## Transcript of Press Briefing on the International Monetary Fund's World Economic Outlook by Olivier Blanchard, IMF Economic Counsellor and Director of the Research Department

_IMF News, October 1, 2009_

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## Bibliographic details
- Published: October 1, 2009

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### Global outlook and headline forecasts
- Advanced countries: output to increase by 1.7 percent in 2010.
- Emerging market and developing countries: output to increase by 5.5 percent in 2010.
- World output: increase by 3.2 percent in 2010 (on a fourth quarter to fourth quarter basis).
- Forecasts represent an upward revision of 0.6 percent relative to April forecasts.

### Drivers of the recovery and fragilities
- Recovery has started; financial markets are healing; growth positive for the rest of the year and in 2010.
- Recovery so far largely accounted for by:
  - Strong public spending (fiscal stimulus).
  - Inventory adjustment (restocking) by firms.
- Risks and constraints:
  - Inventory adjustment will end.
  - High public spending and large fiscal deficits are not sustainable indefinitely.
  - Debt levels projected to reach 110 percent of GDP by 2014 in advanced countries.
  - Bank credit likely to remain tight for quite some time.
  - Consumers in advanced economies likely to save more; capacity utilization at historically low levels; housing investment weak in many countries.
- Implication: advanced countries will need stronger private domestic demand or greater reliance on foreign demand (net exports), implying some emerging markets will need to rely less on net exports.

### Global rebalancing: necessary adjustments
- Rebalancing required on two margins:
  - From public to private demand (increase in private consumption and investment).
  - From current account surplus countries to current account deficit countries.
- Exchange rate adjustment (appreciation of Asian currencies to varying degrees) likely to be part of the package.
- Additional policies may be required (examples cited: increase social insurance, reduce saving and increase consumption in countries such as China).

### Policy agenda and recommendations
- Twofold policy agenda:
  1. Avoid premature exit from supportive policies; prepare credible exit strategies.
     - Exit from monetary policy: mostly technical; timing critical.
     - Exit from fiscal policy: requires major effort and structural reforms (retirement and healthcare systems).
     - Exit from financial policies: must include major financial-sector reforms.
  2. Coordinate policies internationally to achieve global rebalancing and sustain recovery.
     - IMF to assess mutual consistency of national policies under G-20 mandate.
- Fiscal guidance:
  - Consolidation should wait until recovery is on a solid footing.
  - Medium-term plans needed to roll back fiscal deficits and contain public debt.
  - Fiscal rules are useful once a clear direction exists but structural reforms are fundamental.
- Emerging markets should consider removing stimulus earlier than advanced economies once recovery is clearly entrenched.

### Risks, scenarios, and Fund work on vulnerabilities
- Baseline scenario is the WEO focus (most likely path).
- Fund explores downside “worse” scenarios (examples: new banking crisis, fiscal crises, major health or natural disasters).
- An early warning exercise is being developed to assess probabilities of adverse events and policy responses.
- Debt increases in baseline noted; in some adverse scenarios fiscal crises could occur in a few countries.
- Central bank balance sheets: deemed manageable; central banks have tools (e.g., paying interest on reserves) to tighten if needed.

### Regional and country notes (selected)
- China: closer to an entrenched, self-sustaining recovery; monetary tightening will be needed sooner than later to address credit-quality risks and potential asset-price imbalances.
- Germany: current account surplus (just above 6 percent in 2008) narrowing appreciably in 2009 and 2010; domestic demand being supported by stimulative policies.
- United Kingdom: has fiscal rules under revision; consolidation should await solid recovery and be accompanied by structural reforms.
- Turkey:
  - Activity decline in 2009 of 6 1/2 percent.
  - Growth forecast of about 3.7 percent in 2010.
  - Quarter-to-quarter rebound from Q1 to Q2 about 7 percent (annualized about 25 percent).
  - Turkey characterized as more cyclical due to large manufacturing sector.
- Argentina:
  - Activity declined by 2 1/2 percent in 2009.
  - Forecast growth about 1 1/2 percent in 2010, with positive growth emerging in the course of 2010.
- Nigeria:
  - Growth projected at 2.9 percent in 2009.
  - Projected pick up to around 5 percent in 2010.
- Brazil and Latin America:
  - Brazil: contraction of about 0.7 percent in 2009; forecast growth of 3 1/2 percent in 2010.
  - Latin America: rebound supported by commodity prices, policy support, and external demand recovery; modest current account deficit expected near term.
- Developing Asia:
  - Projected growth of 6.2 percent in 2009 and 7.3 percent in 2010.
  - Recovery driven by trade normalization, inventory cycle turn, strong policy responses, and alleviation of financial stress.
- Commonwealth of Independent States (CIS) and Russia:
  - Region badly affected by trifecta: commodity price declines, capital outflows, large decline in trade.
  - Russia: activity contracting by about 7 1/2 percent in 2009; recovery with growth of about 1.5 percent in 2010.
  - IMF uses market-implied commodity-price assumptions: oil prices assumed just above $60 per barrel in 2009 and just above $75 per barrel in 2010.

### Structural issues highlighted
- Banking sector: danger of bank insolvency much decreased, but recapitalization and removal of toxic assets proceeding too slowly in some cases; Fund would like faster progress.
- Pension and retirement systems: crisis forces rethinking of pay-as-you-go versus fully funded systems; expectation is to keep mostly pay-as-you-go but adjust benefits, contributions, and retirement age to improve sustainability.
- Role of IMF programs: cited as contributing to macro stability and better crisis response in many emerging and African countries; programs include social protection elements to shield vulnerable groups.

### Final scenarios and caveats
- Baseline projects continued, albeit relatively weak, recovery especially in advanced countries, assuming limited global rebalancing occurs.
- If private demand fails to recover and fiscal deficits persist, downside risks include elevated debt ratios and potential fiscal crises in some countries.
- Fund work includes scenario analysis and early-warning efforts to identify vulnerabilities and policy options to lower risk and prepare responses.

*Transcript of Press Briefing on the International Monetary Fund's World Economic Outlook by Olivier Blanchard, October 1, 2009.*

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