Transcript of Press Briefing on the International Monetary Fund's World Economic Outlook by Olivier Blanchard, IMF Economic Counsellor and Director of the Research Department

IMF News, October 1, 2009

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Transcript of Press Briefing on the International Monetary Fund's World Economic Outlook by Olivier Blanchard, IMF Economic Counsellor and Director of the Research Department

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• Published: October 1, 2009

Global outlook and headline forecasts

• Advanced countries: output to increase by 1.7 percent in 2010.
• Emerging market and developing countries: output to increase by 5.5 percent in 2010.
• World output: increase by 3.2 percent in 2010 (on a fourth quarter to fourth quarter basis).
• Forecasts represent an upward revision of 0.6 percent relative to April forecasts.

Drivers of the recovery and fragilities

• Recovery has started; financial markets are healing; growth positive for the rest of the year and in 2010.
• Recovery so far largely accounted for by:
  • Strong public spending (fiscal stimulus).
  • Inventory adjustment (restocking) by firms.
• Risks and constraints:
  • Inventory adjustment will end.
  • High public spending and large fiscal deficits are not sustainable indefinitely.
  • Debt levels projected to reach 110 percent of GDP by 2014 in advanced countries.
  • Bank credit likely to remain tight for quite some time.
  • Consumers in advanced economies likely to save more; capacity utilization at historically low levels; housing investment weak in many countries.
• Implication: advanced countries will need stronger private domestic demand or greater reliance on foreign demand (net exports), implying some emerging markets will need to rely less on net exports.

Global rebalancing: necessary adjustments

• Rebalancing required on two margins:
  • From public to private demand (increase in private consumption and investment).
  • From current account surplus countries to current account deficit countries.
• Exchange rate adjustment (appreciation of Asian currencies to varying degrees) likely to be part of the package.
• Additional policies may be required (examples cited: increase social insurance, reduce saving and increase consumption in countries such as China).

Policy agenda and recommendations

• Twofold policy agenda:

1. Avoid premature exit from supportive policies; prepare credible exit strategies.

• Exit from monetary policy: mostly technical; timing critical.
• Exit from fiscal policy: requires major effort and structural reforms (retirement and healthcare systems).
• Exit from financial policies: must include major financial-sector reforms.

2. Coordinate policies internationally to achieve global rebalancing and sustain recovery.

• IMF to assess mutual consistency of national policies under G-20 mandate.

• Fiscal guidance:
  • Consolidation should wait until recovery is on a solid footing.
  • Medium-term plans needed to roll back fiscal deficits and contain public debt.
  • Fiscal rules are useful once a clear direction exists but structural reforms are fundamental.
• Emerging markets should consider removing stimulus earlier than advanced economies once recovery is clearly entrenched.

Risks, scenarios, and Fund work on vulnerabilities

• Baseline scenario is the WEO focus (most likely path).
• Fund explores downside “worse” scenarios (examples: new banking crisis, fiscal crises, major health or natural disasters).
• An early warning exercise is being developed to assess probabilities of adverse events and policy responses.
• Debt increases in baseline noted; in some adverse scenarios fiscal crises could occur in a few countries.
• Central bank balance sheets: deemed manageable; central banks have tools (e.g., paying interest on reserves) to tighten if needed.

Regional and country notes (selected)

• China: closer to an entrenched, self-sustaining recovery; monetary tightening will be needed sooner than later to address credit-quality risks and potential asset-price imbalances.
• Germany: current account surplus (just above 6 percent in 2008) narrowing appreciably in 2009 and 2010; domestic demand being supported by stimulative policies.
• United Kingdom: has fiscal rules under revision; consolidation should await solid recovery and be accompanied by structural reforms.
• Turkey:
  • Activity decline in 2009 of 6 1/2 percent.
  • Growth forecast of about 3.7 percent in 2010.
  • Quarter-to-quarter rebound from Q1 to Q2 about 7 percent (annualized about 25 percent).
  • Turkey characterized as more cyclical due to large manufacturing sector.
• Argentina:
  • Activity declined by 2 1/2 percent in 2009.
  • Forecast growth about 1 1/2 percent in 2010, with positive growth emerging in the course of 2010.
• Nigeria:
  • Growth projected at 2.9 percent in 2009.
  • Projected pick up to around 5 percent in 2010.
• Brazil and Latin America:
  • Brazil: contraction of about 0.7 percent in 2009; forecast growth of 3 1/2 percent in 2010.
  • Latin America: rebound supported by commodity prices, policy support, and external demand recovery; modest current account deficit expected near term.
• Developing Asia:
  • Projected growth of 6.2 percent in 2009 and 7.3 percent in 2010.
  • Recovery driven by trade normalization, inventory cycle turn, strong policy responses, and alleviation of financial stress.
• Commonwealth of Independent States (CIS) and Russia:
  • Region badly affected by trifecta: commodity price declines, capital outflows, large decline in trade.
  • Russia: activity contracting by about 7 1/2 percent in 2009; recovery with growth of about 1.5 percent in 2010.
  • IMF uses market-implied commodity-price assumptions: oil prices assumed just above $60 per barrel in 2009 and just above $75 per barrel in 2010.

Structural issues highlighted

• Banking sector: danger of bank insolvency much decreased, but recapitalization and removal of toxic assets proceeding too slowly in some cases; Fund would like faster progress.
• Pension and retirement systems: crisis forces rethinking of pay-as-you-go versus fully funded systems; expectation is to keep mostly pay-as-you-go but adjust benefits, contributions, and retirement age to improve sustainability.
• Role of IMF programs: cited as contributing to macro stability and better crisis response in many emerging and African countries; programs include social protection elements to shield vulnerable groups.

Final scenarios and caveats

• Baseline projects continued, albeit relatively weak, recovery especially in advanced countries, assuming limited global rebalancing occurs.
• If private demand fails to recover and fiscal deficits persist, downside risks include elevated debt ratios and potential fiscal crises in some countries.
• Fund work includes scenario analysis and early-warning efforts to identify vulnerabilities and policy options to lower risk and prepare responses.

Transcript of Press Briefing on the International Monetary Fund's World Economic Outlook by Olivier Blanchard, October 1, 2009.

References

• PRESS CENTER
• Webcast
• https://www.imf.org/en/home