Transcript

Transcript of April 2023 European Department Press Briefing

April 14, 2023

PARTICIPANTS:

CAMILA PEREZ, Senior Communications Officer, International Monetary Fund

ALFRED KAMMER, Director, European Department, International Monetary Fund

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MS. PEREZ: Welcome to today's press conference on the European Economic Outlook. My name is Camila Perez. I'm a senior communications officer with the media relations division at the IMF, and I'm here with Mr. Alfred Kammer, the Director of the European Department at the IMF. We're going to get started with Alfred's opening remarks, and then we're going to take the questions both from the floor and online. Please raise your hands and wait to be called. Same for colleagues joining us online, send us your questions via WebEx and we will be reading those. And with that, Alfred, the floor is yours.

MR. KAMMER: Thank you, Camila. So, welcome to this press conference on the outlook for Europe. Big message, Europe avoided an all-out recession this winter and showed resilience. But it is facing a triple challenge, defeat inflation, sustained recovery, and safeguard financial stability.

Inflation remains stubbornly high. It is in double digits in most emerging European economies and some advanced economies. Energy prices have fallen, but prices of other household expenses are still increasing at a fast pace.

Meanwhile, economic activity has decelerated sharply as inflation lowered households’ purchasing power, growth slowed in key trading partners, and monetary policy tightening started to bite.

And in recent weeks, banking sector and broader financial stability have been tested, which casts a further shadow over Europe’s near-term economic growth prospects.

Europe’s outlook is one of slow growth and sticky inflation:

• In advanced European economies, economic growth is forecast to fall from 3.6 percent in 2022 to 0.7 percent this year, before some pick-up to 1.4 percent next year.

• In emerging European economies excluding Russia, Ukraine, Belarus and Türkiye, growth should drop from 4.4 to 1.1. percent this year, and then rise to 3.0 percent in 2024.

• Headline inflation is projected to decline thanks to lower energy prices and easing supply chain bottlenecks—we project it at about 5.6 percent on average in advanced Europe this year, and 11.7 percent in emerging European economies. But core inflation will still be above central bank targets by end-2024. Many European economies run close to full capacity and labor markets remain tight, which will set the stage for some recovery in real wages.

Things could easily get more complicated, as discussed in more detail in our new Regional Economic Outlook, which will be released on April 28. Tight labor markets, a resurgence of energy prices, or increasing geo-political fragmentation could bring both lower growth and higher inflation. Failure to contain financial stability risks could lead to crisis and lower growth.

So what should policymakers do?

Policies will need to work in concert to defeat inflation while safeguarding financial stability and sustaining the recovery.

Central banks should maintain tight monetary policy until core inflation is unambiguously on a path back to inflation targets. The course of policy rates should be tailored to changing financial conditions.

Further increases in policy rates are required in the euro area. Central banks in emerging European economies should stand ready to tighten further where real interest rates are low, labor markets are tight, and inflation is not projected to return to target sustainably over the monetary policy horizon.

For most countries, governments should pursue more ambitious fiscal consolidation than is currently planned. This is needed both to place inflation firmly on a path to target and to replenish depleted fiscal space, particularly because shocks have become more prevalent.

Fiscal consolidation would also enable central banks to meet their objectives at lower interest rates; this would lower public debt service costs, and also support financial stability.

A good starting point would be for governments to save the recent windfall gains from energy price declines and higher tax revenues. Targeting any remaining energy relief measures to the vulnerable, eliminating all untargeted measures, and raising carbon prices would also support fiscal adjustment.

Maintaining financial stability will require close monitoring, strong supervision, contingency planning, and prompt corrective action when needed.

Capital and liquidity buffers across European banks are generally comfortable, and further increases in required capital buffers are under way in many countries. But there should be no complacency: recent banking events in the U.S. and Europe have shown that perceptions and funding conditions can change quickly.

Supervisors should continue to take stock of the implications of higher interest rates on financial institutions’ balance sheets, and stress test them. The prudential standards envisaged in Basel III should be implemented without delay relative to the original timetable. Any measures to support indebted households should be strictly targeted to lower incomes and allow policy rate changes to be passed onto lending rates. Banks should fully reflect associated risks in their balance sheets.

In the European Union, financial stability could be bolstered further by extending the reach of resolution tools to smaller banks, ratifying the European Stability Mechanism’s amended treaty to provide a financial backstop to the Single Resolution Fund, and agreeing on common insurance of bank deposits.

Finally, structural reforms should prioritize supporting medium-term growth. To ease labor market tensions, policymakers need to help people join or stay in the labor market by enhancing labor force participation and workers’ job transitions. And we need investments to lift Europe’s productive capacity and speed up the green transition. Many other reforms are needed to boost lackluster productivity. Priorities vary across countries.

It will take resolute, broad, and carefully crafted actions for European policymakers to address the triple challenges they face and simultaneously defeat inflation, sustain the recovery, and safeguard financial stability.

MS. PEREZ: Thanks, Alfred. We can now go to your questions in the room. I think we're going to start with EFE. Thank you.

QUESTIONER: Hi. Thank you. I would like to ask a question about Spain. This year is one of the countries that is growing the most in Europe, but for the next year, the forecast have dropped significantly. Could you explain why? And I would like to have a comment also, a more general comment. With a growth of 0.88 in the Euro Zone, and the biggest countries like Germany really struggling, is Europe really far from a recession?

MR. KAMMER: So, let me first start with your general European question. First of all, we should recognize that coming out of the pandemic Europe had a very strong exit. And that was a clearly a reflection of the strong policy response during the pandemic. And we see that in very high growth numbers in 2022. And as you know, we have upgraded them over time.

What we are seeing now in 2023 is really the effects of the Russian invasion of Ukraine. That provided a huge shock to the European economies in terms of increasing and pushing up energy prices and inflation, which required more monetary tightening, lowered the purchasing power of people, increased the cost of production. And we are seeing these effects carried out in 2023. And that's again, across all of Europe.

We see differences in countries depending on how much they depended on the energy price, the energy from Russia, and how much they were affected by the energy prices. That explains some of the variation. But I should also say again, when it comes to policymakers they stepped up after the Russian invasion of Ukraine with packages which were addressing the problem.

And the biggest problem we saw last year was a big concern that a Russian gas shut off could bring the European economy to a halt in the winter. It did not happen. And that would have been a big recession in Europe. And it did not happen because policymakers increased supply, worked on reducing demand. And I should say for once, there was luck because we also had a mild winter. So, that was really avoiding the big recession.

And what we are seeing in 2023 now is the effects of all of this. But we also see during the year recovery taking place. And that is going to manifest itself more in 2024.

Now, with regard to Spain, in terms of our forecast, Spain's growth, as you said in 2022, was very strong. And we upgraded that the outcome was 0.3 percentage points higher than we had expected. And that momentum is going to carry over into 2023. And therefore, we upgraded our forecast for 2023 by 0.4 percentage points. We have a downgrade for 2024 of 0.4, and that expects the relate response to the monetary tightening and also to tighter financial conditions coming from some of the banking episodes we have.

But overall, I should stress that taken together, '23 and '24 in Spain of what we see canceled itself right out. So, Spain is in a rather good position, I would say.

MS. PEREZ: Thanks, Alfred. We're going to go with the second row.

QUESTIONER: Good morning. Thank you for doing this. I’m from Il Sole, Italy. I was wondering if you could elaborate a bit more on the advisability of ratifying the ESM that looks like an asset to Italy? Thank you.

MR. KAMMER: The ESM treaty, amended treaty, ratification is part of the European Union’s agenda of completing the banking union; and what it would provide is a backstop to the single resolution fund; and, I think, that’s an important architectural element in terms of completing that element of the banking union, and it will benefit all countries involved.

Other elements which are currently for discussion is to find agreement on a common deposit insurance, and also to find, at least, cost resolution options for smaller banks. So, that is a package of three EMS treaty completion. Now, I meant is one of them, all three are important to complete the banking union.

And to why is it important to complete the banking union because these measures are important to improve financial stability across the union. They will also allow for households and corporates to have more access to bank credit across and, hopefully, over time also at similar, at cost; and, therefore, are going to benefit growth, and that it will also make it easier in terms of monetary policy making in the European Union and this, particular, by the ECP because it will improve monetary transmission in the Union. I should add commercial authority. Other elements of the Union should also be completed, and one of them is the CMU, which we have been advocating as well; and, again, that will help in terms of deepen capital markets, and it will help in terms of medium-term growth and increasing productivity.

MS. PEREZ: Thanks. We’re going to go with Bloomberg.

QUESTIONER: Thanks. Phil Aldrick of Bloomberg, and thanks for doing this. I just want to know a little about the U.K. after the disastrous mini budget last year, has the U.K. rebuilt its reputation here? What’s the impression of the delegation this week? And on Europe, on the deposit insurance. There’s been discussions in general about raising the level of deposit insurance, possibly. Is that something that the Europe should consider as well given the financial stability concerns?

MR. KAMMER: tzhank you. On your first question, the answer is unequivocally, yes. When you’re looking at market reaction to the autumn statement and the spring statement, we see now that gilt rates and mortgage rates have reversed their increases, and you will also see that the pound is stronger than it was pre-mini budget crisis. And then, so, the answer to your question is yes.

What we see in the spring statement, again, is an acknowledgement of, or an alignment with medium-term fiscal sustainability, an alignment with the broad objective of achieving the inflation target; and those are excellent elements which we have been indicating are needed for the U.K. And when we’re looking at other elements of the spring statement in terms of improving labor force participation, and also in terms of providing incentives for business investments, those elements are very important and they should set also the stage for future policy making because what we need in the U.K., as we need in all across Europe, we need to boost productivity. We need to step up reforms to ensure medium-term growth, and we need to undertake a huge transformation as part of the green transition that we are envisioning.

So, more is needed, and I would say that it is not just applying to the U.K. but across Europe focusing on the labor force, upscaling labor, improving training with active labor market policies; but, also then, when you’re looking at the green transition for the European Union, they estimated that the green transition will require investments of $4 trillion euros. Three quarters of that needs to come from the private sector, and that means we need a massive amount of private sector investment, and the private sector needs to be part of that as well.

With regard to the deposit insurance. At this stage, we have advocated a common deposit insurance across Europe. So that is our recommendation; and, of course, policy makers need to look at the lessons learned from market turbulences and all of the elements of reform that are in the pipeline need to be assessed in light of that and see what we’re learning from these episodes, including on deposit insurance.

MS. PEREZ: let’s go to F.A.Z

QUESTIONER: Thank you for doing this. F.A.Z, German newspaper. Why is Germany performing so poorly, and is it more to only with energy prices, dependency on energy prices because we don’t see substantial growth since five years or most in Germany; and is Germany the new patient of the European Union?

MR. KAMMER: No, it is not. When you’re looking at the growth pattern in Germany, it is very similar to other European countries. Again, Germany had a strong exit from the pandemic. It experienced weaker growth than we expected in the fourth quarter of 2022; and Germany is one of the countries most affected by the economic effects of the Russian invasion of Ukraine because of its dependence on Russian energy; and that played out already in the fourth quarter, and when we’re looking at our forecast for 2023, that slowdown and that momentum of the slowdown has carried over into ’23 and that’s why we see the downgrade with regard to Germany.

I should also say that we are positively surprised about the resilience of economic activity in the first quarter; and when you’re looking at our forecast, you will see that throughout the year, we’re actually forecasting an increase in GDP of 0.2 percent, and then, of course, in 2024, we will be in positive territory again.

So, the German economy has been affected more than other European economies. The policy response was strong and appropriate. We’re expecting growth to resume during the year, but it is, of course, going to be challenging, and challenging will be something which applies to Germany as well as to many of the European countries. We will need to step up over time, public investment, which has been lacking over the last few decades, and that public investment is needed for the energy transition for maintaining and building up infrastructure; and that is going to be an important part of any policy going forward because that’s going to ensure productivity and medium-term grow, and that applies to Germany as well.

MS. PEREZ: Thanks, Alfred. We’re going to go with first row. Microphone, please, first row? Thank you.

QUESTIONER: Thank you very much. Jorge Valero with Bloomberg as well. A question on the comment you made that some governments need to push more ambitious fiscal consolidation. So, what governments do you have in mind when it comes to Europe; and, also, in that context, the Commission is, the European Commission, is going to propose in the coming days, the coming weeks, a review of the fiscal rules. So, do you think that this review is considered more adjusted fiscal pass for members’ stage or this would be like some common benchmark, like some countries are calling for?

MR. KAMMER: So, our call on the fiscal consolidation actually comes in two parts. The first one is, with regard to achieving the inflation objective. And we have been saying that fiscal policy across Europe needs to be aligned with the tightening of monetary policy. And that means for Europe also that across Europe, more consolidation right now would be better in terms of helping on the inflation front -- so that’s a recommendation to virtually all governments in Europe –- and that would help actually allowing the ECB less of a rate hike that would help them on having less of an impact on debt service, and that would help in containing financial stress which is coming through interest hikes. So that’s a recommendation to virtually all of the countries in Europe. The fiscal stance is neutral to mildly consolidating across, but again, if more could be done, that would help.

And what is the more that can be done? There’s some easy gains. Energy prices are low. That means that some of these energy packages, cost of living packages can be phased out. Second, in many countries they’re still untargeted, and that means to make them more targeted makes them more efficient, less costly, and put more -- less pressure on aggregate demand. And what we’ve also seen is that we have some windfall tax revenue gains because inflation is higher. Those savings should be saved, and that will also help on the fiscal stance. So that’s number one.

The second issue is with regard to medium-term consolidation. And I should say that, with regard to medium-term consolidation, our advice for most of the countries is actually, again, to do more. But in particular, to the high-debt countries in Europe. And here we’re going back to the story we had already last year before the crisis, the war on Ukraine. We need fiscal consolidation in the medium-term in Europe to create buffers so that when the next shock is hitting Europe, the fiscal policy can be used, governments can be -– respond. And what we have seen in both crisis episodes with the pandemic and the Russian invasion of war, that response was essentially to prevent a much worse counterfactual outcome.

With regard to your question on the European Fiscal Framework, we very much agree with the proposal which was made by the Commission. This is a proposal which is based on a risk-based approach, and a country-specific approach. It looks at the medium-term sustainability, and it moves to an expenditure-based rule. Those are recommendations we have been meeting and we are happy to see that incorporated in the Commission’s proposal.

For us it’s important that there is a differentiated approach between the countries because the situations are very different, and so they need different fiscal adjustment. That’s very important within the current framework to emphasize. What we would have wished is one, to have a countercyclical fiscal capacity in there, and that would provide macroeconomic stabilization during shock times, and that helps maintaining growth; and also, to have a facility in there to help with the public common goods like a climate fund which could operate across the European Union. Those are not proposals which have been incorporated. And we would also have wished strengthening of -– or the creation of a European Fiscal Forum in order to have that kind of agency fully empowered at the Union level, which we see already at the national levels.

Now, there’s still discussions going on, on the fiscal rules. For us it’s important that these discussions are bringing -– are being brought to closure soon so that these rules can be brought to fruition and can be implemented soon, and so that we don’t have a prolonged period of situation where we are staying with the existing rules which we know are in need of being upgraded.

MS. PEREZ: Thanks, Alfred. Alex Brummer?

QUESTIONER: Alex Brummer, The Daily Mail. The U.K. has -– is, in the latest forecasts, is at the bottom of the advanced country and the G7 and the European Advanced Countries growth league. I wonder why it’s in that position? And there’s a view in the U.K. that the IMF is consistently underestimated the growth possibilities in the U.K., and I just wondered if you could answer that?

MR. KAMMER: First, again, what we see in the U.K. is a growth pattern over the last few years, it’s just very similar of what we’re seeing in the rest of Europe. We had super high growth rates in 2021 and very strong growth in 2022 exiting from the pandemic, and we now see a sharp slowdown in ’23 and a recovery in ’24. So, this growth pattern is the same across all of the countries in Europe and the same in the U.K.

Why do we see in the U.K. quite a sharp slowdown next year? One -- and that is an issue which is, to some extent, I already address with Germany -- the energy price shock is hitting the U.K. particularly hard because a large part of household budgets are spent on gas energy, and that therefore lowers purchasing power and real incomes, so that is an effect which is much more pronounced in the U.K. Second, what we also see is that we have employment, which is still below pre-pandemic levels, reflecting still continuing sickness and scarring from the pandemic. And, of course, we also saw that the Bank of England was raising rates quickly and appropriately, and we are seeing the impact of a tighter monetary policy on overall demand. So that leads to a situation where the growth slowdown in the U.K. is larger than what we see in some of the neighboring countries.

With regard to the growth forecasts, we are making a best effort to take all of the facts into account, checking our assumptions across and making a best effort in terms of our forecasts. It’s very difficult during the last two years to be very accurate with forecasts. First with the pandemic we had to assess how the –- how things would evolve with vaccines and the virus. And now, with regard to the shock brought by the war, it’s very difficult sometimes to understand what –- how prices rises percolate through the economy and are effecting economic agents, and both shocks are overlaying.

So, when I’m looking at the forecast, I would not in general get too excited about point one here, point one there. We are in a situation where we are still working under a lot of uncertainty. And I should also say, we usually are being accused of being overestimating and too positive on growth. Again, we are making a best effort always to come up with an objective and accurate forecast for all countries.

MS. PEREZ: Thanks, Alfred. The gentlemen in the first row.

QUESTIONER: Yeah, hello, good morning. Russian News Agency, so question is about energy. In March [inaudible], stated that China Zero COVID policy was a relief for Europe as it led to cheap [LNG] flows from China to Europe so the affordable energy became a rescue for you. As we are approaching next winter, do you see risks that Europe could face LNG deficits that can impact the economy, and the second part, it’s also about energy related to oil and price cap on Russian oil and Russian oil refineries. What impact does it have to European economies now, and how can it impact European economy in future. The EU is still buying Russian energy, including 40 percent of Russian diesel. Thank you.

MR. KAMMER: So with regard to your first question, winter of ’23-24, there’s still some, clearly some risks with regard to the energy security, but mostly on the pricing side of going through the next winter, but I would say that the risks are much, much lower than we had before because what happened in the winter ’22-23, first, because of the very strong policy response by European policymakers, supply substituting for Russian gas delivery was up. The system was more integrated in Europe. Demand was reduced, and what we saw is quite a substantial increase in -- sorry -- quite a relative higher storage level of gas coming out of that winter, and with the highest storage level of gas coming out of that winter, that also puts less pressure on the market in order to replenish the reserves during the summer, which have been used in the winter. Last year, clearly, energy purchases were helped by the continued lockdown in China at that point in time, and clearly, this year there is a risk if the rebound in China is larger than we expect, that this would put price pressures on refurbishing that storage, but we are not expecting the same kind of war as we had for the winter of ’23-24, that we had for the window of ’22-23 because Europe is just in a much better situation of having diversified its gas production and also gas imports, but also in terms of having reduced demand.

With regard to the Russian oil, most of the oil has been substituted through other imports, and we would not expect a serious disruption coming from that side for the European economies.

MS. PEREZ: Thanks. Sorry, we are running out of time, so I’m going to take the question from our fellow from Ukraine.

QUESTIONER: Ukraine News Agency here. How would you assess the economic dependence between Russia and Europe today? How it has changed for past year and what your outlook for this year? It’s new question about not only the oil and not only the gas, maybe finance, maybe agriculture, maybe other areas.

MR. KAMMER: With regard to dependence of Europe on Russia, that was mostly dependence with regard to energy imports and mostly on the gas side, and gas imports dependent on Russia has fallen quite significantly from 40 percent before the war to ten percent now, so much less dependence on gas, and that is a reflection of alternative supplies and energy, in particular, coming into Europe, and the same is applicable on the oil side, where Russian oil and oil products are being substituted through other import channels. With regard to your other question, that was referring to which economy?

QUESTIONER:[inaudible] not only this, not only on oil, maybe some others, maybe finance, maybe fertilizer.

MR. KAMMER: So, in general, with regards to the financial linkages, they have been very limited, and they have been reduced further, so there is also less interconnectedness on that side. I think you are pointing to fertilizer and food and grain, and I think that’s a particularly important point and that is an important point for the globe. The discussion, again, is on the export of Ukrainian grain to continue now. This is an important point, not only for Ukraine, but that is an important issue for global food security, and we certainly hope that an agreement can be found, and these grain exports can continue.

MS. PEREZ: Thanks, Alfred. I’m sorry. We ran out of time. Thanks so much for joining the press conference. Thank you so much, Alfred, and have a good day, all.

MR. KAMMER: Thank you.

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