space that they still have, and most of them still have, and by using appropriate macroprudential tools to deal with the volatility of capital flows, or any high domestic credit growth. So let me again give you a few numbers here.

Our forecasts for 2012 are for 8.2 percent for China, 6.9 percent for India, 3 percent for Brazil. These are roughly the same numbers as we gave you in January when we last met. And our forecast for Russia is 4 percent, which is higher than it was last January.

If you turn to developing countries, for example, for sub-Saharan Africa, our forecast is for continuing strong growth based on strong commodity prices in part, at 5.4 percent.

Now, putting things together, these forecast imply a forecast for world growth of 3.5 percent for 2012, improving to 4.1 percent for 2013.

You may want to ask, how does this relate to our forecast as of last January and last September? It is about .2 percent higher than our forecast were in January, and about .5 percent lower than they were in September.

Now, let me turn to the risks. So, geopolitical tension affecting the oil market is surely a risk. But, the main risk remains that of another acute crisis in Europe.The building of the so-called firewalls, when it is completed, will represent major progress, but by themselves firewalls cannot solve the difficult fiscal, competitiveness, and growth issues that some of the European countries face. Bad news on the macroeconomic front or the political front still carries the risk of triggering the type of dynamics that we saw last fall.

This takes me to the last part of my introductory remarks, which is implications for policy.

First, about the baseline, and whether growth under the baseline can be made stronger. Many, even most, of the policy debates here center around how best to balance the adverse short run effects of fiscal consolidation, or bank deleveraging, against their favorable effects in the long run. Now, in the case of fiscal policy, the issue is complicated by the pressure from markets for immediate and strong fiscal consolidation. It is further complicated by the fact that the markets appear somewhat schizophrenic, asking for fiscal consolidation, but reacting adversely when consolidation leads to lower growth. So, what is the advice? We think the advice is the same as the one we have given before, which is that while some immediate adjustment is needed for credibility, you cannot just say, "I will do it tomorrow." The search should be for credible, long-term commitments. How do you do this? By passing measures that decrease trend spending and by putting in place fiscal rules that reduce deficits over time, not right away necessarily. Insufficient progress in designing such a medium-term plan is especially noticeable in the United States and in Japan.

Turning to bank deleveraging, the challenge again here is to make sure that there is deleveraging, but it doesn't need lead to a credit crunch, either at home or abroad. Partial, public recapitalization of banks should remain on the agenda. To the extent that it will increase credit and activity, it could easily pay for itself, more so than most other fiscal measures.

Turning to policies aimed at reducing risks, the focus, again, is clearly on Europe. The measures taken in response to the crisis in the fall represent important progress. Further measures must, however, be taken to decrease the links between sovereigns, between the states, and the banks. These measures run from common deposit insurance to common regulation and supervision of banks. Now that the fiscal pact has been introduced, and is being put in place, euro countries should also explore the scope for issuing common sovereign bonds.

Finally, taking one step back, perhaps the highest priority at this point, but also the most difficult to achieve, is to durably increase growth and decrease unemployment in advanced economies, and in particular in Europe. Low growth not only makes for a subdued baseline forecast and lasting unemployment, but also makes for a much harder fiscal adjustment, and therefore much higher risks along the way. The search for structural and fiscal reforms that help in the long run, but do not depress demand in the short run, should be very high on the policy agenda. Such reforms probably hold the key to successful and durable exit from the crisis. Thank you.

Ms. Bhatt - Thank you very much. Just want to let you know that Mr. Blanchard's opening remarks will be available to you at the end of this press conference. We open the floor to questions. Please identify yourself and your affiliation.

QUESTION: Mr. Blanchard, I would like to address what you call in your introduction the Holy Grail. Take the case of Spain, where you have austerity and you have commentators on the right and the left calling this insane. What with house prices declining, there are a lot of forecasts that say the fiscal crisis in Spain is going to worsen. So, is it correct for the ECB and other European institutions to insist on further austerity when growth is not even on the radar screen?

Mr. Blanchard - I shall let Mr. Decressin start with answers specifically aimed at Spain and then maybe make comments after that.

Mr. Decressin - There is certainly a need for fiscal adjustment in Spain. But, the deficit is very large, and reducing it is more akin to a marathon than a sprint. In that regard, we feel that the Spanish government has struck the right balance between supporting growth and moving forward with fiscal consolidation. At the same time, it will be very important to do something about reforming the labor markets. Again, there, the government has tabled some strong plans and the key is implementation. And finally, there is also the financial sector which needs to increase its capital and liquidity buffers. And again, there are good plans that need to be followed through.

Now, you might say there is no light at the end of the tunnel. I think we disagree there. There are various indicators that are turning around and showing that the policies are working.

First, you see in the current account deficit in Spain having narrowed quite considerably.

Second, you see that prices have slowed down. This is all part of rebuilding competitiveness.

And third, the fiscal deficit is going to be much lower, according to our estimates, this year than it was only a couple of years back.

Now, before growth will return it will take some time, but these are all prerequisites in order to get it going again. We expect that by 2013 growth will be positive again.

Mr. Blanchard - Let me take the more general issue of fiscal consolidation in Europe. Many of these countries face two challenges. The first one is fiscal consolidation, and the second is competitiveness.

There is no doubt that fiscal consolidation is needed for the long run, but in the short run it is not conducive to growth. So it is no great surprise that fiscal consolidation is not leading to positive growth this year. I think the relevant question is not whether there should be fiscal consolidation or not. There should be fiscal consolidation. The question is, at what speed? In the case of Spain, the question is complicated by the reaction of markets, which clearly decrease the margin of maneuver that the government has. When we look at what Spain is doing in terms of the measures that they are taking-- for example the improvement in the relations between the regional governments and the central government--and various other measures that they are taking, we think these are the right ones. What we would not like to do is more fiscal consolidation than that. Or, if activity were to slow down, we would be very reluctant to agree to further fiscal consolidation. We think that wherever it is possible, automatic stabilizers should be left to play. This is a remark about Spain and other countries as well.

QUESTION: Two questions. One for Mr. Blanchard. You said you were for exploring the scope of limited eurobonds. Could you be a little more precise, please, and explain how you would avoid moral hazard problems in that case? Secondly, the World Economic Outlook says there is further scope for monetary easing in the euro zone for the ECB. What would you say to countries like Germany where there are fears of the beginning of price bubbles, for example, in the housing sector, and other segments?

Mr. Blanchard - On the first one, clearly if you are going to have common bonds market, you want to make sure the fiscal policy of the various countries is responsible. So before there was a fiscal pact, I could see the extreme reluctance of some countries to actually participate. The European Union now has agreed to a fiscal pact which is a fairly tough one. I think most countries intend to abide by it. In this case, the moral hazard is more limited. Now, I don't think that there is at this stage the degree of trust and control which would allow for a common eurobond market as a whole. I think this is a goal. This is not something which can be done overnight. But, there are a number of proposals around which are more limited in scope, and I think decrease the moral hazard, or even eliminate the moral hazard. One that strikes me as a very good first step, although not the solution to all problems -- none of these things is the solution to all problems -- is that of euro bills, namely having a common euro bills, with maturity of less than a year market. That strikes me as implying very little risk for the participating countries, and a very useful step in the construction of the eurobonds market. There are other proposals, as we know, there is a German proposal which makes a lot of sense and tries to deal with moral hazard.

Now that the fiscal pact is in place, I think there is more room for thinking about risk sharing along these lines. And this could make a substantial difference to the functioning of the euro zone, starting as soon as this is put in place.

On monetary policy, if I remember, monetary policy is not aimed at making Germany right or wrong, it is aimed at the euro area. And, therefore, the goal of the ECB as it has said, to have euro inflation remain within the target band. This is its job. If, for some reason, this leads to pressure in one country or another, we actually tend to think of this as largely desirable, that the countries which are doing better have a relative increase in prices, the countries which are doing worse have a relative decrease in prices. We think that is part of the adjustment. If it leads to bubbles in the financial markets, then it seems to me that the countries in which this happens should use the macroprudential tools they have to actually address this issue. This is not for the ECB to do by itself. The ECB should not be concerned about inflation in Germany, as opposed to inflation in the euro zone.

QUESTION: I have a question on the outlook of Italy. You present a figure that is -1.9 for this year. I would like you to elaborate on the reason why it is going better compared to three months ago, why it remains the worst performance in the euro zone, and what should be done to close this gap?

Mr. Decressin - We have moderately revised up the outlook for Italy relative to January and that is mainly because tensions in financial markets have eased somewhat. And, also, because the global outlook is slightly better than what it was in January. Now, it still remains one of the lowest growth rates in Europe.

2012 will be a very difficult year for Italy because they're implementing, rightly, a lot of fiscal adjustment, and this is what is weighing on growth. But ultimately it will put the economy on a trajectory for stronger growth in the future. This will however also require advancing the structural reform agenda. And there again, like in Spain, there are very positive steps being taken with respect to reforming the labor market, and these reforms need to be pushed through.

And the third ingredient is to again increase the capital and liquidity buffers of the Italian banking system. But to wrap it up, we believe that the policies have taken a decided turn for the better in Italy and the right policies are being pursued, and now it is a matter of being steadfast, and then we also expect growth to return in 2013.

QUESTION: I have two questions. First of all, the forecast for Argentina is 4.2 for 2012 and 4 for 2013. I want to know if that is the official figure that was built around the statistics of the INDEC, or you added some other information to do this forecast? Also, if there is a lot of difference between the private statistics that you are using, and the official one, the INDEC one? That is the first question. The second is about the announcement of President Kirchner yesterday. She announced that she is going nationalize 51 percent of the oil company. I want to know effect this could have in the forecast, taking into account that, of course, it is going to upset the investment climate.

Mr. Helbling - Starting with the latter on the investment climate, I think there has been some deterioration in the investment climate in Argentina over the past few years, that already built into the forecast. In general, discretionary government interventions that worsen the investment climate make it also more unpredictable, which is not helpful for investment, and long-term growth.

In terms of our forecast for Argentina, our country desk uses both official and unofficial figures in the preparation. Differences between official and unofficial figures generally are larger for inflation. Argentina has also been asked by the IMF to improve its CPI data.

QUESTION: I know from experience that self-critique is difficult, but I'm wondering if the IMF now believes that its push for fiscal consolidation in the last year was too strong, and now Europe is reaping the negative benefits? Or, whether the IMF suggested the appropriate fiscal balance, and now Europe was just too aggressive?

Mr. Blanchard: Self-critique is always difficult, but it is not relevant in this case. I think if I look back at what the Fund has said, since the very beginning of the second phase of the crisis, which is a consolidation phase, it has been very explicit about two things. The first one is what is needed is fiscal consolidation. The second is that it should come, for the most part, through a steady improvement over time, medium-term, fiscal consolidation, by putting in place rules which slowly limit spending or slowly decrease deficits. It has recognized that some initial measures have to be taken for credibility, quite apart from market pressure, but even more so on the market pressure.

These principles, were I think very clearly stated in a piece which came at the very beginning of the fiscal consolidation called "The Ten Commandments." I'm not sure the name was the best one, but at least the 10 points we made there are the points I have just made, and we are sticking to it. We basically think that what is essential is for governments to have a credible, medium-term plan.

Now, if you don't have a medium-term plan, which is credible, or you don't have a medium-term plan at all, then you are forced, and rightly so, by markets to fiscally consolidate more and more quickly. And this has adverse effects on growth. Therefore, the answer is not that you should do this, but that you should basically go back and try to find medium-term measures which are going to be credible and make a difference. I think we have been very consistent on this throughout.

QUESTION: The Philippines seem to grow 4.2 in 2012 and 4.7 percent in 2013. What brought this faster up tick for next year? And on the other hand, what are the downside risks to this? And, just like Italy, Philippines is a laggard in ASEAN 5. What needs to be done for Philippines to have faster growth, maybe even faster than its ASEAN 5 neighbors?

Mr. Abiad - Philippine growth is projected to increase to 4.2 percent from 3.7 percent last year. There are various factors behind that. This is occurring in an environment where global growth is pretty weak. What is supporting growth is basically strong domestic demand, backed by strong government consumption, remittances, and the implementation of various public/private partnerships. In terms of the Philippines’ performance relative to its neighbors, a key element to raising potential growth is basically strengthening investment, both infrastructure investment by the public sector, and also improving the business climate so that private investment strengthens.

In terms of risks, the main risk externally is a reintensification of the euro area crisis. Chapter 1 of the WEO has some estimates of what impact such a scenario might have on emerging Asia. Our estimates are that it could lower output relative to our baseline by about 1 1/4 percent.

QUESTION: Question in three parts here. What are the chances, do you think, of a country in the euro zone deciding that it has had enough of austerity and leaving the euro altogether? The first point. If that would happen, what would be the contagion risk for the rest of the euro zone? And thirdly, what would be the impact on the rest of the global economy?

Mr. Blanchard: We are working on doing everything possible so that this does not happen. And, my sense is that if I look, even in countries like Greece, to public opinion, there is very strong support for staying in the euro. The euro has costs and benefits. At this stage, we see one of the costs, which is it makes the adjustment especially the competitiveness adjustment, harder. And we tend to forget the benefits. But, people are aware that the euro has changed their life in many ways. So, for the moment, there is no plan B. We basically are doing whatever we can to help countries succeed within the constraints of the euro.

The cost to any country of leaving the euro unilaterally would be extremely large and would surely lead to at least in the short run, to a very large drop in output. On the contagion risk, I think that if it were to happen, this would be one of the circumstances where the firewalls would be needed. The issue would be if that country goes out, what happens to the others. And, there would probably be pressure in a number of sovereign bond markets, and the issue would be what to do. In that context, being able to give reasonable financing to the other countries would be essential and that is where the funds we're mobilizing could be used.

Hopefully, if this was done, then the damage to the world economy would be limited. But, again, I want to repeat that we are really working under a scenario in which countries stay in the euro and adjust.

QUESTION: I would like to ask about the forecast on the Arab countries in light of the crisis in Europe and the Arab Spring, how did the Arab Spring and the crisis in Europe affect the economies of the Arab countries.

Mr. Helbling - In terms of the impact on the Arab countries, I it is helpful to distinguish between oil exporters and oil importers in the region. Starting with the latter, 2011 clearly was a difficult year. On the one hand, there has been unrest, not in all countries, but there has been some sort of contagion, which has led to declines in confidence and increases in uncertainty, which have undermined investment. This, in turn, held back aggregate demand in these economies. At the same time, there has also been a decline in tourism for a number of countries, also again in both countries directly affected by the unrest and other countries.

In contrast, oil exporters have generally been less affected by unrest, except for Libya, as we know. They have instead benefited from higher oil prices. A number of oil exporters have also increased oil production, notably Saudi Arabia, which provided a boost to growth in 2011. Looking forward, we anticipate in oil importers a restoration of confidence, which would help investment and domestic private demand more generally. It should also bring a return of tourism, slowly, over 2012/13. What will be weighing a bit on growth is that the uncertainty has also led to uncertainty about policies, which has put pressure on exchange rates, in part, and has necessitated fiscal adjustment. So there will be some fiscal adjustment, for example, if you look at Jordan, there has been some reduction in subsidies on food expenditure items, which will reduce private expenditure.

Oil exporters, in contrast, will benefit from high oil prices. The production increases that took place mostly in the latter part of 2011 will spill over into growth in 2012, so oil exporters will do well.

QUESTION: Mr. Blanchard, I just was just wondering whether you could give us a little more precision on your guidance in cases where countries are facing the schizophrenia? Because it seems like you are saying anchor expectations in the medium term, yet that is not rewarded by markets, which seems to pose something of an imponderable choice here, a difficult choice. You either risk current growth and satisfy the markets, or risk the market backlash. So in that case, which it seems Spain is up against, which risk is better to take?

Mr. Blanchard: You are absolutely right that this complicates the life of policy makers. It's been described as, "Damned if you do, damned if you don't." I think that is right, unless you are willing to get out of this very simple tradeoff. If you can establish credibility through a larger set of measures, I suspect that will spill over to fiscal. So I have a sense, for example, to be very concrete, that a measure that everybody agreed should have been taken years ago, but was not because of political implications, but which is now adopted by a government, will give that government substantially more credibility than if it cuts infrastructure spending by 1 percent this year. So, I think that is what governments have to do. The markets listen and you have to convince them that you are credible, that you know what you are doing. You can do this by passing some structural reform, and sending a signal that you are serious. Or, you can do this by passing medium-term fiscal measures and try to do so in a credible way, and explain and explain and explain. But, otherwise, if you don't do this, yes, indeed, you have a very hard act to perform.

QUESTION: Two questions, quickly. The WEO revised growth for Jamaica this year down -0.5 percent from September's forecast, which was forecast 1.7 percent. What are the factors that led to that downward revision? And secondly, in regard to the euro area, what are the contagion risks to the Caribbean in general and Jamaica in particular, especially given that Spanish companies, especially hotels, have a lot of investment in the Caribbean, and in Jamaica in particular, and a lot of them are leveraged and a lot of banks will be deleveraging to improve their balance sheets? What are the contagion risks for Jamaica in that regard?

Mr. Helbling:- On the downward revisions to growth, in Latin America in general and Jamaica in particular, most of the downward revisions in 2011 and looking backwards and now for 2012 are explained by the changes to the global environment. So, in that sense, Jamaica is not different from most other countries in Latin America where lower commodity prices and lower demand from advanced economies have weighed on growth.

In terms of contagion from the exposure to European banks and other companies, it is clear that this has put additional, depressed growth.

Looking forward, the question is always whether there is substitution for this exposure. What we are seeing in Latin America in general is that, yes, there are subsidiaries of Spanish banks, but they have been so far relatively less affected by the deleveraging of their European parent banks, partly because they're mostly locally funded. So in that sense, they're a bit shielded. Clearly to the extent that Spanish firms operated in Caribbean economies are constrained by the financial conditions in Europe, this could weigh on growth in Jamaica and other economies in the region. On the other hand, there is always substitution, as these companies can look for funding elsewhere for their operations outside the euro area. So one has to weigh the direct negative effects against the substitution, and so, that depends very much on company specific circumstances.

Ms. Bhatt - We have received a lot of questions online. Many have been answered already. But, let me take one—a rather broad question, to Mr. Decressin: What about the situation in Germany?

Mr. Decressin - We have also marked down the growth forecast for Germany relative to last September, so the euro area crisis has had large effect on Germany as well, notwithstanding that they're in a much better position to cope with it.

In our view, there is enough fiscal adjustment in train in Germany, Germany has space to adjust much more slowly than the rest of the euro area, and is doing so appropriately. It can loosen up if the situation in the euro area were to become worse. And, like others in the euro area, it also faces its share of structural challenges. For example, the banking sector is still very much influenced by the public sector and this is something that will need to be reformed over the medium term. And, finally, there is also a need for structural reforms to raise investment. Why is this important? Not only would it would boost activity in Germany and thereby help the rest of the euro area, it would also reduce the large current account surplus Germany has and thereby help internal rebalancing in the euro area.

QUESTION: If China, widening the trading band for yuan is welcome, how much further appreciation is needed and will it help global rebalancing?

Mr. Decressin - First, we welcome the widening of the band for the renminbi. We have said that additional exchange rate flexibility would be helpful in terms of addressing one key challenge that China faces, which is to rebalance the internal economy from one that is driven very much by investment and exports, to one that is driven by consumption, which is also what their five-year plan is envisaging.

As far as the exchange rate and its valuation is concerned, we have significantly revised down our projection for the current account surplus of China over the medium term. If you go to our last WEO we foresaw that the current account surplus for China in 2016 was going to be around 7 percent of GDP. Our present forecast is close to 4 percent. Now, what this means for the extent to which the renminbi is aligned with fundamentals is still not entirely clear to us, because we are in the process of changing our methodology for assessing sustainable current accounts and equilibrium exchange rates. And, so we will need to look at all other economies and come to a verdict, and we expect to be ready to do so soon.

QUESTION: I have a question about Japan. As you mentioned in the report, Japan has serious energy problem right now. Could you explain how deeply you are concerned about that, and what will be the impact on the world economy?

Mr. Abiad - That is one of the risks facing the Japanese outlook right now. Nuclear energy, which used to account for 30 percent of energy supply in Japan, has been cut dramatically, only one nuclear plant is still operational. We don't have estimates of what impact that has. We look at energy shortages as basically a risk to the baseline, along with the other risks coming externally from the euro area crisis, and a possible oil shock emanating from tensions in the Middle East.

QUESTION: Since we are talking about outlook, if you can tell us what is the prediction or outlook for Greece? And, there is a second question, also some people analysts in Europe start already talking about the third program, what is your opinion, sir?

Mr. Decressin - On the outlook for Greece, which is what is directly relevant for this press conference about the World Economic Outlook, after contracting by about 7 percent in 2011, we expect the Greek economy to contact by another 4.7 percent in 2012. There are really two key factors here at play. The first is very large fiscal adjustment that is taking place, and the second is a significant reduction in minimum wages, which is one ingredient in rebalancing and rebuilding competitiveness of the Greek economy. In the short run this will be weighing on demand and therefore subtracting from growth, but in the long run it should help bring growth back up again and improve the competitiveness of the Greek economy.