November 6, 2008
| Webcast of the briefing |
MR. MURRAY: Hello, I'm William Murray, Chief of Media Relations at the IMF and this is an update of our latest World Economic Outlook forecast.
Joining me today is Olivier Blanchard, the Economic Counselor and Director of Research at the IMF, and Jörg Decressin who is the Chief of the Department's World Economic Studies Division.
Mr. Blanchard will have some brief opening remarks, which we'll make them available at the conclusion of the briefing today. Then we'll take your questions.
MR. BLANCHARD: Thank you, Bill.
Good morning. I'm afraid that I'm, again, the bearer of bad news. There has been a lot of information the last month, and most of this has been negative, and therefore this has led us to revise our growth forecast relative to the numbers that we had presented at the last World Economic Outlook press briefing.
Let me give you the bottom line. We've revised global growth for 2008—this is year on year—by 0.2 percent. And we've revised global growth for 2009, again, year on year, by 0.8 percent. So we're now down to 3.7 percent for 2008 and 2.2 percent for 2009.
This is not the place to go into forecasts for particular countries, but looking across broad groups of countries, we now forecast growth in 2009 to be negative in advanced countries, minus 0.3 percent, and to be 5.1 percent for emerging and low income countries. This is a decrease of about 1 percent relative to the World Economic Outlook numbers that you had seen earlier.
The question is why have we revised our forecast. There are many reasons, but two reasons stand out. The first one is there has been a very sharp decrease, much sharper than we anticipated, in demand in advanced countries in the last few months, and this leads us to forecast a sharper contraction for the end of 2008 and the first half of 2009. That's the first reason.
The second reason is that there has been a sharp worsening of credit conditions to emerging countries. Because of this and because of lower exports due to lower demand in advanced countries, this is the main reason why we have revised the forecast for emerging countries by 1 percent.
Now the question is what is behind these decreases in demand and this worsening of credit conditions? Again, I think there are two main factors. The first one is the indirect effect of the financial crisis on the confidence of consumers and firms. What we have seen here is a dramatic fall in confidence, both by consumers and by firms.
For consumers, their wealth has gone down. What is going to happen over the next few years is highly uncertain, and this has led them to cut spending. For a long time, they didn't, but there was sharp discontinuity in the last few months. Now they have gotten scared. They have cut spending. That's true of both consumers, and that's true of firms.
The other factor which affects emerging markets is the migration of the financial crisis to emerging markets, and that comes from continued deleveraging, that is the sale of assets, by financial institutions in advanced countries. We had anticipated it. We actually discussed it at some length at the previous press conference. But it has been broader and stronger than we had anticipated. It's affecting a very large number of countries.
I've given you the baseline numbers. Let me now discuss downside risks and upside risks. There is again clearly an unusual amount of uncertainty, and one has to be very careful in making any statement about the future.
There are, I think, two main downside risks. The first one is in the financial sphere. The measures which have been taken to address the problems of the financial system are comprehensive and are now applied in most countries, but from recent experience we can't be sure that there are no landmines left in the field, either in advanced economies or in emerging economies. And so, it's quite conceivable that we could see a flare up of the financial crisis either globally or in parts of the world, in which case we would have an amplification of the vicious circle that we have seen so far, with the financial crisis leading to lower expectations, to lower demand and so on.
The other downside risk, which has been discussed by many commentators, is the risk of sustained deflation. What we're going to see is probably negative headline inflation in the near future due to the decrease in the number of commodity prices. That's not what matters. What matters is basically whether we're going to have sustained deflation. At this stage, we think that the probability of such a sustained deflation is, for the moment, very small.
Are there upside risks? Well, the good news is I think there are. Part of the decrease in demand in advanced countries reflects a wait and see attitude of firms and consumers, the notion that we really don't know where we're going, so let's wait to see which way it goes, and maybe then spend when things are clearer. That effect, I think, is behind some of the decrease in spending that we have seen in the last two months.
To the extent that things stabilize, even if they stabilize at a relatively low level, it is quite conceivable that uncertainty, would decrease and that we would see a faster recovery of spending than we have assumed in our forecast.
Now the last point I want to touch on is whether there's a role for policy to affect these outcomes, and the answer is a very strong yes. Here, I have to be clear about the assumptions we make when we actually compute our forecasts. We basically work based on current and currently announced policies. What is clear here is that it is indeed likely that policies are going to change relative to the assumptions that we have made.
Here, there are the usual two dimensions of policy which are relevant. The first one is monetary policy. It is fairly clear that in a number of countries there is still room to use monetary policy, and the announcements today by the ECB and by the Bank of England suggest that the countries which have this room are actually using it increasingly. To the extent that there is room, it should be used.
There are however limits how much you can use interest rates. Some countries are very close to zero and don't have much room, and therefore the focus should be and is likely to be on fiscal policy.
A number of countries have room for fiscal expansion. There are always risks to expanding fiscal deficits, but here the benefits exceed the risks in a number of countries. The important thing is that if one country does it by itself, it tends to spill over to other countries and makes it relatively unattractive to use it for a particular country. But if it's done on a wide scale by many countries, then these effects are not there.
We think, here, that global fiscal expansion is very much needed. If it comes, then our forecast may well turn out to have been too pessimistic. We think that this is one of the main priorities for governments to explore this point.
Let me stop here and take your questions.
QUESTIONER: A quick question about deflation: Why do you think at the moment that deflation isn't a more serious risk since it is being priced in some markets?
MR. BLANCHARD: Jörg, do you want to give the details of the construction of the forecast and why we think co-inflation will remain positive?
MR. DECRESSIN: Yes. There may be a brief period of headline inflation. However, wage growth is still relatively sustained in many countries. In Europe, for example, unemployment is still relatively low.
Certainly labor markets are going to deteriorate, but it will take quite some time before this will significantly depress wages into areas that can be considered deflationary. We hope that by that time the measures that have been taken to jumpstart the financial sector, as well as the interest rate cuts, will begin to boost demand and put a floor on wages and prices.
QUESTIONER: You didn't mention the sort of re-inflationary tactics of the central banks, the sort of [inaudible] we're seeing by the Federal Reserve. Do you think that's playing a positive role?
MR. DECRESSIN: The rate cuts are certainly playing a positive role. The liquidity provision is playing a positive role in terms of getting the financial system back on a healthy footing, and that in turn will help support credit growth and demand.
QUESTIONER: I was hoping you could put these figures in some kind of historical context. When was the last time we had the major advanced economies in simultaneous contraction in this way?
MR. BLANCHARD: I think the answer is that this is the first time that there is such a forecast for the post-war period. I think there's a line in the document that you have which gives this information.
Jörg?
MR. DECRESSIN: Maybe two perspectives on this: It's the first time in the post-war period that output in the advanced economies will contract. Now what you have to bear in mind is ...
MR. BLANCHARD: Over a year.
MR. DECRESSIN: Over a year, on a full-year basis.
What you have to bear in mind, though, is that in the course of the last 40 years, potential growth of advanced economies has been slowly diminishing. The reason is, for example, slower population growth, but there are also other reasons.
Now if you measure, if you measure the slowdown in growth relative to potential, then what we are expecting to happen is not worse than, for example, what happened in `82, but it's going to be worse than what happened in the early nineties.
QUESTIONER: Forgive me, if you already addressed this, but could you comment on the size of the interest rate cuts today from the Bank of England and the European Central Bank and whether you think they're appropriate?
And, second, over a lot of the last week, maybe not in the last day or two but a lot the last week, there's been quite a big compression in spreads in emerging markets and apparently some emerging, re-emerging risk appetite or diminishing of the perception of risk. What do you think that's due to and would you like to claim a role for the IMF's actions in that?
MR. BLANCHARD: On the first point, we don't comment on actions by specific central banks, but the message that we have communicated is that movements in that direction are definitely useful. How fast and how you do it, I think, has to be looked at case by case, but we clearly applaud the moves by the ECB and by the Bank of England.
On the second, yes, I think that we're starting to see the effect of some of the measures which have been put in place to help liquidity provision to a number of emerging countries, be it a new facility that we have put in place here at the Fund, or the swap lines which have been extended by the Fed to a number of countries.
MR. MURRAY: I'm going to turn to a question from the Media Briefing Center and then get back to questions here in the room. Part of the question has already been addressed by Mr. Blanchard, but I'm going to read this anyway.
Interest rates are now at a very low levels in countries like the U.S. and Japan. Do you believe that those central banks could lose their capacity to stimulate the economy through further rates?
Then the second part of the question is should they increase their focus on fiscal anti-cyclical stimulus?
MR. BLANCHARD: I think, basically, we have answered both questions, but let me repeat myself.
When you get to zero interest rates, you're done in terms of using interest rates. That's a simple arithmetic fact. We're not quite there yet, but as we get closer, clearly, the room is smaller. The instrument you have left is fiscal policy, and that's why we're basically strongly advocating a fiscal expansion.
QUESTIONER: Your projections for China are pretty optimistic and on which basis are you making these conclusions? And, these figures are without a fiscal stimulus, but we are expecting they are coming out. So if the fiscal stimulus are coming out, the figures could be even higher, maybe too high.
The second is your projections for Q4 for China is 9.0 percent, and that's the same as Q3. Is that a risk or a downgrade from your previous estimate?
Thank you.
MR. BLANCHARD: Let me answer part of the question and then the rest Jörg will take up. We have assumed for China that the commitment to sustain internal demand in the face of decreased exports was there. Therefore, our forecasts for China embody that assumption.
MR. DECRESSIN: We feel that our forecast is well placed. If matters were to turn out worse, then probably stimulus, further stimulus would be deployed by the authorities, but that remains to be seen.
With respect to the 9 percent, this is a downward revision relative to the WEO forecast that we delivered in October, and it's not a growth rate that is materializing in the fourth quarter, but it's the growth rate in the fourth quarter of 2008 relative to the fourth quarter of 2007.
QUESTIONER: (off mike)
MR. MURRAY: Can you mic up so the viewers can hear?
QUESTIONER: This is still the same about the Q3 versus Q3 growth rate?
MR. DECRESSIN: I believe that Q3 was slightly higher, and this is what we have right now.
QUESTIONER: Okay.
MR. DECRESSIN: And there are also measures that have been deployed by the authorities that are beginning to kick in such as easing with respect to credit, rate cuts, reduced reserve requirements and so forth.
QUESTIONER: So this is also lower than your previous estimate, correct?
MR. DECRESSIN: Yes.
QUESTIONER: You forecast a 5.2 growth for Brazil this year and 3 percent next year. What's the main cause?
It's for the next year, almost half of the growth for this year. What's the main reason for that, because in Brazil the internal demand is very hot now? I'd like to have your assessments on that.
MR. BLANCHARD: Jörg?
MR. DECRESSIN: Okay. Well, first, we have relative to the October WEO a much lower forecast for raw material prices which will affect Brazil appreciably.
Second, world demand in general is appreciably lower than what we had at the last time in October, and it's slowing very rapidly.
Third, you've had also in Brazil and other emerging market countries large corrections in equity markets and wealth destruction which will hold back consumption.
And so, if you put all these three factors together and also consider that there's going to be some tightening of financial conditions based on domestic pressures in the financial system, you get to a significant slowdown in growth, and that's why we end up with at 3 percent rather than around 5 percent in 2008.
QUESTIONER: I apologize for coming late, so maybe you've addressed this. But my understanding is the IMF defines a global recession as less than 2.5 percent. I don't see the word, recession, as I look through it. Are we saying that the world is in a recession and can you define how the IMF—can you explain how the IMF defines recession?
MR. BLANCHARD: There has been indeed a tradition to refer to growth rates below 3 percent for the world economy as a global recession.
I'll make the same comment I made at the previous press conference, which is I think that choosing any such number is not useful. I mean it's very clear that growth in 2009 is going to be very low. If we're going to use a number, it seems to me zero percent is the only correct number. By that criterion, then we're basically saying that advanced countries will be in recession in 2009.
QUESTIONER: Can you explain then? Can you explain then why the tradition has been less than 3 percent?
MR. BLANCHARD: I was not here.
QUESTIONER: But does that have to do with population growth?
MR. BLANCHARD: I was not here. I do not find it useful to choose such a number.
QUESTIONER: Maybe Mr. Decressin was here. I think it would be useful to understand the tradition of the IMF.
MR. BLANCHARD: I cannot do it, given that I was not here.
QUESTIONER: Your partner up there who has been here for years and years?
MR. MURRAY: I think, basically, the bottom line is that we're not defining global recession as something at 3 percent or less.
QUESTIONER: I apologize the same way for being a bit late, so I don't know if you have already elaborated specifically on the Italian situation which, of course, has worsened compared to your last projections. So if you could comment on that and what do you think would be the measure to take to improve the situation?
MR. DECRESSIN: We've revised down our forecast in Italy for the same reasons that we've revised it down for much of the Euro Area and the U.S., which is the fallen confidence, the destruction of wealth in financial markets, the slumping global demand.
What you will note is that our growth forecast for Italy, if you compare 2009 with 2008 or 2007, shows somewhat less of a slowdown in Italy than in other Euro Area countries. So this suggests that the Italian economy is somewhat less affected than, for example, other Euro Area countries such as Germany or France, or the United Kingdom, for that matter.
And, there are some reasons to believe that this is the right way to see the situation. The Italian banking system is, thus far, somewhat less affected. The household sector has not experienced the same excesses as, for example, in the United Kingdom or in Spain or in other countries. Household indebtedness, as you know, is relatively low in Italy. And so, we think that this provides some support.
But then again, Italy has a relatively low potential output growth rate for various reasons including low population growth but also challenges on the structural front. So, therefore, if you factor that in, the number for 2009 is not looking very different from the numbers that you see for 2009 in other Euro Area countries.
MR. MURRAY: Thanks, Jörg.
I'm going to keep this in Europe, in continental Europe, for a bit. A question from German National Radio here: Could you explain what you expect for Germany and why?
MR. DECRESSIN: Germany's economy has been very much export-driven over the last several years, supported by wage moderation, which has helped regain competitiveness, regain market share and, as a result, the country has accumulated a large current account surplus.
What you now have is a very large slowdown in global demand, and therefore if the economy has previously been propelled by competitiveness and global demand, it will experience a sharp reversal of fortunes. Therefore, we are forecasting that growth will diminish from around 2½ percent in 2007 all the way down to a contraction of 0.8 percent in 2009.
QUESTIONER: I have two questions. The first is regarding the fiscal stimulus. Could you expand a little bit on which countries do have room for stimulus?
I think the IMF had previously estimated that about half of the countries accounting for about half of global GDP have room for stimulus. I'm wondering if you're including Europe in that as well.
My second question is regarding the upcoming G-20 meeting. What would you like to see or what do you see the possibilities coming out of that meeting as far as either agreements on stimulus or measures to address the financial crisis?
MR. MURRAY: One point, I just want to make. This is on the World Economic Outlook briefing, not G-20 policy. Okay? So we may want to cut that question out.
MR. BLANCHARD: Well, just on this point, I mean related to what we've done, I think we're going to advocate at the G-20 a global fiscal expansion as one of the measures which has to be taken very soon.
MR. DECRESSIN: With respect to the set of countries, I don't have a full list in front of me, but I can mention just some that account for significant output and that cover various continents. We see room for additional fiscal stimulus in the U.S. Of course, the fiscal stimulus would have to be deployed in a way that is mindful of medium-run or longer-run fiscal challenges. Second, we see room, for example, in Europe, in Germany for additional fiscal stimulus. And third, we see also room in China for fiscal stimulus.
There are a host of other countries that I have omitted. I don't have a full list in front of me, but you will quickly get to half of world GDP.
Thank you.
QUESTIONER: I'm sorry. Did you say Europe within Germany, I mean Germany within Europe, or did you say Europe in general?
MR. DECRESSIN: I singled out Germany specifically in Europe. As you know, Europe operates under the Stability and Growth Pact. Therefore, the room that is available for stimulus, for discretionary stimulus, is circumscribed by the Stability and Growth Pact. There are a number of countries that have reached their medium-term fiscal objectives, including Germany among the larger ones, and therefore these countries have room for fiscal stimulus.
QUESTIONER: Can you just put in context: You said earlier that even though the advanced economies have never contracted for a whole year since the war, that relative to the fact that the potential growth is slower, that this would be no worse than in the early eighties, correct? So what was the global economy doing then? Can you just tell me what it would have been then?
Also, what was the last time you had 2.2 percent globally?
MR. DECRESSIN: Okay. The last time we had 2.2 percent growth globally was actually in 2001. Back then, however, potential growth in the emerging economies was a good deal lower than we're estimating it to be now. You can see this in Figure 1 of the World Economic Outlook Update.
So, turning back to your question on advanced economies, back in the early `80s, population growth was appreciably higher than it is right now. If population growth is higher, then it also means that potential output growth is higher. Therefore, when you had a cyclical downturn in the 80s, you did not as easily experience negative growth as you do now.
So if you adjust for that fact, for the differences in potential growth in the early eighties versus now, then you're experiencing something now that is not worse than what you experienced in the 1980s.
MR. MURRAY: Okay. A couple more questions from the Media Briefing Center, then I think we're going to wrap up.
This is on Spain: You've reduced the growth forecast for Spain quite substantially. Can you explain why? Is Spain one of the countries where further fiscal stimulus is needed?
MR. DECRESSIN: Well, we have reduced the forecast for Spain on several accounts. It's clear that the financial crisis is now affecting a much broader segment of the world economy than before, and Spain has important links to the emerging economies that are now increasingly affected. But then again, Spain is also affected by slumping confidence in Europe, in the United States, and it's just part of the global downward revisions that we are implementing.
The Spanish government has already reacted very strongly to this slowdown. I mean it has deployed fiscal stimulus, which we applaud. It has taken a number of measures to heal the wounds in the financial sector. The central bank has provided liquidity. A fund has been put in place to make available money for credit which we also applaud. So, in our minds, the response has been very forceful, and the key challenge now is to implement the measures that have been adopted.
MR. MURRAY: That's great. Thank you, Jörg.
Last question, this one, we jump to the other side of the planet. Could you comment on the outlook for Australia?
MR. DECRESSIN: Australia is affected on two accounts. It's a raw material exporter, and at the same time it's very much integrated with other advanced economies and experiencing a slowdown for the same reasons as the other advanced economies are. Taking the two together, we see real GDP growth in Australia slowing appreciably in fiscal 2008/09, probably hitting around 1.8 percent.
MR. MURRAY: Thanks, Jörg. I'd like to thank everybody.
Again, if you have any follow-up questions, send an email to media@imf.org, and we'd be happy to follow up with Mr. Blanchard and Mr. Decressin.
Again, thank you, Olivier. Thank you, Jörg. Thank you for joining us today.
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