Transcript of the Press Conference on the Release of the April 2018 World Economic Outlook

April 17, 2018


Maurice Obstfeld , Economic Counsellor and Director of the Research Department
Gian Maria Milesi-Ferretti , Deputy Director, Research Department
Malhar Nabar , Deputy Chief of the World Economic Studies Division, Research department
Olga Stankova , Special Assistant to the Director, Communications Department

MS. STANKOVA: Good morning, and welcome to the press conference on the release of the World Economic Outlook, which is entitled this round "Cyclical Upswing, Structural Change."

To my right is Maurice Obstfeld, Economic Counsellor and Director of the Research. To Maury's right is Gian Maria Milesi‑Ferretti, Deputy Director in the Research Department. He oversees the production of the World Economic Outlook. And to Gian Maria's right is
Malhar Nabar, Deputy Chief of the World Economic Studies Division.

With that, Maury, please, over to you for your opening remarks.

MR. OBSTFELD: Thank you very much, Olga. And good morning, everyone. Thank you for being here.

The world economy continues to show broad‑based momentum. Against that positive backdrop, the prospect of a similarly broad‑based conflict over trade presents a jarring picture.

Three months ago, we updated our global growth forecast for this year and next substantially, to 3.9 percent in both years. That forecast is being borne out by continuing strong performance in the euro area, in Japan, in China, and in the United States, all of which grew above expectations last year. We also project near‑term improvements for several other emerging markets and developing economies, including some recovery in commodity exporters. Continuing to power the world economy's upswing are accelerations in investment and, notably, in trade.

Looking at the largest economies, our 2018 growth projections, compared with our earlier October 2017 projections, are 2.4 percent for the euro area, and that is up by 0.5 percentage point from October; 1.2 percent for Japan, and that is up by 0.5 percentage point from October; 6.6 percent for China, that is up by 0.1 percentage point; and 2.9 percent for the United States, which is up by 0.6 percentage point. U.S. growth will be boosted in part by a largely temporary fiscal stimulus, which explains over one‑third of our upgrade over last October for 2018 global growth.

Now, this is all very good near‑term news, but beyond this, longer‑term prospects are more sobering. Advanced economies ‑‑ facing ageing populations, falling rates of labor force participation, and low productivity growth ‑‑ will likely not regain soon the per capita growth rates they enjoyed before the global financial crisis. I should mention our new World Economic Outlook covers some of the longer‑run trends that are driving long‑term productivity. Emerging and developing economies present a diverse picture; and among those that are not commodity exporters, some can expect longer‑term growth rates comparable to pre-crisis rates. Many commodity exporters, however, will not be so lucky, despite some improvement in the outlook for commodity prices. Many of those countries will need to diversify their economies to boost future growth and resilience.

Looking past the next few quarters, moreover, there are notable risks to the outlook. As our new Fiscal Monitor, to be released tomorrow, documents global debt levels ‑‑ both private and public ‑‑ are historically high, threatening repayment problems as monetary policies normalize in an environment where many economies face lower medium‑term growth rates. Our new Global Financial Stability Report, also to be released tomorrow, shows that global financial conditions remain generally loose despite the approach of higher monetary policy interest rates. This enables a further buildup of asset market vulnerabilities. Geopolitical risks, of course, should not be discounted. And, of course, the recent escalating tensions over trade present a growing risk.

Perceptions of these risks could, in fact, already be taking a toll. For example, while global purchasing managers' indexes remain in expansionary territory, they have recently softened ‑‑ in advanced and emerging market economies alike ‑‑ owing in part to weakening export orders. Financial conditions remain easy, as just noted, but have tightened somewhat since the start of the year.

At the IMF, we have been saying for a while now that the current cyclical upswing offers policymakers an ideal opportunity to make longer‑term growth stronger, more resilient, and more inclusive. The present good times will not last for long, but sound policies can extend the current upswing while reducing the risks of a disruptive unwinding. Countries need to rebuild fiscal buffers to enact structural reforms and steer monetary policy cautiously in an environment that is already complex and challenging.

Instead, the prospect of trade restrictions and counter‑restrictions threatens to undermine confidence and derail growth prematurely. While some governments are, indeed, pursuing substantial economic reforms, trade disputes risk diverting others from the constructive steps they would need to take now to improve and secure growth prospects.

That major economies are flirting with trade war at a time of widespread economic expansion may seem paradoxical, especially when the expansion is so reliant on investment and trade. Particularly in the advanced economies, however, public optimism about the benefits of economic integration has been eroded over time by longstanding trends of job and wage polarization, coupled with persistent subpar growth in median wages. Many households have seen little or no benefit from growth.

Now, these trends, in our view, are more due to technology than to trade. And even in countries where trade backlash is not so prominent, public skepticism about policymakers' ability to generate robust and inclusive growth has spread. Voters' disillusionment raises the threat of political developments that could destabilize a range of economic policies in the future, reaching beyond trade policy.

Governments need to rise to the challenge of strengthening growth, spreading its benefits more widely, broadening economic opportunity through investments in people, and increasing workers' sense of security in the face of impending technological changes that could radically transform the nature of work. Fights over trade just distract from this vital agenda, rather than advancing it.

The recent intensification of trade tensions started in early March with the United States' announcement of its intent to levy steel and aluminum tariffs for national security reasons. The announcement has fed into several bilateral negotiations, aimed at reducing U.S. trade deficits with individual trade partners. These initiatives will do little, however, to change the multilateral or overall U.S. external current account deficit, which owes primarily to a level of U.S. spending that continues to exceed total U.S. income. Recent U.S. fiscal measures will actually widen the country's current account deficit. Compared with our October 2017 projection, which preceded the recent U.S. tax and spending changes, we now expect the U.S. current account deficit for 2019 to be roughly $150 billion higher.

Current account imbalances can play an essential economic role, but when they become excessive, they carry risks, including the risk of generating trade disputes. In the present global environment, the burden of reducing excess global imbalances should be shared through multilateral action. Excess deficit and excess surplus countries alike need to adopt macroeconomic policies that align their spending levels more closely with their incomes.

Even in the absence of global imbalances, however, coping with inequitable trade practices, including intellectual property concerns, requires dependable and fair dispute resolution within a strong rule‑based multilateral framework. There is room to strengthen the current system, rather than risk bilateral fragmentation of international trade. And plurilateral arrangements, if consistent with multilateral rules, can also be a useful springboard to more open trade. In this respect, the 11‑country Comprehensive and Progressive Agreement for Trans‑Pacific Partnership and the 44‑country African Continental Free Trade Area hold out promise.

Each national government can do much on its own to promote stronger, more resilient, and more inclusive growth. Multilateral cooperation remains essential, however, to address a range of challenges in addition to the governance of world trade. These other challenges include climate change, infectious diseases, cybersecurity, corporate taxation, and control of corruption, among others. Global interdependence will only continue to grow; and unless countries face it in a spirit of collaboration ‑‑ not conflict ‑‑ the world economy cannot prosper.

With that, we invite your questions.

MS. STANKOVA: Thank you, Maury.

QUESTIONER: So lots of people are speculating on exactly what a trade war is. Can you give us what the Fund's definition is of that? How close are we to that? And what would the impact be?

MR. OBSTFELD: I am not sure anyone has a formal definition of trade war. It is certainly the case that shots have been fired and negotiations are going on on a largely bilateral basis.

The sort of classic historical example would be the Great Depression of the 1930s, the reactions of countries following the Smoot–Hawley Tariff, which was devastating for the global economy.

You know, at this point, although some warning shots have been fired, it is more of a phony war. To use the example of the period before large‑scale hostilities broke out in World War II, the Germans called this Sitzkrieg. And there is still room for countries, I think, to engage in a more multilateral set of discussions to take advantage of the set of dispute resolution mechanisms that are in place to avoid an intensification.

But, again, no formal definition. I think if we get into a cycle of very widespread actions and counteractions, we would begin to see significant economic effects, and that would be, whether you call it a trade war or not, would be very worrisome.

QUESTIONER: You mentioned in your introduction the fact that there were global imbalances. The Fund has been talking about global imbalances for a long time and the need for both parties, both debtor and creditor countries to take action. But if you are, say, President Trump, you see absolutely no action from the creditor nations, like Germany or China, to actually reduce their surpluses. So what action do you think should be taken? What policies should be followed by those countries to actually see those imbalances reduced?

MR. OBSTFELD: Well, we carry out an annual external sector review which looks at countries' imbalances and tries to determine whether they are excessive, either in the negative deficit direction or in the positive surplus direction. In cases of deficit and surplus countries alike, we recommend policy actions that would close up those gaps.

Looking at a country like Germany, for example, we would say that there is more room for productive infrastructure investment, more productive private investment, which would lead to a reduction of its very large current account surplus.

For the U.S., we view it as a country that should be worrying more about the sustainability of public finances and taking actions that would reduce its current account deficit. So there is certainly scope to make progress in these areas in ways that we feel would actually be beneficial to the individual countries and to the global community.

QUESTIONER: Maury, there is a noticeable difference between the tone of your remarks this morning and the actual written report, which is not as gloomy as the remarks you made just now. Is this because, since the report was finalized, things have turned down in the global economy and the trade disputes have gotten worse, so it is already a little bit out of date and you feel the need just to talk it down a bit?

MR. OBSTFELD: Well, we have been raising the theme for a long time of things are good but will not last. Some of the support of the global economy currently is explicitly temporary, and I think you can find these themes in the report, back in our January update, back in our October 2017 report. So I think we are pretty consistent.

It is true, as I noted, that there is a little more high frequency data that has come in that is indicative of some softness, particularly in March. Our forecasts were closed before then. And the trade discussion remains very fluid, and it is hard to keep up to date on that. The landscape, with respect to geopolitical tensions, remains very fluid.

I tend to sort of change things the night before in my opening statement to be up to date, but I think the broad consistency of the messages is there. There is really no contradiction if you read carefully what our policy recommendations are.

QUESTIONER: My question is in Spanish.

(Through interpreter) What is the outlook for the emerging economies, the outlook for emerging economies in Latin America?

Mexico is also in the midst of a trade war in terms of the renegotiation of the NAFTA agreement. So what is the economic outlook for Mexico and the basis for your projections and outlook? And also, in terms of the candidate who is leading the current polls for the upcoming presidential election.

Thank you.

MR. OBSTFELD: I am going to turn this over to Gian Maria.

MR. MILESI‑FERRETTI: (Through interpreter) The outlook for Latin America's growth rate is continually improving, but it is somewhat low. One of the reasons for this is the very critical situation in Venezuela, a country that is not that large, but where the contraction in GDP has been significant. Also, commodity exporters have encountered some difficulties, owing to the lower prices for commodities. These prices are increasing. This does help the situation for some exporting nations.

Mexico, at the same time, is experiencing some negative effects of trade tensions with the United States, and this is important for Mexico because a large proportion of the country's exports do go to the United States.

We do see a positive effect of tax reform in the United States, which will reflect positively on Mexico. There are also some uncertainties, particularly with regard to what will be the outcome of the presidential elections in Mexico, and the new administration will have to contend with some of these challenges. We hope that the prospects for the free trade agreement negotiations with the United States continue to improve.

Barriers to integration would have a very negative impact on the Mexican economy, and we would hope that progress could be made in the context of the free trade agreement renegotiations.

QUESTIONER: I want to ask whether you think Trump's America first policy, everything from his tariff threat position or threats to cancel NAFTA or other trade deals are a major source of uncertainty in your forecast. You said it is fluid and that it is a phony war, but have you made sort of a worst‑case scenario forecast in case it becomes real, the trade war?

Thank you.

MR. OBSTFELD: Some time ago, in October 2016, we did some simulations of what the impact on global output of a far‑reaching trade war would be, basically involving across‑the‑board 10 percent tariffs. And that was fairly substantial. So we certainly have considered those scenarios. We do not regard those as being the most likely scenarios, in fact, and they are not in our baseline.

There is, of course, the possibility that uncertainty itself could be a damper on investment. And a particular risk would be that, you know, asset markets react negatively to bad news on trade, and that could have significant knock‑on effects. I suspect that if you keep poking at the economic expansion, it could turn around and bite you. So it is very important that countries proceed on a more collaborative basis to solve trade problems.

There is certainly room to strengthen the multilateral trading system in several dimensions. It has been a significant support for world growth in the entire postwar period. And, in fact, trade has allowed significant growth not only in the advanced economies but also convergence in emerging and low‑income economies, with incredible advances in the eradication of poverty and increasing a number of metrics of human welfare.

So our strong message at this meeting is: There is a multilateral system. Let's use it. Let's proceed in a collaborative way, rather than in a conflictual way because that will, ultimately, be in everyone's interests. There are not going to be any winners coming out of a trade war.

QUESTIONER: My question is in French.

(Through interpreter) How do you assess the current economic situation in general in Tunisia in comparison to other countries in the region? And what are the negative aspects that could prevent or hinder growth in Tunisia?

Thank you.

MR. MILESI‑FERRETTI: It is a difficult period for some countries in the region. I mean, differentiation across them, some with more ‑‑ like Algeria, which is more reliant on energy exports; others, like Tunisia, that have to undertake external adjustment and are also facing some extent of political uncertainty.

So prospects overall are subdued, with a positive effect that comes from the improvement in growth prospects in the euro area and in Europe more generally, which bodes well for its export prospects. But, as I say, there is a program underway, and the situation remains one that needs to be watched carefully.

QUESTIONER: I am concerned about the economic forecast for the African region.

From the report, are we looking for growth in the African region? Can you give me an overview of the economic forecast for the African region? Could you talk about the impacts that the trade war between the United States and China could have on weak economies like Africa?

Thank you.

MR. NABAR: The region, of course, has a number of economies with different circumstances: oil exporters, other commodity exporters, and more diversified economies. So individual country prospects differ based on production structures.

In general, the region is benefitting from the improvement in commodity prices in recent months. With still‑accommodative financial conditions, a number of frontier economies in the region ‑‑ Senegal, Kenya, Côte d'Ivoire ‑‑ have accessed the Eurobond market, and that is clearly supportive of growth. In many cases, countries are putting in place fiscal adjustment plans which will strengthen buffers and leave them better equipped to deal with the next downturn that comes their way.

However, looking beyond the near term, there are some big challenges that the region faces, primarily for the commodity exporters, the oil exporters. There is a need to diversify away from the dependence on resource extraction to other sectors, and, more broadly, a need to put in place policies that encourage more broad‑based growth and address the constraints that exist in product markets and in labor markets across the region.

In terms of the spillovers from the trade war, it is still too early to assess this.The measures that have been talked about---at the moment, our sense is that the direct impact on the directly affected countries is likely to be quite limited; but, of course, there is an issue of how financial markets react to this, the sentiment in financial markets. And to the extent that frontier economies as well as other economies in the sub‑Saharan Africa region are affected by the changes in financial markets, that could be a channel through which these economies are affected by the developments that we are seeing on the trade front.

MS. STANKOVA: A quick follow‑up and welcoming our online audience. To stay for a second on the region, a question from Zimbabwe. Do you see Zimbabwe's economy growing above sub‑Saharan averages this year?

MR. NABAR: Zimbabwe has been through a difficult period and is obviously undergoing a political transition right now. For this year, we see growth slightly below the sub‑Saharan Africa average, but it is projected to pick up next year.

MS. STANKOVA: All right. To stay for a second with our online audience, there is a question on Russia:

According to the WEO, the Russian economy is expected to soften to 1.5 percent over the medium term as sanctions weigh on activity. Do the sanctions and counter‑sanctions affect other countries? And in what way?

MR. OBSTFELD: Let me take that. I think it is too early to evaluate the effect of the sanctions. We have certainly seen reactions in asset markets, the exchange rate, the stock markets in Russia. Should the sanctions have a noticeable impact on Russian growth, that would obviously still over to Russian trading partners, particularly the CIS countries. But as I said, it is too early to really evaluate the effects.

QUESTIONER: How does the IMF view the indication by U.S. President Trump to potentially reintegrate into the Trans‑Pacific Partnership? And how might it potentially affect the stirring potential for a trade war with countries such as China?

Thank you.

MR. OBSTFELD: I think the U.S. interest in joining the large plurilateral TPP is encouraging. I would presume there would have to be a long negotiation of terms, and all the members would have to agree. So it is a rather distant prospect.

I do not see that as having a direct impact on relations with China. Many of the TPP countries have very strong relationships with China, are integrated into its supply chain. I would view it as mainly having positive impacts on the region, on the Asia Pacific region, which would have positive spillovers for China.

QUESTIONER: In past recent meetings, the IMF has been fairly negative about the impact of Brexit on the global economy and on the United Kingdom, itself. But if you look at the medium‑term forecasts in the World Economic Outlook, you see that in the out‑years, the British economy actually performs a bit better than some of the major European economies. Can you explain that to me?

MR. OBSTFELD: Yes. If you look at our baseline forecast for what the final Brexit deal will look like, it is a very favorable scenario, one in which there are zero tariffs between the U.K. and the other EU countries; one in which there are very generous equivalency arrangements for British financial institutions. So at some level, this is really a best‑case scenario, and it reflects our faith that the bargaining parties will reach a deal that is in their mutual self‑interest.

That being said, there are uncertainties and downsides to that forecast. It is true that a transitional agreement has been agreed in principle to last until the end of 2020, but it still faces a number of difficulties. And we do not know what the permanent settlement will look like. That will be subject to negotiation. So what I would say about our forecast is, you know, if all goes well, then things do not look so bad longer term for the British economy. Though it is important to say, it still sustains losses in long‑term growth compared to what we would have projected had it remained within the EU framework.

QUESTIONER: Mr. Obstfeld, you say that there are no winners from a trade war. Would it also be true to say that regional economies, like the eurozone, that do run quite big current account surpluses and depend on external demand may actually be bigger losers from a trade war than the U.S. or the U.K., who have current account deficits?

MR. OBSTFELD: I would not put it so much on the current account side, but I would say that certainly more open economies have a lot more to lose, those that are more integrated in global supply chains. Overall current account deficit or surplus may be a factor; but mostly, it is openness to trade and dependence on trade that is the main issue.

QUESTIONER: I am interested in what could be the impact of a trade war between the U.S. and China in Latin America, especially in commodity markets. And also, what happened in Brazil exactly for you to increase the growth forecast for 2018 from 1.9 to [2.03]?

MR. OBSTFELD: To take the second question first, in Brazil, we have seen a very broad‑based recovery in spending and investment; particularly going back to 2016, the economy was shrinking, investment had cratered. In 2017, we actually saw a return to positive growth, and the growth momentum has grown to a greater extent than we expected. It was also helped by the fact that very low inflation last year provided room for the central bank to lower interest rates and support the economy. And very, very accommodative global financial conditions have also played a role.

In terms of spillovers from a trade conflict between the U.S. and China, the effects are complex. Brazil's direct trading links with the U.S. are not so high, but anything that negatively affects the global trading environment would have some effect on Brazil, and there could be complex effects from commodity price developments. For example, if China follows through with its threat to place tariffs on U.S. soy, Brazil is a major exporter. That could benefit Brazil. As always, trade policies have winners and losers, but our strong message continues to be that in an environment of generalized trade conflict, it is likely that everyone will lose.

QUESTIONER: I just would like you to comment on the recent institutional reforms of Chinese financial institutions and also the openness [measures] which are put forward by the new PBOC Governor Yi Gang.

Thank you.

MR. OBSTFELD: Let me say first that we will take this opportunity to congratulate Yi Gang on his appointment. He is a very respected international figure. We have worked closely with him in the past, and we look forward to working with him in the future.

On China's financial system, I will leave most of the detail to tomorrow's Global Financial Stability briefing. But I would say that the leadership has recognized some of the imbalances in financial markets, some of the worries about excessive leverage and credit growth, and have been moving forward to improve the oversight system to rein in credit growth to make the quality of growth higher and more stable, and we welcome those measures.

We carried out a very detailed financial sector assessment last year, and our understanding is that the authorities have been very receptive to our recommendations, so that is all very good news.

There are also some plans afoot to further open China's financial sector to foreign investment. We think that is very positive not only from the standpoint of increasing competition but from the standpoint of opening the economy more generally to international trade, which is something that we think would go far to improve the efficiency of the global trading system and to diffuse some of the current trade tensions.

MS. STANKOVA: Turning again to our online audience. I would like to acknowledge a question on digital currencies, pros and cons. We will also, as Maury said, leave it for tomorrow's briefing on the Global Financial Stability Report.

Another question, please.

QUESTIONER: Given your pessimistic approach on Greece and your projections that have been changed for the worse again, do you think that there is enough time to find common ground with the Europeans on the basic elements of the Greek program and mainly on debt relief?

Thank you.

MR. OBSTFELD: Our consistent view has been that there is a need for debt relief. That has to be part of the package, and we are working on that. We do think that, with the appropriate structural policies, with debt relief, the prospects for Greece can be positive going forward. Our hope is to reach that agreement soon.

QUESTIONER: My question is on the euro area economy.

We have seen quite soft data coming out for the start of the year. I was wondering whether your assessment is ‑‑ whether this is something we should be genuinely concerned about. And would the ECB make a policy mistake if you were to taper its quantitative easing scheme in the autumn as things stand? I mean, what is your assessment about that? Should there be prolonged monetary accommodation after September?

MR. OBSTFELD: I think it is certainly true that if you look at the recent data, we have seen ‑‑ certainly last year very impressive growth above expectations in the euro area. And if we look at what we have seen in the first quarter, it looks like, while there is still expansion, maybe a little bit of the air has gone out of the sails. I do not think we can extrapolate a trend from that. And it is not clear either that that will have a material change on the underlying expected path for inflation to return to target. So I would not want to make a call on what the ECB should do in September, based on what we have seen so far. I think we will have to really look at all the data that rolls out between now and then and see what the situation is and make a cautious data‑dependent call on that.

MS. STANKOVA: Thank you. I think we have time for maybe one or two more questions, and then we will have to wrap up.

QUESTIONER: Tying into the question from my predecessor, you site as one of the concerns the risk of tightening monetary policy over the next 12 months. I am just curious to see where you see that happening. If not in the eurozone, do you see it happening in the Japan and in the U.K. as well? Also, why is it a risk in the U.S., given that with the Fed's tightening, financial conditions have actually eased?

MR. OBSTFELD: The U.S. is carrying out a significant fiscal expansion from a position of full employment. So that is, according to our projections, likely to drive the overall unemployment rate down below 3.5 percent. That is a very low level. I mean, it is something we have not seen in the U.S. in about 50 years. So we do not have a good sense of what inflation dynamics would look like at this point if unemployment were to fall to that level. And there is a chance that inflation could rise markedly, causing a greater‑than‑expected hike in U.S. interest rates. So we do view that as a risk because, you know, traditionally sharp increases in U.S. rates have had knock‑on effects; for example, on capital flows to emerging markets.

We also have a situation ‑‑ and I will reiterate, this will be set out in tomorrow's Fiscal Monitor press briefing ‑‑ where debts throughout the world are very high, and a lot of debts are denominated in dollars. And if dollar funding costs rise, this could be a strain on countries' sovereign financial institutions. So this is a primary area where we worry about financial conditions tightening abruptly.

MS. STANKOVA: Last question.

QUESTIONER: I just wanted to find out from you because correspondent banking issues is still a major issue in the Caribbean, and we are still struggling in terms of our economy growing and stuff like that. So I wanted to know if it is something that the IMF is still monitoring and how the IMF plans to help moving forward.

MR. OBSTFELD: Again, this is an area that we have been monitoring for a while, you know, where we remain very concerned. Obviously, correspondent banking is important for a number of reasons, a prime one being the ability to make remittances between countries. And it is an area where we continue to discuss with authorities and financial regulators throughout the world.

That being said, I would defer this to the real experts from our Monetary and Capital Markets Department, who will be briefing you tomorrow morning.

MS. STANKOVA: With this, we will conclude the press conference today.

As Maury mentioned, tomorrow starts with two flagship releases, the Global Financial Stability Report and the Fiscal Monitor, where you can follow up with a number of questions that were raised today.

We wish you a good day, and enjoy the Spring Meetings. Thank you.

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