Transcript of a Press Briefing on the World Economic Outlook Update by Simon Johnson, Economic Counsellor and Director of Research, and Charles Collyns, Deputy Director of Research

July 17, 2008

By Simon Johnson, Economic Counsellor and Director of Research, and Charles Collyns, Deputy Director of Research
Washington, D.C., July 17, 2008
Webcast of the press briefing

MR. MURRAY: Good day. I am Bill Murray, Chief of Media Relations at the IMF, and this is the embargoed briefing on the World Economic Outlook Update. The embargo time is 10:30 a.m. local or 14:30 GMT. That is a revision from an earlier embargo time, so if you can remember that, 14:30 GMT.

The WEO Update is a shortened version of our semi-annual report. So keep that in mind.

Let me now turn the table over to our Economic Counsellor and Director of Research, Simon Johnson. He'll have some brief opening remarks. Thanks.

MR. JOHNSON: Thank you, Bill.

Good morning. After a remarkable five-year span of strong growth and lower inflation, the global economy is facing its most difficult set of circumstances in many years. There are three main points I would like to make. The first point is the global economy is decelerating significantly. The second is that financial conditions are still very fragile. The third point is that higher inflation is a rising concern, implying the need for more assertive monetary policy responses in certain parts of the world.

Against surging food and energy prices and continued turbulence and strained conditions in financial markets, global growth is indeed moderating although not quite as sharply as we projected in our April 2008 World Economic Outlook. At the same time, inflation pressures are intensifying around the world.

In the recent past, the global economy has managed to take large shocks in stride, but we think its capacity to absorb them is being increasingly challenged. How it will navigate through the latest turbulence in financial and commodity markets will crucially depend on how successfully policymakers respond to a fast-changing set of risks in many advanced and emerging economies.

In terms of economic activity, global growth decelerated to 4.5 percent in the first quarter of 2008 compared with the first quarter of 2007, down from the roughly 5 percent pace in recent years with the slowdown led by advanced economies, particularly the United States but also, to some extent, emerging markets.

Regarding financial risks, we are not out of the woods. Strained financial conditions and fragile sentiment in advanced economies are continuing and are not likely to dissipate anytime soon. The latest problems with U.S. mortgage giants, Fannie Mae and Freddie Mac, are emblematic of deeper problems facing the housing sector and mortgage markets in the U.S. where things have not yet stabilized. Banks are gradually repairing their balance sheets but face protracted adjustment and additional losses from weaker credit performance in a context of slower growth.

Consequently, we foresee global growth moderating from 5 percent in 2007 to 4.1 percent in 2008 and 3.9 percent in 2009. On a fourth quarter over fourth quarter basis, growth is likely to decelerate from 4.8 percent in 2007 to 3 percent in 2008 before regaining momentum to 4.3 percent in 2009. Notably, growth in G-7 economies is projected to slow below trend by the final quarter of this year before a gradual recovery gets underway through the course of next year.

At the country level, activity for the United States is expected to be flat or to decline modestly in the second half of 2008. As the effects of the fiscal stimulus fade, consumption continues to be hit from all sides, given prolonged weakness in housing, rising oil and food prices, and tight credit conditions. On a fourth-quarter-over-fourth-quarter basis, we expect growth to be barely positive in 2008 before strengthening toward 2 percent next year as the situation stabilizes.

Euro Area growth is also expected to moderate over the course of this year but regain momentum in 2009. On a fourth-quarter-over-fourth-quarter basis, growth would fall to 1.3 percent in 2008 before recovering to 1.7 percent in 2009, reflecting the drag from high energy and food prices, tighter financial conditions, slowing global activity and a much stronger euro.

In Japan, GDP growth is expected to hover slightly below potential, owing to lower global demand and less favorable terms of trade, with the economy expected to expand by 1.5 percent in 2008 and 2009.

Expansions in emerging and developing economies are also expected to lose further steam. Growth in these economies is projected to ease to around 7 percent in 2008 and 2009 from 8 percent in 2007.

In China, growth is now projected to moderate from near 12 percent in 2007 to around 10 percent in 2008 and 2009.

Despite the slowing global economy, inflationary pressures have continued to mount, owing to the sharp rise in oil prices above previous record highs while food prices have been pushed up by adverse weather on top of continued strong growth in demand. In advanced economies, headline inflation rose to 3.5 percent in May 2008—that's a 12-month change—while core inflation at 1.8 percent. The increase in inflation is more marked in emerging and developing economies where headline and core inflation have risen to 8.6 percent and 4.2 percent, respectively—the highest rates since the late 1990s.

Thus, inflation projects have been raised for both advanced and emerging economies as commodity prices are generally expected to remain elevated. The new oil price baseline is 30 percent than in the April, 2008 World Economic Outlook.

In advanced economies, inflation pressures are likely to be countered by slowing demand and, with commodity prices, they are projected to stabilize. But second-round effects, including in the euro area, remain a concern. The projected increase in inflation for 2008 is forecast to reverse by 2009.

In emerging and developing countries, inflationary pressures are building faster, fueled by soaring commodity prices and continued above-trend growth. Hence, inflation forecasts for these economies have been raised by more than 1.5 percentage points in both 2008 and 2009 to 9.1 percent and 7.4 percent, respectively, and the moderation inflation in 2009 will depend on more assertive tightening of monetary conditions.

Risks related to global imbalances in current accounts also remain a concern. The continuing decline in the U.S. dollar and slower growth of the U.S. economy relative to trading partners have put its current account deficit on a more sustainable path, but surging oil prices are likely to widen global imbalances and complicate the task of managing domestic inflation in several oil exporters. Current account surpluses in some key emerging economies remain large, suggesting that a move toward greater exchange rate flexibility, including for the Chinese RMB, should remain a priority.

Finally, let me comment briefly on some policy implications out of this global assessment. The global economy will need to adapt to a large transfer in purchasing power from commodity users to producers while policy tightening will be necessary in a number of countries that face mounting inflationary pressures. Overall, let me emphasize that macroeconomic policy priorities relate to heading off rising inflation while being mindful of downside risks to growth, particularly coming from the financial sector.

In the major advanced economies, the case for policy tightening is stronger but not yet the overriding concern and policies can remain on hold, given that inflation expectations and labor costs are projected to remain well anchored. And, growth momentum is weak, but this could change quickly. Moreover, efforts to support balance sheet repair in the financial sector need to continue.

In many emerging economies, monetary policy needs to be tightened appreciably, combined with fiscal restraint and, in some cases, more flexible exchange rate management in order to reverse the recent buildup in inflation.

In addition, there is a need for collaborative, multilateral efforts to promote a better supply-demand balance in commodity markets, including by allowing greater pass-through into domestic energy prices from high crude oil prices in some countries and improving the investment climate in the oil sector in some countries and globally. In this context, there is also scope for revisiting biofuels policies in advanced economies.

Thank you. We are now happy to take your questions.

QUESTIONER: So, compared to your April forecast, both the growth and the inflation are higher. I just wondered if you could break down in a bit more detail why you think inflation is going to be higher than you did in April and why growth is ever so slightly higher too.

MR. JOHNSON: Sure. Let me start with the change in our view on growth. That's relatively straightforward.

The effects of the financial disruptions which started last summer are working their way through the U.S. economy and other advanced industrial economies but somewhat more gradually than we anticipated. So, in terms of actual performance in the first quarter, there was good news. We were surprised on the upside, as you might say, for the U.S. and for Europe. But we think the second quarter is going to be weaker in Europe, and we think the third and fourth quarters are going to be weaker in the United States. So it's taking some time to work its way through.

That's our forecast for 2008. Our forecast for 2009 is virtually unchanged. So it's an issue of timing.

On inflation, I think that the main point there is oil prices. When we made our forecast and when we locked in our forecast and presented it back in April, oil prices were substantially lower than they are today. Now we continue to think that oil prices and the oil market remains volatile. More than anything, this means that oil prices could go up, they could also go down. Nevertheless, when we made this forecast, we had to take into account substantially higher oil prices, which has a significant inflationary impact, affecting headline inflation in advanced economies, although not yet, as I said, feeding through into core inflation in those economies, but that's a key thing to watch.

In emerging markets, as you know, headline and core inflation were much more similar because the consumption basket has a lot of fuel in it. It also has a lot of food, and the fuel prices are feeding into food prices. So the food price increase was already evident at the time of the Spring World Economic Outlook, and we talked about it at that time, but it has continued. Food prices have not come down very much in general. So that continues to feed through into inflation pressures. Both headline and core inflation in emerging markets and developing economies are elevated for that reason.

QUESTIONER: Mr. Johnson, in terms of April, you said the U.S. economy then had nearly stalled. I wonder if that's a phrase that you'd use now.

And, secondly, in terms of your estimates on the total losses in the financial sector, I don't have it in front of me, but it's over a trillion. What is your latest revision on that?

MR. JOHNSON: So on the total losses, that is something that will be discussed further when the Global Financial Stability Report update is presented in about 11 days, I believe. So let me defer that question to our experts on that.

In terms of would I use the expression, "nearly stalled," for the U.S. economy? I would nearly use it, I would say. So, in other words, we think that the idea of stalling is a fairly accurate one for the U.S. economy, but it continues to keep going. It's the resilience, of course, of the U.S. consumer and the refusal of the U.S. consumer to succumb to these many shocks from housing, from credit conditions and from the effect of higher gas prices. That resilience is keeping the U.S. economy going, but we think the pace is slowing.

The fiscal stimulus, of course, turned out to be not just timely but extremely timely. So it really arrived at the perfect moment, and we think it was also well targeted. Whether it's going to be temporary remains to be seen. We are on the side of hoping that it will be. But the fiscal stimulus has really helped that.

The question is after the fiscal stimulus wears off, after that money is spent, what's going to happen, and I think "nearly stalled" is probably the right wording for the U.S. economy in the next couple of quarters, but we do see a recovery in 2009.

Remember net exports. The export sector is doing very well, and we think that the housing sector will find a bottom sometime in the next few quarters, and that will help the U.S. economy. If you look at a fourth-quarter on fourth-quarter basis, we think it will be moving back up towards potential by the end of 2009.

MR. MURRAY: Okay. A footnote to Simon's answer regarding the Global Financial Stability Report: We will have a formal announcement coming out to the press. But for planning purposes, expect the briefing on the Global Financial Stability Report update on July 28th here, here at the IMF.

QUESTIONER: In April, the report suggested there was a 25 percent chance of a global recession of less than 3 percent growth. I am wondering if you still see a chance of global recession.

MR. JOHNSON: There is a chance of global recession. I think roughly the risks remain the same. I think, though, the situation has become considerably more complicated since April because of the inflation problem.

So, in April, we felt the global slowdown and the effects in the financial sector were the preeminent problem while we recognized that rising food prices were a first-order problem for some countries.

Now I think we are saying, on top of a moderate slowdown and a modest recovery, we've got a lot of inflation in some places and certainly inflationary pressures everywhere, and that makes the policy response much more difficult because you're trapped between trying to address the slowdown and trying to contain the inflation.

You know that you don't want the slowdown to get any worse than what's in our baseline projection. At the same time, you don't want inflation to get out of control because then bringing inflation down later will be extremely costly. This is a very difficult moment for policymakers in almost every country, I would say.

QUESTIONER: On Latin America, I wonder if you could give us, you know, another view of what's going on there. You mentioned this issue, I mean that you see some countries need to tighten the monetary policy, and it might be the case in Latin America. Maybe you want to mention some countries where you think that should be done.

MR. JOHNSON: Mr. Collyns is handling questions on Latin America.

MR. COLLYNS: Latin America, like the other emerging economies, continues to grow quite fast by historical standards with growth still somewhat above trend.

It is slowing, however. It's not decoupling from the slowdown in the advanced economies. In the data for the first quarter of this year, we do see a considerable slowdown from the rates of growth being achieved last year. And, we are projecting that there will be a sustained slowdown during 2008 and into 2009, as you will see if you look at our forecasts, largely as a result of the slower growth of exports, given the weaker external environment, and the tightening of monetary policy across the region.

In general, I think Latin America clearly does face inflationary pressures in all the countries. We have upward movement certainly in headline inflation and some upward movement in core inflation.

But I think the region does benefit from reasonably well-established inflation targeting regimes in many of the largest countries which are helping to anchor inflation expectations. The central banks in the region have been quite proactive in tightening policy, and that has helped to provide an anchor to inflation expectations. We do think they will need to continue to tighten, but we are encouraged by the proactive approach that has been taken in the region, and they will need to continue in that vein.

QUESTIONER: In your April forecast, you said that Latin America or the Western Hemisphere is going to have a growth this year for 4.4, but today you are saying that the forecast is better. It's 4.5. Would you explain why?

MR. COLLYNS: Yes. That's a relatively small adjustment. It largely reflects base effects. The growth in 2007 was somewhat stronger than we had anticipated in countries like Brazil. We also saw a little stronger first quarter upturn than we expected, a slowdown but still a little bit stronger than we had put into our numbers. So, from these base effects, we do have a somewhat stronger outcome forecast for 2008, but it's a very minor adjustment.

MR. MURRAY: I'm going to turn right now to the Media Briefing Center. It is a question related, country specific to Brazil. I'm going to paraphrase a little bit.

Basically, the question is: Emerging economies such as Brazil, how should they adjust for current inflationary pressures and how should they reconcile that against their need to grow?

MR. COLLYNS: I think the key is to keep inflation under control, to keep inflation well anchored. I think the worst that could occur from a growth perspective would be for inflation to get out of control. In which case, you'd have to tighten monetary policy very sharply and abort growth, have a hard landing which would be very damaging from an economic and a social perspective.

So the key to growth is to keep inflation under control. So there isn't really a tradeoff between the two.

And, as I mentioned before, I think Brazil is actually doing pretty well. They have a very active central bank with a well-established inflation targeting framework. They have been tightening monetary policy quite actively this year and, as a result, inflation expectations in Brazil do remain quite well anchored. There is certainly an uptick in inflation this year toward the upper end of the inflation targeting range but still within that range, and inflation expectations for next year are still pretty close to the midpoint of the range. So Brazil is doing well.

QUESTIONER: You mentioned that the U.S. economic stimulus package had been well timed. Democrats in the House are calling for a second round of economic stimulus. (A) Do you have any advice for them and (B) what sorts of considerations do they need to keep in mind as they debate this?

MR. JOHNSON: Yes. Well, we don't comment on pending legislation, as you can imagine. But I'm happy to talk about what went right with the last fiscal stimulus and what lessons we should learn from that, and that's something which we will examining in the Fall World Economic Outlook. We will be looking at fiscal responses much more generally and look at lessons learned from the U.S. experience.

I think that the timing was really a key part of this stimulus. The problem with fiscal policy, of course, is it's very hard to get the timing right. Even though this stimulus was done very quickly and the checks have arrived within six months really of the consensus formally that this was a necessary thing, that's still a considerable lag. And, you don't know what the economy is going to be like in six months. It's very hard to call what will happen in the housing market. It's very hard to know exactly how financial conditions will play out.

So we continue to regard fiscal stimulus as, obviously, a policy tool that can be helpful in many instances, but one that should be used with great caution and only when you feel that for some very compelling reason that monetary policy cannot, by itself, handle the problems. And, that's speaking about the U.S.

If you look more generally around the world, there's less of a case in many instances, less of a case within industrialized countries, for using a discretionary stimulus because they have stronger automatic stabilizers. The U.S., because it has a relatively small government as a percent of GDP, has a stronger case for sometimes using discretionary stimulus. In other countries, we tend to prefer that they rely on automatic stabilizers, certainly at this point.

QUESTIONER: The old rule of thumb used to be the developed world or the U.S. gets the sniffles; the developing world gets a cold. But a lot of the focus has been on commodity prices.

Specifically in regards to Africa, are you concerned that the developing African countries are going to be very impacted by inflation and commodity prices and rising energy prices or are they going to benefit from it or has the picture gotten even more complicated?

MR. JOHNSON: I think the picture is very complicated. Let me say a few words about the commodities side and then see if Mr. Collyns wants to add anything.

I think the point is, of course, that African countries vary a lot in terms of what kind of commodities they export, what kind of commodities they import, and so you have to differentiate and go country by country which is not what we're going to do here. I think the African Regional Economic Outlook will be the place where you have a chance to look at that in the fall.

It really depends. Some oil exporters are doing very well. Some countries that import oil are doing less well. That, again, depends on what's happening to their specific crops in terms of the terms of trade.

I would emphasize that the inflationary pressure is a much more general one. Of course, many African countries have food. The food share of the CPI could be 30 percent or it could be as high as 50 percent. In some instances, it's even higher. And so, higher food prices, which have definitely been with us for some time and we think may well continue, really hit poor people very hard across Africa. And not only in Africa, of course, but it hits poor people particularly hard every where.

Now, at the same time, I'd say there are risks to the situation. We have emphasized, and we made this point in our Spring World Economic Outlook, that if the global economy starts to turn down as we expect, then at some point commodity prices would also come down. It's hard to call at this moment, but we do urge caution in terms of countries' fiscal positions, for example, and the extent of their external borrowing, that they should keep in mind that while some commodity prices may remain high and some of them could even go higher, it would be a mistake to bet on that in terms of the fiscal position of a country. So you don't want make yourself vulnerable.

We think the countries in Africa have managed this commodity boom remarkably well, and we think they've learned a lot of lessons from previous experiences. And, broadly speaking, they're doing a good job. But we are urging them to be careful, of course, about spending what may turn out to be a temporary windfall.


MR. COLLYNS: Yes. I don't have much to add beyond reinforcing Simon's basic points that the impact of commodity prices does vary very importantly across countries. In fact, two weeks ago, the Fund released a report looking, in detail, at the impact of rising commodity prices on countries around the world with particular attention to Africa. So, if you'd like to see particular information on individual countries, take a look at that.

It does really depend on the pattern of commodity imports and exports of each individual country. Certainly the oil exporting countries in Africa continue to do well, and oil importing countries can also do well if they are exporters of food or of metals, which many of them are.

Unfortunately, there are some countries which do not have rich endowments in any of those products, and those are the ones that we are particularly concerned about. As we said in the report, we are concerned that a number of them are close to a tipping point where the increase in their import costs and the upward pressure on inflation really could destabilize the macroeconomic situation.

MR. MURRAY: Thanks, Charles.

We have a number of questions now in the queue in the Media Briefing Center. So I'm going to start dealing some of them.

This is a China question. Do you see any signs key emerging market economies, notably China, are willing to allow more flexible currency movement to take pressure off other currencies and global imbalances?

MR. JOHNSON: I think there has been growing recognition, particularly this year, that in some countries—for example, China, but not only China—allowing more exchange rate flexibility and allowing in some instances the currency to appreciate can be helpful. Not only from the perspective of global imbalances, but this is also true from the perspective of helping to limit domestic inflation. Obviously, it has to be used in combination with monetary policies and fiscal policies that are also trying to control inflation, but we think there are some encouraging steps in that direction.

And, we do recognize that the Chinese RMB has appreciated to some degree this year in real effective terms, which are the terms in which we look at exchange rates. Part of that is due to the inflation, but part of that is also due to the change in the nominal rate.

However, we do continue to think the Chinese RMB is substantially undervalued, and we think there's scope for further appreciation in China. We think that would be helpful as part of a set of policies that would slightly reduce growth, rebalance the economy and very much in line with what China has repeatedly stated that it would like to do. We think that all of that moves in the right direction that would be very, very timely in this situation.

MR. MURRAY: Okay. Thanks, Simon.

Another question, this is on Spain. So we're moving to another region.

Spain is the only country in the Euro Area where growth will be below the April forecast. Could you please give us the reasons?

MR. COLLYNS: The Spanish economy is clearly in a difficult situation. It's facing a major adjustment in the housing sector. It's also facing the deterioration of the external environment, as faced by the other countries in Europe, with higher prices for commodities and tighter financial conditions. The deterioration in Spain in the first quarter was somewhat weaker than we had put into our projections. We see the economy continuing to be pretty weak during the remainder of this year. So, as a result, we have marked down our projections somewhat relative to where we were in April.

MR. MURRAY: Okay. Thanks, Charles.

We're going back to Asia. Here's a question related to the Philippines from Business World.

What is your near-term view on capital flows? Emerging economies, such as the Philippines, saw a lot of capital outflows of late due to risk aversion. How long will this risk aversion persist?

MR. JOHNSON: Let me say something on capital flows, and I'll see if Mr. Collyns will say something about the Philippines in particular.

I think the global environment is risky and, clearly, capital is responding to that. I think, though, that the nature of risks is a little bit different from what's often considered to be the case. And so, there are many emerging markets actually receiving capital inflows, but there's a lot of volatility. That's the main point.

So capital is coming in, and then very suddenly changing its mind and going back out, and then reversing again the next week. That's part of what I think is affecting our somewhat downbeat assessment of the global economy is that the capital flows have the potential to rush in to make a situation more difficult and then to rush out and make the situation difficult but in the other direction.

So I think that many economies are open to capital flows, and capital flows are becoming more volatile, and this makes, further complicates the macroeconomic picture. Nevertheless, the basic point for Asia and for other regions is that inflation is rising, and policymakers need to make sure they don't fall behind the curve. So while capital, capital flows can complicate the picture on any given day, in general, monetary policy needs to be more assertive and, in many cases, tighten appropriately moving forward.

MR. MURRAY: Okay. Thanks, Simon.

I think we're going to start wrapping this up. So, if you have any last-minute questions, please pose them. If not, I think we're okay. That's good again.

Excuse me. Here, we have one last question. We'll finish on a recession question. How's that?

The question is, Are you still predicting a recession in the U.S.?

MR. JOHNSON: So the thought or the point about the U.S., I think we already covered, which is it's an economy that has nearly stalled, but it hasn't. Right. We don't think there will necessarily be, for example, two consecutive quarters of negative growth which is one of the standard definitions of recession.

But, as you know, the official determination of whether or not an economy is in recession is made by the NBER's Business Cycle Dating Committee, and they take into account many different considerations. Their assessment, which is a very thoughtful one, takes some time to come out. So I'm not going to forecast what the NBER Business Cycle Committee determination is going to be. That's far too complicated.

I think the point is the U.S. economy is slowing down, but, and this is a significant slowdown, but we think there should be a significant recovery, a modest recovery but a significant recovery in the course of 2009.

MR. MURRAY: Great. Simon, thank you very much. Charles, thank you very much and thank everybody for joining us today.

Again, the embargo is 10:30 a.m. Washington time, 14:30 GMT.

If you do have any follow-up questions, you can send me an email at, and we'll be happy to follow up with the authors. Video clips will also be available on our News Market distribution system.

Again, thanks for joining us today.


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