Transcript of World Economic Outlook Update Press Conference

January 22, 2018

Christine Lagarde, Managing Director, International Monetary Fund

Maury Obstfeld, IMF Economic Counsellor and Director of Research

Gian Maria Milesi Ferretti, Deputy Director, Research Department

Gerry Rice, Director, Communications Department

MS. LAGARDE: This is the first time that the IMF presents its midterm outlook on the occasion of the World Economic Forum. I want to thank Klaus Schwab for hosting us this year. It also gives us the pleasure of seeing all of you which would not be the case of we were in Washington. I will be very happy to introduce in a minute Maury Obstfeld and his team but first I want to give a few words of introduction, just to give you the landscape as we see it at the moment. Global growth has been accelerating since 2016, and all signs point to a continuous strengthening of that growth this year, 2018, and next year, 2019. This is very welcome news. Being here, and having arrived to the media center in the middle of the snow, we might be tempted to think of the words of the poet William Blake: “In winter, enjoy.” But we believe that this would be a mistake and that complacency is one of the risks that we should guard against.

We certainly should feel encouraged by the strengthened growth, but we should not feel satisfied. Why? First of all, there are still far too many people left out from the recovery. In fact, about one fifth of emerging markets and developing countries saw their per capita incomes decline in 2017. Second, this is clearly mostly a cyclical recovery. Absent continuous reforms, the fundamental forces that had us so much worried about the “new mediocre” that we feared – in other words, the scars from the crisis, the low productivity, the aging population, and on and on -- – and future potential growth -- all of this will continue to weigh on medium-term prospects. Third reason: there are uncertainties in the year ahead. The long period of low interest rates has led to a buildup of potentially serious financial sector vulnerabilities. We are seeing a troubling increase in debt across many countries and we need to remain watchful. You will say this is the responsibility of the IMF to constantly see the potential downside risks even down the road if not in the immediate short terms. And yes, it is our responsibility. Doesn’t change the fact that we are quite upbeat for the immediate future. But what we are seeing for the more medium term gives us ground for worry.

I did say at the October Annual Meetings, quoting John Fitzgerald Kennedy, that the time to repair the roof is when the sun is shining. I will not venture there today. But it is clearly when the snow stops that here they clear the roads. The same analogy works. It is a perfect opportunity for the world leaders to repair their roofs. This year’s theme of the WEF annual meeting ‘Creating a shared future in a fractured world’ clearly demonstrates that. Let me outline three areas where the sharing has a meaning:

Shared Growth . We think that policymakers should use this moment to make the difficult structural and fiscal reforms that might not happen otherwise and that are too difficult in time of hardship. This means taking steps to boost long-term growth, paying down debt in places where it is too high, and in other places, investing back into the economy through infrastructure and effective social spending. Why is it shared? Because sharing begins by mending your own turf.

Shared Opportunity . Growth in our views needs to be more inclusive, not only across countries – which has occurred over the last few decades -- but also within them. Some areas of focus in our view require training for workers displaced or at risk of being displaced by technology and globalization. We need those new opportunities for workers at risk, for young people, and for women as well, and them being included safely in the workplace.

Shared Global Responsibility . We need robust international cooperation if we are going to tackle shared problems – including fighting corruption, improving the international trading system, tackling tax evasion, addressing climate change issues, and on and on.

While we should certainly appreciate this season and the good news, we should focus on the measure that are needed today for long lasting solutions in order to have that better-shared future.

With that, I am very honored to turn the floor to Maury who will present the Update. I will sit attentively to what he has to say and then I will disappear.

MR. OBSTFELD: Thank you Managing Director, the honor is hours to have you introduce the Update, which is very exceptional. My remarks will echo a number of things that the Managing Director just said.

As the year 2018 begins, the world economy is gathering speed. Our new World Economic Outlook Update revises our forecast for the world economy’s growth in both 2018 and 2019 to 3.9 percent. For both years, that is 0.2 percentage point higher than last October’s forecast, and 0also .2 percentage point higher than our current estimate of 2017 global growth. This is good news. But – and the IMF always has a but -- political leaders and policymakers must stay mindful that the present economic momentum reflects a confluence of factors that is unlikely to last for long. The global financial crisis may seem firmly behind us, but without prompt action to address structural growth impediments, enhance the inclusiveness of growth, and build policy buffers and resilience, the next downturn will come sooner and be harder to fight. Every government should be asking itself three questions today. First, how can we raise economic efficiency and output levels over the long term? Second, how can we support resilience and inclusiveness while reducing the likelihood that the current upswing ends in an abrupt slowdown or even in a new crisis? Third, how can we be sure to have the policy tools we will need to counter the next downturn?

Looking first at where we are now, we at the Fund see the world economy as follows: The primary sources of GDP acceleration so far have been in Europe and Asia, with improved performance also in the United States, Canada, and some large emerging markets, notably Brazil and Russia, both of which shrank in 2016, and Turkey. Much of this momentum will carry through into the near term. The recent U.S. tax legislation will contribute noticeably to U.S. growth over the next few years, largely because of the temporary exceptional investment incentives that it offers. This short-term growth boost will have positive, albeit short-lived, output spillovers for U.S. trade partners, but will also likely widen the U.S. current account deficit, strengthen the dollar somewhat, and affect international investment flows. Trade is again growing faster than global income, driven in part by higher global investment, and commodity prices have moved up, benefiting those countries that depend on commodity exports. Even as economies return to full employment, inflation pressures remain contained and nominal wage growth remains subdued. Financial conditions are quite easy, with booming equity markets, low long-term government yields and borrowing costs, compressed corporate spreads, and attractive borrowing terms for emerging market and developing economies.

How do we explain the current upturn? It did not arise by chance. It began to take hold in mid-2016, roughly, and owes much to accommodative macroeconomic policies, which supported market sentiment and hastened natural healing processes. Monetary policy has long been and remains accommodative in the largest countries, underpinning the current easy global financial conditions. Even though the United States Federal Reserve continues to raise interest rates gradually, it has been cautious, having wisely responded to the turbulence of early 2016 by postponing previously expected rate hikes. The European Central Bank has started to taper its large-scale asset purchases, which have played a critical role in reviving euro area growth, but has also signaled that interest-rate increases are a more distant prospect.

Moreover, fiscal policy in advanced economies has, on balance, shifted from contractionary to roughly neutral over the past few years, while China has provided considerable fiscal support since its growth slowed at mid-decade, with important positive spillovers to its trade partners. In the U.S., of course, fiscal policy is now poised to take a markedly expansionary turn, with complex effects on the world economy.

Our view is that the current upturn, however welcome, is unlikely to become a “new normal” and faces medium-term downside hazards that likely will grow over time. We see several reasons—to some extent reflected in our medium-term growth projections—to doubt the durability of the current momentum:

First of all, advanced economies are leading the upswing, but once their output gaps close, they will return to longer-term growth rates that we still expect to be well below pre-crisis rates. While we project advanced-economy growth of 2.3 percent in 2018, our assessment of the group’s longer-term potential growth is only about two-thirds as high. Demographic change and lower productivity growth pose obvious challenges that call for major investments in people and research. Fuel exporters face especially bleak prospects and must find ways to diversify their economies. A second reason we think this is not a ‘new normal’ is that the two biggest national economies driving current and near-term future growth are predictably headed for slower growth. China will both cut back the fiscal stimulus of the last couple of years and, in line with the stated intentions of its authorities, rein in credit growth to strengthen its overextended financial system. Consistent with these plans, the country’s ongoing and necessary rebalancing process implies lower future growth. As for the other big driver, the United States, whatever output impact its tax cut will have on an economy so close to full employment will be paid back partially later in the form of lower growth, as temporary spending incentives (notably for investment) expire and as increasing federal debt takes a toll over time. Thirdly, as important as they have been to the recovery, easy financial conditions and fiscal support have also left a legacy of debt – government, and in some cases, corporate and household – in advanced and emerging economies alike. Inflation and interest rates remain low for now, but a sudden rise from current levels, perhaps due to procyclical policy developments, would tighten financial conditions globally and prompt markets to re-evaluate debt sustainability in some cases. Elevated equity prices would also be vulnerable, raising the risk of disruptive price adjustments.

Despite rising growth in Europe, Asia, and North America, there is less good news in the Middle East and Sub-Saharan Africa, the last area weighed down by the weakness of its larger economies. Low growth, driven in part by adverse weather events and sometimes combined with civil strife, has sparked significant outward migrations. Improvements in some large Latin American economies are notable but aggregate growth in the region will be weighed down this year by continuing economic collapse in Venezuela.

Even though the recovery has lifted employment and aggregate income from crisis lows, voters in many advanced economies have soured on political establishments, doubting their ability to deliver broadly shared growth in the face of tepid real wage gains, reduced labor shares in national income, and rising job polarization. A turn to more nationalistic or authoritarian governance models, however, could result in stalled economic reforms at home and a withdrawal from cross-border economic integration. Both developments would harm longer-term growth prospects, to the detriment of those who have already fallen behind over the past few decades. Levels of inequality are high in emerging market and low-income economies, and carry the seeds of eventual future disruptions unless growth can be made more inclusive.

The situation creates challenges for policy makers. Perhaps the over-arching risk is complacency. While the current conjuncture might appear to be a sweet spot for the global economy, prudent policymakers must look beyond the near term.

No matter how tempting it is to sit back and enjoy the sunshine, policy can and should move to strengthen this recovery. Now is the time to build policy buffers, reinforce defenses against financial instability, and invest in structural reforms, productive infrastructure, and people. The next recession may be closer than we think, and the ammunition with which to combat it is much more limited than a decade ago, notably because public debts are so much higher.

An upswing so broad also furnishes an ideal moment to act on a range of multilateral challenges. These include countering global financial stability threats, including cyber-threats; strengthening the multilateral trading system; cooperation on international tax policy, including the fight against money laundering; and promoting sustainable development in low-income countries. Of especially urgent importance is to fight irreversible environmental damage, notably from climate change.

MR. RICE: Thank you very much Maury, thank you Mme Lagarde’s. We have a large audience in the room and online. Please identify yourselves and your affiliation.

QUESTION: You mentioned that overarching risk is complacency. You mention we might be closer to a recession than we think.

MR. OBSTFELD: It's hard to, you know, identify one risk as the biggest because I think all are quite worrisome, and they also interact. I think policy makers really need to think broadly, comprehensively, and for the long term, not just over the next political cycle which is sometimes hard for them. As an example, I flagged that the lower long-term growth rates -- these are part and parcel of the sort of political dissatisfaction I think we've been seeing in many economies. Particularly as, you know, the fruits of growth have been quite unequally distributed, and in some countries increasingly so. Financial stability, how we regulate the financial sector is also not disconnected with concerns about inequality. I think pushing on one priority would probably do a disservice to the challenge that policy makers face. They really need a broad approach, one that is very comprehensive.

QUESTION: You mention specifically Spain in the report, and you reduced the prospective for this year because of political uncertainty, but you raise it for next year. So must I assume that you believe that political uncertainty will finish, or that we will have any other stimulus of any kind? Thank you.

MR. OBSTFELD: Well, we are certainly hopeful that the political situation and the uncertainty that it causes will diminish, and that, while this is an internal matter for Spain, that within the laws of the country some way to move forward will be reached. For the current year's forecast we did do a downgrade. This reflects some uncertainty from the Catalonia situation coupled with some optimism because there is growth in the Eurozone and this will benefit Spain. And we expect that momentum to carry over into 2019. Spain is now benefiting. I mean, the growth has been above 3 percent for several years now. It is benefiting from past reforms. We think that pace is not quite sustainable, but, you know, we do see healthy growth for the next couple of years. I don't know if Gian Maria wants to add to that or?

MR. MILESI-FERRETTI: I would just mention that the external environment is clearly helpful because we are forecasting a strong recovery in the Euro Area, including for 2019. So that supports Spanish exports.

QUESTIONER: Two questions. First of all, China actually has been the growth engine during the 2008 financial crisis. Right now it has been ten years from there and you just mention China goes through it rebalancing process. So what role China plays right now comparing to ten years ago? And the second one is, let's say if that will raise rates the same pace as last year. Do you worry it's going to have more pressure on the emerging market? MR. OBSTFELD: China, of course, carried out a very large fiscal stimulus at the time of the crisis. This was a strong support not only for Chinese growth, but for global growth, and even though China's growth rate has come down, given its size in the world economy, given its relatively high growth rate it is still a major source of growth. You know, there are certainly challenges which the leadership has recognized in terms of strengthening further financial regulations, strengthening further hard budget constraints on state-owned enterprises, strengthening the relationship between local and federal budgets. So, there are challenges there, but, you know, we see China as a strong driver of global growth going forward. You know, as far as the Fed is concerned we will expect them to look at the situation in the U.S. and make data-dependent decisions to attain their mandate which is full employment, stable prices. I think the communication over the last couple of years has been particularly good. The adjustment has been gradual. This has not overly stressed the emerging the markets, and our baseline would be for that to continue.

QUESTION: Quite a lot of the last little while has to do with geopolitics. We have seen Southern Africa some dramatic changes in the political situation there. Are you reading, like Goldman-Sacs does, which on the weekend said that South Africa is a top emerging market for 2018? Have you worked any of that into your calculations?

MR. OBSTFELD: Yes. I mean, basically these update numbers pre-date the -- you know, what has been going on in South Africa, these very recent developments, and so we will have more of that in our spring numbers when we issue the World Economic Outlook. But we have not, you know, fully incorporated those very recent developments.

QUESTION: (off mic)

MR. OBSTFELD: I think we have to wait and see how this works out.

QUESTION: You mentioned the tax policies in the U.S. will have impact on growth globally. Attributing that upgrade to the tax policies. Do you expect the same to happen after 2022? Is the U.S. growth going to become a drag on the global growth because of the tax policies and the slow down? Do you expect that?

MR. OBSTFELD: I should preface this by saying that the tax bill and its impact is quite complex and there's a lot of uncertainty around our estimates. Given that some of the features of the tax bill are explicitly temporary we do expect there to be some pay back. For example, temporary expensing of investment should give a surge of investment in the near term. But when that stops there will be some pay back of that. On the other hand, some of the features, the cutting corporate tax, the move to a territorial system are not temporary. We also incorporate in our forecast the pay/go provisions which would require cuts in government expenditure going forward as the deficit grows. Hard to say whether those will be adhered to or relaxed. So, there's certainly some potential for the pay back in U.S. growth to result in slower import growth in the U.S. which would affect trading partners. That's somewhat symmetric with what's happening in the current years, but how big those affects would be, you know, how the overall picture would look is very hard to predict.

QUESTION: When you talk about repairing the roof are you also suggesting that the Eurozone nations should enact structural reforms to increase risk sharing such as deposit insurance and common fiscal policy among them? And a quick second one is do you see any risk, systemic risk in Bitcoin and crypto currencies?

MR. OBSTFELD: In Europe, a number of European countries over the last few years have enacted important structural reforms. I mentioned Spain, a few years back. The Jobs Act in Italy. President Macron's plans for France are quite ambitious. But it would be fair to say that a much broader push incorporating even more nations would benefit the Eurozone countries and the E.U. generally. Now, that's not an architectural issue. That's something every country has to do on its own. As far as the architectural issues are concerned we certainly promote a completion of the banking union, the structures that have been created, the single supervisory mechanism, the single resolution mechanism are great steps forward, but more can be done, for example, in the area of deposit insurance. We also, you know, would like to see more in the way of a central fiscal capacity. So, part of the project of fixing the roof is certainly to enhance and approve the architecture of the Eurozone.

On Bitcoin, we don't like to comment on specific crypto currencies. From the sort of block chain technology in general we see possible advantages in terms of the efficiency of payment systems and inclusion. It's an interesting development. We also see that crypto currencies could offer risks, and it is going to be important for regulators to be watching very carefully to make sure that the risks don't materialize.

QUESTION: Is growth, in itself, not an outdated concept or measurement when we're seeing the benefits at the last cycle filter through to fewer and few people?

MR. OBSTFELD: I think there are two aspects of your question. One aspect is, is GDP the right way to look at welfare? And there I would argue, certainly no, but it's probably better than all the other ways that have been suggested. But it clearly leaves out a lot, and to the extent we can improve our measurement of what the economy produces, both positively and negatively. The economy also produces climate damage and that is not measured in GDP, although in principle we would do that, so that's sort of one issue.

The other issue is GDP is an aggregate. It is the aggregate of what a country produces, but it doesn't measure the distribution of the rewards from producing that. That is something one could do, but it would require a value judgement. You would have to weigh the, you know, the deservingness of the poor versus the rich, and economists have kind of struggle with this for centuries, actually, this is not something that's a new idea. How do you measure overall utility? But it would require a value judgement, and therefore, different people would disagree about how to do it. So, we think you have to keep GDP as an anchor, and where it doesn't get at all of the social or welfare issues that you want to discuss then you supplement it with other data. It's probably never going to be possible to produce one single number that, you know, somehow summaries the happiness of the totality of people in the world. But I think GDP is a key concept and we will keep looking at it.

QUESTIONER: Slight further moderation of China's economic outlook in 2018. I would like to know where China can continue to play a big role?

MR. OBSTFELD: China has, indeed, come to play a much bigger role in global governance and coordination. Tt's a member of the G-20. It's the IMF's third biggest shareholder. It has now entered the SDR, so, you know, there's no question that China is a major, major player.

As I mentioned, Chinese growth just quantitatively is incredibly important to world growth. It's going to be important for China to, you know, to play its role in supporting the multilateral system. Judging from President Xi's comments here in Davos last year it's very eager to do that. That will require I think further steps from China to also open its own economy to imports, and work on a range of issues. Everyone is going to have to contribute to make the multilateral system work better, and China's role is critical.

MR. RICE: Thank you very much, Maury. You'll have a chance to hear more from Maury over the next day or so here in Davos, and, of course, Madame Lagarde. I just want to thank him, thank Gian Maria, Madame Lagarde, and thanks to all of you.

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