Spring Meetings 2003

2003 Spring Meetings: News Releases, Speeches, Committee Papers, Documents and Background Information

Statements Given on the Occasion of the IMFC Meeting
April 12, 2003

Documents related to the International Monetary and Financial Committee (IMFC) Meeting

Managing Director's Statement
to the International Monetary and Financial Committee on the World Economic Outlook

April 12, 2003

The pace of the global economic recovery has slowed since late-2002, particularly among the industrial countries, amid rising uncertainties in the run up to war in Iraq and the continued adverse effects from the bursting of the equity market bubble. Industrial production has stagnated in the advanced countries; world trade growth has slowed; labor market conditions have remained soft; the recovery of fixed investment is not well established; and forward-looking indicators are weak. Against this backdrop, global equity markets have fallen, the U.S. dollar has depreciated, and government bond yields in industrial countries have declined. At the same time, bond spreads for some emerging markets have narrowed, reflecting clearer signals about future policies in these countries as well as global portfolio shifts from equities to high yield fixed income assets. The geopolitical situation has had a significant impact on oil prices and financial markets, which have exhibited considerable volatility in recent weeks.

With the war in Iraq still ongoing, the short-term outlook remains subject to considerable uncertainty. The global economy, however, has shown remarkable resilience in the face of large shocks in recent years, and in many countries the economic fundamentals have been strengthened. In addition, growth should be supported by the policy stimulus in the pipeline, the easing of the headwinds to growth from the bursting of the equity market bubble, and the inventory cycle. On the assumption that the uncertainties surrounding the conflict in Iraq are broadly resolved in the near term, with little spillover outside the region, there is good reason to expect the global recovery to gradually reassert itself during the course of this year.

Against this background, the World Economic Outlook projects global growth of 3¼ percent in 2003—¼ of a percentage point higher than in 2002—and 4 percent in 2004:
  • In the United States, recent economic data have been disappointing, and growth this year is expected to be somewhat weaker than in 2002. But once current geopolitical uncertainties have been resolved, a recovery in confidence and investment, together with additional fiscal stimulus, should underpin stronger growth from the second half of 2003. The continued impressive productivity performance of the U.S. economy also bodes well for the future.

  • Growth has continued to disappoint in the euro area where domestic demand remains weak. Forecasts have been revised down sharply, and only a modest pickup in growth is now expected in 2003 as balance sheet strains, excess capacity, the appreciation of the euro, and fiscal policy tightening in a number of countries are all likely to weigh on the economy going forward. Within this overall picture, the situation in Germany is particularly worrisome.

  • In Japan, recent indicators suggest that the recovery that begun in early 2002 is now slowing. GDP growth in 2003 is expected to be weak as investment and consumption remain subdued in the face of the large imbalances in the corporate sector and the uncertain employment outlook. Moreover, deflation continues, and survey evidence suggests that deflationary expectations are becoming more widespread and persistent.

In emerging market economies, growth prospects for 2003 have been revised down slightly, in part because of the weaker outlook in advanced countries and higher oil prices, but also because of the uncertain external financing environment:

  • In Latin America, economic and financial conditions are stabilizing in response to determined efforts in many countries to address vulnerabilities. Activity has begun to turn up following the deep recession in 2001-02 as the substantial real exchange rate depreciations in the region have boosted net exports. Financial market indicators have generally strengthened since October 2002, although financing conditions remain difficult for some sub-investment grade borrowers. Nevertheless, the outlook remains fragile across the region. The policy frameworks in a number of countries, including Argentina, still need to be strengthened substantially, while the political crisis in Venezuela has had a serious impact on activity.

  • Growth in emerging Asia exceeded expectations in 2002, particularly in China, and is expected to remain robust in 2003. However, the renewed slowing in the global IT sector will, if sustained, have an adverse impact on growth; while domestic demand has generally strengthened, it is still not sufficiently robust in most countries to support a self-sustaining recovery.

  • In central and eastern Europe and the Commonwealth of Independent States, GDP growth has remained solid, underpinned in the former by strong foreign direct investment inflows as EU accession nears and in the latter by rising oil prices and stronger domestic demand. In Turkey, GDP growth has exceeded expectations, but the outlook has recently become more difficult in light of recent policy slippages and the geopolitical situation. To improve confidence, the government needs to adhere strictly to the commitments agreed in the new Letter of Intent.

  • In the Middle East and Africa, growth is expected to pick up in 2003 as many countries benefit from higher commodity prices and improved policy implementation. Regional security concerns and conflicts, however, present serious risks to the outlook, while stronger growth in a number of African countries will depend critically on an early improvement in weather conditions.

This scenario remains the most likely development and represents a realistic basis for our policy discussions. The risks and uncertainties surrounding this outlook, however, are considerable:

  • The conflict in Iraq remains a significant source of uncertainty, which could persist for some time.

  • The global recovery continues to depend heavily on the United States. This reliance on the United States has also contributed to the widening of global imbalances, and while these may adjust in a benign fashion, a disorderly adjustment—involving a sharp depreciation of the U.S. dollar—remains a risk.

  • The possibility of further declines in mature equity markets cannot be ruled out. While forward-looking price earning ratios are now close to historical averages, and earnings expectations have fallen back from earlier optimistic levels, it remains possible that—after a long period of overvaluation—markets could overshoot on the downside. An adjustment in house prices in some industrial countries is also possible.

  • Vulnerabilities in a number of emerging market countries remain high, making them susceptible to any deterioration in the global environment.

Against this background, policymakers face considerable uncertainty, and they will need to remain flexible and adapt quickly to changing circumstances. With inflationary pressures in general quite moderate, monetary policies in major industrial countries should remain accommodative, and there is scope for further easing should it be needed. In the United States, policy is appropriately on hold for the time being, while in the euro area rates were cut by 25 basis points in March; if incoming data were to suggest recoveries were faltering, additional monetary easing should be considered. In Japan, more aggressive monetary action is required to arrest deflation. With regard to fiscal policy, the situation differs between countries, but the room for maneuver in many is limited by the high levels of public debt. The automatic fiscal stabilizers, however, should be allowed to operate fully.

In those emerging market countries experiencing external financing difficulties, macroeconomic policies must continue to aim at rebuilding confidence; elsewhere—particularly in many countries in Asia—there is more room for policy maneuver in response to adverse shocks. A number of countries—including some of those that are among the world's poorest—could be seriously affected by any deterioration in the global environment, and additional assistance from the international community may be necessary in some cases.

Attention is inevitably and appropriately focused at this stage on the consequences of the war, but it is important that critical medium-term policy issues are not forgotten.

  • A greater sense of urgency is needed in implementing policies to reduce global dependence on the United States and to foster an orderly reduction in global imbalances over the medium term. This will require a broad-based effort that includes: aggressive steps to address the serious corporate and financial problems in Japan; the energetic acceleration of labor and product market reforms in Europe; the reestablishment of a sound medium-term fiscal position in the United States; and a shift from external to domestic sources of growth in emerging Asia through additional financial and corporate reforms (in China, greater exchange rate flexibility is also desirable). The broader such efforts, the less the burden will be on individual countries or regions, and the better the prospect for an orderly resolution of existing imbalances.

  • Fiscal consolidation remains a central medium-term priority around the globe. In the industrialized world, public debt is already very high in Japan and some parts of the euro area, and almost all countries face mounting pressures from aging populations. While the scope for short-term tightening is inevitably constrained by the current cyclical situation, additional action to ensure medium-term sustainability is required in many cases including by reforming pension, health, and benefit systems. In emerging markets, the size and structure of public debt are significant sources of macroeconomic vulnerability in Latin America, and public debt accumulation is also increasing in some countries in emerging Asia, including India and China. The key priorities include civil service reform, broadening tax bases and improving tax administration, strengthening governance, and reducing contingent liabilities.

Among the poorest countries, the priority remains to implement policies to reduce poverty and to make progress toward meeting the other Millennium Development Goals. This will require, among other things, an enduring increase in GDP growth, which—particularly in sub-Saharan Africa—remains well below the levels necessary to achieve these goals. As stressed in the New Partnership for Africa's Development (NEPAD), this will require action in a host of areas including restoring peace and political stability, improving governance, infrastructure, health and education, liberalizing markets, including trade, and addressing the HIV/AIDS pandemic. Let me highlight three key issues.

  • Figure. Impact of Institutional Improvements on Income per Capita Institutional reform is of great importance in developing countries. The quality of domestic institutions plays a key role in explaining differences in income levels, growth rates, and growth volatility across countries, as the latest World Economic Outlook highlights. Developing countries could significantly increase their per capita income if they improved the quality of their institutions, while maintaining sound macroeconomic policies. (The accompanying figure, taken from the World Economic Outlook, shows the estimated increase in per capita GDP for a number of regions if the quality of their institutions was improved. For example, real GDP per capita in sub-Saharan Africa could be 80 percent higher if its institutions were on par with those in developing Asia and 250 percent higher if they were of the same quality as the global average).

  • The efforts of the poorest countries to improve their economic management and institutions must be accompanied by additional assistance from industrial countries. Despite recent welcome increases, aid flows from most countries are still well below the UN target of 0.7 percent of GNP.

  • Rapid action is required to improve access for the poorest countries to industrial country markets, particularly in agriculture. In this connection, it is unfortunate that multilateral trade negotiations under the Doha Round appear to be falling behind schedule, and all parties need to make renewed efforts to address key road blocks to further progress, especially in the areas of agriculture and public health. Indeed, progress in addressing these issues before or at the upcoming WTO Ministerial meeting in Cancun could play a critical role in rebuilding global confidence.

Overall, we face a situation of uncertainty and risk. In jointly defining our policies, our overriding priority must be to strengthen cooperation and restore confidence to the global economy. A cooperative approach requires the advanced economies to vigorously gear their policies toward growth, while strengthening international collaboration that has served us so well in the past. We have policy options—let us seize them.