Transcript of the Press Conference on the Release of the July 2016 World Economic Outlook Update
IMF News, July 19, 2016
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- Published: July 19, 2016
Overview
- Event: Press conference on the World Economic Outlook Update entitled “Uncertainty in the Aftermath of the U.K. Referendum.”
- Location and date: Washington D.C., July 19, 2016.
- Principal speakers: Maurice Obstfeld (Economic Counsellor and Director of the Research Department), Gian Maria Milesi‑Ferretti (Deputy Director, Research Department), Oya Celasun (Chief, World Economic Studies Division).
- Context: The United Kingdom's June 23rd vote to leave the European Union (Brexit) occurred amid an already slow global growth environment and preexisting risks.
Global growth projections and headline revisions
- April WEO baseline (prior): 3.2 percent global growth of output in 2016, and 3.5 percent in 2017.
- July WEO update baseline (revised): 3.1 and 3.4 percent, respectively.
- Revision magnitude: both 2016 and 2017 projections downgraded by .1 percentage point.
- Distribution of downgrade: concentrated through 2017 in the advanced countries; outside advanced economies, gains in emerging countries are balanced by losses in the low-income group.
Brexit: assessment, scenarios, and channels
- Immediate assessment: Brexit introduces downward pressure and extra uncertainty; the July baseline incorporates projected negative effects but treats them as relatively benign given limited information (less than four weeks after the vote).
- Key sources of Brexit uncertainty:
- Ultimate trade relationship of the U.K. with the remainder of the E.U. and the wider world.
- Length and contentiousness of negotiations (Article 50 had not been triggered).
- How resulting uncertainty will depress demand (investment, consumer durables, hiring).
- Potential for financial tightening leading to banking sector distress in the Euro Area.
- Explicit model-based downside scenarios presented:
- One moderately worse than baseline.
- One significantly worse than baseline (severe scenario).
- Rationale for baseline over severe scenarios:
- Severe scenarios require a confluence of adverse developments (a “perfect storm”) and larger demand effects than currently evident.
- Financial markets have so far repriced in an orderly fashion, aided by central banks’ preparedness to provide liquidity.
- Time horizon: Real effects may play out gradually, “perhaps over many months,” with amplified financial market responses possible.
Regional impacts highlighted
- Sub-Saharan Africa:
- Growth reduction largely driven by two large countries, Nigeria and South Africa.
- In 2016, regional output growth per capita will be negative (output growth will fall short of population growth).
- Nigeria:
- Forecasts revised down for both years, especially 2016.
- Main contributors to downgrade: supply disruptions in the oil sector (Delta region), energy/power outages, a delayed budget, and shortages affecting purchases of intermediary goods and investment.
- Policy prescriptions emphasized: a coherent, comprehensive package including restoring fiscal sustainability, restoring external imbalances via greater exchange rate flexibility, and structural reforms to improve the business climate and inclusivity.
- Brazil:
- Projected growth: negative 3.3 percent in 2016 and positive 0.5 percent in 2017.
- Explanation for large year-on-year swing: severe contraction in late 2015 and early 2016 means stopping the shrinkage produces a large turnaround in the growth rate; recent improvements in confidence and financial indicators support an earlier normalization.
- China:
- 2016 projection: upgraded by 0.1 percentage point in view of supportive policy actions.
- 2017 projection: left unchanged.
- Concerns: continuing credit expansion, impaired assets in banking system, support for state-owned enterprises that may disadvantage private sector, and the risk of a bumpy transition to a more consumption- and service-oriented economy.
- Middle East and oil exporters:
- Partial recovery in oil prices provided relief for many oil-exporting countries in the region.
- Forecasts show diversity across countries; Iraq contributed to headline movements with an upward revision for 2016 and a downward revision for 2017 due to national accounts and technical oil production revisions.
- Mexico:
- 2016 growth projection revised up by 0.1 percentage point to 2.5 percent, driven by strong Q1 domestic demand and better oil prices.
- Turkey and Central & Eastern Europe:
- Projections finalized before the attempted coup; forecasts were broadly stable with only marginal reductions for next year given a more difficult external environment.
- IMF monitoring and vigilance emphasized; Turkish Central Bank had stepped in to provide liquidity amid volatility.
- United States:
- Labor market: average job growth approximately 150,000 a month over the last year; unemployment below 5 percent.
- May 2016 hiring was weak but June 2016 was “incredibly strong”; data are noisy and affected by events (e.g., Verizon strike).
- Fed normalization: market pricing suggests any further Fed funds rate increase may be pushed farther into the future; Fed remains data dependent.
- Japan:
- Yen movement described as volatile but not disorderly.
- Policy tools recommended: the “three arrows” (structural reforms, fiscal, and monetary) and attention to wage-setting; intervention not seen as necessary.
Financial markets, central banks, and vulnerabilities
- Financial market response to Brexit: orderly repricing; resilience owed importantly to central bank preparedness to provide liquidity.
- European banking vulnerabilities: negative stock market readjustments noted; banking sector remains a source of risk.
- Low interest rate environment:
- Low real and nominal rates reflect weak demand and low inflation expectations—seen as symptoms rather than primary causes.
- Low rates have side-effects (pension funds, bank profitability) underscoring the need to complement monetary policy with fiscal, structural, and financial stability measures.
- FX volatility: flexible exchange rates serve as useful buffers; volatility per se is not necessarily bad, but disorderly markets can merit action. No endorsement of coordinated exchange-rate targeting.
Policy recommendations and priorities
- Comprehensive policy approach required to address constrained policy space and persistent low growth:
- Deploy all main policy levers effectively: growth-friendly fiscal policies, well-sequenced structural policies, and monetary frameworks that keep inflation expectations anchored.
- Design efficient policy packages that exploit synergies across instruments and across countries.
- Consider incidence of measures across income groups and adopt accompanying actions to support cohesion and inclusive growth.
- On trade and multilateral cooperation:
- Warning against unilateral protectionism and tariffs; postwar cooperative institutions (IMF, GATT/WTO) promoted growth and stability.
- Single-country protectionist measures risk retaliation and global welfare losses.
- On China’s financial risks:
- Address impaired loans via mechanisms such as debt-equity swaps, secondary markets, and infrastructure for pricing/disposal of non-performing loans—strengthening the financial sector complements growth objectives.
- On “helicopter money” and fiscal-monetary roles:
- Calls for fiscal support of monetary policy are acknowledged, but explicit helicopter schemes risk blurring monetary/fiscal boundaries and undermining institutional credibility.
Other risks and longer-term concerns
- Ongoing downside risks and fragilities cited:
- Refugee and displacement pressures with political and economic ramifications.
- Geopolitical risks and political strife in several countries.
- Crisis legacies: long-term unemployment, nonperforming loans.
- Emerging and low-income commodity exporters facing balance of payments pressures, debt overhangs, and low investment.
- Falling expectations of long-term potential growth (demographic and technological trends), which can depress current demand and create a vicious cycle of lower potential output.
- Socio-political implications:
- Persistent low growth could exacerbate social tensions, wage stagnation, and demands for inward-looking policy responses that threaten open markets.
- Importance of political leadership to provide narratives and policy actions that restore middle-class prospects and equitable sharing of growth gains.
Transcript of the press conference on the World Economic Outlook Update, Washington D.C., July 19, 2016.