Transcript of Press Conference on the Conclusion of the 2019 Article IV Consultation with the United States

June 6, 2019


Ms. Christine Lagarde, Managing Director of the International Monetary Fund

Alejandro Werner, Director of the Western Hemisphere Department, IMF

Nigel Chalk, Deputy Director of the Western Hemisphere Department, IMF

Daniel Leigh, Deputy Division Chief, Western Hemisphere Department, IMF


Gerry Rice, Director of Communications, IMF

Gerry Rice: Good morning everyone and welcome to this press briefing on behalf of the International Monetary Fund. On the occasion of the staff concluding statement on the United States Article IV Consultation. I think the document has been distributed to you already. So you've had a chance to look at that this morning. We will be on the record and I am very pleased that we have with us the Managing Director of the IMF Madame Christine Lagarde. We also have to my immediate right Alejandro Werner, who is the Director of our Western Hemisphere Department. We also have the Deputy Director of that department and Mission Chief for the United States Nigel Chalk. Just immediately to the right of the Managing Director and we over on the far right is Daniel Leigh who is the Deputy Division Chief in the North American division. So, we will get to your questions as soon as we can. Immediately after opening remarks from the Managing Director and let me just say that the Managing Director is just about to step onto a plane to go to Japan for the G-20 meeting. So she will be leaving us after she makes some opening remarks and the rest of us will stay to take your questions, Madame Lagarde.

Ms. Lagarde: So thank you Gerry and good morning to all of you. Let me just start by remembering that today is June the 6th. On June the 6th 2019, there's a lot that the Americans can be proud of. And not just because of the illustrious pass for having led a journey to freedom that liberated most of Europe and which is being celebrated today on its 75th anniversary. But clearly also for leading this unbelievable multilateral efforts, that took the life of so many and brought life and light to so many others.

I'm saying that because obviously in addition to that the Americans can be very proud of the economy as it stands today. In a matter of a few weeks, the US economy will be in the longest expansion in recorded history. And this is an important achievement that is driven by a robust private sector demand and by policy choices that have helped spur growth and job creation. Speaking of jobs, unemployment is at levels not seen since the late 60s, and wages and households’ incomes are rising as well. And this is happening at a time when inflation pressures in the U.S. remains very subdued. Our assessment is that the economy will grow this year at about 2.6% percent and next year at around 2 percent, and this represents an increase from our initial growth forecast by point 3 percent so lots of positives and a lot to be proud of on the economic front and the economic indicators are saying so. But if we look at a few other indicators, which actually matter, the social indicators there is a lot of room for improvement. We see a challenging picture. Average life expectancy has trended downwards in recent years. Income and wealth polarization have increased, social mobility has steadily eroded, education and health outcomes are suboptimal, and while the poverty rate is falling it remains higher than in any other advanced economies.

So, we believe that more attention should be paid to promoting inclusive and sustainable growth more attention should be paid to social outcome into line with the macroeconomic very good developments that we see. And there are policies that can actually achieve that. There are many policies and we have mentioned them over the course of our previous Article IV reviews. So, I will mention a few of those which we believe would actually really the support of many. Instituting paid family leave comes to mind, expanding the very effective Earned Income Tax Credit that the world envies the United States, helping working family with child and dependent care, all of this would provide a lifeline to families and help support social mobility by making it easier for them to enter the workforce and pursue a fulfilling career.

And speaking of life expectancy, we would like to highlight the important work that is underway by the federal, state, and municipal governments across the country to tackle the current opioid crisis in the U.S. The human cost of this epidemic are tragic and while we know that there is no easy solution, it is rightly a bipartisan priority of the administration and of Congress.

Economic indicators social indicators, if we now turn to markets. Over the first few months of this year financial market conditions have improved markedly. This is good for near-term growth reducing the cost and increasing access to financing. But obviously we are concerned about the risk of an abrupt reversal of financial market conditions that could represent a material downside risks in the U.S., and in particular a sudden tightening of financial conditions could interact adversely with the high level of private, public, corporate, households, and sovereign debt and could create a feedback loop that could also weigh on real activity and job creation. Not to mention the fact that if that was to happen, it would not only have an impact in the U.S. economy, but it would also have spillover effects beyond the borders of this country.

Now let me say a few words about debt. We have highlighted in past consultation that the U.S. public debt is on an unsustainable path. We believe that policy adjustments are needed in order to lower the fiscal deficit and to put public debt on a gradual downward path over the medium term. And there are yet again a range of possible options. However, in our view, any successful package will likely require steps to address the expected increases in entitlement spending on health and on social security. It would also include raising indirect taxation and instituting, as we have said many times before, a federal carbon tax.

Turning to monetary policy, as you know earlier this year, the Federal Reserve has indicated that it was pausing its process of raising interest rates. We fully agree with that approach and believe that this will give policymakers time to gorge the balance of risks to both inflation and employment outcome and to build a clearer picture of whether further adjustments in the federal funds rates are warranted. Whatever the developments we believe that it will be important for the Fed to continue to be exclusively data dependent and to continue to communicate well as it has on its assessment of the economic situation and its expectations for future monetary policy.

Let me now close with something that is much talked about and that has to do obviously with trade. We believe that for the global economy to actually function well, it needs to be able to rely on a more open, more stable, more transparent, more predictable, and rules based international trade system. And as such, it will be essential for the US and all its trading partners including the likes of China, Mexico, and others to agree on a new system, to agree to eliminate the distortions that put a brake on growth, and that not only will affect the economy of those countries directly impacted but will also have spillover effects way beyond the shores of those countries. And we very strongly believe that a better integrated international trading system, is actually conducive to that sustainable strong and balanced growth that is so much needed. As I have said many times nobody wins a trade war and everybody suffers.

With these brief remarks, I will exit the scene. I will join colleagues in Fukuoka Japan and I'm sure that we will be discussing these findings, as well as, many other economic considerations that obviously you are familiar with. Thank you very much. And I'll leave it to you for questions to my eminent colleagues.

Mr. Rice: Thank you. Thank you very much. Madame Lagarde. Okay so we'll turn to the questions in the room and I know we have many colleagues watching this online as well. But let's turn to your questions in the room. Please try and keep them succinct and we'll try and take as many as we can. So questions please. Good Morning.

Questioner: Hi. Good morning. Thank you, Gerry. My question is, so like the report mentioned the trade tensions but I'm wondering does the technology decoupling between U.S. and China take consideration in this report. Can we quantify the impact of that potential decoupling which might have potential impact on not only U.S. and China, but the global technological development. How do you see that going the influence of the U.S. economy?

Mr. Chalk: So, I mean certainly we think that those issues are important. They're much more difficult for us I think to model than the trade tariffs we've been looking at trying to think about how to model those things. But it's quite complicated. I think we have a reasonably good read on how much trade disruptions can distort both the U.S. economy and the global economy and lead to headwinds to growth. And we've put out some of that work in the April 2019 WEO. I think we have not yet put out work on the technology but it's something we're looking at and working on

Mr. Rice: Thank you Nigel.

Questioner: Thank you, Gerry. In the report you speak about spillover effects from the trade war to other countries. I wonder if you could elaborate a little bit on what could be the potential spillover effects to the hemisphere and particularly Argentina. Thanks.

Mr. Werner: I mean in several studies we have looked at different channels of transmission. I mean obviously you have they did a channel through the trade that the different countries involved in trade negotiations. The impact you can have to third countries and we saw some of those effects in play last year especially with agricultural producers that saw an increase in their exports to some of these countries. But, overall and especially given the increasing uncertainty that we are seeing the effect of uncertainty on investment. Our estimates show that for almost all the third countries once this uncertainty and market effects are taken into account, everybody loses. And although you can have just summarizing some trade diversion and these trade diversion effects can be positive for some countries. Once you are at and we're seeing some of those effects play it now. And we also saw them play out in the fourth quarter of last year. Uncertainty hitting the markets and uncertainty heating the investment process around the world then almost everybody ends up being affected negatively. That's what we’ve seen. For the case of Argentina, as I said I mean you might have some a positive effects coming through agricultural exports but most all, Once you have uncertainty affecting investment decisions and leading firms to postpone decisions until there is more clarity on the rules of the game and also uncertainty hitting markets and therefore postponing financing this issue etc. usually this is negative for almost everybody around the globe. And that's why the MD says nobody wins with a trade war. Thank you really.

Questioner: Do you have our first assessment of the potential effects of the tariffs on Mexico and for the U.S. if they are put in place starting on Monday?

Mr. Chalk: So, I think it's pretty clear that the effects of tariffs on Mexico are certainly larger as a share of GDP from Mexico than they are for the United States. But I think both sides both countries have a negative effect. And it's quite pronounced in certain sectors particularly those sectors that are very integrated across the border. So, for example in sectors such as automobiles and transportation and agriculture where there's a lot of two way flows across the border. They tend to have a large sector effect even if the overall macro effects are not as large. The sectoral effects can be quite pronounced. We don't have any specific estimates of the effects of these terrorists with something we're looking at.

Mr. Rice: Thank you Nigel. Yes sir.

Questioner: I wanted to ask whether you have been able to model the effects of the US trade measures that have been adopted by the United States steel tariffs that were adopted under Section 232. And there has been a succession of tariffs that have been imposed on China. Has that had any effect on the U.S. So, can you quantify that.

Mr. Chalk: Yes. So the way we approach our forecasting is we already built into our forecasts. The policies have been put in place. So, for example assume aluminum tariffs and the tariffs on China. We actually have built into our forecast that the policies have not yet in place such as those tariffs proposed for Mexico. We do not build in until they're actually in place.

So, if you look at our forecasts that we just released those tariffs are in place already embedded in that forecast of course as offsetting factors with you know things are happening to inventories things that happen to consumer demand. So you're only seeing the net effect I think in general. What we've seen so far in terms of the time effects have been a modest headwind to the U.S. economy particularly the tariffs they've been placed on China.

They've been more of a headwind in particular sectors and in particular states than they have for the economy as a whole. We have not yet seen a large impact of the tariffs on consumer prices although we do see their effects on import prices. So we as we presume that they are being somehow absorbed in the production chain either through profit margins or some increasing efficiencies in production, but we're not yet seeing them passing through into consumer prices.

That doesn't mean that they won't pass through because it takes some time and there's some lags involved and certainly if the tariffs or increase we would expect eventually those effects would turn up both in more pronounced in activity and then also in consumer price inflation.

Mr. Rice: Thank you Nigel. I think there was a question from Bloomberg in the front.

Questioner: Thank you very similar question just piggybacking off of those, but could you talk about the increased potential increased risk of a recession in the U.S. and the potential spillover effects as Madame Lagarde mentioned in relation to the trade tariffs and slowing growth.

Mr. Chalk: So, I should say that we don't see recession as a likelihood in our baseline in the U.S. is certainly always a risk that we consider but it's not in our baseline. We instead see a gradual slowing of the economy to a point where the economy slows down a little bit below the potential growth rate. Since right now the economy is actually quite a bit above where potential growth is, I think Madame Lagarde highlighted what we see as the principal risk which is actually a risk linked to financial conditions. But I think we've seen that the trade tensions and financial conditions are actually quite intimately connected that as trade tensions and uncertainties increases are 100 set that's reflected also in market pricing of equity prices risk spreads and that then feeds into activity and so the idea that there would be right now financial conditions are providing some support to growth.

But as we saw in the fourth quarter of last year once those financial conditions tighten they feed quite quickly into activity and into a slowdown of activity and that's kind of the principal channel by which we see for the United States at least that and for other countries through spillover effects that this this will be the sort of predominant channel by which activity would be affected. Is that so the uncertainty about trade and about policies creates risk aversion which then leads to a tightening of financial conditions which then feeds into a slowdown of activity. And that's the sort of I think we've highlighted that is that the risk that we're most concerned about for the U.S. economy.

Mr. Rice: Thank you lady in the front here. Thank you.

Questioner: I'll show you why you said that tariffs are only put in place. Consider this in estimation. So I was wondering whether you could tell us if the US goes through they actually implemented US$300 billion of products for Chinese imports. How would that impact your estimation. And also, generally if China-U.S. trade tensions continue to escalate how do you see the future of the U.S. economy.

Mr. Chalk: Yeah so on the general question an escalation in trade tariff is an ambiguous negative for the U.S. economy and for its trading partners in terms of the quantification we actually did put out in the April WEO in chapter 4 of the April WEO a box where we looked at the impact of the 25 percent tariff across the board on Chinese goods. I would refer you to that for the U.S. over the long run and it reduces GDP by around a point three percent of the GDP over a longer term. A little bit less in the shorter term. Obviously, those estimates are very uncertain and I think those estimates when we put them together had a relatively benign view of how much those tires would feed through into financial condition. So if that channel is more pronounced if risk aversion is much higher than you could expect to see larger macro effects in the U.S. and abroad thank you.

Mr. Rice: Anything further in the room. Okay we can take one more round. Let me start with ladies. Bloomberg.

Questioner: Want to ask you about the fiscal deficit which was another issue brought up potential risk because we're seeing a lot of 2020 candidates, Democratic candidates, talking about expansive programs like a Green New Deal, Medicare for all. What kind of impact would that have on the deficit. What risks does that pose if any so.

Mr. Chalk: So I think we've said for a long time that the US fiscal policy is unsustainable and that that path in the U.S. is unsustainable is largely due to the fact the population is aging and so some of the entitlement programs will grow relatively rapidly over time quickly as the Baby Boom generation ages. That will increase spending and worsen the fiscal picture. So that's something we've been concerned about for quite some time. At the same time, we also see there's quite a lot of say fiscal needs in the U.S. in order to address some of these issues that we've highlighted in the report. Some of the inequalities and social issues that we've highlighted.

So those things certainly cost resources to some extent. They're not a large drain on resources but they would require some resources. However, we think that there is a path where both those investments in social and human capital can be made and the deficit can be brought down over time. To do that as we've highlighted in the report in managing director had mentioned the needs to be some effort to tackle entitlement reform and Medicare and Social Security trying to reduce the cost inflation in health care provided by the federal government.

We also think there's a need to raise revenues either through a carbon tax through an increase the federal gas tax. We've advocated for a federal V.A.T. as well. So, there's a number of tools at their disposal that can be used to achieve this fiscal adjustment while providing resources for the other spending needs that we see are necessary or would be useful. And we've kind of trying to highlight that package within the report.

Mr. Rice: And can I just say we'll take the last question and I apologize but I haven't had a chance to switch on your mike please.

Questioner: I apologize but I didn't have a chance to read the article IV. But I did read the G 20 surveillance note and I took note of a paragraph from which you said many advanced economies can use structural reform to enhance growth. What would you recommend in that respect for the U.S. economy are there structural reforms that the U.S. could undertake that would increase growth. Thank you yep.

Mr. Chalk: So as we try to highlight in this consultation and past consultations, we think things that would increase worker productivity including investments in health and education would be useful in the US particular things to increase access to both health and education. Things that would improve retention rates for example at college improving science and technology education K through 12. Those would be useful. We've also in this report and in the past highlighted immigration reform as something a skill- based immigration reform is something that can enhance both labor productivity and also increase the supply of labor in the U.S. which would help for very long run growth. And I think also putting the fiscal situation on a more sustainable trajectory in the end will reduce risk premium in the U.S. and will help support long run growth.

Mr. Werner: I mean maybe then you left. I mean you backing on that question about market concentration issues maybe infrastructure. There are other reasons that we think we need. All right.

Mr. Leigh: Thanks. The country has another trend we've been following that relates to investment and innovation is the rise in corporate market power. This has been the case in many sectors in the US from airlines to pharmaceuticals to high tech companies. And we found in some work we published in the April WEO but also earlier. That this eventually if it continues can reduce investment and innovation.

So really thinking hard about how to address the rise of market power and ensure that markets remain contestable. That's going to be an important part of the menu for structural reforms to raise long term living standards in the U.S. and on infrastructure. Absolutely, as Nigel said this is something we've advocated a lot. You have to find resources to pay for it. We've advocated for a federal gasoline tax to help pay for the potholes repairing the bridges and the roads. This could really save peoples improve people's lives by making the commute time lower. And you know this is something that we know the authorities are thinking about and it's an important part of the overall mix for raising living standards over the long haul.

Mr. Rice: Thank you Daniel. We will make Madame Lagarde remarks available to you know straight away so we'll get those to you. You have the staff concluding statement and in a few weeks you will have the full report. The article IV report once our board has had a chance to discuss and review it in the usual way. So, let me just thank you all for coming here this morning. We appreciate it. And thanks to my colleagues up here on the podium and we look forward to seeing you soon. Thanks.

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