Transcript

Beijing, January 20, 2015

SPEAKERS:
Olivier Blanchard, Economic Counsellor and Director of Research Department,
Gian Maria Milesi-Ferretti, Deputy Director, Research Department,
Alfred Schipke, Senior Resident Representative for China,
Christoph Rosenberg, Advisor, Communications Department

MR. ROSENBERG: Let me welcome you here for our January update of the World Economic Outlook, for the first time launched here in Beijing in recognition of the growing importance of China and this part of the world. We’re webcasting live around the world and Chinese interpretation is available. Let me first introduce our panelists. To my right, we have Olivier Blanchard, who is the Economic Counsellor of the IMF and the Head of the IMF’s Research Department. To his right, we have Gian Maria Milesi-Ferretti, who is the Deputy Director of the department. To my very right, we have Alfred Schipke, who is our Senior Resident Representative for China.

We’ll start with some opening remarks by Olivier, which I think are available now also in hard copy for those of you here in the room. Then we’ll follow with some Q&As until 11:45 when we’ll have to sharply leave because we have a commitment right after that. Just a word about the focus of the press conference. I’m sure you will have many questions about China, which of course is appropriate. But let me just remind you that this is the World Economic Outlook, so we of course appreciate also questions about the global economy including some of them online. So with that, let me pass it over to Olivier. Thank you.

MR. BLANCHARD: Thank you Christoph. Good morning to all of you. Let me give you the basic theme of this update. The global economy is going through strong and complex cross currents. On the one hand, major economies are benefitting from the decline in the price of oil. But on the other, in many parts of the world, lower long-run prospects adversely affect demand, adversely affect investment, and resulting - to continue with the current analogy - in a very strong undertow.

The upshot for the global economy is that while we expect growth in 2015 to be stronger than in 2014, we have revised our forecast for 2015 down a bit. So, you get this mixed message - growth is better this year than last year; we expect growth to be better this year than last year, but not quite as good as we hoped for. More specifically, our forecast for global growth in 2015 is 3.5 percent, which is 0.2 percent more than in 2014 but is 0.3 percent less than the forecast we had for WEO this year as of last October. For 2016, we forecast 3.7 percent growth. Again, a further increase in growth; but again, here we have revised down our forecast relative to where we were in October 2014.

So, this is the number for global growth. But as I’ve said at a number of press conferences earlier, the number doesn’t mean much because it is really just an average for the world. At the country level, the cross currents that I’ve referred to make for a very complicated picture. For example, there are clearly good news for oil importers, but clearly bad news for oil exporters. There are good news for commodity exporters, but bad news for commodity importers. Continuing struggles for countries which still show scars from the financial crisis are slowing in their growth. Some countries are far beyond that. The countries which are linked to the dollar are in a very different situation from those which are linked de facto or de jure to the Euro or the Yen because of a change in exchange rates, to which I will come back. So, you have a lot of combinations. Each country really suffers or benefits from these various factors in ways which are different and force you to look at each country one by one.

So, let me expand a bit on some of these themes. The price of oil has declined from about US$100 last June to about US$50 today. The sudden decline seems largely due to an unexpected change in the strategy of OPEC not to cut supply in the face of larger non-OPEC supply and weaker demand. We expect the factors which led to that decision to remain in place. So this is reflected in our forecast, we expect the decrease in price to be quite persistent. We expect some return, some increase, but surely not anincrease back to the levels where we were, say, six months ago.

Now for oil importers, this is definitely good news. If you think about it, the effect is very straightforward. The decrease in the price of oil increases real income. It decreases the cost of production for the firms which use energy. Both lead to, in the first case, consumption; in the other case, investment. But in both cases, more spending. It’s useful to do a very simply computation and see that the effect can be potentially large.

If, for example, you take a typical advanced economy, the ratio of oil consumption to GDP is about 3 percent. Now if you think that the oil bill is divided by two because of the price decline, this is an increase in real income of 1.5percent of GDP. That is equivalent to a fairly large, for example, a very large fiscal expansion. The effect is very much the same. It leads to more money in the pockets of consumers, of firms, and so on.

It also leads to lower inflation, given that the price of oil is part of a consumption basket. In other times, it could be a blessing. There were times in the past when we found inflation was too high and it’s helped decrease it. Unfortunately, these are not the times today. In the current environment of already too low inflation and many central banks being at what we call the zero interest bound, they may not be able to decrease interest rates, the effect is actually adverse. Low inflation or even deflation increases the real interest rate and decreases spending. So, this effect actually is potentially negative for places like the euro zone or Japan.

Now on that, I want to be clear. We think that the effect ofa decrease of the price of oil on oil importers is, a major plus; and other things equal, it will help theseeconomies have more demand and more growth. If it was the whole story, we would have revised the forecast up, but there is more to the story and I’ll come to it.

Now for oil exporters and for firms involved in new forms of energy production, this is clearly bad news. To the extent that the price decrease is persistent, which is the assumption that we work under, oil exporters will have to reduce their level of government spending. Now some of them, such as Saudi Arabia, have fairly large financial buffers and therefore can afford to do it relatively slowly. Others are in a much tougher situation and do not have the buffers needed to accommodate this without a very large decrease in spending. In that context, the adverse effects on Russia or Nigeria, to take two of the most relevant examples, are likely to be very large. These countries will suffer.

Some energy firms may also face financial risks. Clearly if you assumed that the price of oil was going to be US$100, it is now US$50, it may be that some investments don’t make sense and some firms will be in trouble. The point to make here is that systemic risks, namely risks from the problems of some countries or the problems of some firms, to the rest of the world seem to us to be quite limited. So, we do not see a major systemic crisis coming from the decrease in the price of oil.

Another important development is the movement in exchange rates. Since August, the Dollar has appreciated in real terms, that means relative to trade partners, by about 7 percent. The Euro has depreciated by about 3 percent and the Yen by 10 percent. Now, is it good news or is it bad news? Well, while the appreciation of the Dollar is clearly going to slow down the recovery in the US, the recovery in the US is quite strong; and therefore, it will continue despite the appreciation of the Dollar. At the same time, the depreciation of the Euro and of the Yen will give a much needed boost to demand in those two parts of the world, which very much need an increase in demand and an increase in output. So again, on that, we see this as a very good development.

I’ve talked about good developments. Let me now turn to the less good ones. These positive developments are offset by bad news on a number of fronts. One of the major disappointments for 2014 was the low growth in Japan. Sustained growth in Japan requires two conditions. The first one is more private demand in the short run to boost output, but that’s not enough. It also needs higher potential growth in the medium run. At this stage, potential growth in Japan is very, very low. So far, both private domestic and foreign demand have disappointed. The structural reforms which could help increase potential growth are not yet sufficient, we think, to have a substantial impact on the medium term and the future of Japan.

More generally, our assessment of the underlying growth potential in many countries has been revised down. The reasons vary. For example, the effects of the decline in commodity prices, which started in 2011, on Latin America’s growth prospects are only now becoming clearer, and these countries are revising their growth projections downwards. The same is true of sub-Saharan Africa, which depends very much on commodity prices. Russia is clearly suffering from a combination of ills; from uncertainty to a poor investment climate, this was true even before the events in Ukraine; to sanctions; to lower oil prices more recently. Therefore, the future of Russia is quite bleak, and we have revised our projections down substantially.

In China on the other hand, we see a gradual decrease in growth to below 7 percent in 2015. As you’ve seen we have a forecast of 6.8 percent for 2015, reflecting a welcome decision by the authorities to take care of some of the imbalances which are in place, and the desire to reorient the economy towards consumption and away from the real estate sector and shadow banking. This being said, lower growth in China will have an adverse effect on its trade partners, in particular on the rest of Asia.

Now, I’ve tried to give you a sense of the many forces at work. Let me now give you a number of specific forecasts. So looking at advanced economies, our forecast reflects the increasing divergence between the United States, on the one hand, and the euro area and Japan on the other. So for 2015, we have revised US growth up to 3.6 percent, but we have revised eurozone growth down to 1.2 percent, and Japan growth down to 0.6 percent.

Some of our largest downward revisions are actually elsewhere. They are in emerging markets, in particular in sub-Saharan Africa, in the Commonwealth of Independent States (CIS), and in Latin America. Revisions are smaller in emerging Asia where growth is still very high, in particular in the two leading economies, China and India.

Let me end with risks to the forecast; there are always risks. The most obvious one involves stagnation in either the eurozone, or in Japan, or in both. In both, using the “three arrows”, to borrow from Abenomics, is clearly the way to go, to use monetary policy, fiscal policy and structural reforms. What is true for Japan is just as true for the eurozone as well. Risks of another episode of financial turmoil associated with the increase in short rates in the US, something which is likely to happen in the middle of the year, are surely there, but limited. Some emerging market corporate firms, which are indebted in dollars, could also prove to suffer from the Dollar appreciation. Others, which depend very much on energy production, might be in the same situation. Again, we do not think of this as creating systemic risks but it may create periods of turmoil, of uncertainty.

Now, let me end on a more positive note. To be honest, assessing the favorable effects of a decline in the price of oil in the current environment is very difficulty. It depends on many factors, many of them we do not totally assess or cannot assess. So it may be that this decline may turn out to be a stronger shot in the arm, to use an expression I used a month ago in talking about it, than is currently implicit in our forecast. In other words, we have been conservative in assessing the positive effects of a decline in the price of oil. So, it could be that our forecast turns out to have been too pessimistic. If it is the case, next time we meet, I will have good news. I very much hope so. I thank you for listening to me. Now it’s time for questions.

MR. ROSENBERG: So, let’s open the floor.

QUESTIONER: .. a quick comment about the Switzerland, the franc, last week please. As you know, it caused financial volatility. How could the Switzerland central bank play a better role in communicating to the market?

MR. BLANCHARD: So, let me make a number of remarks about what happened last week to the Swiss franc and the implications that I see. I think I see two things. The first one is that it reminds us of the strength of capital flows, inflows/outflows, and in particular what we call safe haven flows, which is that when investors become more risk averse, you get very large movements and countries can be nearly overwhelmed with the inflows or the outflows. This was clearly what was happening to Switzerland. So I think we are in a world in which these are going to happen, and the way to handle this is through probably by letting exchange rates adjust. But clearly in the case of Switzerland, they had decided that the appreciation which came from the inflows was getting too strong and they had put, what we call a floor, which is they basically had decided to peg.

So I think the second lesson is that when you peg, it’s difficult to exit from a peg in a clean way. They have been accused of having done this unexpectedly but they had no choice. If you announce you’re going to do it, you’ll get the speculation, the purchase of the currency before you actually are ready to move. So, there had to be an unexpected component to it. It clearly created some turmoil, and it is an example of some of the things which can happen in the coming year. We have focused very much on the exit from unconditional monetary policy in the US. I tend to think that it might be smooth, but events like what happened last week may well happen in one form or anotherthroughout the coming years.

QUESTIONER: I had a quick question about your assumptions about oil price given how central this is to the forecast. OPEC appears to have what is a somewhat self-defeating strategy, and yet you think OPEC’s not going to change that strategy. Why?

MR. BLANCHARD: Well, the way OPEC worked in the past was that they would agree to restrict supply; but in the end, the burden was largely on Saudi Arabia to cut supply sufficiently to achieve the OPEC goal. As the increase in non-OPEC supply has increased, and as some of the members of OPEC have produced more as well, it would have forced Saudi Arabia to cut production very much in order to sustain the high price. I do not know what went through the mind of the Saudis, but it’s clear that the cost of cutting production enough to maintain the very high market price might have become very costly to them, even if beneficial to OPEC as a whole. It may therefore be that’s why they decided not to do it. If this is the reason, there is no reason to think that the future is going to be very different and that they are going to change their mind any time soon.

QUESTIONER: I have two questions. The first one is which country do you think will be the new engine in the near future? Will the US be the only engine or the so-called G2, China and US will play together to lead the growth? Or do you think there is another potential country? My second question is for the emerging markets including China, the outside environments has been very complex. The monetary policy in the major countries are all different. So do you think China and other emerging markets are facing greater pressure, for example the capital outflow, and how to solve it? Thank you.

MR. BLANCHARD: So on the first, I do not like the “engine” analogy. I think each country depends for the most part of what happens there in the country itself. It is clear that it helps if some countries are growing fast because this increases exports to them. But most countries rely mostly on domestic demand, not external demand. So, this metaphor of “engine” strikes me as overused. This being said, yes, among advanced economies, the US is going to do well, much better than the euro and Japan. That’s for sure. But one has to remember that there’s a fairly large number of emerging market countries which are growing, which have growth rates much above that of the US. The main one being this one, you know, we’re talking about the revision down of the growth rate in China, but we’re talking to a revision down to 6.8 percent. So, there is no question that a lot of the action in the world is still going to come from emerging markets. I think that’s where I would leave it.

On monetary policy, yes, I think that the normalization of monetary policy in the US is going to put some pressure on financial markets in emerging market countries and elsewhere. Again, I think that when it happens, it’s not going to be news. We have anticipated this for a while. So I think that some of what’s likely to happen has already happened, such as an increase in interest rates in a number of countries, such as a deprecation of exchange rates in a number of countries. I do not think that on the day on which the policy rate increases in the US, you’ll see enormous changes, unless the Fed does something very unexpected. But if the Fed proceeds as expected, I do not expect a major effect.

Will there be capital outflows from some countries? Again, I think that if there were to be, we would start to see them now. I think there is some capital which went to some emerging market countries because interest rates were more attractive. Some of that capital may turn around. This is more of an issue for Latin America than for Asia. The cumulative gross inflows to Asia have been relatively stable, relative to the pre-crisis period. So, I don’t think that there’s an enormous amount of capital waiting to go back to the US. Again, I do not see this as a major issue.

QUESTIONER: I have two questions on Europe’s economy. What are the main factors that contribute to a rise in Spain’s growth forecast in 2015, and to maintain it in 2016, while so many European countries have been revised down? My second question is how do you see the political situation in Greece and in Spain, the emerging of parties, like Podemos, its proposals on how to restructure the eurozone debt? How could this affect Europe’s economy? Thank you.

MR. BLANCHARD: Good. I’ll take this one, but Gian Maria may add something. Spain indeed is going to have relatively high growth by euro standards - not by Chinese standards, but by euro standards - next year, and that’s good news. But we have to remember that theu nemployment rate is still much above 20 percent. So there’s a very long way to go; hence even that type of growth rate is not going to decrease unemployment very fast.

Why is there growth? Well, because things have happened in Spain as a result of the crisis, good things. The first one is that there has been a substantial improvement in competitiveness due both to an increase in productivity and to a decrease in wages. So, exports in Spain are doing well. That’s helping. On the domestic front, something interesting is happening. Some of us were worried that deflation would kill demand, but there seems to be more optimism in the air with a positive growth rate. So the saving rate is coming down, consumers are spending more, and domestic demand is fairly strong. So, these two factors have the effect of increasing growth. In situations like this, there is a virtuous cycle to it, which is more confidence in the future leads to more investment, more consumption; and so growth can continue to take place for a number of years.

On your second point, as I said, the unemployment rate in Spain is still much too high; and in Spain, as in many other countries, this is leading to the rise of parties which either do not want to be part of the euro or have populist positions. That’s something that we have to worry about. That’s why really growth in the eurozone is of the essence, if only for political reasons. Do you want to add something?

MR. MILESI-FERRETTI: I would just add oil. Spain is a net oil importer obviously. Most demand comes from that. Most demand and disposable income comes from that channel.

QUESTIONER: … on the Chinese economy…

MR. BLANCHARD: So I shall make just one remark, and then pass the microphone to Alfred. Our forecast was for 7.4 percent, so we got it exactly right.

MR. SCHIPKE: Growth, of course, is moderating, but that is for a good reason. What we have seen is an adjustment that is taking place with moderating credit growth, which some here refer to “total social financing”, and of course adjustment in the real estate sector. We have revised our growth projection downwards from 7.1 in October to 6.8 percent in part because we see this healthy adjustment in the real estate sector going forward.

This is going to be a multi-year process, where of course investment demand will be slower in order to facilitate the adjustment. The risk is that the government is faced with three tasks at the same time. On the one hand, it is trying to reduce vulnerabilities in the economy. At the same time, it tries to facilitate the adjustment that is going on. But the third point is also very important, that it tries to avoid a too sharp slowdown. So, macro policies need to be carefully calibrated.

MR. ROSENBERG: I’ll take one online question. The question is whether further stimulus from the ECB through quantitative easing will help the European economy.

MR. BLANCHARD: I think that the effect of quantitative easing have to a large extent already happened. The investors have known for a while that this was likely to come, and this has already led to a flattening of the Euro curve in the eurozone indicating the anticipation of QE and is probably behind much of the depreciation of the Euro. So in a way, QE has already worked.

Now for it to actually work, it has to be that when the ECB announces it, it corresponds to the expectations of investors, more or less. The risk is that it’s too small and the investors will be disappointed, and some of what happened will be reversed. My expectation is that the ECB will do something more or less consistent with what investors have anticipated. Therefore, the effects we have seen will continue. But in a way, the effects have already happened.

QUESTIONER: You revised down, it was very significant, for Latin America and Brazil. I would like to ask you why and if specifically about Brazil and also Latin America in general, beyond commodities was also related to uncertainties on the economic policies of the countries. Thank you.

MR. BLANCHARD: So I shall start, and then Gian Maria will speak more specifically about Brazil. It’s true that we have revised growth down in Latin America quite a bit. I think what’s happening in Latin America, the common factor is indeed the declining commodity prices. What was thought to be potential growth earlier in the 2000s was largely due to strong commodity prices. As commodity prices have declined, which they have done since 2011, countries have realized how much of the growth really came from high commodity prices.

This is a learning process. This is why the revisions tend to come out with the same sign quarter after quarter. We’re learning that the high growth of the early 2000s just could not be sustained. That’s common now. Each country reacts to these decreases in different ways, some better than others. But I think that’s a context in which you have to think about Brazil. Now in the case of Brazil, there are indeed specific factors, which Gian Maria will talk about, which explain why the forecast for Brazil is so low.

MR. MILESI-FERRETTI: Another couple of points on Brazil. So of course the forecast for 2015 depends on what has happened, particularly in the second half of 2014; and activity has been quite weak, particularly investment. You mentioned uncertainty and part of the uncertainty was initially related to the elections. That uncertainty was resolved but there has been a fallout from the investigation on Petrobras that clearly has affected confidence and has added to uncertainty, for example related to investment plans of the company. That is also affected by what is happening to oil prices. Finally, what I would mention is that monetary policy has tightened to deal with inflationary pressures, and that clearly tends to put a break on domestic demand. So low investment, weak confidence, tighter monetary policy are factors that have shaped our assessment of the forecast, in addition to this rethinking of the effects of weaker commodity prices.

QUESTIONER: I have two questions. The first is do you think the Chinese economy in the near future, especially in 2015, will benefit from the Chinese anti-corruption and why, especially what specific areas will benefit from the anti-corruption? The second is I notice that you have said in the Financial Times in 2009 that the China and United States will play an important role in the global economy recovery. And facing a maybe 7 percent or even below 7 percent growth rate, do you still think so?

MR. SCHIPKE: Maybe just a quick comment on that. Clearly good governance and the rule of law are critical for the efficient allocation of resources. We know that corruption can lead to misallocation of resources. In that respect, addressing those issues can be quite beneficial.

MR. ROSENBERG: Okay, maybe I’ll take another online question here. The question is about Africa and what the decline of oil prices will mean there and what the IMF is prepared to do to help those countries who are negatively impacted by the oil price decline.

MR. BLANCHARD: Most African countries are oil importers and so on that, are helped. Some countries are not, and the main example is Nigeria. Nigeria will have to adjust. I do not know at this stage whether they can adjust on their own or they might need a program from the Fund. If they did, you know, any member is welcome to come. At this stage, I have no information about it.

QUESTIONER: Do you think the present world commodity prices are caused purely by supply and demand or it is because the appreciation of Dollar and maybe leading capital flowing into Dollar related assets. Will this trend continue? Thanks.

MR. BLANCHARD: So I think the answer is yes, the appreciation of the dollar plays a role because you can think of the price of oil as being determined in terms of a market of currencies so that if the dollar appreciates relative to that basket, then the price of oil in terms of dollars will actually tend to come down. So, there is some effect which has to do with the shifting currencies. Beyond that, we do not think that the decline in the price of oil is due to speculation in the sense of financial speculation. In the sense of financialization of the market, we think it reflects straight supply and demand factors of the usual variety, countries needing less oil and some countries producing more.

MR. ROSENBERG: Will the oil price trend continue?

MR. BLANCHARD: It’s very difficult to know what the trend for the price of oil is. There are many factors. So at this stage, I’ll refrain from giving you a forecast, even the long-run forecast.

QUESTIONER: My question is that since you predict that China’s economy will slow down, so what would be the industries or areas that make the largest contribution to this slowdown? And what are the drivers for the growth of Chinese economy in this year? Thank you.

MR. SCHIPKE: We clearly see the real estate sector as being one of the sectors that needs to continue to adjust. There are, of course, other sectors that suffer from oversupply; and those will probably also have an adverse implication on growth. But then there are also many upsides that can be mobilized, especially if the 3rd Party Plenum is being implemented, and that relates especially to the service sector. I think further liberalization of the service sector, allowing competition in the sector, can have significant gains. So there are a number of areas, but the service sector is probably one of them to highlight.

MR. ROSENBERG: Let me take one more online question and then I’ll turn it to our last question from the audience. This is a question about the economic outlook for India. What is your impression of the economic reforms undertaken by the new prime minister, Narendra Modi?

MR. MILESI-FERRETTI: If we look at our global forecast for India, let me start with that, it is roughly unchanged. So it reflects on the one hand, a positive effect from oil prices, given that India is a large net oil importer. And the other effect, economic activity has been a bit slower than we expected and you also have somewhat slower external demand. I think the reform plans of the new prime minister are promising. We’re going to have to see the speed of implementation. The effects on the economy are going to be clearly due to the extent that these are structural reforms accruing gradually over the medium term. But again, a key is going to be implementation.

QUESTIONER: I wanted to know if the recent volatility in the markets will push back the Fed to raise their hikes in the long term? Because you were talking about mid-year. Do you see that being pushed back?

MR. BLANCHARD: I cannot speak for the Fed. But my sense is that if anything, volatility in the markets, say due to what happened in Switzerland, suggests that predictability of monetary policy is of the essence. So if anything, I suspect this will lead the Fed to be extremely clear about what its intentions are and not change the date that they have in mind, unless events force them to.

QUESTIONER: …Your report says you expect less of a policy response from the Chinese to monetary growth. So are you assuming consensus to interest rates cuts? Are you assuming less than that or what’s your assumptions for monetary policy?

MR. BLANCHARD: For the details, you’ll have to talk to Alfred. I think the general principle is that they clearly were willing to take measures to maintain some growth even if housing turned out to be worse, and the fact that there is this gift in effect from the price of oil allows them to obtain the same effects with...