Transcript of October 2020 European Department Press Briefing
IMF News, October 21, 2020
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- Published: October 21, 2020
Overview
- Pandemic human toll: "More than 240,000 people have lost their lives."
- Regional GDP projection for 2020: "a 7 percent decline in Europe's GDP in 2020."
- Projected rebound: "real GDP is projected to rebound by 4.7 percent in 2021."
- Gap versus pre-pandemic outlook: "it would still be lower by 6.3 percent in 2021, relative to our pre-pandemic projections."
- Reported cumulative job support: "at least 54 million jobs have, at some stage, been supported by job retention schemes in Europe."
- Estimated aggregate GDP loss statement: "This implies a GDP loss of almost €3 million."
Economic impact, projections, and country timing
- Recovery horizon:
- "it will take until 2022-'23 for most countries to return to 2019 levels of GDP."
- Uncertainty and scenario drivers:
- Second wave outcomes (severity and containment measures) are a key downside risk to 2021 growth forecasts.
- Vaccine or therapeutics are cited as upside risks that could speed recovery.
- Country and sector heterogeneity:
- Spain: larger impact due to "a large tourism sector", prevalence of "small and medium enterprises", and "a large number of temporary employment contracts."
- Portugal: tourism exposure and spillovers from Spain; IMF assumes "a more gradual recovery than the Portuguese government for the second half" but "a stronger rebound in 2021."
- Western Balkans: first wave stemmed; second wave intensifying infections will weigh on activity; tourism and travel restrictions are important channels.
- Ukraine: WEO forecast revised from "a contraction of 8.2 percent in June, to a contraction of 7.2 percent currently" reflecting better Q2 outturns in retail trade and consumption.
Policy response and measured effects
- Fiscal support scale:
- "average size of announced discretionary fiscal measures for 2020 was 6.2 percent of GDP for Europe's advanced economies, and 3.1 percent of GDP for its emerging economies."
- "A large share of the fiscal packages was used for job retention programs and liquidity support for firms."
- Monetary and macroprudential policy:
- "Policy rate cuts, asset purchases, easing of conditions under which banks can obtain liquidity, and lowering of bank capital and liquidity buffers" supported credit flow.
- "Highly accommodative monetary policies by the European Central Bank and other reserve currency economies had a powerful, international spillover effect easing monetary conditions including in emerging Europe."
- IMF emergency financing: "IMF emergency financing supported six European countries."
- Counterfactual estimate:
- "For the European Union economies, we estimate that without the policy actions and a strong EU support, economic activity might have been an additional 3 to 4 percentage points of GDP lower in 2020."
- Recovery Fund expected impact:
- "Under the European Recovery Fund ... on average, the recovery funds will provide 3 percent of GDP in grants."
- Expected growth impact "between 0.75 percent. It could be higher, going up to 1.5 percent, depending on how these funds are being absorbed."
- Firm solvency and banking:
- "In advanced economies, around one-third of the pandemic induced solvency shortfall could be addressed by announced policies such as wage subsidies, grants, or tax rebates. In emerging Europe, it is only around one-quarter."
- Banks entered the pandemic "with strong capital and liquidity buffers" and "absent new shocks, the average capital ratio of large EU banks should stay well above the minimum capital requirements."
- Nonperforming loans "will rise" and "policy makers will need to facilitate their efficient disposal."
Policy recommendations and priorities
- Immediate priorities:
- "Policy must stay resolutely supportive to sustain the recovery."
- "Governments cannot afford not to spend."
- "Income support and job retention programs should remain in place as the pandemic evolves" and be adapted "from protecting jobs toward supporting workers including through reskilling programs."
- For firms: move "beyond liquidity support and ensure that insolvent but viable firms can remain in business" via "speedy debt restructuring in or outside of bankruptcy, or in some cases, make equity available to viable firms."
- Monetary policy stance:
- "Long term inflation that is generally anchored around or below targets and sizable economic slack suggest that Central Banks should keep highly accommodative monetary policies in place."
- "Macroprudential easing should be unwound only gradually."
- Medium-term fiscal strategy:
- Countries should "put in place plans for the medium-term, on how they will reestablish fiscal buffers" and "build buffers" so policy space exists for future crises.
- Once temporary support is unwound, redeploy resources "to public investment that will build a more resilient, smarter, greener, and more inclusive economy for tomorrow."
- "For the EU countries, the next generation EU instrument can play an important role" and should be deployed "as soon as possible."
- Structural reforms and inclusion:
- Design reforms to "boost productivity growth" and to "reap the benefits of digitalization and mitigate climate change."
- Improve social systems to better handle "worker dislocation and retraining needs arising from automation and technological change."
- Better targeting of fiscal support to address likely "sharp rise in inequality" affecting "the youth, women, and least educated" disproportionately.
- Banking sector engagement:
- Banks should "engage with shareholders in developing a credible strategy to raise capital over the medium term."
Specific program and operational notes
- IMF-Ukraine Standby Arrangement: "We started a Standby Arrangement of $5 billion with Ukraine in June" to support macroeconomic stability, pandemic response, and reforms over an "18-month period."
- Forecasting approach and limits:
- IMF forecasts incorporate assumptions about the second wave and "assumed that the second wave will be dealt with, with social distancing measures, limited and partial containment measures."
- Forecasts are sensitive to epidemiological developments; IMF notes "we rely very much on epidemiologists" and emphasizes substantial uncertainty.
Transcript of October 2020 European Department Press Briefing, October 21, 2020