Transcript

Transcript of October 2019 World Economic Outlook Press Briefing

October 15, 2019

SPEAKERS:

Gita Gopinath, Economic Counselor and Director of the Research Department, IMF

Gian Maria Milesi‑Ferretti, Deputy Director, Research Department, IMF

Oya Celasun, Division Chief, Research Department, IMF 

Raphael Anspach, Senior Communications Officer, IMF

Mr. ANSPACH: Good morning. Welcome to the press conference on the World Economic Outlook. I am delighted that you could join us, both here in the room, as well as online.

Before we start, I would like to introduce to you the speakers of today's press conference. Let me start with Gita Gopinath. She is the Economic Counsellor and the head of the IMF's Research Department. Gian Maria Milesi‑Ferretti. He is the Deputy Director of the IMF's Research Department. And Oya Celasun, the head of the division in charge of the World Economic Outlook in the Research Department. We will try to get to as many of your questions as possible. But before we do that, Gita will start with some introductory remarks.

Gita, the floor is yours.

Ms. GOPINATH: Thank you, Raphael. Welcome. It is really a pleasure to see you all at the release of the new World Economic Outlook. I would also like to take this opportunity to congratulate the three Nobel laureates in economics, Abhijit Banerjee, Esther Duflo, and Michael Kremer. I think that was a wonderful bit of news that we all got yesterday. As for the global economy, the global economy is in a synchronized slowdown. And we are, once again, downgrading growth for 2019 to 3 percent, its slowest pace since the global financial crisis. Growth continues to be weakened by rising trade barriers and growing geopolitical tensions. We estimate that the U.S.‑China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020. Growth is also being weighed down by country‑specific factors in several emerging market and developing economies and also by structural forces, such as low productivity growth and ageing demographics in advanced economies.

Now, we are projecting a modest recovery, to 3.4 percent in 2020, another downward revision of 0.2 percent from our April projections. However, unlike the synchronized slowdown, this recovery is not broad base and remains precarious. The weakness in growth is driven by a sharp deterioration in manufacturing and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods. In addition, the automobile industry is contracting, owing also to a variety of factors, such as disruptions from new emissions standards in the euro area and in China that have had durable effects. Overall, trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012.

In contrast to weak manufacturing and global trade, the services sector continues to hold up, almost across the globe. Now, this has kept labor markets buoyant and wage growth and consumption spending healthy in advanced economies. There are, however, some initial signs of softening in the services sector in the United States and the euro area.

Monetary policy has played a significant role in supporting growth. In the absence of inflationary pressures and facing weakening activity, major central banks have appropriately eased to reduce downside risks to growth and to prevent a de‑anchoring of inflation expectations. In our assessment, in the absence of such monetary stimulus, global growth would be lower, by half a percent in both 2019 and 2020. Advanced economies continue to slow towards their long‑term potential. Growth has been downgraded to 1.7 percent for 2019, and it is expected to remain there into 2020. Strong labor markets and policy stimulus are offsetting the negative impact from weaker external demand for these economies.

Growth in emerging market and develops economies have also been revised down to 3.9 percent for 2019, owing in part to trade and domestic policy uncertainties and to a structural slowdown in China. The uptick in growth in 2020 is driven by emerging market and developing economies that are projected to experience a growth rebound to 4.6 percent in 2020. Now, about half of this rebound comes from recoveries or shallower recessions in stressed emerging markets, such as Argentina, Iran, and Turkey, and the rest by recoveries in countries where growth slowed significantly in 2019, relative to 2018, such as Brazil, India, Mexico, Russia, and Saudi Arabia. There is, however, considerable uncertainty surrounding these recoveries, especially when major economies like the United States, Japan, and China are expected to slow further into 2020.

In addition, there are several downside risks to growth. Heightened trade and geopolitical tensions, including Brexit‑related risks, could further disrupt economic activity and derail an already fragile recovery in emerging markets and the euro area. This could lead to an abrupt shift in risk sentiment, financial disruptions, and a reversal in capital flows to emerging markets. In advanced economies, low inflation could become entrenched and constrain monetary policy space further into the future, limiting its effectiveness.

To rejuvenate growth, policymakers must undo the trade barriers put in place with durable agreements, rein in geopolitical tensions, and reduce domestic policy uncertainty. Such actions can help boost confidence and reinvigorate investment, manufacturing, and global trade. In this regard, we look forward to more details on the recent tentative deal reached between China and the United States. We welcome any steps to de‑escalate tensions and to roll back recent trade measures, particularly if they can provide a path towards a comprehensive and lasting deal.

To fend off other risks to growth and to raise potential output, economic policy should support activity in a more balanced manner. Monetary policy cannot be the only game in town. It should be coupled with fiscal support, where fiscal space is available and fiscal policy is already not too expansionary. Countries like Germany and the Netherlands should take advantage of low borrowing rates to invest in social and infrastructure capital, even from a pure cost‑benefit analysis. If growth were to deteriorate more severely, an internationally coordinated fiscal response, tailored to country‑specific circumstances, may be required.

While monetary easing has supported growth, it is essential that effective macroprudential regulation be deployed today to prevent a mispricing of risk and excessive buildup of financial vulnerabilities. For sustainable growth, it is important that countries undertake structural reforms to boost productivity, improve resilience, and lower inequality. And these reforms are always more effective when good governance is already in place.

To summarize, the global outlook remains precarious, with a synchronized slowdown and an uncertain recovery. At 3 percent growth, there is no room for policy mistakes and an urgent need for policymakers to support growth. The global trading system needs to be improved, not abandoned. And countries need to work together because multilateralism remains the only solution to tackling major issues, such as risks from climate change, cybersecurity risks, tax avoidance and tax evasion, and the opportunities and challenges of emerging financial technologies. Thank you.

QUESTION: Good morning. I would like to follow up on your comment after the U.S.‑China agreement in principle. You welcomed the good step. Does it change your view on the global growth and outlook?

Ms. GOPINATH: We look forward to hearing the details of the trade agreement, when they play out. Right now, in our assessment, if you look at all the tariffs that have been put in place, and if you include the ones that were supposed to come into effect today, October 15, and the one in December, that would cumulatively reduce the level of global GDP by 0.8 percent by end 2020. Now, if the October tariffs were never to happen, that would bring down the estimated negative impact from 0.8 to 0.7. And if the December tariffs were, again, never to happen, you would come closer to 0.6 percent being the negative impact. We should emphasize that much of this negative impact comes from confidence effects, which is why it is very important that these changes or the trade truce has a feature of being permanent and durable.

QUESTION: I just wanted to touch on no‑deal, no‑deal Brexit, the possibilities. What fallout would you expect from a no‑deal Brexit? What market fallout would you expect? And what preparations should the U.K. and the eurozone be taking for that potential outcome?

Ms. GOPINATH: Our baseline assumes that there will be an agreement and that the transition will be smooth. In the absence of that, if there were to be no agreement and a no‑deal Brexit, then that would reduce the level of GDP in the U.K. by about 3 percent over the long run and between 3 to 5 percent, depending upon how disruptive the exit is, over a two‑year period. So those are the numbers that we have. It is about 3 to 5 percent over two years, if there was ‑‑ depending upon how disruptive the Brexit is. And in the long run, we are talking about 3 percent.

QUESTION: I was wondering if you could expand a little bit on your assessment, that the recovery next year will be precarious. Exactly what would be driving that? And at what point do you consider growth to sort of turn recessionary? Do we have to see negative global growth for us to use the "R" word? Or would that be something that would happen both ‑‑ just in the U.S. and Europe and other places?

Ms. GOPINATH: We describe the recovery as precarious because about half of it comes from recoveries in what we called stressed emerging markets. These include Argentina, Iran, and Turkey. And this could be recoveries, or it could be shallower recessions. And another half comes from recoveries in some emerging markets, like Brazil and India, where growth in 2019 was particularly weak, relative to their recent growth numbers.

In your question on recession, I think the way we want to think about it, from the perspective of global growth, is that if global growth were to go below 2.5 percent, that is usually a scenario where there are several countries in a recession; but that is, however, not in our baseline. We do not project a recession in our baseline over the next 12 months.

QUESTION: I would like to find out your specific findings on Nigeria. Last week you released the Article IV on Nigeria, where you said there was a need for a package of measures to reform the economy. You highlighted the fact that the government is making steps to increase VAT. You noted the fact that the prior reform is ongoing. What are those measures of reforms that you think the government should introduce?

You also noted the fact that, in the banking sector prudential issues are improving. I wanted you to highlight more about that.

Ms. GOPINATH: In the case of Nigeria, a lot depends upon oil prices and oil prospects. And there has been some weakness coming from that. The important thing to keep in mind about Nigeria is that per capita growth remains weak. And this is why we call for structural reforms. I am going to ask Oya to add more to that.

Ms. CELASUN: Thank you. That is right. There was a slight upward revision for growth this year that came mostly from strong agricultural production early in the year. But growth is not high enough to lift ‑‑ to turn per capita growth into positive territory, as Gita said.

For some time now, we have been emphasizing the need for a comprehensive package to lift growth. One element of that will have to be stronger non‑oil revenue mobilization. Nigeria has one of the lowest rates of revenue in the world, which was hit hard by the drop in oil prices. That is essential for the country to be able to spend more on priorities, such as social safety net and infrastructure. Other areas are the need for tight monetary policy and a simpler unified exchange rate system. Foreign exchange restrictions have also been distorting public and private sector decisions and holding back investment.

More generally, as you mentioned, strengthening the banking system's resilience and continued stronger structural reforms, especially in infrastructure and the power sector and broader governance, are critical.

Mr. ANSPACH: Thank you, Oya and Gita. Maybe this is a good place to remind everyone that we will have regional press conferences on Friday, where we will get into more specifics on individual countries.

QUESTION: Good morning. Between the April WEO and the July update, there is a slight increase in the prospects of the Brazilian economy. My question is, is this a sign of an increased pace? Or is the Brazilian economy just barely walking?

Ms. GOPINATH: So, in the case of Brazil, they have had some recovery, some improvement. But what remains the case is that there is policy uncertainty that remains. Now, the pension reform is ‑‑ the progress being made on that front is very good. But given that debt levels are still quite high, more needs to be done. Also, in the case of Brazil, there have been other very specific factors, like there was the mining disaster that negatively impacted growth. We expect things to improve, if this policy uncertainty continues to be reduced and more reforms get undertaken.

Ms. CELASUN: So, Brazil has elevated levels of pent‑up demand. It has barely recovered from the '15, '16 severe recession. It has had growth of about 1 percent for two years, '17, '18; now, only 0.9. We expect, as Gita mentioned, as the fiscal reforms, structural reforms progress, confidence to spread into the real economy and that pent‑up demand to be realized.

We expect the growth outturn was favorable in that regard. We saw an uptick in investment and, in particular, growth in the construction sector, which has been weak for some time.

Mr. MILESI‑FERRETTI: Maybe I can add just one word. Brazil clearly benefits from the fact that monetary policy has been able to ease. Interest rates are at historical lows for Brazil. And global financial conditions have been quite accommodative. So spreads are low. So those elements would clearly be [helpful] for a recovery.

QUESTION: Gita, you talk about, if the tariffs for today and for December are not going to happen, that would kind of save global GDP by 0.2 percent. So do you have an estimation of, if all the tariffs that have been added between the U.S. and China in the trade tensions are removed, what would that mean for global GDP? Also, just more generally, what do you think a trade deal between the two countries would bring for global growth?

Ms. GOPINATH: The answer to your question, of course, depends on the specifics of a trade deal. But based on what we have right now, if all the tariffs were to come off, the ones that were put in 2018 and 2019, including those announced, we would be talking about a boost to the level of global GDP by 0.8 percent by the end of 2020.

QUESTION: You mentioned climate change. How big of an impact will climate change have on the African economy? And how much do you support the green economy being championed by the African Development Bank?

Ms. GOPINATH: Climate risks are an important concern, and it is not a concern just in the future, but it is a concern today and now. It certainly has affected some countries more than others, in particular, low‑income countries are more subject to these disasters. The particular consequences of that are country‑specific, and we would have to look at the details. But it is very important for countries to undertake both mitigation policies and we will soon have the release of the Fiscal Monitor, where there will be a very detailed discussion of carbon pricing and how that can help. But then also adaptation because, in the meantime, countries have to put infrastructure policies into place to adapt to it. This is a challenge because, of course, it has huge financing needs, but this is something countries have to address.

QUESTION: You say that monetary easing has been appropriate in the industrialized countries, but that very low inflation constrains future monetary policy. Are there negative impacts globally from very low or negative interest rates?

Ms. GOPINATH: So, indeed, in our estimates, global growth would have been a half percent lower in 2019 and 2020 in the absence of monetary easing that was almost simultaneous around the world; but we absolutely flag some of the risks from having interest rates be very low for long. And a major one is, of course, because of a buildup of fiscal risks, very high levels of corporate debt. A search for yield in a world where interest rates are negative in many countries are leading to a buildup in financial risks. The Global Financial Stability Report will be going into that in much greater detail, but that is a very important factor that we keep in mind; that during the time when monetary policy remains in this highly accommodative stance, it is very important for prudential policies to be implemented and made sure that they are effective.

QUESTION: Just to get a sense of what you see in terms of the shadow banking crisis that is unreeling in India, you mentioned in your comments in the report about what the public sector banking sector still needs to do; but with respect to the overall financial system, as well as the government's finances at this point in terms of state government as well as the central.

Ms. GOPINATH: So in the case of India, there has been a negative impact on growth that has come from financial vulnerabilities in the nonbank financial sector and the impact that has had on consumer borrowing or borrowing in the small and medium enterprises. Appropriate steps have been taken. There is still a lot more that needs to be done, including cleaning up the balance sheets of regular commercial banks. So, in our projections, we have that India will recover to 7 percent growth in 2020. And the premise is that these particular bottlenecks will clear up.

On the fiscal side, for India, there have been some recent measures, including the corporate tax cut. There has not been announced anything about how that will be offset through revenues at this point. So, it looks optimistic, the revenue projections going forward, but it is important for India to keep the fiscal deficit in check.

QUESTION: Good morning. I want to know what happened with Mexico this year because we made the structural reforms in the past six years, and we couldn't see big increases in the GDP, and now we have slower projections for GDP. Last week, you launched the Article IV for Mexico, and you said that the political uncertainty behind this is slower. So, again, I want to know what happened with our structural reforms.

Ms. GOPINATH: In the case of Mexico, besides policy uncertainty, it is very much the case. And this is what Gian Maria flagged. What matters is what the borrowing costs are. And it is certainly the case that, in the case of Mexico, interest rates are still high, and there are pretty tight financial conditions.

Mr. MILESI‑FERRETTI: When we refer about political uncertainty, we mean there is uncertainty about the fate of some of the structural reforms. And that, of course, can take a toll on investment. And it has. We have, as Gita mentioned, tight monetary policy conditions. And we have had an under‑execution of the budget, which has taken a toll on activity in the earlier part of this year. We think that should wane eventually, but it has weighed on activity. Mexico, of course, has been subject to external shocks, uncertainty in its economic relations with the United States. Think of what happened on the migration front relatively recently. And, also, Mexico is actually a big manufacturing center, and there is a big global downturn in manufacturing. And while, of course, Mexico can benefit to some extent by some trade diversion when there are more barriers within the U.S. and China, it does suffer when global manufacturing activity is under stress, as is the case at the moment.

QUESTION: I would like to stay in Latin America, if that is possible. I would like to ask you about Ecuador because it has been in the news over the last few days. Did President Moreno make the right decision, cancelling the austerity package, in the IMF's view? What will happen with the program in Ecuador? I also would like to ask a more comprehensive question. Do recent outcomes in both Ecuador and Argentina hurt the IMF's reputation in Latin America and globally?

Ms. GOPINATH: I should first start by saying that we express our deepest sympathies for the people who have been injured and the people who have ‑‑ some have even died in the violence in Ecuador. We very much welcome that there is an attempt to bring in all the stakeholders and to make decisions about macro reforms, taking into account the various parts ‑‑ the various communities, that are going to be affected by it. So, quite simply, we stand ready. We stand in support of the authorities. These are challenging times. And we would like to see that the reforms get done and that they are successful.

To your question about Argentina and Ecuador, the only thing I would point out is that the IMF goes into these countries when there are stressful times, when there are difficult situations. It is unfortunate that there are difficulties that the people have to face, but this is the challenge that we deal with. It is the challenge that the authorities in these countries deal with. And it is always our intent to do the best for the people in these countries, working closely with the authorities.

QUESTION: Trade volume growth has dropped dramatically in the first half, to 1 percent, and is projected to rebound to 3.2 percent. So what is the main driver of this pickup?

Ms. GOPINATH: There are several factors behind it. On the one hand, there is the trade policy uncertainty and trade barriers, but there is also a lot going on in other areas, like in the auto sector.

Mr. MILESI‑FERRETTI: Part of the explanation for the rebound is, of course, that there is a bit of a pickup in global activity projected for next year. And that is a recovery in investment. That is a recovery in trade. You also have to think, we have what we call a base effect. Fundamentally, trade has been very weak in 2019. So just some normalization in the later part of 2019 and early 2020 will give you a notably positive growth rate.

In terms of specifics, clearly, the car sector has been weighing heavily on manufacturing activity and growth. And some stabilization, improvement of the situation in the car sector would lead to a recovery in trade. The same is true for semi‑conductors. The so‑called tech cycle was one contributor to the big weakening in global trade. And we have seen it in the numbers for countries in East Asia, where exports have suffered more than elsewhere. And, again, there, we see a little bit of a pickup.

So all these factors together lead us to expect some recovery in global trade. It is not a great recovery. If you look at the overall growth number, it is still relatively modest, but it is better than 2019.

QUESTION: I noticed you mentioned several factors in the Asian economic forecast. One is the spillover from the U.S. trade war. The other is the slowdown of China's growth.

I wanted to ask, how concerned are you for the situation ongoing in Hong Kong for the global economic growth and their financial stability?

Ms. GOPINATH: In Hong Kong, we have actually had a significant revision down for growth in Hong Kong in 2019. We expect some recovery in 2020. In 2019, it is a combination of the trade tensions, the slowdown in trade, but also the slowing down, the structural slowdown in China. And it is also an outcome of the social unrest. We have seen declines in tourism, for instance, and in retail sales. But we expect there to be a recovery from Hong Kong going forward. In terms of the spillovers to the global growth, they remain quite small at this point.

QUESTION: In your report have you assessed the impact of the implementation of the continent wide free trade agreement for Africa. And how will this impact growth in Africa and in Senegal?

Ms. CELASUN: So this was a very favorable development in a world where we see trade barriers rising. African countries do not trade much with each other. So greater facilitation of trade and lower tariff barriers would help greatly and create new opportunities for growth. It is a medium to longer term issue, it creates an upside potential and we would expect this to have a positive impact over the medium term. Much needed given the demographics in Africa, many jobs will have to be created given a young population.

QUESTION: In your view, what is going to be the impact of these renewed tensions in Kashmir on the Regional Economic Outlook, India and Pakistan specifically? And since you have already mentioned India, what is your view about the economic growth outlook for Pakistan?

Mr. MILESI‑FERRETTI: As you know, Pakistan has started implementing an ambitious program with the IMF. There is need for a substantial fiscal adjustment. The deficit over the last year has exceeded expectations. Fortunately, this has been the case mostly for one‑off reasons, and tax revenues are picking up notably. But, of course, when you do have a fiscal adjustment ongoing, domestic demand is going to be compressed. Hence, we have a forecast for the growth rate that, in the short run, is going to decline: 3.3 in 2019, 2.4 in 2020, but pick up after that. And we think there are good signs on the confidence front, with increased demand for local currency assets by foreign investors in light of the fact that we now have an exchange rate that is more reflecting actual economic conditions, with some degree of floating. The authorities have been steadfast in their implementation of the program. Challenges remain, of course. It is a set of macroeconomic imbalances that needs to be addressed. There are uncertainties. You mentioned one of them. There are others, oil prices. Pakistan is a large oil importer and, hence, very sensitive to what happens to oil prices.

So far, we have seen good signs. And we hope that there will be a notable pickup in growth over the medium term, which is sorely needed in Pakistan to lift the living standards.

For India, I think Gita already addressed the general outlook. Overall growth remains very strong by the standards of the world economy, even though it is lower than the very high standards at which we were accustomed to looking at India. A growth rate above 6 percent is still notable and extremely important in a country that has such a large population.

We have a forecast for a further pickup next year, also helped by tax cuts on the corporate front. There, again, there are many macroeconomic challenges. Again, Gita has emphasized the need to keep the fiscal deficit under control. And, of course, India and Pakistan are not immune to global geopolitical tensions and to trade tensions that can take a toll on their manufacturing activity and demand for their exports.

QUESTION: In the World Economic Outlook, page 38, you noted that there is a sharp decline in foreign direct investment among major economies last year. And this is especially the case for FDI between China and the United States. So, my question is, how do you evaluate the FDI decline's influence on the world economy? And what is the way to reverse it?

Ms. GOPINATH: We have this very nice box in the WEO, which is about what is happening with FDI. And you see this decline in FDI. An important factor for that is, basically, the changes in tax rules, so including the tax policy changes in the US. I will have Gian Maria go into it in more detail.

Mr. MILESI‑FERRETTI: Yes. So at the global level, really, the main reason why we see a very large decline in FDI is fundamentally a restructuring of the internal financial activities of multinational corporations. There is repatriation of cash by U.S. multinational corporations, in light of U.S. tax changes, which have virtually no impact on economic activity. These may be funds invested in U.S. dollar securities from overseas and, with the tax change, they are now invested in the very same U.S. dollar securities, but from the U.S., so absolutely no change.

But you hint a different set of issues, which is definitely of more relevance for global financial integration, which is what could be the implications of increased fragmentations or trade tensions. One aspect of that could be a decline in foreign direct investment among major regions when we are talking about greenfield investment, about mergers and acquisitions, and so on. It is clearly way too early to be able to assess how much is actually happening. These are typically data that are released with a longer lag. And because they mix together financial operations with real investment, it is a bit difficult to tell them apart. But, of course, the potential for increased fragmentation to reduce the efficiency of production, to reduce productivity growth, is there. And it is one of the major concerns we have in regard to an increase in trade and investment barriers.

QUESTION: The question is on Saudi Arabia. The question is: Do you believe that the Saudi reforms and non‑oil sector could both bypass the current forces pushing towards lowering growth projections?

Ms. GOPINATH: In the case of Saudi Arabia, we had a revision down for their growth for 2019. An important part of that was basically weakness in the oil sector, so weakness as in lower oil production being tied to new OPEC Plus rules. So the lower oil production is one of the factors for the downgrade for 2019.

We are expecting some improvement. In fact, the non‑oil sector has been doing better over time, so that looks good. But it is clearly the case that an important downside risk remains, geopolitical tensions in the region. And also, of course, if the global economy were to slow, the negative impact of that on oil prices could also be an important downside risk for Saudi Arabia.

Mr. ANSPACH: With that, I would like to conclude, but Gita has one last announcement.

Ms. GOPINATH: Yes. I just wanted to point out and thank my colleague, Oya Celasun. This is going to be ‑‑ at least maybe for a short while, this is going to be her last presentation here, while she moves on to higher and more important things. So thank you so much.

Ms. CELASUN: Thank you so much. It was a pleasure interacting with all of you. Thank you.

Mr. ANSPACH: Thank you again, and I hope so see you around for the next couple of days. Thank you.