Transcript of a WEO Conference
IMF News, April 16, 2013
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- Published: April 16, 2013
Overview — main theme
- The World Economic Outlook (April 2013) theme: shift from a two-speed recovery to a three-speed recovery, with a possible "three-and-a-half-speed" characterization due to Japan.
- Key concern: strong interconnections mean an uneven recovery is risky — "the world economy is as weak as its weakest link."
- Policy emphasis: monetary policy is the main short-term lever; fiscal policy should be "less and better" now and commit to more consolidation later where appropriate; structural reforms and banking repair remain central.
Global growth forecasts (selected figures cited)
- Emerging market and developing economies: forecast to reach 5.3 percent in 2013, and 5.7 percent in 2014.
- United States: forecast to be 1.9 percent in 2013, and 3 percent in 2014.
- Without fiscal consolidation, U.S. growth could be "between 1.5 and 2 percent higher" in 2013 (arithmetically).
- First-quarter forecast: 2.4 percent; second quarter forecast: 1.6 percent.
- Euro area: forecast to be minus .3 percent in 2013, and 1.1 percent in 2014.
- Germany: forecast 0.6 percent in 2013.
- France: forecast slightly negative in 2013.
- Japan: forecast 1.6 percent growth for 2013.
- China: forecast 8 percent in 2013 (forecast made before newest data; staff "still stick to our 8 percent forecast").
- India: forecast 5.7 percent in 2013.
- Brazil: forecast 3 percent in 2013.
- Slovenia: revised to a contraction of 2 percent in 2013 (previously penciled in as a contraction by 0.5 percent).
- Spain: deficit around 10 percent of GDP in 2012 (including financial sector measures); plan implies roughly 6.5 percent in 2013.
Advanced economies — characterization and policy guidance
- United States
- Underlying private demand described as "quite strong" despite a "very strong, indeed an overly strong, fiscal consolidation of about 1.8 percent of GDP."
- Policy recommendation: define the right path of fiscal consolidation — "both less and better fiscal consolidation now and a commitment to more fiscal consolidation in the future."
- Euro area
- Weakness extends beyond the periphery to parts of the core; low core growth harms periphery through trade linkages.
- Periphery: "substantial contractions" expected in 2013 for countries such as Italy and Spain; internal devaluation progressing slowly.
- Financial-fragmentation risk highlighted after Cyprus; tail risks reduced by ECB measures (e.g., OMT), but spreads facing periphery borrowers remain "too high."
- Policy recommendations:
- Strengthen banks urgently without weakening sovereigns.
- Allow automatic stabilizers to operate where scope exists; in countries with fiscal space, "go even beyond this" and reconsider the speed of fiscal adjustment.
- Increase transparency and speed in banking repair and recapitalization; complete banking union steps expeditiously.
- United Kingdom
- Example cited of a country with scope to reconsider initial fiscal consolidation plans given weak private demand.
Japan — policies and external spillovers
- Policy mix: aggressive quantitative easing, a positive inflation target, fiscal stimulus, and structural reforms.
- Growth forecast 2013: 1.6 percent.
- Risk noted: fiscal stimulus without a "run" (presumably "credible") fiscal consolidation plan risks higher risk premia and debt unsustainability.
- On exchange rate effects: the yen depreciation is viewed as a logical consequence of monetary policy; expectation that nominal depreciation may be offset by inflation, leaving real exchange rates unaffected.
Emerging markets — performance and challenges
- General: emerging markets "are still going strong" and continue to attract capital inflows due to fundamentals and low interest rates in advanced economies.
- Forecasts reiterated: China 8 percent, India 5.7 percent, Brazil 3 percent for 2013.
- Challenges:
- Managing capital flow volatility while accommodating desirable underlying trends.
- Potential for credit booms historically; so far policymakers have "generally succeeded" in keeping aggregate demand aligned with potential.
- Potential output growth has declined in some emerging markets — "we shall not see again some of the high growth rates of the past."
- Policy guidance: accommodate beneficial inflows while deploying tools to reduce volatility when flows threaten macro or financial stability.
Regional snapshots and country specifics
- Spain
- 2012 deficit ~10 percent of GDP (including financial sector measures); projected ~6.5 percent in 2013.
- For 2014, "new measures will have to be specified" to continue adjustment; priorities: specify fiscal adjustment measures, pursue structural reforms (labor market, liberalizing services), ensure effective asset management company operation, and accelerate bank restructuring.
- Italy
- Fiscal adjustment significant in 2012 (cyclically adjusted deficit reduction of around 2 to 2.5 percent of GDP); further cyclically adjusted reduction of around 1 percent of GDP expected in 2013 if implemented.
- Growth remains weak due to fiscal tightening; outlook should improve by end-2013 if planned adjustments are implemented.
- Structural reform progress noted; further reforms (privatization, legal system improvements) and bank balance-sheet strengthening remain needed.
- Political uncertainty (lack of new government agreement) is an identified risk.
- France
- Current account deficit "fairly elevated"; labor market reform underway. Macro stance "broadly appropriate" for the year; additional adjustment will be needed next year.
- Cyprus
- No GDP forecast provided in the document; IMF and European partners are negotiating a program; concern about financial-fragmentation spillovers to the periphery.
- Slovenia
- Growth outlook revised to a contraction of 2 percent in 2013.
- General government deficit cited as "between 3 to 3.5 percent of GDP"; public debt around "55 percent of GDP or less."
- Banking-system problems can be addressed via timely recapitalization and asset management solutions without major sovereign stress given relatively low public debt.
- United Kingdom
- Cited as a case where fiscal consolidation pace may be reconsidered given weak private demand.
- Brazil and South America
- Brazil's slowdown in 2012 significantly affected regional trade spillovers; Brazil expected to recover to about 3 percent in 2013, supporting the region.
- Channels of spillover primarily trade linkages; some neighbors (Paraguay, Argentina) are less financially integrated, so trade is the dominant channel.
- Middle East (oil importers) and Egypt
- 2012 was difficult for Egypt and oil-importing economies in the Middle East due to political transition and social unrest; stabilization expected to be gradual with "relatively moderate improvement in 2013."
- South Sudan
- 2012: severe impact from oil production shutdown starting January 2012, reducing GDP "by almost half."
- Hope that oil production will resume if agreements reached, which would boost growth and relieve pressures.
Risks, tail risks, and near-term outlook
- Short-term tail risks from a year earlier (U.S. fiscal cliff/debt ceiling and risk of euro breakup) have receded due to policy actions, but "we're not out of the woods."
- Forecast uncertainty: Mr. Blanchard estimates "a 50 percent chance" of disappointment with U.S. growth for 2013.
- Monetary easing appropriate in many cases but can increase risks of excessive risk-taking and asset-bubble formation; current assessment: not a major macro issue but "clearly have to watch."
- Gold: viewed as unpredictable and of "no macroeconomic import" in this context.
Banking, financial markets, and needed measures
- Persistent adverse feedback loops in the euro area among weak banks, weak sovereigns, low activity, and low confidence.
- Measures to reduce spreads and boost lending suggested:
- Improve bank transparency and accelerate supervision (including ECB role in banking union).
- Recapitalization where needed.
- Consider securitization or mechanisms to make SME loans more usable as collateral to ease bank funding constraints.
- Effective asset management companies to remove bad loans.
- Cyprus episode raises questions about renewed financial fragmentation; monitoring of deposit flows and fragmentation is emphasized.
Key policy recommendations (concise bullets)
- United States: adopt "less and better" fiscal consolidation now, with commitment to more consolidation later; avoid blunt measures like the sequester.
- Euro area:
- Urgent measures to strengthen banks without weakening sovereigns.
- Let automatic stabilizers operate where feasible; consider slower fiscal adjustment where fiscal space exists.
- Accelerate banking-union and ECB supervision steps to improve transparency and reduce spreads.
- Japan: pursue monetary easing and structural reforms, but pair fiscal stimulus with a credible consolidation plan to avoid debt-sustainability risks.
- Emerging markets: manage capital inflows to accommodate desirable rebalancing while limiting volatility via macro- and macroprudential tools.
- Country-level: press ahead with structural reforms (labor markets, services liberalization, privatization), clean up bank balance sheets, and specify credible fiscal paths for multi-year adjustment.
Italic: Transcript of a WEO Conference (April 16, 2013).