Transcript of a Press Briefing on the International Monetary Fund’s World Economic Outlook

October 6, 2010

Olivier Blanchard, Economic Counsellor and Director of the IMF Research Department
Jörg Decressin, Assistant Director of the IMF research Department
Petya Koeva Brooks, Division Chief of World Economic Studies
Rupa Duttagupta, Deputy Division Chief of the World Economic Studies
William Murray, Division Chief of Media Relations

Wednesday, October 6, 2010
Washington, DC
Webcast of the press conference Webcast

MR. MURRAY: Good day. William Murray, Chief of Media Relations of the IMF. This is the latest WEO press conference. We are covering Chapters 1 and 2 of the WEO.

The briefing today is Mr. Blanchard, Economic Counsellor and Director of the Research Department, which produces the WEO. Joining Mr. Blanchard is Mr. Decressin, Ms. Koeva Brooks, and Ms. Duttagupta. They are all members of the World Economic studies team and they will be happy to take your questions once Olivier has some brief opening remarks.

MR. BLANCHARD: Thank you, Bill. Good morning, and sorry to be a bit late.

The world economic recovery is proceeding, but it is an unbalanced recovery. It is sluggish in advanced countries and it is much stronger in emerging and developing economies.

To understand what is going on, one has to look at the factors behind this recovery. Over the last year or so, the main drivers of the recovery were inventory accumulation and fiscal stimulus. The first one is coming to a natural end and the second one is being slowly phased out. So, what has to happen is that consumption and investment must now take the lead.

Now, in most advanced countries, however, consumption and parts of investment are still weak and will remain so for some time. By contrast, in most emerging and developing economies, consumption investment is strong and, therefore, sustaining growth. So, what I want to do first is develop a bit these two points and then turn to policy implications.

The weakness of consumption and parts of investment in most advanced economies reflects both a correction of pre-crisis excesses which have to be corrected and the scars of the crisis. So, U.S. consumers who had ever borrowed before the crisis are now saving more and consuming less. This is good for the long run but it is a drag on demand in the short run. Housing booms have given way to housing slumps. Housing investment in many countries will remain depressed for some time to come.

Weaknesses in the financial system are still constraining credit, a theme which was developed by the GFSR yesterday. Bottom line, this is what leads us to predict low growth for advanced countries. The relevant numbers are 2.7 percent for 2010 and 2.2 percent for 2011. With such low growth, we forecast that the unemployment rate will remain very high. The numbers here again are 9.6 percent for the US in 2010 and 10 percent for the euro also in 2011.

By contrast, in many emerging economies where excesses were limited and the scars of the crisis are few, consumption investments are contributing to strong growth. In many of these countries, output is nearly back or already at potential. Our forecasts for emerging and developing countries as a whole are for 7.1 percent for 2010 and 6.4 percent for 2011. If you turn to emerging Asia, we forecast growth in emerging Asia to reach 9.4 percent this year and 8.4 percent next year.

The question is whether a more balanced recovery can be achieved. The answer is yes, but it requires two complex global rebalancing acts. Indeed, rebalancing is one of the main themes of our report and of the way we think about the world at this point, the major challenges. So, let me talk about these two rebalancing dimensions.

First, internal rebalancing: when private demand collapsed, fiscal stimulus helped reduce the fall in output, and that was very much needed and right. This helped avoid the worst. But private demand must now become strong enough to take the lead and sustain growth while fiscal stimulus gives way to fiscal consolidation. This is internal rebalancing. It has to be done in each country.

Then we have external rebalancing, the second aspect of rebalancing. Many advanced countries, most notably the U.S., had to rely excessively on domestic demand before the crisis and they must now rely more on net exports. It is a question of sustaining growth for them. Many emerging countries, here most notably China, had relied excessively on net exports before the crisis and must now turn more to domestic demand. These readjustments are essential to maintaining a strong and balanced recovery.

Let me turn to policy implications, how can these rebalancing acts be achieved. I am going to make four points. First, where private demand is weak, central banks should continue with accommodating monetary policy. One should be realistic, however. Not much more can be done and one should not expect too much from further quantitative or credit easing. It should be done but the implications for the economy will be limited.

While there is no evidence yet that sustained low interest rates are leading to excessive risk-taking or bubbles, were such risks to materialize, they should be addressed through macro-prudential measures, not through increases in the policy rate. That was the first point.

Second point: wherever needed, governments must continue both financial repairs and financial reforms. Many banks do not yet have enough capital to sustain strong credit growth. Securitization, which has to play an important role in any financial system in the future, is still moribund. Financial reforms are proceeding but, again, as was discussed in the GFSR presentation yesterday, questions remain about too-big-to-fail institutions, about the perimeter of regulation, and about cross-border issues. The faster reform uncertainty is reduced, the more the financial system will be able to support demand and growth. That is an essential element needed for a strong recovery.

Third, and again, wherever needed, governments must address fiscal consolidation. What is essential here is not so much to phase out fiscal stimulus now but to offer a credible medium-term plan for debt stabilization and eventually for debt reduction. Such credible plans may involve fiscal rules, the creation of independent fiscal agencies, phased-in entitlement reforms.

These have not yet been offered in most countries, but they are essential because, when they are in place, they give more fiscal room for governments to use fiscal policy today. How much fiscal space each country has will depend from country to country, but this first step, which is a credible, medium-term consolidation plan, is essential.

Fourth, and last, those emerging market countries with large current account surpluses must accelerate rebalancing. This is not only in the world economy's interest but also mainly in their own. In many countries, many of those countries, we see distortions which have led to too low a level of consumption or too low a level of investment and are decreasing wealth there. Removing these distortions and thus allowing consumption and investment to increase is highly desirable from the point of the country. To a large extent, market forces in the form of large capital inflows are pushing these countries in the right direction. Unless offset by reserve accumulation, they will lead to exchange rate appreciation. With the help of macro-prudential measures, these flows can help in reallocating production toward domestic goods. These were the four dimensions of policy which I see as most relevant.

The important point, to end, is that all these pieces are very much interconnected. Unless advanced countries can count on stronger private demand, they will be very reluctant to achieve fiscal consolidation. If fiscal consolidation is in question, then worries about sovereign risks can easily derail growth. If growth were to slow or even stop in advanced countries, emerging market countries would have a hard time decoupling. Its downside risks, which were described again in the GFSR presentation yesterday, should definitely not be ignored.

Final point: the need for a careful design at the national level and collaborative action at the global level may be even more important today than they were in the peak of the crisis a year and a half ago. Thank you very much.

QUESTIONER: Two questions, if I may. What are the risks of a double-dip recession in the advanced economies? Secondly, what mechanisms are there to persuade the surplus countries to run down those surpluses? Has this not been the problem all long that there is no mechanism for persuading countries like China or Germany, the Eurozone, to actually increase their domestic demand? What is a way of doing that?

MR. BLANCHARD: Let me take all the questions. We do not, as you see from our baseline, expect a double-dip recession. We have a fan chart in the World Economic Report document which gives a probability distribution. According to that fan chart, which is our best assessment of risk, the probability that for the world as a whole growth would be less than 2 percent is under 5 percent. Of the U.S., we do not have a number in the document, but we think that the probability is low. Although the probability of negative growth in this case is low, it is probably a bit higher than the first number I gave you.

On the issue of how we achieve this rebalancing, I think the important point to make is that this is a win-win game. Clearly, these rebalancing operations or acts require a lot of structural change adjustment, and so on, but it is beneficial to each country on its own and it is essential to the world recovery. So, we think there that the best way to proceed is clearly through cooperation and we think that the G-20 process and the G-20 members are in a unique position to achieve this cooperation. This is an urgent issue to take up and we hope that they take it at their next meeting.

QUESTIONER: In the report, you mentioned strong and coordinated policy responses from different economies are quite essential to limit the fallout of the recession. In your view, how can different economies better take coordinated multilateral cooperation instead of a unilateral action to guarantee a balanced and sustained global recovery?

My second question is that I do think it is necessary and pressing for emerging markets to have a bigger and larger say in the IMF and other leading international institutions. Thank you.

MR. BLANCHARD: I will take the first question. I think the second question is out of bounds for this particular press conference.

MR. MURRAY: The Managing Director has a press conference tomorrow morning and that would be a good question to raise.

MR. BLANCHARD: What is needed in terms of coordination or cooperation should be clear from my introductory remarks. The main challenge of advanced countries is fiscal consolidation. They are going to be reluctant, and maybe in some cases hardly able to achieve it, if growth is weak, and they basically need to rely more on net exports, for example, in the case of the U.S. But fiscal consolidation is the main task of advanced countries.

The main task of most emerging market countries, at least all the emerging market surplus countries, is to rebalance. Here, again, there are issues of cooperation. What is needed for external rebalancing is a fairly general appreciation of emerging market country currencies relative to advanced country currencies. If one country decides to peg its currency or prevent the adjustment, this makes it much harder for the other countries to adjust and that is where cooperation or coordination is probably of the essence for emerging market countries so that they can all appreciate in the proper way and not get into fights or, as it has been called, currency wars.

QUESTIONER: You recently gave a glowing endorsement of the UK's plans for fiscal consolidation and yet in this World Economic Outlook you suggest there may be scope for easing off on a deficit reduction in some countries. My question is, if growth disappoints, would you expect the UK and other advanced economies to ease off on deficit reduction plans?

MR. BLANCHARD: Fiscal consolidation in the UK has been very ambitious, although sometimes people tend to exaggerate how much stronger it is than in other countries. To give you numbers, we estimate that the measures announced lead to fiscal consolidation from this year to next year of the structural primary balance of about 1.7 percent of GDP. This compares to 1.3 percent in France and 1.4 percent in Canada.

Does it make sense for the UK to do more than others? Well, the fiscal deficit in the UK is larger than in the other countries. This being said, I think there should be no question that in the short run this is going to decrease growth. Fiscal consolidation is needed; it is needed for long-term growth. In the short term, typically it decreases growth; it decreases demand.

Now, this being said, our forecasts for the UK which incorporate these fiscal measures are for 2 percent growth in 2011 and, therefore, positive growth. In other words, we do not think that fiscal consolidation comes close to killing growth, as some have said.

What would happen if growth turned out to be much less than is currently predicted? Our generic advice in our fiscal documents as well as in the WEO is that, if growth threatens to be substantially lower than is currently forecast in any country, in the UK or any other country, then the fiscal plan should be revisited.

QUESTIONER: Germany has experienced quite extraordinary growth recently and the labor market looks quite good as well. Do you think that this is an episode or something longer lasting?

MR. DECRESSIN: The growth rate was indeed very strong, 9 percent in the second quarter, but there were a number of special effects at work. For example, the first quarter had disappointed on account of a very harsh winter and second quarter has made up for this. We expect that, going forward, growth in Germany will slow in the third and in the fourth quarter. As global growth is also forecast to slow, Germany’s exports will be affected.

Nonetheless, we have revised up our forecast for Germany for this year. We are now at a growth rate of 3.3 percent, which is 1.9 percentage points more for 2010 than we forecast in July. We have also revised up our forecast for 2011 to 2 percent growth, which is about 0.4 percent more than we had in July. So, there are some permanent factors but also a large temporary element in this very strong growth rate of the second quarter.

QUESTIONER: The WEO report gives a pretty strong endorsement for legislating fiscal targets. I wondered if you could elaborate on why you have come out so strongly in favor of that approach, given what we have seen here in the US, in particular the states that seemed to have struggled in their effort to simulate the economy because their hands were tied by balanced budget laws.

MR. BLANCHARD: Again, it goes back to the way we think fiscal consolidation should be done. The ideal way of adjusting is to do relatively little today but convince markets that debt will be stabilized eventually, and that is very difficult to do because it is hard to establish credibility if you do nothing today. This is the context in which fiscal rules, either as transition devices or permanent devices, can be extremely useful.

The historical experience with fiscal rules is that, when they are well designed, they often work well. They slow down the growth of spending and they typically allow for a deficit reduction.

They nearly never work perfectly in the sense that there is a bit of cheating, a bit of change in the rules over time, but typically the net result is that they work and that is why we are very strongly pushing the idea of fiscal rules in the current context.

QUESTONER: A question on Russia probably for Jörg. You shaved a few percentage points, a few decimals from Russia's growth rate. Was it just because of the drought or are there any other factors at play? In general, why is Russia not growing more rapidly?

MR. MURRAY: This is Petya, actually.

MS. KOEVA BROOKS: We have revised down the growth operate for Russia modestly this year to 4 percent from 4.3 in our previous report. This is entirely due to the temporary factors and the heat wave and its negative impact on the economy, which we saw earlier in the year. Going forward, we expect the economy to grow at about 4.3 percent in 2011 and you will note that that is actually a modest upward revision relative to our previous forecast.

More generally, the recovery that we are seeing in Russia is a moderate one and there are a number of reasons for that. One is that the oil prices that we are seeing now are not as high as they were prior to the crisis. Another factor was that, as a result of the economic crisis, the banking sector was affected in terms of slowing down the supply of credit in the economy. We have seen progress in this dimension, but, again, this is something which is going to be constraining growth going forward.

MR. MURRAY: I am going to take one question from the Online Media Briefing Center and keep in Europe for a second:

Have the new WEO projections taken into account the new measures by the Portuguese government announced a week ago?

MR. DECRESSIN: No, they do not take those into account. The measures taken by the government amount to roughly 3 percent of GDP, so this additional fiscal consolidation will have a substantial effect on the Portuguese economy. In the WEO we are forecasting that growth this year will be about 1 percent in Portugal and next year it will be about zero. If you factor in the measures that have been announced since we finalized our WEO forecast, then this will not affect, of course, our growth forecast for this year, but for next year the economy is likely to contract by about 1.4 percent.

QUESTIONER: In your World Economic Outlook you have projected a positive sign for emerging economies of Asia, but you also projected a downward revision in the case of Pakistan because of the severe floods. Do you think that it is only the floods or are there any other reasons which are impacting growth negatively?

MS. DUTTAGUPTA: I can take that question. Most of the revision reflects the adverse effects of the floods faced by Pakistan. As you know, the IMF has acted very fast. At the same time, this will affect the vulnerable segments of the population. We expect growth to slow down from about 4.8 percent this year to 2.8 percent next year.

While policy response to the flood is needed, it is also important to keep in mind that fiscal sustainability should be maintained over the long run. Taking all that into consideration, the outlook has obviously weakened.

QUESTIONER: Following what you said about the Portuguese economy and the effects of austerity measures, do you think this would be a case to revisit the fiscal consolidation plan, bearing in mind it would put recession in the economy?

MR. DECRESSIN: No. Portugal is under significant pressure to adjust. In fact, we welcome the package and we encourage the government to follow through with it rigorously.

QUESTIONER: I wonder, Mr. Blanchard, what is your assessment on the Brazilian currency? Finance Minister Mantega has talked about a currency war, and in the report it says that Brazilian economy is now showing signs of overheating. If there would be an increase in interest rates, it would worsen the problem of the valuation of the real against the dollar. In the past 12 months, the real has risen over 5 percent and the government has just doubled the tax on foreign bonds invested. So, what would you suggest for the government to do in this case?

MR. BLANCHARD: Let me give a general answer and then let somebody talk about the specifics of Brazil. Let me go back again to the bigger picture, which is that we think that external rebalancing will imply an appreciation of a large number of emerging market currencies, to a different extent, but this will still be relevant for countries like Brazil.

Capital outflows from advanced countries are increasing, given that returns are not very appealing in advanced countries and more appealing in emerging countries. Then the danger is that some countries close their doors, leading capital to other countries and making things very difficult for these countries to handle. So, this is an example of potential currency tensions that we talked about earlier.

Faced with this, I think that the multilateral answer is to make sure that all the countries which have to appreciate, appreciate. In the case of Brazil, given the current circumstances, these flows are likely to be rather permanent so that e trying to fight them through reserve accumulation is probably self-defeating.

Is there a case for controls? Our position again for Brazil but more generally is that controls can possibly be used to try to direct the capital flows to where they are most useful, not so much to affect the general level of the inflows but to make sure that capital flows do not lead to bubbles, credit booms, and such things that we have seen in the past.

MS. KOEVA BROOKS: If I may just add a little bit more on Brazil. As you know, the economy has been growing extremely strongly. In the first half of this year it was growing at over 8 percent. For the year as a whole we are seeing growth at about 7½ percent. So, any amount of economic slack that was there seems to have been exhausted. Also in response to building inflationary pressures, the central bank raised interest rates by about 200 basis points, which we think was the appropriate response.

Again, on the policy responses there, we are still seeing very fast growth of primary spending. The 12-month primary surplus which we have seen so far as the end of August was about 2 percent, which was way lower than the NDF target of 3.3 percent. So, in this context, we think that a slowdown in spending growth will help, first of all, meet the target and, second of all, take off some of the pressure and the burden on monetary policy to increase interest rates which will also help contain pressures on the currency.

QUESTIONER: Can you tell me how big an obstacle you think the problems in the American real estate or housing market and the UK housing market are to the respective recoveries in both countries and to the global recovery generally?

MR. DECRESSIN: There are significant obstacles but of a somewhat different nature. In terms of construction, the boom has been much bigger in the United States while perhaps in terms of prices it has been bigger in the UK. The issue here is that the UK is already a more built up economy.

So, if you are looking forward, construction in the United States will make a very low contribution to growth, if any, over the near term and that will hold back the recovery. In the UK, it is more that lower house prices will be weighing on consumer confidence and could, as they do in the United States, also lead to further impairments on loans as households are struggling to repay, especially when the houses are worth less than the mortgages they have.

Again, there are differences between the US and the UK that are important to take into account. Overall, the real estate sector is probably going to be a bigger burden in terms of getting strong recovery in the United States than it is in the UK.


MR. BLANCHARD: Rupa is the person who knows everything about Africa, I am not sure she speaks French. Rupa, can you say something about the prospects for Africa?

MS. DUTTAGUPTA: Africa was also hit because of the global slowdown, but thanks to good macroeconomic policies in the run up to the crisis, most of the countries had built enough fiscal space to respond to the crisis, which is an important reason why the slowdown was short-lived and in general Africa was very resilient.

But going forward, the shock would affect Africa's ability to meet some of its longer-term goals, for example its Millennium Development Goals. So, it is very important now to take advantage of the good times and rebuild the fiscal space that is needed in order to protect the most necessary elements of Africa's needs, for example, investment in health, education, and social services.

QUESTIONER: Two questions. In the WEO you mentioned a challenge in emerging countries is to handle capital inflows. What will be the impact of the recent Bank Central of Japan drop in interest rate and more quantitative easing in the US on Indonesia, and how a country like Indonesia should cope with the volatile flows?

The second question is still on the currency wars. Do you think the G-20 has failed dealing with the currency issues and whether you think that there is a need to form a smaller group of countries to cope with these issues, and whether the IMF will coordinate a new global currency agreement and whether it will lead to a new monetary system?

MR. BLANCHARD: I will make a general remark and then ask Rupa to talk about Japan and Indonesia maybe. It is much too early to talk of failure. Clearly, the issue of external balancing is becoming a more and more important one. As a result, the issue of exchange rate adjustment is becoming more and more important as well. We are just starting to see the forces, which force these adjustments and the reactions of countries. I am optimistic that the G-20 can actually work out a solution, but we are just at the beginning of the process so it is much too early to declare it a failure.

Let me turn to Rupa.

MS. DUTTAGUPTA: In general, very easy monetary conditions have been one of the factors resulting in large capital flows to emerging markets, including Indonesia. Another big factor is the overall much stronger growth prospects of these countries.

Now, in terms of Indonesia itself, the authorities have currently kept monetary policy on hold. We think that is appropriate because inflation is very much within the inflation target band, but we do support a gradual tightening as inflation expectations start moving up.

QUESTIONER: Mr. Blanchard, in light of the Irish announcement last week that the (Bank Anglo Irish) would cost 50 billion euro, and in the run-up to the four-year plan that is going to be announced next month, what do you think the prospects are for the Irish economy? Is there not a danger that these very draconian cutbacks to be announced next month will inhibit all growth? Finally, does IMF recommend that Ireland increase its corporate tax rate?

MR. DECRESSIN: The Irish economy is currently still struggling. It is reeling from a real estate boom that is unwinding and a banking crisis that is leading to market pressures on interest rates. In such circumstances, a strong and very credible fiscal adjustment is absolutely essential. So, what is needed is a very strong medium-term fiscal plan, but markets are also demanding a downpayment. That this is why we actually support the tough fiscal consolidation measures that the government is taking.

We believe that the economy, after contracting by about 0.3 percent this year, will again grow next year and reach around 2.3 growth, which is broadly unchanged from the forecast that we made in July. In the end, it will be helped along by stronger net exports because the global recovery is gathering steam even if there will be a temporary slowdown during the second half of this year and the first half of next year. This will help pull the Irish economy along.

MR. BLANCHARD: I would like to add something, again more general, about fiscal policy. When we go country-by-country our advice differs, but the principles are the same. We basically think that all countries have to have medium-term, credible fiscal stabilization. How much room they have in the short run depends very much on the initial position.

So, in countries such as Ireland or some of the Southern European countries, Greece for example, there is really no choice than to do fairly dramatic things in as clear a manner as possible, and Ireland is one of these cases. In countries in which there is more room to play, then clearly fiscal consolidation can proceed much more slowly. So, what I want to insist on is that principles are the same. The application to each country has to take into account the specific features of that country, the amount of fiscal space that the country has.

QUESTIONER: Two quick questions for Mr. Blanchard. You have repeatedly talked of the need for emerging economies to collectively appreciate their economies, but is not the continuing depreciation of the US dollar at the root of the problem which is forcing these countries to try to stay under the bar?

Secondly, you used the phrase "if growth stops in advanced economies," not slows but stops. That is fairly strong language. Under what circumstances do you think that could happen and how do you rate the danger of that possibly happening?

MR. BLANCHARD: On the second, we discussed the double dip earlier and I gave you what we think the probability distribution is and the probability that world growth literally stops is zero. The probability that growth is less than 2 percent at the world level is, as I said, around 5 percent or so.

On the first, it takes two to tango. The appreciation of one currency is by implication the depreciation of another one or some other ones, so there is no question. The general statement is that external rebalancing requires the appreciation of many emerging market currencies vis-à-vis many advanced country currencies.

Now, in the first category you clearly have the yuan and a number of other Asian currencies in the second category you clearly have the US dollar. So, it is clear when we talk about the exchange rate adjustment, this requires an adjustment of the yuan vis-à-vis the dollar. Whether it happens formally through the depreciation of the dollar and of advanced country currencies or by an appreciation of emerging market country currencies is irrelevant. The important thing is that the adjustment takes place.

MR. MURRAY: Thank you all for joining us today. If you do have follow-up questions, send an e-mail to and we will follow up for you. Again, thanks for joining us for the WEO press conference. Tomorrow the Managing Director will be here at 9:00 a.m. Washington time. Thank you.


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