Transcript of October 2021 European Press Briefing
IMF News, October 20, 2021
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- Published: October 20, 2021
Regional growth and outlook
- Advanced European economies are set to expand by 5.2 percent in 2021, 0.3 percentage points of GDP higher than expected in the July update.
- Emerging market economies will hit 6 percent in 2021 — an upgrade of 1.1 percentage points.
- Recovery described as "increasingly, resilient" but "bumpy" and clouded by uncertainty due to COVID-19, supply-chain disruptions, high energy prices, shortages of some durable goods, and rising prices.
- Employment has yet to reach pre-crisis levels; hours worked are still 3 percent less than before the crisis.
Inflation and monetary policy
- Main recent drivers of consumer price increases: energy prices (including oil) and supply-chain disruptions with elevated transport costs.
- Expectation that these factors will subside in the course of 2022.
- For inflation to become persistent, an acceleration in wage inflation would be required — not currently in the IMF baseline for advanced Europe.
- IMF view for monetary policy:
- In most advanced economies: monetary policy should remain highly accommodative because labor market slack remains and broad-based inflationary pressures are limited; premature tightening would hurt the recovery.
- In several emerging European economies: inflation expectations are rising; a gradual scaling back of monetary accommodation is warranted — phase out asset purchases and signal or initiate normalization of rates.
- Medium-term underlying inflation projection for the Euro area: 1.8 percent.
- Observation: natural gas prices increased five times over the last year; these spikes expected to fade by the second quarter of 2022.
Fiscal policy: withdrawal, rules, and sequencing
- IMF projects a major reduction in fiscal deficits in 2022:
- For advanced economies: fiscal deficit will decrease by four percentage points.
- For emerging European economies: fiscal deficit will decrease by one percentage point.
- Fiscal withdrawal should be carefully orchestrated and calibrated to the strength of the recovery; pace should guard against undercutting recovery momentum.
- Risks from premature fiscal tightening: if recovery stalls while fiscal policy is scaled back, monetary policy would have limited ammunition in many advanced European economies.
- Fiscal policy should shift from emergency support to:
- Retargeted support to specific sectors.
- Temporary investment incentives and hiring subsidies to enhance workforce skills and bring people back to jobs.
- Adapted social safety nets and labor market institutions to address automation and distributional effects.
- On EU fiscal rules: IMF advocates reform to make rules simpler, easier to monitor, enforce, and communicate, and to support consolidation trajectories from 2023 onward, especially in high-debt countries.
- Medium-term fiscal consolidation: authorities should communicate clear medium-term plans early to provide certainty about consolidation paths.
Labor reallocation, automation, and structural policies
- Anticipated labor reallocation from low-skilled, shrinking sectors to expanding, higher-skill sectors:
- Baseline expects about 1.5 percent of the labor force in the lowest-skilled sector will be set free.
- Baseline expects a need for additional labor in high-skill sectors of about 1 percent of employment.
- Automation is expected to accelerate and add to labor market pressures.
- Policy priorities to manage transition:
- Active labor market policies, retraining, and upskilling programs.
- Temporary incentives and hiring subsidies.
- Investments in green and digital infrastructure to support sectoral shifts.
Supply-chain disruptions and policy responses
- Disruptions are pandemic-driven: supply reductions combined with a strong demand rebound created mismatches and bottlenecks.
- Market forces will resolve many demand-shift adjustments, but policy can address bottlenecks, especially in transportation and infrastructure.
- Recommended public actions:
- Invest in infrastructure to strengthen and diversify supply chains (resilience, not on-shoring).
- Support green and digital transitions to facilitate medium-term adjustments.
Energy prices and the green transition
- Energy has been the biggest driver of recent consumer price increases; oil prices have returned to pre-COVID ranges due to strong demand.
- Spain example: dynamic pricing amplified transmission of gas price shocks to retail electricity; temporary measures used to protect vulnerable populations amid what IMF sees as temporary price spikes expected to fade in Q2 2022.
- Broader policy implications:
- Invest in energy storage and production.
- Coordinate policies for the green transition to avoid transition bottlenecks.
Country-specific assessments and recommendations
- United Kingdom:
- UK has been tuning fiscal stance through the crisis; IMF welcomes proposed progressive taxation and a clear medium-term fiscal consolidation plan to provide certainty.
- Russia:
- Russia experienced a relatively shallow recession in 2020 and rebounded strongly in 2021; fiscal and monetary settings were supportive. IMF emphasizes need for structural reforms to raise productivity and growth.
- Spain:
- Measures to limit electricity tariffs seen as protecting the vulnerable during temporary price spikes; longer-term focus needed on energy storage/production and the green transition.
- Portugal:
- IMF forecast differs slightly from Portugal's official projections; Portugal is rebounding strongly in H2 2021 into 2022.
- Tourism hit hard; Next Generation EU Fund and structural reforms expected to support medium-term growth and productivity if implemented.
- Ukraine:
- Responded well to crisis with fiscal support and accommodative monetary policy; inflation has picked up (partly from minimum wage hike). IMF supports the central bank's tightening to anchor expectations and contain second-round effects.
- Greece:
- Debt rose during the pandemic; fiscal consolidation in the medium term is needed.
- Next Generation EU Fund and implementation of structural reforms are key to strengthening growth and debt sustainability.
- Western Balkans:
- Hit hard by the crisis; benefited from easing financial conditions, fiscal support, and IMF emergency support and SDR reallocations.
- Major downside risk: low vaccination rates (about 30 percent) that expose the region to future infection waves and economic setbacks; policy focus on communication to address vaccine hesitancy is important.
- France:
- France implemented a strong fiscal response and has a supportive fiscal stance for next year while pivoting to more targeted support. IMF notes the importance of medium-term consolidation to rebuild fiscal buffers.
Risks, scenarios, and vigilance
- Key near-term risks: COVID-19 resurgence, persistent supply-chain bottlenecks, sustained energy-price shocks, low vaccination in some regions.
- IMF does not expect an inflationary spiral in Europe at this stage; main drivers are energy and temporary supply-side factors expected to fade in 2022.
- Emerging European economies face higher risk of second-round effects due to tighter labor markets and rising inflation expectations; central banks in those countries are already tightening or signaling tightening.
- Policy recommendation summary:
- Maintain accommodative monetary policy in advanced economies while monitoring wage pressures.
- Gradually normalize monetary policy in emerging European economies where inflation and expectations are rising.
- Orchestrate fiscal withdrawal carefully; pivot support toward reallocation, investment, and social protection; communicate medium-term consolidation plans early.
- Invest in green and digital infrastructure and in strengthening supply-chain resilience.
- Implement active labor market policies and retraining to manage labor reallocation and automation impacts.
Transcript of October 2021 European Press Briefing — IMF Communications Department