Transcript

Tokyo, Japan
October 9, 2012

Olivier Blanchard, Economic Counsellor and Chief Economist, IMF Research Department
Jorg Decressin, Deputy Director, IMF Research Department
Thomas Helbing, Division Chief, World Economic Studies, IMF Research Department

Ms. Bhatt - Good morning, everyone. Welcome to Tokyo. I am Gita Bhatt from the IMF media relations and welcome to the launch of the 2012 WEO that kicks off the World Bank/IMF Annual Meetings. Let me do some quick housekeeping. First of all, I want to welcome everyone viewing the webcast and those who are participating online on our press center.

For those in the room, we have simultaneous interpretation, English channel 2, Japanese channel 3, French channel 4, Spanish channel 5, Arabic channel 6, and Chinese channel 7.

Let me now start by introducing our speakers.

Mr. Blanchard, Economic Counselor and Director of the Research Department.

Mr. Decressin, Deputy Director of the Research Department.

And far right, Mr. Helbling Division Chief of the World Economic Studies Division.

Mr. Blanchard will make some opening remarks and then we will open the floor for questions. His opening remarks will be available to you after the press conference as well, and on the press desk.

Mr. Blanchard - Good morning to all of you. Good afternoon and good evening to those of you who are listening to us from far away. Let me also thank our hosts for exceptional hospitality and organization. Let me now turn to the issue at hand.

In one sentence: The world economic recovery continues, but it has weakened further. In advanced economies, growth is now too low to make a substantial dent in unemployment, and in major emerging markets, growth, which had been strong earlier, has also decreased.

Let me start with a few numbers. You have all seen them. I will just summarize the ones which I think are most important.

Relative to our last April forecast, our forecast for 2013 has been revised from 1.8 percent down to 1.5 percent for advanced countries, so a revision of .3 percent, and from 5.8 percent down to 5.6 percent, revision of .2 percent, for emerging and developing economies.

If you look across countries, the downward revisions are widespread, they are however stronger for two groups of countries. First, for the members of the euro zone, where we expect growth in 2013 to be very close to zero, and for three of the large emerging market economies, namely China, India, and Brazil.

The forces behind this forecast are for the most part familiar.

Let me start with advanced economies. The main force pulling growth up is accommodative monetary policy. Central banks continue not only to maintain very low policy rates, but also to experiment with programs aimed at decreasing rates in particular markets, at helping particular categories of borrowers, or at helping financial intermediation in general. And, this is extremely useful.

But, unfortunately, there are two forces which continue to pull growth down. The first is fiscal consolidation, and the second is still weak financial systems.

In most countries, fiscal consolidation is proceeding according to plan, and while consolidation is needed, there is no question that it is weighing on demand and, therefore, on output. And, the evidence increasingly suggests that in the current environment, the fiscal multipliers, the effect of fiscal consolidation on demand and output, are large. Larger than in normal times.

Turning to the financial system, the financial system is still not functioning efficiently. In many countries, probably more so in Europe than either in the U.S. or in Japan, banks are still weak, and their position is made worse by low growth. As a result, many borrowers still face tight borrowing conditions, decreasing their demand as well.

More seems to be at work, however, than these mechanical forces I have talked about: Monetary policy, fiscal consolidation, the weak financial system. I think you can call it a general feeling of uncertainty about the future, worries about the ability of European policy makers to control the euro crisis, there are worries about the failure of U.S. policy makers to agree so far on a fiscal plan. There are worries about the ability of the Japanese policy makers to reduce sufficiently their budget deficit. And all appear to play an important role in weighing on demand and again on growth, although it is difficult to nail down exactly what the strength of that effect is, but almost surely it is there.

Let me turn to emerging market and developing economies.

A constant theme of these world economic outlook presentations has been the degree to which the world economy is interconnected, be it through trade or through capital flows . This time is not exception. Low growth in advanced economies is affecting emerging and developing economies through exports, and as was the case in 2009, the trade channels are surprisingly strong, with, for example, lower exports accounting for most of the decreasing growth in China, and through supply chains, which are playing an increasing role, much of the decrease in growth in Asia.

On the capital flow side, alternative periods of risk-off and risk-on episodes triggered by, for the most part, progress and then regress in the policy actions elsewhere in the world are triggering volatile capital flows, in particular to Asia and to Latin America.

While these emerging economies are exposed to those risks which come from outside, some also have homegrown characteristics, policy uncertainty in India is certainly slowing down domestic demand, tighter policies in Brazil in response to what was an economic boom earlier have led to a slowdown which is still visible in the data.

Here, let me be clear. We do not see these developments, be it in China, India, or Brazil as signs of hard landing in any of these countries. Indeed, we see positive policy measures being taken in all three countries, but the numbers suggest that these countries are going to have lower growth for sometime, at least lower than some of the very high growth rates that we saw in earlier times.

Let me finally turn to policy. So, here, the general strategy for policy, at the very general level, is very clear: Continue with accommodating monetary policy, which is a very powerful force for growth on its own. And, then, limit the adverse effects of the brakes. Continue with fiscal consolidation and here, our old advice still holds: Don't do it too slow, don't do it too fast. Continue to repair the financial system, decrease policy uncertainty, in other words delever fiscal consolidation, which is needed, and maintain growth.

In the short run, however, the main issue continues to be the state of the euro zone, and this is what I shall concentrate my remaining remarks on.

Over the past few months, it is clear that there has been an important change in attitudes in the euro zone, and the realization that an ambitious architecture must be put in place, and that is a major change. The lessons of the past few years are now clear for the euro. Euro countries can be hit by very strong shocks, stronger than wethought could happen. Then, weak banks can considerably amplify the adverse effects of these shocks, and we're seeing this, and then, if it looks like the sovereign itself might be in trouble, then sovereign bank interactions can further worsen the outcome.

So, if you take this as a diagnosis, then a new architecture must aim at a number of things: It must aim at reducing the amplitude of the shocks in the first place, at putting in place a system of transfers to soften the effect of adverse shocks, if they happen. It must aim at moving the supervision, the resolution, the recapitalization process of banks to the euro level--- that is what is known as the banking union project-- and it must decrease sovereign risk.

It is good to see that these issues are now seriously explored and some of these mechanisms are being put together. In the short term, however, more immediate measures are needed. Spain and Italy must follow through with adjustment plans which reestablish competitiveness and fiscal balance, and maintain growth. To do so, they must be able to recapitalize their banks if needed, without adding to their sovereign debt. And, fundamentally, they must be able to borrow at reasonable rates. Now, most of these pieces are in the process of falling into place, and if the complex puzzle can be rapidly completed, one can reasonably hope that the worst is behind us.

If uncertainty is indeed partly behind the current slowdown, which I believe, and if the adoption and the implementation of these measures decreases uncertainty, then things may actually turn out better than our forecasts, not only for Europe, but also in the rest of the world. And, I think that the case for an upside scenario is actually stronger than it has been for awhile.

So, on this mildly optimistic note, let me end my presentation and then turn to your questions.

QUESTION: In the WEO you note the recent announcement of the OMT plan by the European Central Bank. I would like to ask you, your advice to countries most under pressure in the euro zone would be to apply for this plan, for this measure quite rapidly?

Also, where do you see the trigger point for the application of the OMT? Yields have come down in countries like Italy and Spain recently, but there is still a part of what Mr. Draghi called the convertibility premium. Where would you see the point where the OMD will have to be triggered?

Mr. Decressin - Our advice is for countries in the periphery that they continue with their adjustment programs, and then it is a matter of market developments and the extent to which the countries can sustain the strong programs that they have put in place. As far as we are concerned, we stand ready to help these countries within our framework, and then it is really a decision for them as to whether they want to apply for help under the ESM, and for support by the Fund.

Mr. Blanchard - I think the issue here is why the yields on Italian and Spanish bonds have come down. It is possible that they have come down based on the anticipation by investors, that these countries would actually accept programs and take advantage of the OMT at some stage in the future. And so, if this is the case, we cannot be sure that the yields will indeed remain low for the duration.

QUESTION: Given what you now know about fiscal multipliers and the effects on growth as you outline in the WEO, has the IMF's advice on fiscal consolidation added to the problems we have seen in the world economy over the last couple of years? What lessons should advanced economies take from your findings in this report? For Greece and Spain in particular, doesn't this mean those two countries should move slower on austerity measures given the effect on growth?

Mr. Blanchard - Let me answer this important question.

First, the advice of the IMF has always been that we have used this expression: This is a marathon, not a sprint. This is going to take many years. Steady and slow wins the race. It is still very important to have credible, medium-term plans because then you can go more slowly at the beginning than otherwise. Second, we have been more specific in the recent past, partly in the light of what you just said, which is that we have said that countries should focus in general on structural targets rather than nominal targets; put another way we have said let the automatic stabilizers work, and we have been successful in a number of cases to shift to such targets. This has the implication that if growth turns out to be worse than expected, then the country does not have to take additional fiscal measures, which could make things worse.

And third, as time goes, and we see, indeed, a weaker recovery in many countries, in some case, we have said that the targets themselves had to be adjusted. As you saw, the Portugal program just readjusted the targets, moving from 3 percent next year to 4.5 percent, and I think that when the case is there, we have to be ready to readjust the targets.

QUESTION: I have a question on China. China's growth is again lowered to 7.8 percent this year and 8.2 percent next year. Would you suggest China -- does China need another huge stimulus package? As boosting consumption takes time, would you recommend maybe more investment or more net export? Would this worsen China's imbalances?

Mr. Helbling - We have revised growth down to 7.8 percent this year and 8.2 percent next year. There are two elements in the growth forecast for China. On the one hand, there is deliberate soft landing that the authorities have tried to achieve, recognizing that the sustainable growth rate of growth is lower. That has been incorporated in our forecasts for a while. The downward revisions of about 0.2 percentage points for both 2012 and 2013 in the current WEO mainly reflect weaker external demand. The authorities have already responded, we think appropriately, by lowering interest rates, both lending and deposit rates. They have also accelerated spending on infrastructure investment, which should provide a boost. Under our baseline forecast, we think that is appropriate. And, under these conditions the economy should, growth should gradually pick up, slightly. Just a little bit above 8 percent. Clearly if downside risks, if the global economy were to slow much more than expected, then additional policy measures would be needed. We would favor fiscal policy, on budget, in a transparent fashion, mainly aimed at maybe stimulating investment, the first time, but also supporting rebalancing toward consumption in the medium term. That would include stronger social safety nets, lowering taxes on consumption and labor. And, supporting education and health systems. Such policy support would also be consistent with rebalancing global demand, rebalancing, and China's contribution to reducing global imbalances.

QUESTION: I would like to ask you, Mr. Blanchard, if you would give us an evaluation about the Brazilian development of the economy, because according to the WEO, Brazil got one of the most cuts in the projections for this year and perhaps for next year? What is going on with Brazil?

Mr. Helbling - Brazil in 2012 has one of our most, or largest, downward revisions. That being said, as in the case of other emerging markets, initially the slowing of the Brazilian economy was deliberate. After the policy stimulus and with the commodities boom, the Brazilian economy was booming, growing above capacity, price and cost pressures were increasing, etcetera and a credit boom was stirring, rising financial stability risks. So, I think what happened then is that policy tightening, which was deliberate, coincided with the much stronger than expected slowing of glowing growth. The authorities have appropriately eased policies, the policy rate has come down by 500 basis points, the policy framework has also been changed by doing away with the minimum rate on savings deposit, as now had the policy rate going to 7.5 percent. We have seen that the policy stimulus was slow to gain traction because the slowing of global growth also led to some performance problem in the financial sector, in a process of financial deepening. When growth was slowing, there were some signs of increasing NPLs that lowered the traction of monetary policy, but now, I think, with the massive monetary policy shift, we see in current data that growth has started to pick up, and we expect growth in Brazil to accelerate. And we stuck with 4 percent growth forecast in 2013 in this WEO.

QUESTION: I have a question about global economy. The global economy's growth projection marked down not only euro zone but also almost all major economies, including China. After 2008 crisis, the IMF repeatedly expressed concern of downside risk to the global economy. Do you think the world economy knew the danger it faced or not? And also, how do you expect Japanese role for a slower world economy.

Mr. Blanchard - On the global economy, my remarks at the beginning have partly answered your question. I think the new element is the degree of uncertainty about policy, both in Europe and the United States. I think that is what worries us. At the same time, it is sufficiently well identified that if the measures which have been promised are delivered, in the case of Europe, and if the U.S. avoids a fiscal cliff, one can be relatively optimistic about the future. I shall let my colleague answer more.

Mr. Helbling - On Japan: in this global environment, Japan faces many of the same challenges other countries face, including weak external demand. There is an additional element, a risk of deflation. But, most importantly, Japan faces the challenge of medium-term fiscal consolidation. Fortunately, there is no need for abrupt fiscal consolidation. Interest rates are very low. But the challenge is to develop a credible fiscal or medium-term fiscal consolidation plan. There has been an important first step. The gradual increase in the VAT rate. We think more is needed. I think, as is highlighted in Chapter 3 of the current WEO, if you have a fiscal consolidation challenge, if you need to bring your debt down, it is not just an issue of fiscal policy. There are two other elements, supportive monetary policy, where the Bank of Japan has taken important steps in the right direction over the past few months. We actually think more steps are needed. And secondly, structural reforms to boost the longer term growth.

QUESTION: It is obvious that global growth is continuing to decelerate faster than most people expected, but not easy to see where the momentum is going to come from for a restoration. Monetary policy is having a limited impact, fiscal policy is generally tending to be on the tighter side, world trade growth is slowing, investment seems to be slowing. Can you be a bit more specific about where a restoration of growth is going to come from in the main countries? To what extent is that going to be the overriding concern at these meetings?

Mr. Blanchard - If you look at what is shaping the current numbers and try to look forward, I think, again, there is some reason for optimism. If you look at fiscal consolidation, I think the pace of fiscal consolidation was extremely large in some countries, which were under market pressure, and will slow down. So this will help. Another , very strong brake to growth, say a year or two years ago, was the very weak financial system, the very weak banks. And, in many cases, the banks are stronger, financial intermediation is working. There are plenty of risks which Mr. Viñals will talk about them when he talks about the GFSR tomorrow. But, at this stage, for example, in the U.S., most people can borrow at relatively low rates, most businesses can borrow at relatively low rates as well. This is improving. If you take housing, which is an issue in a number of countries, such as the U.S., I think it is reasonable to say that it is no longer a break. It still hasn't recovered to the precrisis level, surely it now not get all the way back there, but it is turning around, it is starting to help demand. If you look at consumers, in many cases, the increasing wealth, which has come from the fact that stock markets have done relatively well, implies that they no longer have to increase their saving rate very much. Therefore, again, that is a good sign. It means they can consume more, demand more. So, if you look forward, it seems to me that there are many reasons to think that, again, if there are not major policy mistakes being made, and I have insisted on this before, it could well be that demand will pick up, to different degrees, in different countries, for example in the U.S., and quite possibly in Europe, and by implication for the rest of the world.

Mr. Decressin - Our forecast, which sees amodest reacceleration of growth is based on two important assumptions. The first is that the euro area crisis gets gradually resolved, that the pieces of the puzzle that Mr. Blanchard referred to fall into place; and the second is that the U.S. economy avoids the fiscal cliff and that the debt ceiling is raised in a timely manner. If both of these are addressed, there will be significant decline in uncertainty which in and of itself should help recovery.

QUESTION: You mentioned a couple times in the report that a common deposit insurance scheme is needed in Europe. Could you describe a little bit of how this should look? And second, you said the fiscal multipliers are stronger this time than in the past. Could you elaborate on why?

Mr. Blanchard - On deposit insurance, it is clear that it has to be part of a complete banking union. That cannot be done overnight. It is part of the process where you have to shift your supervision, regulation, with defined recapitalization rules, and introduce deposit insurance, but it is surely part of what the banking union must have.

On the fiscal multipliers, why is it that they are bigger than was the case before? I think the answer is actually quite simple, which is that in normal times---which is when econometricians estimate multipliers--- when there is a fiscal consolidation, typically, the monetary authority is able to offset some of this through a decrease in the interest rate. So, the effect you see on activity is the result of these two actions. On one hand the first consolidation, on the other, the monetary policy action. We are in a period in which many countries are in the liquidity trap. As we know it doesn't mean they cannot use monetary policy, but monetary policy is much more constrained than in normal times. In this case, you just get the effect of fiscal consolidation without the offset from monetary policy. And that is, I think, why we see multipliers in this crisis which are substantially larger than they are in normal times.

QUESTION: I want to ask you what are you advising the ECB and the euro zone to do on Greece to bring its debt back to a sustainable basis? What is the IMF willing to do to achieve this? And, on Spain, please, how do you envision the role of the IMF in Spain? Do you see it as an advisory role or do you see it as part of a troika like in the case of Greece and Portugal, that would provide a loan along with the conditions that would go along with it?

Mr. Decressin - On Greece we have a mission in the field that is now looking at all the elements of the program, the measures that need to be taken. It will be looking at the debt situation. It will be looking at the fiscal position in particular and the structural reforms. It is really premature for us to take a position as to where they are going to come out. What we are looking for is program that is sustainable and that will help the Greek people, and gradually move their economy out of recession.

With respect to Spain, our involvement is really going to be determined by what the Spanish government is looking for from us. We stand ready to help within our frameworks.

QUESTION: First, I just want to follow up about the China's growth. There is this idea that some of the growth is just China's structural rebalancing rather than simply an adjustment to the cyclical shift, so I was wondering if you could comment on that and where you think the evidence lies, whether it is structural or cyclical, and second, a bit of the background to the current meetings. As you know, some Chinese banks have pulled out of attending these meetings. I was wondering if you could comment a bit about the China-Japan relations, the second and third largest economies, and whether there is scope for more talk at these meetings to resolve some of these issues? I know you don't comment on politics.

Mr. Helbling - Let me start with the latter. I think the IMF was founded to support free trade, and foster peaceful economic relations and foster adjustment in the global economy. This still is our mandate.

On growth in China, I think there is a cyclical element in the sense that external demand has weakened substantially. I think also growth over the past few years has been supported by exceptional factors, before the crisis, by very strong growth in the United States in particular and other advanced economies. After the global financial crisis, with exceptional policy stimulus, the experience has been that growth in the double digit rates hasn't been sustainable. Price pressures started to emerge, other bottlenecks started to emerge, imbalances started to emerge, imbalances between investment and consumption, so on, so forth. So now that there is recognition that the sustainable rate of China is lower, and that it has been recognized in the twelfth five-year plan, I think China has engineered a soft landing toward that sustainable growth.

Mr. Blanchard - Let me add two things to that.

On the current account imbalance which is clearly an important aspect, we had an analysis in the previous WEO, but we extended it. We think that the large decrease in the surplus is partly cyclical, but also partly structural. Therefore, it will not go away when things go back to normal.

On the other, which is the shift on the underlying rate of growth, as we have said, as it is also said in the five-year plan, it would be desirable for China to move to some extent from investment to consumption. It would be good for Chinese consumers, for Chinese households. When you do this, you change the basket that you are producing, in particular you increase the proportion of services that you are producing and decrease the amount of manufacturing. What this means more or less mechanically is that the rate of productivity growth that you get is likely to go down because productivity growth, at least as measured in services is lower than in manufacturing. This hasn't taken place on a major scale. But if we look forward and think it is desirable, then China may not be able to sustain the kind of growth rates that it has sustained in the past.

QUESTION: First question is, could you talk a little bit more about the fiscal cliff in the U.S.? What would your major advice to the U.S. when it may result in a recession, if there is no major agreement? At the same time, if they put off all the coming events, it may result in a downgrade again for the U.S. bonds.

Secondly, I want to have your comment on, do you believe that further monetary easing, more accommodative monetary policy will be needed for the advanced economies?

Mr. Decressin - On the fiscal cliff in the United States, we believe that it must be avoided. It would entail a tightening of fiscal policy of roughly 4 percent of GDP and would plunge the American economy back into recession, with deleterious consequences for the rest of the world. You mentioned that fiscal adjustment has to happen in the U.S. to avoid a downgrade. Indeed, what we are advocating is a fiscal withdrawal, an adjustment of about 1 1/4 percent of GDP, which would entail that a number of the so-called Bush tax cuts could be prolonged, and that other measures that have helped support the economy can be prolonged too. But in the end, there would still be an adjustment, a reduction in cyclically adjusted terms of the fiscal deficit of 1 1/4 percent of GDP, and this puts the U.S. economy on track toward better public finances. What is much more important in all of this is that in the end there is a medium-term plan that is being developed that explains very clearly how the deficit is then brought down further over the next five years, and beyond, from the still high level that it would have next year.

You asked about monetary easing. Well, this depends on how this recovery is developing. We have a lot of fiscal adjustment in place in many advanced economies, on the order of 1 to 1.5 percent of the GDP, and as Chapter 3 of the WEO shows, if you want to be able to sustain this fiscal adjustment, you need growth. And, monetary policy is one lever in order to promote growth in the global economy. Obviously, there are others actions that need to be taken, too, and most importantly, there is the need to continue to clean up and reform the financial sector.

Mr. Blanchard – Let me add a footnote on monetary easing. Yes, our advice is unambiguously to have monetary accommodation, low policy rates, and when we think that some group of borrowers is not able to borrow, but should be, then specific intervention is justified. For example, what the Bank of England did with “funding for lending” schemes, which were addressed to a very specific set of borrowers, we are aware that very low interest rates sometimes create risks, as some investors, for example, want higher return and are willing to take too much risk in order to get it. We still think that given the macro importance of monetary easing, that is central, and to the extent risks are created, the countries should be willing to use macroprudential tools to make sure that such risky behavior does not take place.

QUESTION: I have a question on Germany. The decrease of the growth forecast was pretty obvious and the OECD already saw Germany in a recession. Could you elaborate a bit on the German growth perspective?

Mr. Decressin - First, we don't see Germany in a recession. In 2012 we have actually not revised our growth forecast for Germany. We had somewhat stronger net exports and consumption and weak investment. But for next year, we have revised it down by half a percent of GDP because the weakness you see elsewhere around Germany, in the peripheral economies of the euro area, but also elsewhere in the world in the emerging economies, is going to impact the German economy quite a bit because it is a very open economy.

QUESTION: What is your suggestion for developing countries that are planning to have a strong participation in capital markets and how is it affecting the fiscal position? What is the situation of Latin America in this international scenario?

Mr. Decressin - Well, our view here is that participation in international capital markets is generally a good thing. But, you have to have strong domestic institutions in order to really profit from it. So it means having strong supervision of the banking sector, strong supervision of capital markets. Then you are still exposed to very volatile movements in capital flows, because uncertainty in the global economy goes up or down. In these circumstances we believe that capital flow management measures are appropriate in order to protect, for example, export sectors that otherwise would be damaged by large exchange rate swings. And with respect to Latin America, let me pass it over to Thomas who is our expert on Latin America.

Mr. Helbling - Many economies in Latin America are already what we consider to be financially integrated economies and have done exactly what Mr. Decressin has said. They have strengthened supervision, they have strengthened their policy framework, and that has really helped financial integration. If you look currently in Latin America, financial integration has helped in the sense that they have been able to issue local currency bond held by foreign investors. It is interesting to note that over the past year, foreign demand for local currency bonds has remained quite strong throughout the whole period, in fact inflows have increased. That again falls into the category that financial integration, if done right, can help.

Also, we think that many Latin central banks have successfully steered their policy course, focused more on inflation targeting, and have thus used the exchange rate to their advantage and for absorbing shocks, have become less procyclical and have really stabilized the economy.

QUESTION: You find here that the multiplier is stronger than you thought. Also we have the diminishing return of monetary policy and spillover to emerging markets. Shouldn't the IMF push for more fiscal expansion and less monetary expansion to avoid all this?

Mr. Blanchard - Again, the question of the optimal speed of fiscal consolidation is a central one, especially in this context. You use the word fiscal expansion. I think that there are very few advanced economies in which I would be willing to entertain the thought. We are facing a very difficult situation in which the levels of debt are very high. These are levels of debt where things can go wrong very, very quickly. If investors start having doubts, they ask for high interest rates, which leads to an enormous interest burden which increases the risk that something wrong happens, which justifies in turn the interest rate. We are in a zone where we really don't want to stay. Can we really increase the level of debt, have further fiscal expansion? I don't think that is a possibility. The question is at what speed we should consolidate. Again, here, I think our message has been that, unless you are under tremendous pressure from markets and cannot convince them to go more slowly, you should do it steadily, but slowly. I think the evidence on fiscal multipliers reinforces that point.

Ms. Bhatt - Thank you all for coming. Thank you to the panelists. I want to remind you that we have the Fiscal Monitor press at 10:30 today, so don't go away.