Transcript of European Economic Outlook October 2024 Press Briefing
IMF News, October 24, 2024
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- Published: October 24, 2024
Overview
- Headline: Europe’s recovery is falling short of its full potential; medium-term outlook unchanged.
- Main spokesperson: Alfred Kammer, Director, European Department, IMF.
- Key drivers highlighted: Russia’s war in Ukraine; EU fiscal framework; fragmentation of the Single Market; weak capital markets; skills mismatches.
Near-term outlook and growth projections
- Baseline: modest increase in growth for 2024 and 2025.
- Inflation timing: IMF expects the ECB to sustainably reach its target by mid-‘25; for most CESEE countries, this will take until 2026.
- Recovery composition: current rebound driven mostly by consumption with a projected handoff to investment when policy rates decline.
- Uncertainty: high uncertainty keeps consumers and investors cautious, moderating the recovery and contributing to a downgrade for 2025.
Inflation and monetary policy guidance
- Advanced economies: central banks should pursue a smooth loosening path.
- CESEE guidance: ease more cautiously in several CESEE countries because real wages may outpace productivity growth there.
- Türkiye: tight monetary policy needs to be maintained; easing would be premature while the fight against inflation is not yet won.
Fiscal stance and EU fiscal framework
- Fiscal recommendation: tighten the fiscal stance across most of Europe; deficits are too large to stabilize public debt.
- EU fiscal rules: new EU framework addresses sustainability concerns while allowing investment in green transitions and infrastructure; follow-through required.
- UK specific: IMF welcomes commitment to reduce or stabilize debt in percent of GDP over the next five years; achieving this will require a notable fiscal effort and clear fiscal framework that protects public investment.
Medium-term challenges: productivity, scale, and capital allocation
- Income gap: Europe’s income per capita is 30 percent lower than the U.S.; the gap has remained unchanged for two decades and did not exist at the turn of the century.
- Main causes: low productivity in CESEE and low capital stock.
- Three binding constraints identified:
- Fragmented markets preventing firm scale and cross-border growth.
- Capital markets that fail to channel savings to young and productive firms (venture capital in the U.S. is four times as high as in Europe).
- Missing skilled labor where it is needed.
Measured Single Market barriers (quantified)
- Estimated tariff-equivalent barriers within Europe’s Single Market:
- Manufacturing: 44 percent ad-valorem tariff equivalent.
- Between U.S. states (for comparison): 15 percent.
- Services between EU countries: 110 percent ad-valorem tariff equivalent.
- Investment gap highlighted: Draghi report cited an investment gap of 4.5 percent of GDP (mostly private).
Key policy recommendations (Europe-wide)
- Deepen and better integrate the Single Market by removing barriers to the free flow of goods, services, capital, and labor.
- Open energy, telecommunications, and financial services sectors to increase private sector investment, dynamism, and innovation.
- Advance the Capital Markets Union and Banking Union to funnel savings to the most productive firms and startups.
- Ease administrative barriers to market entry, especially in the service sector.
- Improve infrastructure, institutions, and governance in CESEE countries.
- Support public investment where needed (infrastructure, connectivity) while prioritizing growth-friendly fiscal consolidation where public debt is high.
Country-specific notes and headline points
- Ukraine:
- Growth downgraded due to bombing of energy infrastructure and continued war; projections for 2025 were revised down reflecting continued conflict.
- IMF teams supporting macro-stability, enterprise operations, vulnerable populations, and reconstruction fundamentals for EU accession.
- Spain:
- Strong recent growth driven by tourism, pickup in investment, employment gains supported by immigration.
- Recommendation: shift growth drivers toward productivity-enhancing reforms domestically and EU-wide; Single Market reforms important.
- Germany:
- Heavily affected by Russia-induced energy price shock due to energy-intensive manufacturing.
- Challenges: sharp near-term decline in working-age population; weak productivity; low public investment rates.
- Recommendations: boost labor supply (childcare, elder care, reduce marginal tax on second earners), raise public investment, reduce administrative burdens, champion Single Market and Capital Markets Union.
- Russia:
- 2024 growth upgrade (from 3.2% to 3.6%) driven mechanically by first-half data outturns; 2025 forecast downgraded (from 1.8 to 1.3 of GDP in April to current outlook) as overheating and supply constraints normalize and tight monetary policy slows demand.
- Medium-term: reduced potential growth due to lower technology transfers and financing under sanctions; nominal GDP revisions lowered debt-to-GDP ratios.
- Türkiye:
- Policy pivot praised: vulnerability reduced and inflation on a downward trajectory.
- Advice: maintain tight monetary policy, adopt forward-looking minimum wage agreements, pursue more fiscal adjustment to enhance credibility and reduce inflationary pressures.
- Italy:
- Debt ratio decreased since 2020 peak but remains very high (end-2023: 134 percent); deficits still higher than desirable.
- Recommendation: pursue more ambitious, growth-friendly fiscal consolidation alongside structural reforms to raise growth.
- Banking and mergers:
- Larger Pan-European banks and cross-border consolidation are seen as part of achieving scale in the banking system and supporting firm growth; IMF welcomes mergers in general but does not comment on individual transactions.
Trade, tariffs, and external tensions
- Tariffs and trade openness:
- IMF urges cooperative solutions to address subsidies and trade tensions.
- Tariffs are generally unhelpful, raise costs, harm competitiveness, and risk retaliation.
- Policy approach: prioritize cooperative, transparent approaches to subsidy issues and avoid tariffs that would undermine trade benefits.
Transcript of European Economic Outlook October 2024 Press Briefing — IMF Communications Department, October 24, 2024.