Transcript of a Press Briefing by Jaime Caruana, Counsellor and Director, Monetary and Capital Markets Department, and Simon Johnson, Economic Counsellor and Director, Research Department, International Monetary Fund

January 29, 2008

Washington, D.C.
Tuesday, January 29, 2008

View a Webcast of the press briefing

MR. MURRAY: Good day. My name's Bill Murray. I'm Chief of Media Relations at the IMF. This is an embargoed briefing on an update of the Global Financial Stability Report and the World Economic Outlook.

The embargo will expire in two hours, at 11:00 a.m. Washington time.

Joining me today is Jaime Caruana, Counsellor and Director of the Monetary and Capital Markets Department, and Simon Johnson, Economic Counsellor and Director of Research at the IMF.

Simon will open up with brief opening remarks, to be followed by Jaime. And then we'll take questions on the staff's views regarding the global financial system and world economy.

Thank you.


MR. JOHNSON: Thank you.

Following a strong third quarter in 2007, the five year long global economic expansion has begun to moderate in response to the spreading effects of financial disruptions. Recent data suggest that growth in advanced economies slowed markedly in the fourth quarter of 2007.

As discussed in the GFSR Financial Market Update, which Mr. Caruana will talk about in a moment, financial market strains originating from the U.S. sub-prime sector, and the associated financial losses have deepened and spread.

In terms of our projections using the revised PPP weights that were published in December, we now see global growth moderating from 4.9 percent in 2007, to 4.1 percent in 2008. Our 2008 projection reflects a markdown of .3 percentage points relative to where we were at the time of the October 2007 world economic outlook.

The revision is mostly accounted for by a weaker outlook for advanced economies. Growth in emerging markets -- the engine of global growth -- is expected to hold up generally quite well. But here, too, we expect growth will slow to some extent.

In the United States economic activity slowed notably in the fourth quarter, with recent indicators pointing to a further weakening in housing and a softening of activity in manufacturing, employment and consumption. We project U.S. growth at around 1-1/2 percent this year, about .4 percentage point below our October estimates.

Projections on a fourth-quarter-over-fourth quarter basis give a better sense of the slowdown. On this basis, U.S. growth is projected to decline from 2.6 percent in 2007 to 0.8 percent in 2008.

Activity in the Euro area has moderated, and we've marked down our growth projections for 2008 to 1.6 percent. The revised outlook for the Euro area constitutes a markdown of 1/2 a percentage point relative to our view in October. On a Q4-over-Q4 basis, we see a deceleration from 2.3 percent in 2007, to 1.3 percent this year.

Japan has been less directly affected by recent financial disruptions, but a weaker external picture and some softness in domestic spending are expected to weigh on growth.

In emerging market and developing countries, we expect some moderation in growth but, overall, growth should remain strong. Led by China and India, these countries have benefited from strong momentum in domestic demand and improved policy frameworks.

And, in the case of commodity exporters, we would also expect economic growth to remain solid, given elevated energy prices and high prices for metals and food.

Overall, growth in emerging market and developing countries is expected to ease from 7.8 percent on an annual basis in 2007, to 6.9 percent in 2008. The slowdown reflects for the most part slower trade growth, as well as some policy tightening in countries facing overheating and inflation pressures. But at this point, we do not expect the financial market turbulence to have a substantial direct impact, and this, in part, reflects improved policy frameworks.

At the same time, I would stress, headline inflation has generally increased across advanced and emerging market countries, reflecting sharp increases in food and energy prices. In advanced economies, inflation pressures are expected to subside sooner or later as economies slow, although there are serious concerns about possible second-round effects in some countries.

In some emerging market countries, inflation remains a major issue.

Let me discuss the risks to these projections. These risks are predominantly on the downside.

The main risk is the ongoing turmoil in financial markets. This could further weigh on domestic demand in advanced economies, and a sharper slowdown could then impart more significant spillovers to emerging market and developing countries.

Emerging market countries that are reliant on capital flows could be more directly affected, although strong momentum from domestic demand provides some upside potential.

I also see serious risks on the inflation front. While slower global growth would normally place downward pressure on oil and other commodity prices, tight oil market conditions and possible supply disruptions suggest that upward price spikes remain a concern, particularly if the global slowdown is modest, and if strong demand from emerging Asia and other emerging market economies remains.

Finally, let me briefly comment on some policy implications of this global assessment.

Policymakers remain alert to the changing balance of risks from rising inflation and slowing activity, while responding as needed to financial market dislocations.

In the United States, monetary policy remains the first line of defense against a sharper economic slowdown. The Fed has acted to help forestall the spreading effects of financial disruptions and market uncertainty on activity. A fiscal stimulus package could also provide useful complementary support to an economy under stress, although it will be crucial to ensure that such a package is temporary. It should be temporary so as to continue with medium-term fiscal consolidation, and so as to maximize the package's impact on aggregate demand in the near term.

A temporary U.S. stimulus package would be consistent with key medium-term fiscal consolidation objectives as part of the U.S. policy plans under the, or as part of the multilateral consultations. If you recall, key industrial and emerging market economies have come together on this and on what is needed from each of the participants through the multilateral consultation process coordinated by the IMF to help reduce medium-term global imbalances between saving and investment. These are still reflected in large current-account surpluses and deficits around the world.

More broadly speaking, it strikes me that the dual objectives of the multilateral consultation on resolving global imbalances and supporting global growth have, if anything, become more relevant and important now. The road map for policies of the participants continues to chart the right course. Moreover, in a time of heightened market uncertainty and financial market turbulence, tangible joint progress by all participants to help mitigate some of these risks is a sound insurance policy for the global economy.

For the Euro area and the European Central Bank, inflation pressures remain a serious concern, and it remains appropriate to keep interest rates on hold at this stage. Going forward, monetary policy would need to respond flexibly in case downside risks to growth would materialize, or if inflation pressures were to intensify. Fiscal policy could also, under some circumstances, play a supportive role through allowing the full play of automatic stabilizers -- which are significant in Europe -- around a medium-term consolidation path.

In some European countries, fiscal space may be available, if needed down the road.

For some emerging market countries, inflation from commodity prices remains a more immediate concern, as food accounts for a larger share of their consumption baskets, and domestic demand remains strong. Against this background, many of these countries have appropriately tightened monetary policy. Going forward, emerging market economies should continue to pursue prudent macroeconomic policies aimed at containing inflation in the face of price pressures and achieving sound public finances.

Nonetheless, emerging market and developing countries also need to remain alert to signs of a sharper global slowdown, and to stand ready to use the space that many have earned through building credibility. This will enable them to appropriately apply counter-cyclical policies if conditions warrant. I would stress that country circumstances vary, so there is absolutely no one-size-fits-all here.

Thank you.

Now I hand off to Mr. Caruana.

MR. CARUANA: Thank you, Simon.

In the last press conference that we held in mid-October, we said -- if you remember -- that the adjustment process in the financial markets would be protracted. Today we can say that much of this adjustment has already happened. There has been significant repricing of risks, along with de-leveraging and balance sheet adjustment in the financial sector.

On the liquidity front, conditions have improved, thanks to central bank policies and operations. However, strains persist, and term premiums and credit spreads reflect wider problems in the financial system, such as valuation of complex products, credit deterioration, counter-party mistrust, and balance sheet pressures on financial institutions.

All in all, the process of adjustment is still incomplete. Counter-party confidence has not been restored, and we face risks ahead.

Looking at these challenges ahead of us, I would mention first the risks of the widening of credit deterioration and spillovers to other markets as a consequence of the interaction between the credit cycle and the weaker economic conditions, mainly in the U.S., but more broadly in the world economy. Emerging markets have remained resilient so far, as underlying growth and better policy environments have supported the continuation of strong capital inflows -- though we must say that recent falls in equity prices suggest that some emerging markets may not be able to avoid the spillovers.

The second point, in terms of risk, would be that the pressures on the balance sheets of financial institutions can affect the availability of credit. Write-downs in the U.S. and Europe are significant -- you have seen that-and pose a challenge for institutions, for banks that are absorbing off-balance-sheet vehicles, and that are facing now wider credit deterioration. So it's the combination of the write-downs and other pressures that is a challenge now ahead of us.

Although the sources of the current strains are varied and complex, market failures and also weaknesses in the oversight have contributed to these problems, and they need to be corrected. These corrections require not only macro policies, but also policies in the financial instability area.

As you know, there are many initiatives by the private sector and also by the authorities. Let me mention the work of the Financial Stability Forum, some of them standard setters, national authorities. The Fund is participating in these initiatives -- to draw lessons from this episode. Importantly, the test is not over yet and the lessons cannot be therefore final.

So what I would like to do today is to present just a view of the policy lessons from our perspective, from the perspective of the Fund staff. And these are the lessons that we are developing for the next Global Financial Stability Report.

The immediate priority should be to rebuild counter-party confidence and financial soundness of institutions. For that first disclosure -- that's not new, but it's very important -- clear disclosure of exposures, both on and off balance sheet, including valuation methods and the assumptions that they are taking to calculate the write-downs would be very helpful.

Auditors and supervisors, we think could and should contribute to these early disclosures, and also to ensure consistency across institutions. My own impression is that this is work that is already being done, although they come from very different traditions and practices.

The second element would be capital. Those systemic institutions that have lost balance-sheet strength need to raise capital and to restore liquidity cushions. As we can say, the good thing is that equity is flowing into the financial sector.

The third is liquidity. Central banks will have to continue to provide liquidity in a flexible way to ensure the proper functioning of inter-bank markets.

And in considering all these three important elements, we think it is important to maintain a delicate balancing act, because this is a point -- we are in a point in which it is very important to avoid actions that can exacerbate the cycle. That's more in the short run. In the medium term, risk management practices of financial institutions need to be improved, and also frameworks for financial stability have to be strengthened.

In our original statement we mentioned several of the policy recommendations in relation to credit rating agencies, in relation to unregulated mortgage and consumer credit originators, the need for an active role of central banks in monitoring individual banks' risks. We think also that this is an opportunity to improve cross-border coordination and, more than that, even convergence in the liquidity management tools and practices that the central banks use.

But I will not expand on that, and I will be happy to take your questions.

Thank you very much.

QUESTION: (Off mike) -- potentially systemic disruption could arise in the event that they are unable to recapitalize (off mike).

Could you tell us a little bit about --

Could you tell us a little bit about the IMF's thinking about the bond insurers, the systemic risks around this issue? And how you would recommend addressing it?

MR. CARUANA: Yes, we agree that monoline insurers are a very important piece of the systemic risks in the future. We think that they have been -- they have several businesses of lines, as you know, and they have been insuring municipal bonds as well as complex securities, as you know.

We think that perhaps they are more complex, and also more differentiated among different institutions that constitute these monoline insurance. But our point here would be that we agree that it would be important to get them re-capitalized, or get the support in order for them not to be downgraded, and to avoid the need for institutions that have been insured by them to have additional write-downs.

So I think that the initiatives that have been explored, in terms of private institutions' participating in recapitalizing this sector, is a very promising one, and I think it's an avenue that should be really explored.

QUESTION: May I just have a quick follow-up on that?


QUESTION: Which is how serious would be the consequences if it was not possible to arrange such a recapitalization, and these institutions were indeed downgraded?

MR. CARUANA: Well, that's very difficult to calculate, and we don't have a figure. There have been several figures posed by private sector participants.

We think it would be a proportion, a small proportion, of the write-downs that already the banks are facing because of the sub-prime. But it is significant enough so as to take seriously the recapitalization. And probably, I think there is merit in understanding to what extent recapitalizing to the extent that rating agencies do not downgrade these kind of institutions could be cheaper than the effects that the downgrades could have in the different securities that they are providing guaranty.

So I think it's a very interesting exercise. And, again, we are supporting the idea of recapitalizing these institutions.

QUESTION: I have a question for Simon Johnson about the European economy.

You mentioned that interest rates were appropriate there at the moment. But, given that growth is going to be so weak, where is the inflationary pressure coming from, especially given that the Euro is relatively strong at the moment?

MR. JOHNSON: Thank you, that's a very good question. Where is inflation coming from, if the Euro zone is slowing down, as we think and as we expect?

And the answer is, of course, various second-round effects, which are very well established in Europe and in the Euro zone, and which have tended in the past to be stronger than in the United States. And I think, given what we've seen over the past six months and what we're seeing right now, there's every reason to continue to believe that is the case.

So the Euro zone finds itself in a difficult position. Its economy is slowing down, but inflation remains a very serious concern. And, of course, keeping inflation expectations well anchored in the situation is tremendously important. The European Central Bank has done an excellent job of managing liquidity and supporting liquidity, while clearly communicating their policy framework is unchanged.

And I think, going forward, they're going to be able to respond to the new data and respond to what's happening to both growth and inflation in an appropriate manner.

QUESTION: Thanks. So we were expecting a full update, including country estimates. And we are only seeing regional ones.

So why was it decided to do it this way? Why didn't you go -- is it -- was it considered not necessary to have country updates?

And, again, since I am from Russia, I am mostly interested in that region, Russian and the CIS. If you could use as examples for your answer, could you use that region, please? Thank you.

MR. JOHNSON: Thank you.

Yes -- in terms of the presentation of the data, this is a quarterly update, as you know. And it's only the second quarterly update we've done. So we're a little bit experimenting with the format.

And I think this actually conveys quite clearly to you the way in which we present and think about the big major movements in the global economy on a relatively high-frequency basis.

A lot of things are changing rapidly. We have -- our main forecasting is bottom-up, and there's a lot of bottom-up content here. But at the same time, we're looking at these major blocs, and how they're moving. And we're able, I think, to communicate that to you in this format.

With regard to Russia, I think there obviously the key issue is oil. At today's oil prices, you know, we think there's a lot of robustness in the Russian economy. And the outlook for oil, of course, depends on what happens globally, and what happens in emerging markets. You know, we usually take our oil forecast from the futures price in the market, and that shows a very modest decline in the near-term future.

So on that basis, commodity exporters more broadly I think are going to hold up quite well in 2008. What happens beyond -- what happens in 2009 -- depends very much on how events in the leading industrial countries unfold in the next six to nine months, and exactly how the policy responds to what happens in the real economy, and what happens to inflation.

QUESTION: My question goes to both of you gentlemen.

The African region has been one of those that have been growing steadily in the past three or four years, at about 4 to 5 percent growth last year. Until recently, where there was this global market turbulence in Kenya, East Africa, there have been instability since after the elections which has affected the neighboring economies. We hear that there are shortages of (off mike) in countries like Rwanda, Burundi, Uganda. And recently in South Africa there has been electricity blackout that has led to shutting down of some mines, affecting them in (off mike) industry, the agricultural industry.

Is this a cause to panic? What sort of implication does this have in the short, medium and long term? And can it possibly affect this impressive growth that we have experienced in the past few years?

MR. JOHNSON: So -- perhaps I'll take that on the first round.

So, Africa, actually, if you look at our numbers, you see that, as a whole, for the African continent, we think that growth in 2008 might actually be up compared with 2007. And here we think the key driver is commodity prices -- which I think you sort of alluded to -- and also policy, progress that's been made with improving policies throughout Africa, which has really been very impressive.

We're going to have a chapter in our April World Economic Outlook that looks more closely at those two issues -- commodity prices and policy frameworks -- and draw some implications from it.

But I think there's more robustness, more reason to expect robustness in Africa than in some recent or previous episodes. But I would stress that a lot depends on the global economy, and a lot depends on what happens in the industrial economies: how much do they slow? How much is policy able to respond and counter the effects?

That's a key question for Africa, as it's a key question for other parts of the world.

So it's one, integrated global economy that is under stress, and it's having to deal with some fast changing, difficult circumstances, output coming down, and inflation remaining a serious issue in many places.

It's a very tricky situation. Everyone is involved in that.

MR. MURRAY: Okay, let me turn now to the Media Briefing Center.

This is a question -- I'll get back to the room, as well. It's touching upon the combination of the relationship between the financial sector and the macro economy in the context of the U.S. and Asia. Let me just read the question: Is the increasing linkage between the financial sector and the macro economy true for Asia? If the region's economic growth will ease mainly from a fallout from a slowing U.S. economy, what has happened to the so-called "decoupling" theory? Or, is the region's economic slowdown seen to be a result of the losses in Asian bourses?

MR. JOHNSON: That's a very nice question, with a lot of elements.

I think our view is, again, it's the slowing U.S. economy. It's the spillover from the U.S. economy to the European economy. It's slowing growth in major export markets for Asian producers of manufactured goods, for example. And that -- the transmission is through a fairly old-fashioned trade mechanism.

Now, it's true that the financial spillovers have been less than they might have been, and that's very good news under these circumstances. But, still, everybody is caught up in the same global trade pattern. And that, I think, is what's driving and what's going to be the big driver of the shocks to emerging markets.

Now we do think there's policy space in Asian emerging markets which have -- in places where they have strong fiscal position and where they have what I would call "macro space." So where inflation is not a problem, where inflation's not accelerating, where inflation expectations remain well anchored, then there is more scope for policy responses.

And we think that the process made establishing and strengthening the credibility of policy frameworks, particularly over the past five to 10 years in many parts of the world, including Asia, that is extremely helpful now, when there is a potential need for counter-cyclical policy.

We have to be careful not to get ahead of what's actually happening in the economy. You have to wait for it to slow, you have to watch the pressure come off. Because these economies, many of them are growing very fast, and they have a serious or incipient inflation problem.

Inflation remains absolutely the top issue on the agenda of policymakers around the world. And that's exactly as it should be.

QUESTION: I have two questions, actually.

One concerning Italy -- just a general opinion, if you can express it without specific estimate, of course -- but the last evaluation of the IMF was quite positive about the improvement in public expenditure and fiscal policy.

And now we are facing political instability in Italy, lack of government.

I just wanted to know if the IMF has any concern for the political situation in Italy, and regard the reflection, of course, on the economic stability?

And the second question is about reading your data. I would like to know if it's correct to say the total adjustment depends also from the introduction of the PPP as a factor. So I'm trying to understand how much comes from the slowing in the growth and financial turbulence, and how much from the introduction of this new parameter?

MR. JOHNSON: Okay, let me take the second question first. I'm very glad you asked that question. I had mentioned in the beginning, we have put something in your packets about it.

The numbers that we've handed out are all restated using the new weights. So when you look at this table, you should not be confused. You should see exactly what happens, using the new weights, going back to 2005. If you need to go back earlier, we can provide that.

Don't go back and look at the October WEO -- World Economic Outlook -- and make that comparison directly, because that uses the old weights, and then you could get confused between what's the weight change and what's the effect of the financial turbulence.

If you look at these numbers, you see "Global Growth 2006," "`05," "Estimated 2007" -- obviously there's still some data coming in, revisions. We think that will be 4.9. "Projected 2008," 4.1.

So that's using -- that's all using the new weights, and that says we're going down, we think, from 4.9 to 4.1. That's our baseline reduction. And that's using the same weights. So none of that reduction is due to change in weights.

Do you want to -

QUESTION: It is minus 0.3 for 2008.

MR. JOHNSON: That is how much we've changed our projection, relative to what we said in October, if we had said in October using the new weights.

So I'm sorry if this is confusing you.

QUESTION: Okay, so it's -

MR. JOHNSON: Before -- back in October, if we'd had the new weights, we would have said 4.4 for 2008 -- right? Now we're saying 4.1. So that's the .3 reduction. That's the revision to the forecast.

On the Italian -- more generally, European -- situation, I think the key issue is the slowdown, the extent of the slowdown. I think that's the big driver across the Euro zone, and that's what we're showing you here.

Now, the Euro zone, of course, is not as much affected as the United States. The epicenter of the problems, of the housing problems and the associated financial problems, remains the United States.

And I think you can see this clearly if you look at our fourth-quarter-on-fourth-quarter numbers. And that's why we've added them here. This is also not always what we emphasize, but I think in this case, it shows you, clearly, the U.S. goes down from 2.6 to .8. The Euro area is going down from 2.3 to 1.3.

The major driver here are these global forces, and the forces coming out of the U.S. and the way that it's been transmitted through the European financial system. And that's what I would focus on.

And I think the slowdown will be fairly -- we're still looking at exactly how it will be divided across European countries, but we think it's fairly even at this point. It's hard to say that one country's much more involved than another country, within the Euro zone, for example. So it's somewhat an evenhanded reduction, if you like, across the Euro zone.

That's the main driver, that's what's really affecting prosperity, opportunity, living standards around the world in 2008.

QUESTION: I'm sorry, just last follow-up.

So the political situation is not of concern for the IMF? Or is it?

MR. JOHNSON: All political situations are always of concern.

But I think I would just repeat that the main driver, what you should focus on, the big story remains the same story. It's U.S. housing. It's the way it's worked through the financial system. It's the fact that those consequences have not completely played out. And it's the fact that Europe, unfortunately, got pulled in through some financial transactions. Other parts of the world did not. Emerging markets did not. Africa did not -- through the financial mechanism. Eastern Europe is connected through its links to Western Europe.

So that's the main driver of what's happening in the global economy. And that's going to be the key determinant of economic performance around the world in 2008 -- exactly how that plays out.

MR. MURRAY: I'm going to take another question from the media briefing center. I'll get back to the room again.

The question is: What will be the repercussions of the U.S. slowdown in the economies of countries of Latin America, like Mexico, which is the most integrated with the U.S.?

MR. JOHNSON: So, if you look at our chart, we have in the category -- in the second block -- "Emerging Market and Developing Economies." Down there we have "Western Hemisphere." So that is Central and South America.

And you see where our estimate is that 2007 growth will come in at 5.4, and our projection is 4.3.

So the story is very similar to what we've been talking about in the context of Asia, for example. There's some slowdown coming, largely through trade linkages. Again, there's been very limited direct financial spillover.

It's a moderate slowdown. I would not want to exaggerate the extent of that, but it is something of a slowdown. And we think it's going to be, at this point, fairly evenly spread across all the countries in the region.

So, as I was saying on Europe, it's a fairly evenhanded reduction that we see there.

QUESTION: Keeping on the issue of Latin America, I mean it's pretty remarkable that, when you have a slowdown in the advanced countries you keep your forecast for Latin America.

I mean, why -- what's happening there? Why are you keeping, you know, high growth for Latin American standards?

And the second part, I would like to ask you about Spain. Because, you know, it's a country with a large current-account deficit, trillion reals. And then huge, you know, housing market valuations in recent years.

I mean, do you think that Spain is going to be more affected by the slowdown than other countries in Europe?

MR. JOHNSON: I always defer to Mr. Caruana on Spanish questions.


So in Latin America, we do think -- I mean, remember, you know, we're comparing our forecast today with what we said in October. So we were already expecting some slowdown for 2008. And, you know, we think that that remains in the cards, even though 2007 outcomes were somewhat better.

I mean, Latin America's made a lot of progress in policy frameworks. And, again, a very nice example of what we're talking about with other regions. So this is extremely helpful in managing the shocks, and it's fortunate, it appears -- every indication is -- that key Latin American financial institutions were not directly involved, did not have a large or perhaps significant exposure to U.S. sub-prime. So they're not being pulled in through the financial transmission mechanism.

However, they are affected by trade. And that's -- we think that was in our numbers already, and we actually are fairly confident that that picture, as we had it in October, remains valid.

As regards to Spain, I think that my answer is very similar to Italy. It's a fairly -- what we're looking at is a fairly evenhanded reduction across Europe. And exactly how that breaks down country by country we'll show you at the time of the April World Economic Outlook, when we'll have a little bit more data from the beginning of 2008.

But right now it's hard to say exactly who's going to be more affected, one country versus other countries. That's still unfolding.

The Euro zone, as a whole, though, I think you can see the picture.

MR. MURRAY: Okay, I've got a question here in the media briefing center for Mr. Caruana, I believe.

The question is: Was it good or bad for financial stability that the French Central Bank kept news about Societe Generale to itself for two or three days?

MR. CARUANA: I mean, on this episode the lesson I would like to draw is that what we have been insisting for a long time, the importance of improving risk management in financial institutions, and also the importance of transparency. I think these are the two lessons, and I will not enter into the details of any specific transaction.

But I think the whole financial turmoil that we have been experiencing for months is a good reminder of how important is, in the resolution, both the actions by the financial institutions -- the private sector -- and also by the public sector. It's very important that both act together, improving risk management, and improving, in the case of the public sector, frameworks.

QUESTION: I had some questions about what you specifically were looking for in the U.S. and how it spills over.

So, maybe I'm misreading this, but if you compare the fourth quarter `06 to `07, `07 to `08, there's a gigantic falloff, right? And then you see a very large falloff everywhere else.

But -- so two questions. On the other hand, for all of 2008, you have a projection of 1.5 percent. So are you essentially predicting that the fourth quarter is really terrible, the first quarter is really terrible, and then the rest of the year is improvement?

MR. JOHNSON: No. This is -- so, again, we were trying to make this clearer. And thanks for the question. It's an important point to clarify.

When you report annual average growth rates -- which is our headline number, and most people's headline growth number -- there's a lot of carryover from the previous year. So the fact there was a strong -- for example, the fact there was a strong third quarter in the U.S. in 2007 keeps the 2008 number higher than it would be otherwise.

So what we're trying to show you -- and that's why, if you look at the U.S. number compared, for example, to the Euro area number, you might say, well, 2.2 goes to 1.5 in the U.S. That looks like a small change compared to 2.6 going to 1.6 in the Euro area. Why does that make any sense?

And that's just due to carryover from what happened in 2007, and the strong U.S. third quarter in particular.

So what you should really -- I mean, in order to convey to you, hopefully, our view of what will actually happen during 2008, the best way, we think, to show this is look at the fourth quarter in 2008 relative to the fourth quarter in 2007. So you get the whole cumulative effect of what happens during 2008, but only what happens during 2008.

And that's, as you said, it's more significant decline. That was a strong, that was a 2.6 for the same period, 2006-2007, fourth quarter and fourth quarter, we think it will be .8 within 2008.

And this, I should clarify, also includes what we understand to be the likely fiscal stimulus in the U.S. So it's .8 with the fiscal stimulus already included in here. And that helps, in our view, in the second half of 2008.

QUESTION: Off mike) -- when the question of decoupling, you see quite clearly that the drops elsewhere are also quite significant.

MR. JOHNSON: That's right. But they're not as significant in the United States.

And, unfortunately, we don't have the same high-frequency data, or accurate and reliable data, for many emerging markets. We do have it, you know, for China.

So we think that China will actually on a, again, Q4-on-Q4 basis, slow down from 11.2 to 9.4. And, of course, they've wanted to have some slowdown for a while now, because they feel their economy's overheating. They're concerned about inflation, as are many people.

So, on that basis -- I mean, again, just trying to show you what we have -- we can see at least one key emerging market following the same sort of pattern.

QUESTION: (Off mike) -- also get a little clarity on something Mr. Caruana -- the formal statement.

It says, "The line between regulated and unregulated is always complex. It has become evident that unregulated or lightly regulated financial institutions should be regulated -- " -- basically.

What sorts of institutions are you talking about?

MR. CARUANA: We are specifically -- I think it was clear, but we are specifically talking in the case of the United States. I think the experience has proved that the originator of mortgages that were lightly regulated and supervised, this has created -- this has been part of the incentive structure that has created additional risks.

So we think that in this case it has proved clear that it should be regulated.

QUESTION: If you're -- if the prediction is that U.S. growth slows to 0.8 percent in the fourth quarter, what kind of statistical range is there, in terms of error? And what kind, therefore, what kind of possibilities then of falling into a recession, if it goes so close in the fourth quarter?

MR. JOHNSON: It's not in the fourth quarter. It's fourth quarter on fourth quarter. So fourth quarter of 2008 compared with fourth quarter of 2007, what will that rate, what will that growth rate be, right?


MR. JOHNSON: We think there are some downside risks to this, to this scenario. There are also some upside risks. It's a little bit weighted towards the downside. I, you know, think that precisely what's going to happen in individual quarters is very hard, very hard to say in this, in this situation.

It's a significant slowdown. That's what I focus on. It's a significant slowdown. It is having, it's a global slowdown without any question, and the pattern you see around the world, I think, is picked up quite well in these numbers. That's what I would, that's what I would focus on.

QUESTION: A quick follow-up, just getting back to some other people have mentioned decoupling, does this support the notion that there is still pretty close linkages between a U.S. slowdown and the rest of the globe or are we seeing?

I mean I know you've talked about the difference between the financial sector impact and the trade relationship, but which way would you see this, these data pointing toward, more of a decoupling or still a lot of linkages?

MR. JOHNSON: Well, there are obviously linkages. I think that reports of decoupling have been greatly exaggerated. It's a question of how, what kind of linkages. There are some financial linkages, and that's what's brought in Europe. There are also some trade linkages, and that's what's bringing in Latin America and it's bringing in Asia, and I think that's what could spill over to Africa. So it's the nature of the linkages.

It's not yes, there are linkages; no, there aren't. It's exactly how these linkages play out, and I think that's what, that's what we're seeing in these numbers, and that's what we're expecting in 2008. It's going to be a story of how are you linked to the U.S. and to what extent can your policy deal with the repercussions. To what extent are you constrained, for example, by your domestic inflation in terms of having an appropriate counter cyclical policy?

MR. MURRAY: We have a question on the Media Briefing Center, more specifically, on India: What is the assessment of the Fund against the backdrop of what is taking place globally?

MR. JOHNSON: I think no one is exempt from a global slowdown. That's why you call it global.

India has relatively less trade exposure than some other Asian countries, so that, that will limit the effects. India also appears not to have been drawn in through the financial mechanism. We don't think there's substantial exposure there. So that's very good news for India.

We are always looking closely at the Indian situation, at the forecast. It's a little too early to tell exactly the extent of the effect. I think it will be

somewhat more moderate than in some other Asian countries, but I think, honestly, no one is going to be exempt. It's going to be very hard for even the most effective counter cyclical policy to keep any country from having some slowdown in these circumstances.

QUESTION: When you were saying your new estimate for 2008, you said that includes our idea of how the economic stimulus will work out. Does that mean that you see it kicking in, in the third quarter or could you be a little bit more precise about that?

MR. JOHNSON: Sure. Our baseline includes a fiscal stimulus that has effects in the third and fourth quarter. Of course, it could happen earlier. It could happen later. It could be bigger. It could be smaller. So there's upside and downside risks around that.

It's also assumed this is a temporary fiscal stimulus. It keeps the U.S. on this medium-term path to fiscal consolidation. That, I think, is really very important, and I think there are real risks if it turns out to be something different.

The baseline is fiscal stimulus comes through roughly as currently agreed and that it takes effect in the third and fourth quarters of this year. It affects the numbers that we're showing in that form.

QUESTION: I guess in the last couple days, people now seem to think the U.S. economy might not just be slowing but faces a risk of really slowly sharply. There's this talk about a vicious cycle of home price declines curbing bank lending which curbs demand, and then it kind of spirals. Could you comment on that, what, how do you think there's a risk of that?

MR. JOHNSON: I think there certainly are risks of the kind of financial accelerator or decelerator, perhaps, in these circumstances that you're talking about.

I would emphasize, though, that I think that's not in our baseline. I think those risks have been somewhat exaggerated by some people. I think the key point is monetary policy remains effective.

Cutting the Fed, as the Fed has cut interest rates significantly since the summer, this is going to have an effect on the real economy. It may not have an effect as quickly and in the same fashion as it has in the past, but I think it's going to be effective, and this is going, this is a key. This is the first line of defense against the kinds of shocks that give you a downturn like we're seeing the U.S.

In the context, where monetary policy is working but there is still a timing issue, I think the fiscal stimulus, as currently being discussed and it seems like it will go ahead, could be quite helpful and complementary in the second half of the year. So there are some risk management reasons for exactly use the fiscal stimulus to take the edge off of a potential downward spiral, the kind you're talking about. I think this is actually a good combination of policies for the U.S. in the current sense as we read the data.

QUESTION: Following up on the fiscal stimulus package, are there any other key assumptions that you've used to come up with a forecast for the U.S. economy?

MR. JOHNSON: Sure. We used the usual World Economic Outlook assumptions. I can go through all of them if you want. But in terms of what we expect for commodity prices, oil prices taken from the market, we have a forecast of commodity prices that is basically flat for 2008 and in terms of the path of interest rates, the standard assumption we take is what's in the futures market for interest rates. So we use the market expectation.

That's not saying that's what the Fed is necessarily going to do, but you have to use something for the forecast, and that's the convention.

Did you have something else specifically in mind?

QUESTION: Well, I was wondering since it includes the assumption that this fiscal stimulus package will be implemented, if there are any other factors that you're looking at that are unusual that you've included in your assumptions?

MR. JOHNSON: Well, I'm not sure exactly what you mean by unusual. When a government has a fiscal policy or fiscal plan that's credible and about to be implemented, we do usually include that in our forecast. So that's actually a standard. That's not a departure from our standard approach at all.

But there's nothing. There's nothing. Unless you have something specifically in mind, there's no additional. There's no policy that's not yet been discussed or something like that. That, we couldn't put in our forecast.

We put credible policy plans in, and that's the case with the U.S. in our view.

QUESTION: Thank you. I'm going to be greedy and try a quick clarification on something that's already been raised and then a new question.

Just clarifying on the U.S. forecast, can you tell us what portion of the growth comes from the fiscal stimulus package? In other words, absent that, would it 0.6, 0.7?

Also, give us some sense, even if it's sort of anecdotal or qualitative rather than quantitative, of whether the kind of growth path that you envisage might incorporate a couple of quarters of near to zero or zero growth. I'm trying to figure out in my mind whether 0.8 percent in Q4 to Q4, what that means or implies in terms of the path of the growth in between.

Secondly, when you talked about Europe -- and I guess this could extend to some of the other advanced industrial economies as well -- you talked about an expectation of an even, essentially even impact of the U.S.-driven slowdown. But to what extent do you see the prospect for a house price bust in some other industrialized economies, for instance, the U.K.? Spain was another economy that a colleague here raised.

What is the prospect that the U.S. experienced could be repeated elsewhere and then, in turn, have implications for those economies and other economies linked to them?

MR. JOHNSON: Okay, let me take the second question first, actually. This is something, again, we'll come back to at length in the April World Economic Outlook. We'll have a chapter and, in fact, a big focus of the report is on housing and the real economy which includes looking at various measures of not just house pricing but how housing has been financed and whether there's been a relaxation of credit standards, I mean to the extent one can see that in various data measures, and so on and so forth.

I think it's a little -- I mean we have warned about house prices and other asset bubbles in the past. I think it's a little too in general terms. It's a little too early to say exactly how these are going to play out in Europe. I think what's in our baseline is really the effects through the credit channel of what's happened to banks and the way in which they've changed their behavior. They've become more cautious about lending.

So I think while we have, we're not, we've flagged some concerns about specific places before -- you can see that in our October World Economic Outlook -- we'd stick with that kind of wording and that kind of assessment for now. Then that's one reason to think it's still an even, a fairly even effect of the U.S. slowdown because we don't think there's places where the financial system in Europe, Western Europe or Euro Area, has been exempt.

In terms of the growth path for outlook, well, obviously you can construct it on a quarterly basis in lots of different ways. We actually think that you could have a slowing, a fairly even sort of slowing during the year, not particularly that close to zero, and we think that this fiscal stimulus could add something. It's, you know, hard to say precisely. Perhaps, I think you said 0.2 to 0.1, perhaps a little bit more. It depends on the timing also with how the fiscal stimulus comes through.

Obviously, it's, the key thing is it's a modest stimulus. It's targeted. It depends on how. The plans aren't yet finalized in terms of how it's going to be spent. Is it going to be given to people who we think will spend it right away. That's a very important issue. So it's hard to put a precise number on that.

QUESTION: But in your own estimates, I mean you must have had a sort of X fiscal stimulus baseline, and then you've added a fiscal stimulus to it. So what's the difference?

MR. JOHNSON: I'm not going to tell you, I suppose, the exact difference. It's in the order, the order that we've been discussing. So 0.2 to 0.3, talking about the Q4 and Q4 basis, yes.

QUESTION: Let me just first ask your comment, arising from your comment that rising inflation will slow down economic activity. I am sure that emerging markets will not escape this phenomenon.

I've been observing, particularly in South Africa, the Reserve Bank which so obsessed with trying to curb inflation that they have been talking about bringing it to 3 percent, down to 3 percent. Some of us would say this is Operation Impossible. I mean looking at the fact that causes of inflation. I mean the money from the rising oil prices, for instance, which we have no control over them and right now, the recession, possible recession in America.

Do you think this is a wise idea? I mean they are already under the pressure from (off mike) to break away from this tradition.

And, secondly, staying with the fiscal stimulus, would you comment at this time that all nations consider injecting fiscal stimulus into their economies?

MR. JOHNSON: Thank you for those two very good questions, and I think these will actually bring me back to what I regard as the key themes for us today.

First of all, it is striking and it is appropriate, it's a good thing, that all central banks around the world are very focused on inflation and bringing inflation down and keeping inflation expectations anchored.

It is absolutely. You are absolutely correct.

There's a lot of pressure on this, for example, from higher oil prices. But when you have a shift in relative prices, such as a higher oil price, that doesn't necessarily have to become a higher price level or continuing increase in prices which is inflation, and central banks around the world have made tremendous progress in breaking that link, in allowing economies to adjust relative prices without it becoming inflation. That's a huge, huge success not just in the past five years, the past twenty years, but in the past five years it's really been marked.

I think the view of the IMF is that you should not give this away, that you build policy credibility -- for example, monetary policy -- in order to use it when you need to. This is what gives some countries scope for counter cyclical policy now.

But it's very important not to throw things out the window for the short term. You're going to have problems in the medium term, and the medium term is always just around the corner. So I think remaining focused, and this is an issue for, as you said, central banks in Africa, central banks in Asia and central banks in Europe as well.

Inflation is a key issue. Inflation is very much with us. There are few countries that don't have to worry a lot about inflation right now. Japan is one. The United States, we think, is slowing down sufficiently, so the pressure is going to come down on inflation. But most countries have to keep their eye on the ball of inflation, and it's very important that the central banks have the ability and the power to continue to focus on that.

So we're all in the same boat both from a point of view of how the global economy is developing and in terms of the policy problems. It is not easy to be a central banker in today's circumstances, okay, for exactly these reasons. It's not easy anywhere.

Secondly, with regard to fiscal stimulus, I would like to clarify in case anyone has misunderstood what I've said today. We think that there are two kinds of fiscal stimulus to discuss: what you get from automatic stabilizers and what you get from discretionary fiscal policy.

Automatic stabilizers are what play a role when the economy slows down. Taxes will usually fall and spending in some forms, for example, unemployment insurance, will rise. We think that most countries in the world have built up enough credibility so they can allow automatic stabilizers to work. There are very few exceptions to that.

Now, should you go beyond that? Should you use, when should you use a discretionary fiscal stimulus? Well, if you look at the situation of the United States today, you have one example where monetary policy is still effective, but it's not perhaps working as quickly and as much or as directly as in some past episodes, and there are some risk management issues. You want to avoid the downward spiral, and you want to provide a temporary, targeted assistance to private consumption, keep it going while the full effects of monetary policy can come into effect.

Then, in those circumstances, I think a modest and I'll emphasize again, temporary, fiscal stimulus can be helpful. I don't think that most countries in the world are currently in that situation. I think it is a good time to think about the circumstances under which other countries might want to do that when, clearly, you do not want to be overtaken by events.

It is important to prepare. It is important to think ahead, but I would emphasize this is something that you keep in reserve. It is not the first line of defense. You only need it if monetary policy is not working fully through the economy and if you have a significant slowdown.

Here's the most important point: It depends, obviously, on your fiscal position, on the budget deficit and on your debt levels. That, I think, is obvious to everyone, whether you have scope for fiscal response. But it also depends on inflation. If you have a perfectly sound public finance system and a slowdown and you have a lot of inflation and you don't think for whatever reason that inflation is coming down, then fiscal stimulus may not be a good idea.

Inflation is a very, inflation and inflation expectations are a very important constraint. The central banks and other policymakers worked very hard to bring inflation down around the world. It is tremendously important that they be allowed to keep inflation under control and keep inflation expectations well anchored. We, I believe, would support a fiscal stimulus only in circumstances where we felt that the stimulus could be delivered and could be successful and could support the economy without creating problems even for the fiscal position or in terms of inflation and inflation expectations.

MR. MURRAY: Thanks, Simon.

The last question of this briefing, this is for Mr. Caruana: European prime ministers are meeting today to discuss greater transparency of bank balance sheets, ratings agencies, enhancing the IMF's role in warning of global systemic risks. Do you think there are concrete new proposals worth pursuing in these areas?

MR. CARUANA: As I mentioned before, there are a lot of initiatives and there are a lot of authorities that are cooperating, trying to learn the lessons and trying to make the financial system more resilient and the capacity to react promptly also more important.

So I think there are plenty of initiatives, and again we are working on these issues. We are really strengthening our capacity to monitor events and to draw lessons that can be helpful to a wide number of countries, and there are also we are participating in other initiatives of the Financial Stability Forum.

So I think it will take some time still. As I have said many times, the turbulence has proved that the financial system today is quite complex. It requires time to draw the lessons, but I also think that it is very important to draw the right lessons. Again, we are working on that, and there will be, I'm sure, good recommendations that will come out of this meeting and from other fora and meetings that will continue to happen.

MR. MURRAY: Thanks, Jaime. Thanks, Simon.

Just a reminder, the embargo on this press briefing and the documents posted on the Media Briefing Center expires in one hour, at 11:00 a.m. Washington time. If you do have any follow-up questions, please send an email to, and we'll chase some answers from the principals here today.

Again, thank you to Jaime Caruana, Simon Johnson, and all of you here and on the Media Briefing Center for joining us today.


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