Participants:
Maurice Obstfeld
Economic Counsellor and Director of the Research Department
Gian Maria Milesi‑Ferretti
Deputy Director, Research Department
Oya Celasun
Chief of the World Economic Studies Division, Research Department
Olga Stankova
Sr. Communications Officer, Communications Department
Ms. Stankova ‑ Good morning, everybody, and good afternoon to those who are watching from other parts of the world online. Welcome to this press conference on the release of the World Economic Outlook. This World Economic Outlook is entitled Subdued Demand: Symptoms and Remedies.
At the press conference, we have Maurice Obstfeld, Economic Counsellor and Director of Research of the IMF. To his left is Oya Celasun, Chief of the World Economic Studies Division. To Maury’s right is Gian Maria Milesi‑Ferretti, Deputy Director of Research overseeing production of the World Economic Outlook.
Now I will pass the microphone to Maurice Obstfeld. He will make introductory remarks and then we will take your questions.
Mr. Obstfeld ‑ Thank you very much, Olga. Good morning and welcome everyone.
A return to the strong, sustainable, balanced, and inclusive growth that the Group of 20 Leaders called for at Hangzhou in September still eludes us. Global growth remains weak, even though it shows no noticeable deceleration over the last quarter. The new World Economic Outlook sees a slowdown for the group of advanced economies in 2016 and an offsetting pickup for emerging and developing economies. Taken as a whole, the world economy is moving sideways. Without determined policy action to support economic activity over the short and longer terms, subpar growth at recent levels risks feeding on itself through the negative economic and implicit forces it is unleashing.
We project global output growth at 3.1 percent in 2016 and at 3.4 percent in 2017, the same as in early July shortly after the United Kingdom’s Brexit vote to leave the EU. Within this broad outlook, however, we have slightly marked down 2016 growth prospects for advanced economies while marking up those in the rest of the world. Prospects for 2017 are unchanged for both country groupings relative to July. Over the medium term, while we expect that advanced economies will continue along a disappointing growth path, emerging market and developing economies should accelerate, as most of the large economies with currently shrinking economies stabilize and return to their longer‑term growth paths that we expect.
Even this more granular view conceals important differences within country groups. US growth has disappointed in 2016, but is partially offset by smaller upside surprises in Europe and Japan. Outside of the advanced economies, Emerging Asia has done better, whereas sub‑Saharan Africa as a whole has not, dragged down by its big commodity exporters despite a number of smaller countries benefiting from lower oil prices and doing quite well.
Why not be satisfied with recent growth rates? Other things being unchanged, the trend shift in global output away from the richer economies which grow more slowly, and toward emerging and developing economies which grow relatively more quickly, should raise global growth over time, but this has not happened.
Compared to the 1998‑2007 averages, long‑term potential growth is now projected to be lower in all regions. Current growth rates are lower still in much of the world, notably in emerging and developing economies. Admittedly, some of this long‑term growth decline reflects demographic trends as well as developments during the earlier period that could not be sustained. Those would include the initial burst in productivity due to the ICT revolution, China’s growth surge, and a global financial up‑cycle that culminated in a worldwide crisis in 2008‑09. Yet negative output gaps remain widespread, and the crisis has left a cocktail of interacting legacies—high debt overhangs, nonperforming loans on banks’ books, deflationary pressures, low investment, and eroded human capital—that continue to depress potential investment levels. Because investors and consumers become more cautious when they expect growth to lag for longer, realized growth can fall as well.
These self‑fulfilling mechanisms could be reversed were global demand higher, but the policy response so far has been unbalanced in relying excessively on central banks. Markets fear that policy has no room to counter the next big negative economic shock.
Then there is the gathering political fallout from persistently low growth. The slow and incomplete recovery from crisis has been especially damaging in those countries where the distribution of income has continued to skew sharply toward the highest earners, leaving little room for those in the lower brackets to advance. The result in some richer countries has been a political movement that blames globalization for all woes and seeks somehow to wall‑off the economy from global trends rather than to engage productively with foreign nations. Brexit is only one example of this tendency.
In short, growth has been too low for too long, and in many countries its benefits have reached too few, with political repercussions that are likely to depress global growth further.
These concerns highlight the risks to our projections, which remain tilted to the downside. The presumed recovery in 2017 and beyond could be derailed by several possibly interacting developments: a bumpy transition in China, a further sharp fall in commodity prices, a tightening in global financial conditions, climate‑related disruptions, or a sharp hike in trade barriers. Geopolitical tensions could flare up, adding to the humanitarian crises already afoot in the Middle East and Africa, further complicating the policymaking environment.
An upside outcome would be the adoption by many countries of comprehensive, consistent, and coordinated policies that exploit synergies across policy instruments, across time, and across countries to boost growth and make it more inclusive. This strategy was explained in a Staff Discussion Note that we released last week. Comprehensive policies are three‑pronged: They deploy structural and fiscal policy in support of monetary policy, while monetary policy, in turn, maximizes the expansionary effects of structural reforms and active fiscal measures.
Consistent and well‑communicated policies harness the power of stabilizing expectations. Coordination among countries, as with the 2014 Brisbane Action Plan on structural measures, confers beneficial spillovers, making the whole greater than the sum of its parts. If widely adopted, this general approach based on the three policy prongs the IMF has been recommending since at least last spring can raise growth now. It could also defend against a negative global shock, limiting the resulting damage to economies and to fiscal positions if carried out on a larger scale.
Among structural policies, a renewed commitment to lowering trade barriers is especially important, in contrast to current trends. At the same time, governments must recognize the need to develop labor market resilience, to lower barriers to entry in product and services markets, and to ease adjustment for those people most vulnerable to the dislocations from technology, trade, and structural reforms. Here, too, policymakers can send the clearest message and have the biggest effect through coordinated action.
With that, we welcome your questions.
Ms. Stankova ‑ Thank you, Maury.
Question ‑ Two questions for you. What will be the economic impact on the global economy if Donald trump wins the US presidency? Secondly, what is the appropriate policy stance for the Federal Reserve at the moment?
Mr. Obstfeld ‑ Let me start with the Fed. The Fed in September decided not to go for a second interest rate hike at this time. In our view, that is a very appropriate balancing of the risks in the economy, and they will make a data‑dependent decision going forward, as is also appropriate. At the moment, inflation is below their target levels, and wage pressures are moderate. So, there does not seem to be a great danger of overheating.
Labor force growth has been very strong, though, and so it is not out of the question to think that at some point in the next few months it would be appropriate to raise rates. We cannot really tell that until we see the data going forward, and they are monitoring that as we are.
There has clearly been a lot of discussion in the election of changes which could be quite dramatic, especially in terms of the US’ long‑standing positions on trade policy. I think these introduce an element of policy uncertainty into the mix. As we know, uncertainty is not great for investors and for employment. So, we will see how this develops going forward. It is very hard to know what would actually happen after the election, given the various checks and balances within the US government.
Question ‑ In the report, you are revising upward the outlook for the UK and you downgraded them slightly for next year. I was wondering, is it a way of acknowledging that you overestimated the negative impact of the Brexit vote?
Mr. Obstfeld ‑ Well, on the Brexit vote, if you look back at our Article IV and other writings, we presented several scenarios. The numbers that we are talking about for both years are within the ranges of our milder scenario. In view of the unprecedented nature of the vote, we felt that there was a very wide range of uncertainty about what might happen. That is why we presented a couple of different scenarios without necessarily picking out one or the other.
In the event, really after the first day or so, the market response to the Brexit vote was much more favorable than I think anyone would have anticipated. The market stabilized fairly quickly. Had they not, that could have generated a much more dramatic downside not only for the UK but for Europe.
Nonetheless, I think it was wise of us to warn against those possibilities. In fact, I think it would have been malpractice not to think about those possibilities. Clearly, central banks did think about those possibilities. They did prepare for them. Markets knew they were preparing for them. I would credit that preparation in part for the mild response that we ended up seeing.
What we have seen in the months after the Brexit vote is a very, very sharp depreciation of the sterling, which has intensified in the last few days as a timetable for triggering Article 50 emerged and as Prime Minister May gave some more hints about what her government’s negotiating position might be.
The depreciation of the pound has different effects. We should recognize that, first and foremost, it does reduce sharply the purchasing power of British incomes over imports, so it is a decline in real income for the UK. The adjustment reflects the necessity for the UK at this point to adjust downward its large current account deficit. At the same time, it has arguably helped some sectors of the economy by making them more competitive. After the initial month, we have seen a resurgence in PMIs in the tradable goods sector. So, it is a mixed bag.
We further downgraded 2017, just because we now know that the negotiation process will be going on. It will entail a lot of uncertainty. There is some evidence of deferred investments in the UK economy that will have an impact in that year.
So, all in all I would say that what is happening is certainly consistent with one of our scenarios, and it is certainly the one that we are much happier to have seen turn out than the alternative worst scenarios.
Question ‑ A question about China. In your remarks you said that one of the risks going forward is a bumpy transition in China, but this time you maintained the forecasts of China’s economic growth this year and next year. So, I wonder how confident you are that the transition can be smooth and what will be the challenge at this point.
Mr. Obstfeld ‑ We view the near‑term prospects in China as favorable for maintaining our baseline forecast. This is in part the result of new measures that the Chinese authorities have taken to support the economy through fiscal means and other means.
Perhaps paradoxically the same confidence about the near term makes us much more worried about the medium term, because among the measures we see that are supporting the economy now and next year are rapid domestic credit growth, continuing support of sectors with excess capacity and a general expansion in the financial sector, particularly shadow bank, which, while it supports activity in the short term, could threaten financial stability longer term.
So, there are some major challenges ahead in terms of upgrading the regulatory framework, dealing with extensive nonperforming loans, imposing hard budget constraints on state‑owned enterprises and more quickly eliminating excels capacity, all of which are consistent with the very significant progress that has been made in many areas which have led to a shift in the economy toward services and toward consumption but which need to go more quickly to avoid imbalances building up. It could be dangerous later.
Question ‑ In the section on the euro area of your report, you state again that countries with enough fiscal space should do more to stimulate growth by investing more. I would imagine that you still are referring to countries like Germany and the Netherlands, among others. Why are these countries so reluctant to listen to your advice and at what cost?
Mr. Obstfeld ‑ Well, you have to ask them. We find our logic very compelling.
This is a great time for countries to carry out needed infrastructure investments and other public investments, such as investments in public education, and this is not true only in the Eurozone. I think many countries worry about headline debt levels and that is not a concern I want to dismiss.
But given the very low interest rates, it should still be recognized that if you can carry out productive investments at essentially zero borrowing cost, this ultimately raises GDP; it ultimately can help make debt more sustainable. So, we would prefer for policymakers to look at the matter through that lens.
I think within the Eurozone there is another problem which relates to the need to supplement what the ECB is doing with other policy levers. If the ECB is going to maintain its mandate or reach its inflation mandate of roughly 2 percent inflation, it is very hard to do without higher inflation in some of the countries which have small or no output gaps at the moment. That is going to require more of a demand push in those countries.
The ECB is stretched in terms of pushing the extensive margin of its policies into negative interest rates and other measures. It would be able to normalize much more quickly if there were more support coming from other policy tools. Many of the same countries that are reluctant to give that support for various reasons are also unhappy with the ECB doing what it is doing, and I would suggest that you cannot have it both ways.
Ms. Stankova ‑ Let me take a few questions from online to follow up on what we were just discussing on the euro area, inflation, Portugal, and Spain.
On inflation, according to your estimates, inflation in the euro area would rise to 1.1 percent in 2017. Under this assumption, is there a need for additional easing through expanded asset purchases?
On Portugal, the IMF recently suggested that Portuguese banks should have a solution for bad debt. The so‑called bad bank is in a way government‑announced. It is good news. On Spain, Spain got its economy revised up to 3.1 percent. How is political uncertainty going to influence growth going forward? What are the challenges ahead?
More specifically, on monetary policy issues, you will have a chance to ask questions in detail tomorrow at the GFSR press conference and specific country questions on Friday’s press conferences by our regional departments.
Mr. Obstfeld ‑ As I said in answering the last question, euro area inflation remains weak compared to the mandate. This is not a minor problem. I do not want to give a disquisition on the perils of low inflation, but for one thing it really prevents the elimination of debt overhangs because you do not have a reduction in their real value due to inflation being at target. It is also the case that, in the Eurozone, core inflation is forecast to be below target for quite some time over the medium term. So, clearly this is not a satisfactory state of affairs.
What is to be done? Well, I would come back to my answer to the last question. It is true that the ECB could take further measures which would be helpful on the inflation front, and it no doubt will do so if inflation continues to be below target and to be forecast for the medium term to be below target. It would be much more effective for other policy levers to be brought to bear in line with the type of approach we recommend in the Staff Discussion Note I mentioned in my opening remarks.
Monetary policy cannot bear all of the burden. By making it bear all of the burden, we risk some of the side effects from low interest rates that we have noted and that have been commented on within the context of the euro area.
On Portuguese banks, I will in fact defer that to Peter Dattels and our colleagues on the Global Financial Stability Report who will be speaking to you tomorrow. On Spain, I am going to turn it over to my colleague, Gian Maria.
Mr. Milesi‑Ferretti ‑ Yes, we have marked up our forecast for Spain this year despite the prolonged political uncertainty, and there are a couple of reasons for that. The economy has been quite strong in the first half of the year. That weighs a lot on determining what the growth rate is going to be for 2016.
A second factor is an external environment that has been more benign than observers, including ourselves, were thinking, especially after the UK vote of last June. With this more favorable external government, very good market conditions, there has been less emphasis on the dangers that a protracted period of political uncertainty can bring.
But going forward, if you think of the challenges that the Spanish economy faces, it will need to resume its fiscal adjustment in a gradual fashion, given that public debt is reaching a hundred percent of GDP, and the fiscal deficit has overshot targets in part because of the fact that there is more political uncertainty and not a firmly established policy setting with the government to back it up. All those challenges loom high on the horizon. For that reason, the sooner the situation is stabilized, the better.
Question ‑ Can I just return to Brexit for a minute. I covered Brexit in some detail and I do not really remember too many forecasts of the IMF saying they thought it was going to be a soft landing for the UK after a no vote. In fact, there were quite little warnings about how terrible life would be. There would be falling house prices, falling share prices. The economy would go into recession with knock‑on impacts on to the rest of Europe. Maybe I missed the caveat, but most of the IMF message seemed to be very negative about the short term for the UK.
So, my question is this: If you got it wrong about the short term, why should we trust you about the longer‑term impacts?
Mr. Obstfeld ‑ I would just refer you back to the Article IV report. There are two scenarios. One of them does not involve recession. It is there; it is in black and white.
We did focus on possible risks and those possible risks were there. I do not think we could have dismissed the outcome; I do not think policymakers dismiss the outcome. Partially because of the strong response and also the strong policy response by the Bank of England, we are looking at pretty much what I would call a soft landing—I think you characterized it correctly—for 2016.
It is very hard to project exactly how the negotiations will play out and what will be the effects on the decisions of investors, of job creators throughout Europe over the next couple of years as these negotiations continue. Even Chancellor Hammond warned about this uncertainty yesterday. So, again, we are happy about the outcome. It is our job to warn against the risks. I think if you look at the published analysis, it was pretty balanced in setting out alternative scenarios.
Question ‑ Thank you for doing the briefing.
The IMF has been bumping up its projections for Russia since the spring. My question basically is to ask for a comment on what the Russians are doing right other than it being the effects of oil.
You actually mentioned in your report that the shift in Russia and Brazil is one of the major changes since April. If you could elaborate on that.
Then you also say in the report that there is this overreliance on central banks, that the Russian central bank seems to be playing an active role these days. The Head of the Russian Central Bank recently criticized the quality of easing by saying that it leads more to financial volatility than to investment. So, if you could share your opinion on that one.
Mr. Obstfeld ‑ I will take the second half of that and turn the first half over to Mr. Gian Maria. The Deputy Governor of your central bank will be here this week speaking at a seminar on exchange rates, so I hope I can ask some of these questions or the audience will and she can tell us more.
I think monetary conditions in Russia have been very different from what they are in Europe or the US or Japan. I have called for a very different strategy, which I might say has been carried out quite skillfully by the Bank of Russia.
There are critiques of quantitative easing. It is common to hear especially emerging market policymakers voice those and it is a very active debate. From our perspective, we view these policies as useful in avoiding deflation and attaining the price stability mandates of the advanced country central banks. There are certainly some spillovers, but we think on the whole they have been fairly contained.
I will turn it over to Gian Maria for more on the Russian economy.
Mr. Milesi‑Ferretti ‑ Yes, we have marked up our forecast. Clearly, the improvement in oil prices helped, as you noted. It helped the fiscal front, among other things. Of course, also production of oil has been quite strong.
Clearly, the policy response has played a crucial role in ensuring that the two large shocks that hit the Russian economy, which are the big decline in oil prices and the sanctions, have been contained. Clearly, the macro impact has been very severe, but the policy response has been appropriate.
The exchange rate has played a crucial role in acting as a stabilizing device. The big depreciation of the exchange rate basically allowed to contain the fiscal impact of the decline in oil prices, because it has limited the decline in oil revenues when measured in rubles.
At the same time, you needed tight incomes policies to ensure that you would not get nominal increases in domestic prices that would basically offset the impact of the depreciation that was put in place. Clearly, this is hard for domestic demand, because real incomes in Russia have declined. Domestic demand has declined very dramatically, but that has helped to reduce the impact of the shock on external accounts. Domestic demand now is gradually recovering. Monetary policy has started an easing cycle. From a cyclical perspective, we see the Russian economy moving clearly in the right direction.
There are challenges, of course. The challenges relate to what is growth going to be in the medium term. Russia has unfavorable demographics and investment is still weak, with the impact of sanctions that clearly can affect what happens to productivity through a variety of channels; think of technology transfer, for instance. So, policymakers have a lot of challenges ahead, but I would say on the macroeconomic front, the response to the shocks was an appropriate one.
Ms. Stankova ‑ I will take again a couple of questions from our online audience and we will move to other regions, MENA and Latin America.
Can you explain the reasoning behind this slight downgrade for the MENA region despite the noted improvement in prospects in global oil markets?
A question on Latin America, Argentina. Why do you think inflation will be above 23 percent in 2017 for Argentina?
Mr. Obstfeld ‑ I will let Oya take up Argentina first and then we will move to MENA.
Ms. Celasun ‑ For Argentina, what we expect for the end of this year, December 2016, is a near 40 percent inflation rate. At the end of 2017, that actually declines to just above 20 percent. So, we do project a very significant decline in inflation.
Mr. Milesi‑Ferretti ‑ In the MENA region, aggregate figures are affected a lot by large variations in growth rates for countries that are undergoing dramatic domestic strife and violence. So, sometimes it is a little bit tricky to interpret revisions as reflecting just a change in outlook because of oil prices, because you have these underlying factors. Think of countries like Libya or Yemen, for instance, Iraq, not to mention Syria.
If you look at the main economies, you have two offsetting forces. On the one hand, you have the improvement in oil prices which should help over the medium term. On the other, you have a very protracted period of needed adjustment in fiscal policy as these countries adapt to lower oil revenues.
These adjustments are painful, because they entail cuts in government spending; they will have to entail cuts in domestic demand. Moreover, many of the countries in the reason have a pegged exchange rate vis‑à‑vis the dollar, and that implies that one of the channels of adjustment is not there when an oil price shock hits and, hence, the cuts that need to be implemented to domestic spending need to be, other things being equal, larger. So, those effects clearly weigh on the growth outlook for the region.
Question ‑ The WEO report says that Brazil seems closer to exiting the recession. However, inflation remains high. The Article IV report says that there is the need for structural reforms.
On the WEO, the projections of the performance of the Brazilian economy are unchanged for the last three months. What is the outlook then? Positive or negative?
Mr. Obstfeld ‑ Oya, do you want to respond?
Ms. Celasun ‑ Sure. We have seen throughout this year, from the earlier months of the year quite a strong rebound in confidence in Brazil. Activity indicators are moving in the right direction as well. We are expecting activity to bottom out around the end of this year and then growth to resume next year or late this year. So, that is a welcome sign, but there some adjustments that lie ahead.
What underpins this improvement is that there is progress with the reform options put forward with the government that moves through Congress in a reasonable timeframe. Beyond that, the outlook is, as you pointed out, a very gradual improvement in the growth rate to around 2, 2 1/2 percent over the medium term after a strong recession.
It will be important to complement the reform effort with policies to deal with the structural bottlenecks, such as alleviate infrastructure bottlenecks, make the tax system less complicated, and remove barriers to trade to strengthen the outlook.
Ms. Stankova ‑ One more question on Latin America and then we will move to Africa for some questions from the online audience.
In addition to the weakening of the export sector, what other factors are contributing to the low expectations for Mexico?
Ms. Celasun ‑ Okay. Lower oil prices relative to two years ago clearly have had an effect on Mexico’s outlook, but also in this more recent round of forecast changes the downgrades to the US outlook have played a role. In the US, the manufacturing sector has been underperforming relative to the rest of the economy and that has a direct bearing on Mexico’s outlook as well.
Ms. Stankova ‑ What should be the policy recommendation for commodity‑exporting countries, like Ghana, which are expected to experience low growth?
Ms. Celasun ‑ Commodity prices are pretty much lower today across the board and the broad policy recommendation for commodity exporters is to adjust within clear, coherent policy frameworks to this new reality. Specifically focusing on Africa, for countries outside of monetary unions, it is important to allow the exchange rate to adjust, which helps to restore the domestic currency value of fiscal revenues, which still are quite heavily dependent on commodity revenues. Fiscal policy has to adjust to the new reality, and there has to be movement toward diversification of the economy to non-commodity sources.
Question ‑ Given the not‑so‑good picture, what would you say is the future of developing countries like Zambia? Do we see countries regaining positive growth recorded over the years? What are the opportunities ahead?
Mr. Obstfeld ‑ As Oya just pointed out, the fall in commodity prices is likely to be long‑lasting and so it really calls for commodity exporters to diversify their export bases and their economies more broadly, and this is going to require investment.
It will also, by the way, require a welcoming international trade environment. One of the negative consequences of a push toward greater trade restrictions would be to make it all that much harder for many emerging and lower‑income developing countries that rely on exports to grow.
Aside from that, diversification would also rely on not only physical investments but educational investments, human capital, improvements in governance and institutions. All of those can contribute to restoring growth rates in commodity exporters.
Question ‑ So, even if Greece implements all the necessary reforms and returns to growth, as you project in your report, it will still not be able to stand on its own unless debt relief is delivered. There is the sense, however, lately that the Europeans are not willing to offer the debt relief that you think is necessary. Do you think that it is realistic to expect a debt agreement before the German elections?
Mr. Obstfeld ‑ The ESM program is under review now and there will be new Debt Sustainability Analyses. From our point of view at the Fund, we think it is essential that regardless of what the politics are in individual countries, that the numbers add up. The numbers should not be a function of the politics.
So, I think the parties have to sit down and think about arrangements that will lead to a realistic fiscal plan for Greece, one in which the level of primary surpluses demanded is politically sustainable in that country. The value of debt will have to be consistent with that if the plan is going to be a long‑term viable plan rather than more of “kicking the can down the road.”
Question ‑ As you know, Boko Haram has raised havoc in Nigeria, Chad, and Cameroon. 2.5 million people remain displaced; 400,000 people, especially children, are at risk of dying of starvation. This is coming at a time when oil prices are very low. What do you think will be the economic outlook in West Africa because of terrorism? Do you think the IMF can do anything about it? What would be your advice [to leaders]? Should they help or should they come to rescue of African countries?
Mr. Obstfeld ‑ Concerns over security are indeed a major disrupter of economies in several parts of the world and the African countries you mentioned provide examples. Part of the recent negative growth performance in Nigeria was related to the fact that oil facilities had to be taken offline due to security issues. So, this has become a major macro‑critical factor in a number of countries.
The IMF stands ready to assist its membership with advice, technical assistance and financial support, should that be necessary, but we cannot do much directly in the security sphere. This is a major international issue which requires regional cooperation and perhaps even broader cooperation, because the negative effects ramify beyond the regions in which they occur.
Ms. Stankova ‑ I think we have to wrap up. You will have a chance to ask questions at the upcoming press conferences tomorrow and throughout the week, including the GFSR and Fiscal Monitor press conferences tomorrow, and on Friday, a set of regional press confidences. Thank you. Goodbye.
