Transcript of a Press Conference on the World Economic Outlook by Kenneth Rogoff, Economic Counsellor and Director of the Research Department, IMF

IMF News, September 26, 2001

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Published: September 26, 2001

Global outlook and recent revisions

Global growth projection for 2001: marked down by a little over half a percent to 2.6 percent.
Outlook for 2002: a similar reduction from April projections; baseline in the WEO currently presented as 3.5 percent for 2002, but noted that global growth in 2002 is "likely to be rather lower than the 3.5 percent presently projected" given the September 11th aftermath.
The quantitative projections in the WEO were completed before the events of September 11th, 2001; the attacks increased downside risks to the short-term global economic outlook.
The WEO projects a potential gradual recovery toward the end of the year, with a "reasonable prospect that a recovery will begin in the first half of next year."

Immediate market and macroeconomic impacts of September 11th

Equity markets: major stock indices in the U.S. and Europe fell "7 to 15 percent" over the two weeks following the attacks; in Japan by "5 percent"; many emerging stock markets fared worse, particularly in Latin America and in Asia.
Bond markets: broad-based flight to quality with a sharp rise in spreads for both high-yield and emerging market bonds.
Oil prices: rose immediately after the attacks but subsequently "have fallen sharply to levels significantly below where they were on September 10th."
Currencies: movements in the major currencies were "relatively moderate," with the U.S. dollar weakening only slightly against the euro and the yen.
Direct economic damage in relation to the overall size of the U.S. economy described as "relatively moderate" compared with historical events (example cited: Kobe earthquake of 1995).
Trade and globalization: WEO reduced trade growth projections from earlier May projections; long-run forces favoring increased globalization remain in place despite near-term concerns about higher transport and insurance costs.

Country and regional notes (selected)

United States: WEO figures provided earlier in the briefing referenced U.S. growth of "1.3 percent" for the year (published WEO), but Rogoff emphasized it was "premature to try to quantify" the post-September 11th impact; noted a significant likelihood of a near-term recession (two quarters of negative growth a "significant likelihood") but optimism for a V-shaped rebound in the following year.
Japan: WEO published projection for 2001 of "minus 0.5 percent" and for 2002 of "plus 0.2 percent"; Rogoff emphasized room for more aggressive monetary easing in Japan despite concerns about transmission given bank lending behavior.
Mexico: GDP projection of "4 percent" for next year (as cited in questions); vulnerabilities mainly tied to developments in the United States and the importance of fiscal reform to reduce medium-term fiscal risk.
Argentina: WEO calls for "a 1.4 percent economic contraction" (compared with previous expectations for some growth); Argentina's ability to access international capital markets depends on successful implementation of its zero deficit plan.
Brazil: projected current account deficit increase to "5 percent" this year; flexible exchange rate seen as a helpful buffer; recent fiscal consolidation underlined as important to keep current account deficits under control.
South Africa: praised for sound macroeconomic policies and reduced external vulnerability; exchange rate pressure on the rand noted; potential offset from gold exports in a flight-to-quality environment.

Monetary and fiscal policy guidance

Monetary policy response: characterized as "aggressive" and appropriate. Specific actions noted:
- The U.S. Federal Reserve cut interest rates by "50 basis points" last week.
- Bank of Canada cut by "50 basis points" quickly followed the Fed.
- The ECB and the Swiss National Bank also cut by "50 basis points" (as phrased: "quickly followed by cuts of the same magnitude by the Bank of Canada and then the ECB and the Swiss National Bank").
- Subsequently, the Bank of England and the Bank of Japan also cut rates; monetary authorities in Denmark, Sweden, New Zealand, Hong Kong SAR and Korea also cut rates.
- The Fed entered into temporary swap arrangements with the ECB, the Bank of England, and the Bank of Canada to provide dollar liquidity.
Fiscal policy guidance:
- Allow automatic stabilizers to operate.
- Avoid "frantic, ill-focused actions to stimulate the economy"—be cautious given long and uncertain lags and the difference between temporary and permanent measures.
- In the United States, additional fiscal appropriations for defense, reconstruction, and the airlines will also provide support to activity.
Policy space:
- There "remains room for maneuver" for monetary policy in major economies; Europe has "somewhat more room for maneuver" than the United States.
- There "remains room for more aggressive monetary easing in Japan," even after recent steps.

Risks, structural issues, and policy priorities

Downside risks: the attacks increased already significant downside risks; key channels are reduced consumer and business confidence and increased risk aversion.
Structural reform: with emphasis that Europe and Japan must rely more on internally generated growth, making structural reforms more important; the WEO discusses structural reform and the IT revolution (Chapter 3).
Emerging markets: weaker global outlook and market differentiation by policy performance mean emerging market countries must "stay the course of prudent macroeconomic policies and structural reforms."
Oil market risks: noted as a source of uncertainty and potential volatility; two countervailing forces—weak global outlook dragging prices down and heightened political uncertainty pushing them up—leave Rogoff "cautiously optimistic" that oil will not be a major problem in coming months.

Communication and judgment under uncertainty

Projections completed before September 11th; the WEO's published projections therefore need careful reinterpretation in light of subsequent events.
Rogoff emphasized humility in forecasting given significant economic and non-economic uncertainties.
The IMF does not provide a single official probability of a global recession; historically the world has not experienced negative growth in any year since 1970, and even deep slowdowns have usually remained positive in annual terms.
Rogoff withdrew an earlier offhand phrase "done deal" regarding U.S. recession, clarifying uncertainty about the precise magnitude of the slowdown.

Transcript of a Press Conference on the World Economic Outlook, Wednesday, September 26, 2001 — Kenneth Rogoff, David Robinson, Tamim Bayoumi; proceedings moderated by Graham Hacche.