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Transcript of a Press Conference on the International Monetary Fund’s 2011 Article IV Consultations with the United Kingdom
June 6, 2011
Webcast of the press conference  |
MR. OSBORNE: Ladies and gentlemen, it gives me great pleasure to be able to introduce John Lipsky, he’s the Acting Managing Director of the IMF, of course, and his team here at the Treasury building for the first time. The need for better international scrutiny of national economies is one of the main lessons we’ve learned from the last few years. As John will explain shortly, this year’s annual Article IV economic assessment by the IMF has been accompanied by two additional reports. One is an in depth analysis of the UK financial sector, the other is the first ever IMF spillover report. This is the new work exclusive to the five economies that have been identified as systemically important, the U.S., China, Japan, the Euro Zone, and the UK, and this report looks at the relationship between the UK’s domestic policies and the wider stability of the global economy.
This is an important policy innovation in macroeconomic surveillance which will compliment the work of G-20 finance ministers to deliver strong, sustainable, and balanced growth. Both are important steps. We should all hope that these new tools will help us avoid future financial and economic crises on the scale of the one which we’ve seen in recent years. But more scrutiny and early warning is not enough on its own. National governments need to listen to what independent international organizations like the IMF are saying. Indeed, the IMF’s own independent evaluation of its performance in the run up to the crisis revealed that certainly in the case of the UK, many warnings were made in private, especially about the precarious fiscal position. If those warnings had been heeded rather than suppressed, then perhaps we would not find ourselves confronting in this country such a huge fiscal challenge today.
Let me, very briefly, set out the main lessons that I draw from today’s IMF report on the UK before handing over to John. First, I welcome the IMF’s continued strong support for our overall macroeconomic policy mix including our deficit reduction strategy. As the opening sentence of that report states, the post crisis repair of the UK economy is underway. Difficult decisions on tax and spending inevitably generate a position and lead some to argue that there is an easier way.
The IMF expert team has spent two weeks here engaging with all shades of opinion, including those who’ve been calling on us to change course. The IMF have publicly asked themselves the question whether it’s time to adjust macroeconomic policies, in other words, is it time to change course, and they have concluded definitively that the answer is no.
As they state in their concluding statement, strong fiscal consolidation is under way and remains essential. I also agree that the policy mix of deficit reduction and interest rates that stay lower for longer is the best way to rebalance our economy towards exports and investment. Of course the IMF notes that the economic data in the UK has shown, yes, stronger job creation and tax receipts than expected, but like many countries, weaker GDP growth and high inflation than was forecast last year. Their analysis suggests that a significant reason for this has been the unexpected spike in global oil and commodity prices. Around the world this has led to slower growth and higher inflation than was forecast a year ago.
Here in the UK we have taken some domestic action to ease the pressure on households and businesses, such as the six pence per liter cut in fuel taxes relative to previous plans that I announced in the budget. And I believe we should look at whether we can do more internationally to improve supply conditions and the operation of oil markets in order to stabilize prices and support the global recovery.
The second lesson I take from today’s IMF report is that we need to press on with medium and long-term reforms to improve the sustainability of our public finances. The IMF today explicitly referenced the reforms we’ve proposed to the state pension aid and John Hutton’s proposals on public sector pensions. It’s essential that we now see those through. The IMF also reference our Plan for Growth, published earlier this year, which set out ambitious reforms to planning and regulation. And we are now working on the second phase of the Growth Review for publication in the autumn.
Finally, ladies and gentlemen, we are reminded today that we must complete fundamental reforms to our financial system, both domestically and internationally. I strongly agree with the IMF’s view that financial stability in the city of London is not just good for Britain, it is good for the world. I welcome their recognition that this government has shown global leadership on financial reform, including the creation of the Independent Commission on Banking and the new system of regulation, and I particularly welcome the IMF’s support for proper international implementation of Basil III in a way that provides a level playing field while retaining national discretion to operate macro prudential tools.
I will have more to say on these issues in my Mansion House speech next week.
Let me conclude by saying we very much welcome the IMF here today. There has been extremely good engagement with them and I think that has benefitted both sides. I’ll ask you all to welcome John Lipsky to present the IMF findings in detail and to take questions from you. Thank you.
MR. LIPSKY: Thank you very much, Chancellor. Appreciate the welcome and it’s a welcome opportunity to share with you our conclusions and to entertain your questions.
First, let me introduce my colleagues. To my immediate left is perhaps well known already to you, Ajai Chopra, Deputy Director of our European Department at the IMF and in charge directly of our relations with the United Kingdom. Kevin Fletcher is the desk officer for UK in our European Department. Ceyla Pazarbasioglu, who’s helped me learn a lot about pronouncing Turkish surnames, also is from our Monetary and Capital Markets Department and she has been in charge of the Financial Sector Assessment Program, or FSAP, that has been conducted here with the UK and to my far right, Olga Stankova, from our External Relations Department.
So, moving on from the -- as the Chancellor said, this is a special year of our relations with the UK in that we’re conducting our normal consultation missions, our regular annual discussion with the UK authorities and others about the status of the outlook for the UK economy and the global economy and a discussion about the policies being followed, but in addition, this year we have conducted a FSAP, a Financial Sector Assessment Program, which represents a very thorough review in detail of the entire financial sector in the UK. What’s notable this year is the IMF’s membership have now made mandatory FSAPs for the 25 economies with systemically important financial systems, so it is natural that the UK, with it’s very large and internationally important financial sector, would be one of the first to undertake an FSAP under this new regime, if you will, that makes these analyses a regular part of Fund surveillance activity.
And finally, this is the first year in which we are conducting spillover reports, as the Chancellor mentioned, with five systemically important economies and the idea here is that we have gone to each of the systemically important -- the authorities in each of the systemically important economies to discuss their views of the policies -- the impact and the policies of the others upon them. We’ve also discussed with the important partners of each of the systemically important economies their views about policies of the five.
This has allowed us, in our discussions, in this case with the UK authorities, to enrich the policy discussion with the perspective of UK’s partners. So this has been, I think hopefully, a very fruitful set of discussions for the authorities here. It certainly has been a particularly useful and insightful one for us.
I’d like to share with you some of the key conclusions of this year’s Article IV discussions. Most important, of course, the UK economy is recovering from the impact of the financial crisis. As we all know, and as the Chancellor mentioned, growth has flattened in recent quarters, as a spike in energy and commodity prices together with a still weak housing market has weighed on consumer confidence. At the same time, as we know, headline inflation has accelerated reflecting both the spike in commodity prices and the indirect tax hikes. Naturally, these developments raise the question whether it’s time to adjust the macro economic policy strategy. According to IMF staff analysis, the answer is no. We expect that the deviations from the economic trajectory that had been forecast to be largely temporary.
Looking ahead we expect the economic recovery to resume in 2011 albeit at a moderate pace, and although the unemployment rate remains unacceptably high, it appears to have stabilized and it’s encouraging that employment growth has picked up recently.
So, real GDP growth is expected to reach around 1.5 percent this year representing a slight downward revision to our projection in the April update of our World Economic Outlook Forecast. However, this revision mainly reflects the weaker than expected rebound in the first quarter of the year, and in our view, growth is still expected to accelerate gradually to a 2.5 percent annual pace over the medium-term reflecting, among other things, strengthening exports, growing business investment spending, and recovering private sector employment.
Turning to inflation, we expect that inflation will remain faster than 4 percent for most of 2011 but then will decelerate to near the 2 percent target over the policy horizon as the effects of recent commodity price shocks and indirect tax hikes dissipate gradually, and when these factors are taken into account, the current policy mix of tight fiscal and loose monetary policy, in our view, remains appropriate.
Now, the fiscal consolidation that is underway we know is designed to achieve a more sustainable budget position, thus reducing fiscal risks. Although this consolidation no doubt will create some headwinds for near term growth, but it will also assist disinflation, and thus it can be counted, if necessary, by looser monetary policy than would otherwise be the case.
As we all know that the uncertainty around the central scenario forecast remains high, this is not just true here, this is true for all the advanced economies. Of course, the potential policy responses if risk materialized would depend upon the specific risk that might appear, and you’ll find that discussed in more detail in our concluding statement.
Turning to the financial sector, our analysis of the spillovers from the United Kingdom makes it clear, as the Chancellor remarked, that UK financial stability not only is in United Kingdom’s best interest, but is also a global public good. This latter aspect reflects the large size and extensive international interconnectedness of the UK’s financial sector, thus, in our view, it’s an all together positive development that UK banks have strengthened their capital and liquidity positions over the past year. Despite it’s increased resiliency, however, the financial sector definitely remains in a recovery phase. Given the domestic and global importance of the financial system here, it’s of key importance that institutions, markets, and infrastructures are subject to first rate regulation and best practice supervision, and further improvements in the quality of supervision will be required to reach this demanding standard.
A very positive post-crisis development has been the creation of a high quality resolution framework for financial institutions. However, dealing successfully with the potential risks created by systemically important financial institutions requires a range of tools. These include recovery and resolution plans, higher prudential requirements, and frankly, more intrusive supervisions, including rules for early action. But little will be achieved regarding resolvability without progress on cross-border resolution and this will require international consultation and high-level political commitment, and we are therefore very pleased to see that the UK authorities continue to exercise leadership on these matters.
As we all know, the UK currently is moving the financial regulatory infrastructure towards a triple peak model which is a significant innovation. Naturally the transition will be challenging. Among other considerations, it’s critical that the process not divert attention from efforts to enhance financial sector supervision, which I mentioned is still in recovery mode.
Well, before I take questions, I would like to thank our counterparts at the Treasury, Bank of England, and the FSA for their kind hospitality and cooperation over the last several months. As always, the authorities have been very generous with their time, very willing to engage in frank and enlightening discussions that form a crucial part of our consultation and surveillance process. So, thank you very much, and with that we open the floor to questions.
MS. STANKOVA: Thank you, John. Now we will take your questions. Please introduce yourself and your affiliation when asking a question.
QUESTIONER: The IMF’s forecast for the UK, both here and in the recent WIO are significantly slower for growth than the Office of Budget Responsibility and have higher deficits in the medium-term than the Office of Budget Responsibility (OBR). Does this mean that you are recommending that the government does use the flexibility in its fiscal mandate to use (inaudible) that is your central expectation that that’s necessary?
MR. CHOPRA: As Mr. Lipsky already said, the reason that we have adjusted our forecast for growth in 2011 is very much to do with the outturn in the first quarter, and what I will emphasize again is that much of the revisions to our forecast also just reflect the spike in commodity prices. The OBR made it’s last forecasts in March and we, of course, had the luxury of having a bit more information since they made their forecast. In terms of differences in our projections, there are also slight differences in projections of output gaps. This is a very difficult thing to estimate and I know you yourself have done some analysis of this matter. So, the differences in projections with the OBR come about because of relatively small differences in our medium-term path for output and the output gap.
The government’s fiscal mandate allows the full operation of automatic stabilizers, and that, of course, remains available and consistent with the conduct of fiscal policy.
QUESTIONER: You’re clear that the inflation spike is temporary and there’s no need for the government to change course there. You say that there is a short-term headwind, however, arising from the fiscal tightening. What percentage of, as it were, negative growth do you impute from the projections you’ve done? That is, you know, given you know the size of the fiscal tightening that is about to hit to UK, you know, it’s already begun, but the main loading begins now, what is the size of the headwind? Because it should surely therefore help UK policymakers to judge, you know, when this moment comes, when the plan B that you’ve spelled out in the form of tax cuts and potentially more quantitative easing, will be necessary. What level of, as it were, zero or close to zero growth would be the trigger for the plan B you’ve spelled out here.
MR. LIPSKY: Let me make two remarks and then ask Ajai to provide details. First of all, we’ve made no such claim of any alternative scenario. What we’ve said is that we consider that the current deviations from forecast represent temporary factors and that the current policy mix strikes us as appropriate. If in the future it the economy’s trajectory proved to deviate from our forecast, then it will depend very much on what is the source of any deviation in terms of policy response. And I think as Ajai Chopra just pointed out and we pointed out in our documentation, that there is flexibility built into the existing policy stance in terms of automatic stabilizers, in terms of flexibility monetary policy, in terms of the policy buffers left -- that exist by design in the plan to accommodate short-term deviations.
Secondly, our forecast for the restoration of growth is consistent with the fiscal tightening that is planned -- the fiscal consolidation that is planned. In terms of more specifics, I don't know. Ajai, if you'd like to add something?
MR. CHOPRA: Just two points over here. Firstly, you were asking about the magnitude of the headwinds. All I would say over here is that the fiscal multipliers that are in the OBR's analysis are very plausible multipliers. They are in line with IMF estimates for a range of countries. And we have applied those fiscal multipliers in our analysis based on the path of fiscal consolidation. And I think that calculating the headwinds becomes a small arithmetic exercise at that point.
You also asked about the inflation projections. As we've made very clear in our statement, we see the bulk of the inflation overshoot coming from transitory factors. What we do is, we also look at futures prices for commodities and energy, and factor that in. And on that basis, we do see inflation returning to target.
Now, these are central forecasts. On inflation, there could be shocks, there could be other things that happen. And what will be critical is for the Bank of England, as they do every month in the context of a Monetary Policy Committee meeting, to look at what's happening in the economy. To look at what's happening with their inflation forecast, to look at the balance of risks around these forecasts, and make a monetary policy decision on that basis.
MS. STANKOVA: Thank you. Second question, lady in the first row.
QUESTIONER: You've been here a couple of weeks, I'm sure you were, therefore, well aware that the Sunday newspapers were full of many economists and experts lining up to say that the cuts were too fast and were too deep and were damaging the economy and it was time to change course.
You've been very clear in your remarks and in your written words that you do not believe it is time to change course. But will you take on head on the criticisms that the cuts are too fast and are damaging the economy? Do you agree that they're damaging the economy but it's a price worth paying in the short-term for long-term gain?
MR. LIPSKY: First of all, let's make sure a few facts are clear. The level, for example, of public spending is -- as a percent of GDP has been reduced by, in our forecast, about a half a percent of GDP, compared to the previous fiscal year. However, it remains very far above the pre-crisis levels of spending and represent long-term highs in spending. So I think it's important to retain that perspective.
Secondly, the -- when you use the term 'damaging', I think that strikes me as a very loaded term. The fiscal consolidation, as I said earlier, does create some headwinds to growth. But it also creates some positive aspects. In the short-run, disinflation that should contribute to a lowering of interest rates and helping the economy. And in the longer term, bolstering confidence and restoring fiscal sustainability. So, I think that's certainly the way that we view this current process.
MS. STANKOVA: And the next question please?
QUESTIONER: To what extent do you consider the risk to growth from the Eurozone -- from the turmoil in the Eurozone, particularly Ireland, in terms of exports, for example?
MR. LIPSKY: Of course. You're quite right that we are very deeply engaged with our members -- with our Euro-area members. We have concluded support arrangements together with our European partners, the ECB and the European Commission, to agree with the Irish authorities on a plan of economic stabilization and adjustment.
Most recently, we also agreed on a program with the Portuguese authorities that was endorsed by both the now outgoing government and the opposition parties now about to be the governing parties. And as you may have seen in the press, we recently last week reached an agreement with the Greek authorities on a policy package that they are now discussing internally.
All of these are intended, of course, to provide greater stability to the peripheral countries of the Eurozone that have been hit by financial and real economic stress. And we think it is important that the situation becomes stabilized and turn towards positive growth in these economies that face substantial challenges.
Of course, the UK economy trades with its Eurozone partners. It's a principle trading partner, so it has a very vital interest in the success of this venture. In particular, the case of Ireland. As you all know, the UK authorities joined in the support being provided for Ireland.
Right now, that program appears to be on track. That's not to say it's not a difficult challenge. And of course it requires some forthright action by the Irish authorities to reestablish the basis for sustained growth. As I said, right now that program appears on track and contains some positive signs, like a return to export growth in the Irish economy. But we all have interest in the success of this effort.
And Ajai and Kevin, if you want to add any details. Thanks.
MS. STANKOVA: The lady in the second row.
QUESTIONER: Just to go back to this question of the risk of prolonged period of weak growth. You do highlight that there could be permanent costs to that, because you can have loss of human capital from people being unemployed for a long time, capacity is lost permanently because companies have gone bust. And you highlight that it would be very important to avoid those risks.
I guess I'm just interested in what constitutes a prolonged period of weak growth in the IMF's view? When you will, on these forecasts, have had 3 years of growth of 1.4, 1.5 percent -- well below trend, after a very serious recession. So that's very weak growth for a recovery, and quite weak growth just for normal times. Does -- what would a prolonged period of weak growth look like? And isn't this it?
MR. LIPSKY: Well, first I wouldn't want to get involved in any kind of false precision about definitions. And would note, for example, as I alluded to in my opening statement, we are going through a period of somewhat weaker than expected growth in all the advanced economies at this moment.
Some of that we think, in general, reflects the rise in energy prices. Some of it may reflect a brief interruption in some areas of industrial production, especially the automotive sector reflecting the specific problems -- very unusual problems deriving from the Japanese earthquake and some temporary disruptions in the supply chain.
But looking forward, our expectation is that average growth in the advanced economies -- average -- this year will reach 2-1/2 percent, about the same next year. That, of course, represents a modest recovery -- a relatively moderate recovery relative to what might have been expected in the past in a post-recession period. And so, there are two things --
QUESTIONER: (off mike) of the UK.
MR. LIPSKY: But as I think I said, our anticipation is a return to the forecasted growth path in 2012 of something around 2-1/4, 2-1/2 percent. In other words, we've maintained our forecast for the UK economy.
In looking forward and responding to the specific question that implied why aren't we getting a stronger recovery in the advanced economies? It seems to me that there are two factors that are worth noting.
Both are ones that we had anticipated. As you know, the Fund's research -- and we stated quite clearly at the outset of the financial crisis in 2008 that our reading of history says that economic downturns accompanied by financial crises have tended to leave long tails in terms of a period of relatively moderate growth. That is, relative to downturns not accompanied by financial stress. So, we had been concerned that this was an inevitable result of this period.
At the same time, we've also noted and emphasized quite recently -- we emphasized in our recent World Economic Outlook forecast -- that the global growth this year, next year, we anticipate will be around 4-1/2 percent. Global growth for the last 20 years averaged 3.6 percent. For the last 30 years averaged 3.5 percent. So, at a global level growth is actually quite strong relative to medium- and long-term trends.
However, it's the distribution that has led to problems. 2-1/2 percent growth for the advanced economies is not fast enough to make a significant dent in the rise in excess capacity in unemployment that has been the hallmark of the downturn. Average growth of 6-1/2 percent in the emerging economies at a time in which most of those economies have little or no excess capacity left and have now begun -- been subject in the wake of the rise in energy and commodity prices to rising headline inflation, means that it is time to be adjusting the expansionary policies in the emerging economies that have been put in place in response to the crisis.
And more broadly, this is the exact reason underpinning the impetus for the G-20's mutual assessment process in support of the framework for strong, sustainable, and balanced growth. In other words, the way to achieve faster growth in the advanced economies is by globally consistent and coherent set of macroeconomic policies that will strengthen domestic demand in the emerging economies. And at the same time, accompanied by fiscal consolidation and structural reforms in the advanced economies. It's this coherence that is going to help overcome the natural tendency toward a period of more subdued growth, coming out of a period of recession accompanied by financial stress.
MS. STANKOVA: We'll take next question, please.
QUESTIONER: Two, if I may. On the UK, any worries about the slow pace of productivity growth? And then just in terms of Greece, does the IMF have any thoughts on a debt reprofiling from Greece?
MR. LIPSKY: First, with regard to productivity growth in the UK. It's our view that -- our read of the data suggest that there has been some degree of labor hoarding during the downturn. In other words, it might be useful to contrast what happened in the U.S. with what's happened in the UK.
The downturn in output was greater here than in the U.S., but the downturn in employment was greater in the U.S. than in the UK. So our read is that some of the sluggishness in productivity represents labor hoarding that, as the outlook turns favorable, as confidence rebuilds, as demand rebuilds, means that productivity growth should accelerate. And that leads us to be cautious but moderately optimistic on the outlook for potential growth here in the UK.
With regard to Greece -- is there anything to add? They are -- as I said, we've announced last Friday that together with our European partners and the Greek authorities that we'd reached an understanding on a policy package that would, together, put the current program on track. Still to be confirmed are the financing needs that would be associated with that. And right now, the program that we are supporting -- let me be clear -- the program that we are supporting that has been approved and which the latest package is intended to put back on track does not contemplate debt restructuring.
MS. STANKOVA: Thank you. Maybe we have time for one or two more questions, if there are any. Yes, please.
QUESTIONER: On the investment side, things have been pretty disappointing. I wondered if you thought there was any argument for the government to give investment a bit more of a kick via public spending? Use some of its flexibility on that side.
MR. LIPSKY: You mean to encourage investment by direct spending rather than by fiscal consolidation and lower interest rates?
MR. CHOPRA: The way we see it is that corporate balance sheets are in fairly sound shape. And our forecasts build in a growth in both private investment as well as net exports.
What I would add to the point that Mr. Lipsky made about labor hoarding is that as that gets unwound, that that will help competitiveness and that will help exports. And that also then feeds back to private investment. So, we do not at this point see any need for targeted schemes on that front.
MS. STANKOVA: Thank you. Perhaps last question.
QUESTIONER: John, I still wasn't clear about your answer to Stephanie Flanders. I didn't understand what point structural unemployment and low growth is where we need to change policy. At what point do you draw the line that slow growth has been going on too long and unemployment -- which you seem to depict now as still being -- having temporary factors in it -- becomes structural?
MR. LIPSKY: As I said, we have a base case scenario that we think is still the right scenario. Until we decide that it's -- that we have been, in your context, too optimistic about growth prospects, at that time we would naturally consider how policy could be made appropriate -- consistent with that forecast. But right now, we feel very comfortable that developments are consistent -- underlying developments are consistent with our medium-term forecast.
Do we think they could -- that the outlook could be improved? And that was the essence of my answer to Stephanie. That, yes, we do. But it's not just -- we are not the only ones who agree that the outlook can be improved. It's the consensus of the G-20, working together through the framework for strong, sustainable, and balanced growth, are convinced that through policy coherence and consistency that the growth outlook can be strengthened for everyone. And that's the goal of that effort, and that's the importance of that effort.
MS. STANKOVA: All right. Thank you very much. With this we conclude the press conference.
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