Transcript

Washington, D.C., April 11, 2007

MR. MURRAY: Good day. I'm William Murray, Chief of Media Relations at the IMF. This is the world economic forecast briefing for the Spring 2007.

Before I turn the table over to Simon Johnson, the Economic Counsellor and Director of Research at the IMF, let me also introduce Charles Collyns, Deputy Director of Research, and to his right, Timothy Callen, the Chief of the World Economic Studies Division of the IMF.

Mr. Johnson.

MR. JOHNSON: Good morning. As of March 26th of this year, I assumed the role of Economic Counsellor and Director of the Fund's Research Department. As part of my new job, I am pleased to brief you this morning on our latest view of the global economic outlook.

Let me start by saying 2006 was another robust year for the global economy. With growth at 5.4 percent, it was the fourth consecutive year of strong global activity. Indeed, we have not seen a four-year span like this since the early 1970s.

Notwithstanding the ups and downs of financial markets recently, the global economy is set for another good year in 2007. Our central forecast sees global growth slowing mildly to 4.9 percent this year with somewhat slower growth in the United States, continued solid growth in Europe and Japan, and continued impressive growth in emerging markets and developing countries led by China and India.

The risks to this favorable outlook also look less threatening than they did at the time of our September WEO. This may sound surprising to some of you. All of us have heard or read about issues in the U.S. housing market, problems in subprime mortgages, bankruptcies and foreclosures, and more recently softening of business investment. Much of the news has not been good.

You might ask, if the U.S. sneezes, won't the rest of the world catch cold?

This is the key risk to the outlook and a timely question we have looked at extensively in this report. Our bottom line view is that while the U.S. may indeed have sneezed, it appears to be a mild sneeze thus far, and not likely to spread.

Has the credit cycle turned in the United States?

No. I do not believe that it has. This is not to say that financial risks have not risen. They have risen, as emphasized in the new Global Financial Stability Report released yesterday. Emerging strains in U.S. subprime and mortgage lending where credit standards were clearly relaxed are going to impact that segment of the market.

To date, though, there is little contagion to other lending categories, especially the further up the credit quality ladder you go, but we will be watching developments there closely.

Others may worry that the recent bout of financial market volatility may begin to undermine the strong global growth that we envisage. But I do not believe that the financial tail is about to wag the economic dog.

In our view, the cascade of selling in financial markets that we saw about a month ago represented a limited and largely temporary pullback from riskier assets including from emerging markets, after a long period of market buoyancy. Markets have since rebounded, and we see solid underlying macroeconomic fundamentals as providing an anchor to skittish financial markets, rather than market turbulence undermining economic momentum.

Having said that, it has been a useful reminder that financial markets can turn abruptly, particularly for those emerging market economies that are reliant on external capital, but where policy credibility has not yet been firmly established. It is a significant and repeated irony in today's world that success can substantially complicate macroeconomic management by attracting a surge of capital flows. Such inflows can enhance growth, but at the same time countries must take care of monitoring and addressing external vulnerabilities that could arise.

On inflation, our concerns have eased from six months ago as oil prices have fallen from their highs of last August, but inflation does remain a potential concern. As the global expansion enters its fifth year, output gaps, which are hard to measure, have closed, and labor markets have tightened across both advanced and emerging market economies. As a result, it is possible that increasing globalization of product and labor markets may have a somewhat less restraining influence on prices and wages going forward.

In oil markets, too, spare capacity is still tight, and the recent pickup in oil prices has provided a reminder of the continuing risk of another oil price spike.

With respect to global imbalances, the large current account surpluses in some countries and deficits in others, some progress is being made with more balanced growth geographically and lower oil prices, and there are some signs that imbalances are stabilizing, although they still remain large. Global imbalances can be resolved while supporting continued rapid global growth.

Let me summarize quickly how we see prospects in the major regions, starting with the United States. Our U.S. growth projection for 2007 has been marked down since the September WEO to 2.2 percent. This markdown partly reflects a weaker-than-expected second half of 2006, and the expectation that head winds from housing will continue for a while longer. The economy still appears likely to regain momentum through the course of this year, and into 2008. Thus far, the U.S. housing market's broader impact in the economy has been contained as resilient consumption remains supported by solid income and jobs growth. Household finances are solid and financial obligations for both renters and homeowners look manageable.

Since last summer, the Fed has paused on interest rates, pulled in opposite directions by the slowing economy and stubbornly high core inflation. The Fed, in our view, has appropriately kept its options open, and the incoming data will be critical in judging the right course forward.

While the U.S. economy has slowed, the rest of the world has remained on track. The euro area grew at its fastest pace in six years in 2006, and the economy's forward momentum looks solid. Area-wide growth is expected to moderate from 2.6 percent in 2006 to about 2.3 percent in 2007 in our forecast, partly reflecting fiscal consolidation in Germany and Italy and the effects of past monetary tightening. Growth has been boosted by employment gains and rising productivity, a healthy combination that Europe has not seen in some time.

Strengthening area-wide activity has provided a context for the ECB, the European Central Bank, to progressively normalize interest rates. With inflation below or close to 2 percent, and growth moderating but expected to remain above potential, withdrawal of remaining monetary accommodation by the European Central Bank seems warranted to forestall inflation pressures.

In Japan, the expansion appears to have regained its footing after a midyear pause. Positive sentiment in the business sector and continued employment growth should carry the expansion forward. We see growth in 2007 at 2.3 percent, about the same pace as last year. But with consumption still lagging and deflation not completely defeated, the BOJ will need to maintain a supportive monetary stance. Turning to emerging market and developing countries, we expect them to continue to grow strongly this year albeit at a somewhat less brisk pace than 2006, drawing continuous support from favorable financial conditions and in many cases from strong commodity prices. China and India continue to lead the way. In China, growth moderated slightly in the second half of 2006 partly reflecting measures to cool fixed asset investment from its recent rapid pace. But nevertheless, the economy is expected to grow by around 10 percent in 2007, and we see risks in China to be on the upside. It is unclear whether the Chinese economy will slow consistently in response to efforts to rein in rapid credit growth given the constraints to monetary policy posed by the tightly managed exchange rate.

India's broad-based expansion gathered momentum in the course of last year, running at around 9 percent, but growth should moderate some in 2007. However, spare capacity in the economy remains very low, and overheating remains a risk, despite monetary policy tightening. Elsewhere in emerging Asia, the near-term outlook remains very positive, partly reflecting intraregional trade linkages and China's strong economy as well as prudent macroeconomic management.

Activity in Latin America is projected to decelerate slightly this year from its 5.5 percent pace in 2006 as external factors appear slightly less favorable. The slowdown is expected to be broad based, with Brazil and Chile exceptions. But underlying fundamentals generally look good as most countries have continued to build credible macroeconomic policy frameworks and reduce balance sheet vulnerabilities.

Emerging Europe's growth is projected to moderate slightly from its 6 percent pace in 2006. The region continues to benefit from high rates of inward foreign direct investment and foreign bank lending. However, the heavy reliance on foreign capital could expose parts of emerging Europe to risks down the road should conditions in international financial markets become more challenging. In the Commonwealth of Independent States, or CIS countries, brisk growth is expected to moderate somewhat.

The outlook for the Middle East remains favorable, although growth is expected to moderate slightly this year. Most oil exporters have begun to increase government spending to address long-standing structural problems and invest in oil sector capacity.

In Africa, the near-term outlook remains very positive against the backdrop of strong global growth, continued progress in achieving macroeconomic stability, and rising oil production in a number of countries. Growth is expected to exceed 6 percent in 2007, up from about 5.5 percent in 2006.

So, by and large, things look very good. But the challenge is to sustain this remarkable record of strong global growth. In recent years, the combination of technological progress and increasingly open global trading and financial systems and more resilient macroeconomic policy frameworks have laid the foundation for superlative growth. This progress is coming under pressure, and I am concerned that not enough is being done to take advantage of the current period of prosperity. Let me briefly mention two specific issues.

First, aging populations in advanced countries are going to pose increasing fiscal challenges as pension and health care costs rise. These countries need to do more to place public finances on a sustainable footing, including through difficult reforms to entitlement programs that will only become more difficult the longer they are delayed.

Second, I am concerned by the perception that globalization benefits only a few countries, or only certain groups within those countries. This makes little sense when one considers how successful the global economy has been over the past two decades.

In advanced economies one only needs to look as far as the rise in real labor compensation per worker to realize how much the economic pie has grown, but all too often what too many of us focus on is our slice of the pie. This does, however, raise a valid point, that global integration and competition have brought tremendous gains, but carry distributional consequences that need to be addressed more effectively. If we don't, the danger is renewed protectionism, and that could jeopardize many of the gains that some of us now seem to take for granted.

We can now take your questions.

QUESTIONER: Two points. One, if the global economy grows quickly as you think it will in 2007/08, it will be six years of very strong growth. Is there a period in the past that had been longer than that; is that the precedent for a length of growth this long? Secondly, which of the many risks that you highlight do you think is the most threatening to that period of global prosperity to continue?

MR. JOHNSON: A very good question. How far back do we have to go to find a period of prosperity like this. There was a period of very good growth in the late '60s and early 1970s; so we would be around that previous record. We can go back earlier in the '60s, into the '50s, to find something comparable.

This growth is more balanced than some of the rapid global growth we have seen before. Everyone around the world is sharing this prosperity. It is a very important point to emphasize. I hesitate to say that it is completely without this precedent, but it is very impressive and something we obviously hope will continue.

In terms of the risks that are most threatening. I'm not sure I would single out any particular one, I think you have to look at the range of potential risks in all of these situations, those risks that I mentioned. Obviously, whenever you have rapid growth, people always think about inflation as a potential issue. But again, I would emphasize the balanced nature of this global growth. There are many economies expanding their capacity. China and India are investing dramatically. Japan and Europe are having strong pickups in business investment as well. And there is increases in oil capacity, as I mentioned.

So as long as people continue to see the prospects, the returns on investment as being positive, I think we can sustain global growth around 5 percent per year for some time to come.

QUESTIONER: A year ago, your predecessor was talking about the urgency of coordinated action to deal with global imbalances. There doesn't seem to be any talk about it now. Does that mean that you think they can be resolved without international coordinated action? Or, you have just given up on the political likelihood of that actually happening.

MR. JOHNSON: I think as we talk about in the report, progress has been made on these global imbalances. For example, our projection on the U.S. current account deficit has come down by about 1 percent of GDP this year relative to the last WEO. That is an important step in the right direction. And I think that countries, major countries around the world that are involved in these imbalances have been paying more attention to this issue, partly, I think, because we raised it, and partly because other people have raised it. And I think, as you probably know, at the Spring Meetings this weekend there will be further announcements in this regard, and I'm certainly not going to preempt those in any way.

QUESTIONER: On the Japanese economy, the Fund seems to be more optimistic than the Japanese government. Can you elaborate on the thinking behind this optimism, and maybe what downside risks you see in the Japanese economy? And also, in the report, you mentioned the yen carry trade in the context of the weak yen. To what extent is the Fund concerned on the reversal of the yen carry trade? And, is there anything that the Japanese government or the central bank can do to prevent a disorderly reversal?

MR. JOHNSON: Thank you for the very timely question about the Japanese economy and Japanese policies. We are very supportive of the Japanese government's current policy stance. We think the priorities are exactly right. They, of course, are focused on fiscal consolidation, improving the state of public finance, and at the same time, as they are doing that, they are trying to nurture a sustained economic recovery. We think Japan has tremendous fundamentals in terms of its potential technological systems and development, and its exports, and with the current stance of fiscal and monetary policy, we are quite optimistic that growth will be sustained in Japan.

On the carry trade, of course, this is an important issue, not just for Japan, but for other countries, and I think that the Japanese government is obviously very aware of this. It is not an easy matter in which to intervene, and we should expect exchange rates to go up and exchange rates to go down for various countries involved in this carry trade. I don't think there are further actions that are appropriate at this time, and certainly no need for any kind of heavy-handed intervention in this. I don't think the carry trade is as destabilizing as some people claim it is. It is certainly an issue to watch going forward, but at the moment, I think the stance of monetary and fiscal policy in Japan is completely consistent with sustained growth, both in Japan, and around the world. I see nothing in that scenario that would push global growth down below 5 percent per year.

The question is, what are the downside risks to the Japanese economy. I think everyone is concerned about a return to deflation in Japan, so we're concerned about the consequences of falling prices in Japan. And, of course, in this regard, anything that tends to push up prices in other parts of the world helps. There has been some increase, for example, in the price of manufactured imports in Japan, that is actually good news for Japan. A small amount of inflation, moderate, very moderate amount of inflation is actually reasonably healthy for Japan. We are not expecting prices to fall in Japan significantly, although there might be some tendency toward deflation later this year.

QUESTIONER: Among the main trading partners of the U.S., Mexico seems to be the most affected by the U.S. economic slowdown, even more than Canada, 1.4 percentage points from 2006 to 2007. Has there been any other factor contributing to this deep slowdown in the Mexican economy? Now you are advising fiscal reforms for Mexico and other countries that depend on these exports. However, in the short term would you advise any kind of additional measures to jump start the economy?

MR. COLLYNS: I would agree that the main factor that has led to recent softness in the Mexican economy is the slowdown in the United States, particularly in the manufacturing sector. As you know, the auto sector in the U.S. has been going through a period of adjustment, and that certainly is affecting Mexico. We are expecting both the U.S. and the Mexican economy to gain momentum during the course of the year.

We don't see any need for any particular measures to jump start the economy. We see the new government has been appropriately focused on medium-term measures, while putting a a very sensible, well-disciplined budget on the table. We welcome progress toward putting in place a civil service reform, and we see the government getting to grips with medium-term structural agenda, which is very welcome and appropriate.

QUESTIONER: Thank you. On the question of bio fuels, the report says that an efficient solution will be to reduce tariffs on imports from developing countries like Brazil. I would like to ask you to expand on that. And, if I could have your projection on the perspectives for the Brazilian economy and if you share the overall optimism on that.

MR. COLLYNS: First, on the outlook for Brazilian economy, certainly we are optimistic that the Brazilian economy will continue to gain pace. The Brazilian economy has benefited and will continue to benefit from strong commodity prices. But, it has also gone through a period of relatively slow growth. The fact that inflation has now come down to low levels has provided space for the central bank to bring down interest rates very substantially over the past couple of years. And, the economy is already responding to that reduction in interest rates, and we expect growth to continue to pick up. As you know, there was a recent revision to the GDP national accounts going back a few years which shows that the performance of the Brazilian economy has been somewhat stronger than we previously thought. Which is welcome. But we do expect further acceleration of the economy both this year and next year.

On the issue of bio fuels, we are somewhat concerned that there is a tendency to see bio fuels in the advanced countries as a quick fix to reduce dependence on hydrocarbons in those countries. However, we see technological and trade limits to how far this can go, to achieve the very ambitious objectives that have been set by the advanced countries. Based on the current trading system and current technology, it would require conversion of a very substantial amount of agricultural land to corn and other products that could be converted into ethanol, which is already putting pressure on agricultural prices around the world, which has costs.

We think that there would be gains from liberalizing trade in bio fuels, reducing the tariffs that are imposed in the United States and in the European Union on imports of bio fuels, which would allow taking advantage of the comparative advantage that Brazil and other tropical countries have in the production of sugar and other produce that can be converted into bio fuels. Over the longer term, we would also like to see technological improvements that would allow a wider range of agricultural production to be turned into bio fuels to provide a more sustainable way of helping to reduce hydrocarbon dependence.

MR. MURRAY: We have a question from the media briefing center: On Italy's public expenditures, how do you evaluate the wage increase of 4.5 percent on an annual basis just obtained on negotiations with the government by public administration employees?

MR. CALLEN: Let me first of all say, when we look at the fiscal position in Italy, we have seen quite a considerable underlying improvement over the last year. We are expecting the deficit to come down to around 2 1/4 percent of GDP this year. Last year, substantial progress was made but a number of one off budgetary items actually kept the headline deficit higher.

We believe, therefore, that the Italian government is on the right track. We have however been emphasizing that over the medium term much more still needs to be done, public debt in Italy is still high, and of course the looming pressures from population aging are coming up. And, the real focus on the fiscal adjustment should be on the expenditure side, the tax ratio in Italy is already relatively high, expenditure adjustment is really what is needed at this stage, and that will include keeping wage increases in the public sector down to moderate levels.

QUESTIONER: I would like to follow-up on the question relative to the Brazilian economy. Although your forecast is quite positive for Brazil, yet it points out that the growth of the economy will be this year of about 4.4 percent, while that of other neighboring countries in the region, Venezuela, Argentina, will be considerably bigger than that. Why is that in your view? What, if the forecast is so positive, concerning Brazil, why isn't its economy growing at the same pace of its neighbors?

MR. COLLYNS: There are both cyclical and structural factors that are affecting the rate of growth in Brazil. As I said earlier, Brazil has gone through an adjustment period of bringing inflation down to low levels, which has provided scope for the central bank to lower interest rates progressively. We anticipate this process can continue, interest rates in Brazil remain relatively high to neighboring countries. Given the very substantial improvements in the macroeconomic framework, the continued record of fiscal discipline, we see no reason why Brazilian real interest rates should remain at high levels through the medium term. The central bank is following an appropriately prudent approach, lowering interest rates gradually, so that the economy will grow faster, while also maintaining a low rate of inflation.

But at the same time, there are also structural factors that continue to impede growth in Brazil. I think the list is quite well known, Brazil has an extremely high level of public spending given its level of income. That high level of public spending is supported by a very high rate of taxation in Brazil. There is quite a well-known agenda for tax reform in Brazil that the government is pursuing, in terms of, in particular, reforming the system of indirect taxes. It will help to reduce the tax burden on the economy. There are also a number of issues in the financial sector, very high rates of directed credit, very high reserve requirements, the need to develop capital markets in Brazil. The government knows these issues well and is moving toward dealing with them. There are also a number of issues in the area of the business climate and infrastructure, which, again, the government is aware of and is dealing with. Recently the government announced a package of increased spending on infrastructure which is an important step forward. So, we see that over time, Brazil will achieve much faster growth, based on continued efforts to improve the fundamentals that support that growth.

MR. MURRAY: We have a number of questions on the media briefing center from Latin America. I want to remind everybody that at the end of this week the Western Hemisphere Department will have a regional economic outlook briefing so if we don't get to all these questions at this briefing today, you should certainly revisit it on Friday.

QUESTIONER: For some years the United States economy has been regarded as the engine for world growth. Do you suggest that now the shoe is on the other foot, that increasing growth abroad is in fact keeping the U.S. economy from sliding further than it otherwise might?

Also, your comment on the tightly managed exchange rate in China, is there an implication that there is a factor that is making it more difficult for the Chinese to influence their own economy?

MR. JOHNSON: There are two questions. First is about U.S. growth and whether this is being carried forward by other countries, and the second is about China and the Chinese exchange rate.

On the first question, as I emphasized before, growth is more balanced around the world. This is a very good thing for global growth, and there is some positive effect on the United States. It helps, also, in the rebalancing, the addressing of these global imbalances, which is important. And this is part of the reason why the U.S. current account is going to improve this year. The U.S. growth, though, also remains very important, and we're positive on that. Household balance sheets are strong, business investment is holding up well. And, we think that going forward there is going to be a strong momentum for growth in the U.S. and in the rest of the world. The message is that we are seeing balanced global growth, much more balanced than for a long time.

On the second question, the Chinese exchange rate, I think we have emphasized in this report and other reports, and I think as is recognized in China, some degree of appreciation of the Chinese exchange rate, is not inappropriate and should be expected. The renmimbi has appreciated, in nominal terms, relative to the U.S. dollar, the U.S. dollar has obviously depreciated against some other currencies. So in real effective terms the Chinese currency has not appreciated. But these are steps in the right direction that actually make it easier for China to manage its own macroeconomic policies, as well as being consistent with balanced global growth, which is a very good thing for everyone.

QUESTIONER: On the ECB your recommendation in the WEO is for increasing interest rates to 4 percent by summer and continue increasing if the economy continues to be robust. If the forecast in the WEO of an increase in economic growth of 2.3 in 2007 and 2008 is achieved, are you saying that the ECB will need to increase above the 4-percent level? And if yes, to what extent is the increase going to be necessary, we are going to need to reach 4.5 percent, or reach a restrictive monetary policy?

And also, in the euro zone, the euro hit yesterday at two-year high against the dollar, an all-time high against the yen. Do you see this development in the exchange rate as a break to economic growth in Europe, or is the internal growth robust enough to withstand the euro increase?

MR. JOHNSON: The questions are about the euro zone, both growth and likely prospects for the exchange rate and interest rate. I think at the end of your question you put your finger on a key point, which is that there are very good internal dynamics within the euro zone supporting the European growth. Exchange rates move up and move down, as I said earlier, and with the euro currently at a reasonable level, the euro zone is roughly balanced in terms of its current account. So, there is something we would watch, but it is not an issue of concern right now.

I think, also, inflation, while it merits considerable attention in the euro zone, is actually under control, and the stance, the current stance of the European Central Bank is something we're very comfortable with. I think that there is no room for complacency in the euro zone or in any of the other economies around the world. But, the current economic situation is favorable, and the current stated policies in terms of interest rates are completely reasonable. I am not going to tell you exactly what I think the interest rates should be this summer. I think we have to see the data. We have to watch how the data comes in, both in the euro zone and in the United States, and the central banks are updating in our view correctly. They have the right idea about what is going on, the right emphasis. So we're quite comfortable with that.

QUESTIONER: So you are not sure it is going to be necessary to go to 4 percent, as you say in the WEO, by summer?

MR. JOHNSON: I think that the central banks obviously have to update as the new data come in. We have to watch what happens to oil prices, we have to watch what happens to price of imported and manufactured goods. And, we think the European Central Bank, the direction which they have currently, normalization of interest rates, is right.

QUESTIONER: You see pace for growth superior in the euro zone in 2008 than in the United States. Do you think it is one-time event, or do you see it as a trend for the long term?

MR. JOHNSON: A very good question about long-term rates of growth in the euro zone versus the United States. We do think that potential growth in the euro zone may be increasing, we are encouraged by some recent signs. It is too early to take a strong position on that. We also think that potential growth in the United States remains strong. This is a very fortunate situation to be in, if we're right. I understand that you may feel some competitive pressures, but what I'm more focused on is global growth and whether this remains balanced and whether it remains sustainable.

I think the news from both the euro zone and the United States and Japan is very good on this. And this is supported by what we're seeing in emerging markets and developing countries. I wouldn't worry too much about who wins that particular race. What is more important is the global picture. The prospects in the euro zone are improving the growth numbers, these growth numbers are very good, extremely encouraging, and we think the stance of monetary policy and broadly speaking, fiscal policy with some specific issues we highlighted before, is consistent with sustainable growth. This is a very positive message on the euro zone and on Europe.

QUESTIONER: Mr. Johnson, do you have a comment, also, on the Italian economy about sustained growth? How do you see it for the future? This year, if I'm not mistaken, Italy surprised you a bit with better growth than anticipated, so the numbers on the list, what you do you think for the future and what do you think about what Mr. Callen articulated before, about expenditures can add something?

MR. CALLEN: I think it is certainly true that the Italian economy performed much stronger last year than we expected at the time of the last WEO. We see that there was a sharp upturn in investment, net exports contributed to growth, and consumption also strengthened. If you look at our forecast going forward, we see this as pretty much being maintained this year and next year, with maybe a very slight slowing over the next two years. So, I think at this stage we certainly feel comfortable with that projection, growth of around 1 3/4 percent of GDP. On the expenditure side, let me emphasize again that we really see expenditure control and consolidation as being the key issue for the medium-term fiscal position in Italy.

QUESTIONER: How often is the IMF right in its projections? Do you assess your accuracy?

MR. CALLEN: We do assess our accuracy. What we have done typically is every five years we employ an academic economist, an expert in economic forecasting to come in and look at the forecast performance of the WEO. The last assessment was published in early last year, done by Prof. Allan Timmermann of UC-San Diego.

I guess it depends of course on how you assess accuracy. We can certainly not claim to be spot-on every actual number, but I think that the review Prof. Timmermann did suggest that we were certainly in line with the accuracy of the private consensus forecasts, which we take to be a good sign given that statistically an average of many forecasters is very difficult to beat. We think that is positive.

Clearly, there are times when we are too optimistic about the global economy and times when we're too pessimistic, and I think over the last couple of years we have actually been erring on the side of being too pessimistic, that we have seen global growth coming in above what we expected in the WEO. Assigning a grade to our forecasts is for others to do.

MR. JOHNSON: If you look at Fig. 1.10 on page 13 of the WEO, you see the line is our central forecasts and that is the numbers we talked about. But we show you the error band around this. We're quite honest about this. That error band is based on historically what our error has been in terms of forecasting. And then we adjust the band in terms of what we talk about in the report. We are trying to be quite transparent on what our forecast errors have been in the past. Now, what our forecast errors are in the future, I can't forecast. But, I do think we are putting our cards on the table, and you could look at other people's forecast errors-public sector, private sector, and around the world-and tell us what our error bands are. I think they compare quite favorable.

[Inaudible.]

MR. JOHNSON: You certainly can feel free to write about those private sector forecasts and not about us. I think that the report has considerable analytic content in addition to providing the numbers, and we think that we have, because of the 185 members of the IMF, we have some unique insights into what is going on around the world, in both big economies and small economies, so we have a multilateral perspective on growth, and our mandate is very much not to come out and tell you that things are good when things are bad, it is actually to come out and tell you honestly what is happening with the global economy, honestly how that is going to affect countries, how that is going to help them and how it is going to hurt them. That is what we're trying to do. If we do that right, we're doing our job.

QUESTIONER: Thinking about the United States is confronting inflation pressures on the demand side, and Mexico, too, do you see some kind of downward trend in interest rates in the short term?

MR. JOHNSON: The question is about U.S. interest rates or Mexican interest rates?

QUESTIONER: U.S. and Mexico, is the same thing. We are confronting the same thing.

MR. JOHNSON: -I don't think that is true. I don't think U.S. and Mexico are the same thing. Let me ask Charles to speak to Mexico, and I'll come back on the U.S.

MR. COLLYNS: Mexico has an independent monetary policy, and will not just follow the United States. I think it has established a good track record of credibility using its inflation targeting framework. It provides for an independent approach. That said, of course, what happens in Mexico is substantially affected by what happens in the United States. And, of course, the central bank in Mexico will be watching very closely the developments in the United States. As we have said, at this point, our clear belief is that the Mexican economy will be recovering momentum in the course of the-year, as the U.S. economy does so. But, we do recognize that there are downside risks to that forecast, and the Mexican authorities will, of course, be watching very carefully to see what will be happening, and take appropriate action in response.

QUESTIONER: On the United States interest rate change?

MR. JOHNSON: On the United States, I think, the situation is quite finely balanced. We agree with the Fed on this. On the one hand, growth has slowed somewhat, we don't think it has slowed a lot, but it is something you have to monitor and stay on top of, and on the other hand, there are some inflationary risks, what some call core inflation. You have to look at that, too. There are some pressures in both directions, in the United States. And as I said, we have to look at the data as it comes out every week and update on that basis. Think it is very hard to say which way the U.S. is going to move, but in our view, we agree with the Fed's assessment of the issues on both sides of the question.

QUESTIONER: 1.8 percent this year, 1.9 this next year, doesn't sound too exciting. Is it a temporary slowdown, or what needs to be done to accelerate the growth in Germany?

MR. CALLEN: I think the first thing to say, actually, is that the German economy clearly grew very strongly last year. We see this as mainly due to the fact that there has been a lot of restructuring going on, German exports are clearly very competitive, exports have done very well. Investment has also been very strong, what really to date has been the missing link has been consumption. Clearly, that picked up at the end of last year, partly in response to the VAT increase.

Now, going forward, we do see some slowing, partly because of the unwinding of the temporary boost in consumption, but also the fact that monetary and fiscal policies are tightening, and given somewhat slower external growth, probably export performance will slow although remain strong. What really needs to happen now I think to boost growth further is ongoing structural reforms and fiscal consolidation. On the fiscal side, the government has made good progress, but we need to see this continue again based on expenditure restraint rather than tax increases. But, then we also need to see more competition introduced into domestic sectors of the economy to improve productivity growth in those areas.

QUESTIONER: You say, you mention that Italy is registering a booming extra fiscal revenue. And, in here it is written that the overall adjustment this year is due to this revenue much more than tighter expenditure control. So, the question is, how do you think the government should use this money to continue the adjustment or as somebody would like to do, to tax to reduce tax? I am asking for two reasons, also this morning we had another record, and also because a group of IMF experts was in Italy for a couple of weeks just studying this problem.

MR. CALLEN: It is a nice position, you have very, very strong revenue growth. The budget has been coming in, I think, better than expected in contrast to periods before when we were seeing slippages; so I think the government is in a favorable position here. I guess as you gathered from the previous answers on Italy, we would certainly favor this money being saved, reduce the deficit and pay down public debt, which I think we clearly see as being too high.

On the issue of the work the Fund has been doing, my understanding is that there was a mission from the Fiscal Affairs Department which went to Italy to look at, I think, particularly the budget system and what can be done to improve the efficiency of public spending. My understanding is that the mission was trying to bring international best practices, to particularly bring the experience from other countries to bear on Italy to provide advice to the government on what can be done to improve the structure of the budget and the quality of the spending. I believe that on the ministry of the economy's website there is actually a posting that explains what the mission was doing.

QUESTIONER: You mentioned that Europe has increased its productivity, but also in the report you say that there is a big gap compared with the U.S. in productivity and labor utilization. Do you think Europe will be able to improve its growth without reforms in labor market? And also, do you see a need for bigger regulation in the hedge fund market?

And for Mr. Callen, if you could comment on the Spanish economy, and the increasing current account deficit.

MR. JOHNSON: Let me take the general questions first. You are quite right, we do think European labor markets could become more flexible and we are encouraged, we talked about this in the report, by steps taken in this direction. We think if you combine this with the current positive short-term conditions in Europe, there is quite a favorable potential situation. We are also, though, worried about pressures for protectionism in Europe. I would not underestimate these and I think the, this requires more attention to making sure the people don't lose from the process of globalization, people who feel they have lost, the training available, new opportunities available for these people. So, we are not saying impose changes. We are saying the people have to feel they participate and benefit more from globalization. And that will be consistent with boosting productivity growth and sustaining more rapid growth in Europe. That is our picture, that is our story on Europe.

Let me turn to Tim on the Spanish economy.

MR. CALLEN: Clearly, what we continue to see is very strong growth in Spain, but the current account deficit has widened to nearly 9 percent of GDP. And, private sector indebtedness has been increasing.

What we expect over the forecast is a modest slowing in growth, which will have a limited impact on the current account. But, I think what we're emphasizing is that really economic policies need to manage the downside risks that could be associated around this central scenario and particularly the need to temper demand, expand supply and improve competitiveness.

I think on the fiscal side, certainly, there is scope for reining in government expenditure to some degree. But, I think probably the most fundamental thing is to improve productivity and competitiveness in the Spanish economy. We believe the relatively poor productivity growth is rooted in market rigidities. Under the Lisbon agenda, the Spanish government has clearly identified a lot of policy reforms needed, and I think really the key is to accelerate these structural reforms to deregulate and foster competition in sheltered domestic sectors such as energy, communications, and also we would be in favor of introducing more flexibility into the labor market.

MR. JOHNSON: On the hedge funds, we're not calling for more regulation of hedge funds at this time. The message on this and the big message hopefully from this press conference, the financial sector is the tail, and the dog is the economy. Meaning, it is the economy that really matters. As long as countries run sensible, responsible macroeconomic policies around the world, as broadly speaking they are, then you will have some ups and downs in financial markets, and always have some concerns about speculators, they go by different names in different periods. As long as macroeconomic fundamentals are sound, issues in the financial sector are not going to be of first-order importance.

Obviously, there are some particular concerns about whether hedge funds are taking extremely large leveraged bets that could have adverse consequences on banks who might be lending to them. And, we note that we pay close attention to the fact that central banks and other regulators are looking closely at this, and hoping, and we ourselves, the IMF, are trying to help some central banks encourage appropriate stress testing for their major banks to so they can really think about these exposures in different scenarios. But we don't see anything in this current situation that would merit a heavy-handed, big increase in regulation across the board of any kind. The economics, as long as you run your economic policies in a sensible manner, you can participate in this balanced global growth, and sustained global growth for almost everyone around the world, which is what we want.