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PRESS CONFERENCE ON|
WORLD ECONOMIC OUTLOOK (WEO)
Wednesday, April 12, 2000
MR. HACCHE: Good morning, ladies and gentlemen. Welcome to the first press briefing of the 2000 Spring Meetings, which is the press briefing on the April 2000 Report on the World Economic Outlook. I am Graham Hacche, Deputy Director of the IMF's External Relations Department.
As in the past, this briefing and the WEO Report itself are embargoed until 10:30 this morning Washington time. The World Economic Outlook, the WEO, draws extensively on work in the Fund's area and specialized departments and is coordinated in the Research Department under the general direction of Michael Mussa, Economic Counselor and Director of Research, who is immediately to my right.
The WEO project is directed by Flemming Larsen, Deputy Director of the Research Department, who is to the right of Mike Mussa, together with Tamim Bayoumi, who is Chief of the World Economic Studies of the Research Department and who is to the right of Flemming Larsen. To my left, is David Hawley, who from May 1 will be Chief of our Media Relations Division.
A transcript of this press conference will be put on our Web site later today or tomorrow. Before turning to questions, I will hand over to Mike Mussa, who has some opening remarks.
MR. MUSSA: Thank you, Graham. It's a little strange to find you on my left on this occasion.
We now estimate that world GDP growth last year in 1999 was 3.3 percent, a full percentage point stronger than we feared it would be in the interim WEO of December of 1998. And that really testifies to the policy adjustments that were made in the major industrial countries to ease monetary policy and to the strong stabilization and reform efforts in a number of emerging market countries around the world.
Next year, we look for world GDP growth to exceed 4 percent, at about 4.25 percent, and that forecast I think is probably subject to an upward bias, in terms of potential revision risk. All areas of the world economy are contributing to the strengthening and growth prospects going forward.
North America, of course, has been particularly strong, with the U.S. economy continuing to record very strong growth in the last two quarters of last year and is anticipated in the first quarter of this year to turn in, again, growth in the 5 to 6 percent range. Canada has been doing very strongly. Mexico's economy accelerated at the end of last year.
In Latin America, the recession in Brazil turned out to be much briefer and shallower than was anticipated. And other economies, especially Argentina, which experienced a recession, turned to recovery in the latter part of last year, and that recovery is expected to continue and to gather strength as we move into 2000.
In Asia, also, we saw remarkable turnarounds last year in the number of economies that were caught in crisis, with Korea recording almost 11 percent real GDP growth, and the other economies caught in crisis showing smaller, but still very significant, patterns of recovery. And that is especially true of Thailand and Malaysia, as well as Hong Kong. Among the largest economies in emerging Asia, India and China are expected this year to continue to turn in strong growth performances, respectively at about 6 and 7 percent growth.
In Africa, also, we see a strengthening of growth, particularly in South Africa, and we anticipate in Nigeria, the two largest economies on the continent, and more generally among most of the other countries, though there are some that are adversely affected by civil conflict and by weather-related difficulties.
In emerging Europe, we are seeing a strengthening of growth, generally, across the region, and this is particularly so with growth continuing relatively strong in Poland and Hungary and picking up to show significantly positive growth in the Czech Republic. Russia also has turned to significantly positive growth this year, helped significantly by stronger oil prices and import compression related to the real depression of the ruble. We expect that positive growth to continue at least through the year 2000.
So the picture for global growth is a strong and quite positive one for the year 2000 and we believe beyond. There are, however, important risks going forward. I think not so much for this year, but for the latter part of this year or next year there are some question marks. Those question marks relate, in particular, to the anticipated slowdown in the U.S. economy and how that will be brought about and what the consequences might be if the U.S. economy develops more inflationary pressure than is now anticipated and more monetary tightening than now appears in the cards turns out to be necessary; that relate also to the pattern of growing global current account imbalances between the major regions of the global economy, the U.S., on the one hand, with its current account deficit rising to 4 percent of GDP or higher, and the need to correct that gradually over time; the problems also with respect to the likely correction that will be needed in exchange ranges; and the uncertainties that are associated with asset prices, particularly equity prices, in global financial markets and whether and how large of a downward correction we may see in those prices.
With these opening comments, I want to turn the microphone briefly to my colleague, Flemming Larsen. I, first, want to express my personal appreciation to Flemming Larsen, who has worked in a key capacity on 30 World Economic Outlooks. Flemming will be leaving the position of General Supervisor of the WEO to assume the directorship of the Fund's Paris office. And at the Executive Board meeting to discuss the WEO last month, the Executive Board took the unusual step of expressing its deep appreciation for Mr. Larsen's outstanding contributions to the World Economic Outlook and to the surveillance activities of the Fund over those 30 WEOs.
MR. LARSEN: Thank you very much, Mike.
As usual, we have a number of special issues/topics in this World Economic Outlook. On this occasion, we have three special issues: The first is on asset prices and the business cycle. As you all know, the past couple of decades have witnessed a return to low and relatively stable consumer price inflation among the advanced countries and inflation has also come down considerably in most of the developing world.
However, fluctuations in stock market prices and in property prices have remained substantial and highly correlated with the business cycle. This juxtaposition of low and stable consumer price inflation, with asset price volatility, has led to a growing debate about the challenge asset price volatility poses to the broader task of macroeconomic stabilization.
Key questions we have looked at in this context include: what drives asset prices, through which channels do asset prices affect aggregate demand and activity, and in which situations are runoffs or falls in asset prices so worrisome that policy makers need to respond. The chapter warns against targeting specific levels or ranges of asset prices, but nevertheless emphasizes the need to respond if the effects of asset price fluctuations threaten to be destabilizing.
A second topic is the plight of the poorest countries. And in Chapter 4 of the WEO, we analyze the reasons for the growing gap between the poorest and the richest countries. While some developing countries have made impressive progress in raising living standards in recent decades, too many countries, and nearly one-fifth of the world population, have regressed in relative and sometimes even absolute terms. This is arguably one of the greatest economic failures of the 20th Century. As you will see from the analysis, the reasons for this failure are complex, and reversing the trend will require progress on many fronts.
The chapter discusses the need for substantial reductions in debt burdens. It also discusses the need to raise economic growth as being clearly the most critical aspect of what is required to address the poverty problem through appropriate reforms that harness market forces and strengthen the confidence of domestic and foreign investors.
And for the advanced countries, the chapter emphasizes two particularly important contributions that they need to make in addition to fostering debt reduction: One is to reverse the downward trend in official development aid, and the second is to reform those trade policies that disadvantage the poorest countries. This is clearly long overdue.
More generally, integrating the poorest countries into the global economy clearly is a critical part of the solution. The current backlash against globalization on the argument that it hurts the poor is inconsistent with the experience of the successful emerging market countries in Southeast Asia.
Finally, on the third special issue, Chapter 4, drawing some lessons from the most remarkable economic achievements of the 20th Century. As a piece of economic history this may not be news, but I nevertheless think that you may find it interesting. There are also a couple of background studies that were prepared for this chapter, which are available at the back of the room, I believe.
MR. HACCHE: Thank you, Flemming.
When you are called for a question, please wait for the microphone to be handed to you and then state your name and affiliation.
First question, please?
A QUESTIONER: Despite your assertions that Argentina's recovery is underway, some people on Wall Street have complained and are worried that this is very weak. And despite the efforts of the government on the tax revenue collection front, nothing seems to be happening either.
So are you worried about this? What makes you think Argentina will really recover this year? And if the economic activity continues at this pace, will the country be able to meet IMF targets?
MR. MUSSA: Well, it is true last year that Argentina suffered a more severe-than-anticipated recession, and one of the effects of that recession was to keep revenues to the government well below what had earlier been projected.
The latest economic data in Argentina for the last part of last year/early this year, however, do point to a strong recovery of industrial production. Some strengthening of commodity market prices also, which we are seeing now, and I anticipate we will continue to see as the global economy turns upward, will also help the value of Argentine exports.
So I think we'll see quite strong growth in the Argentine economy this year. On a year-over-year basis, 3 percent or perhaps a little bit more; fourth quarter-to-fourth quarter, stronger than that.
Now, I think when one looks beyond the year 2000, to 2001, 2002, then there is a question mark about the current account position of Argentina and whether the deficit will begin to widen again, as the economy does recover. That makes it particularly important for Argentina to work hard, develop more flexible labor market institutions in order to improve its international competitiveness and its capacity to respond to the type of shocks which we saw with the Brazilian devaluation and earlier with the crisis of 1995.
A QUESTIONER: Regarding the Japanese economy and the Bank of Japan's monetary policy, you said in the report and I quote, "With the recovery looking fragile, however, additional steps to ease liquidity seem appropriate to provide further support activity."
Now, are you suggesting that under the current circumstances it is premature for the Bank of Japan to end its zero interest rate policy and push up short-term interest rates slightly? And can you offer any suggestions as to what additional steps they should take under the current circumstances? What additional steps are justified under the current circumstances?
MR. MUSSA: First of all, I think that notwithstanding the very weak fourth quarter GDP numbers, which I believe were significantly distorted, we think the Japanese economy is in recovery mode and has been since early last year. But that recovery has been particularly weak in terms of private demand, with consumption spending clearly weakening in the second half of last year. Business investment spending, though, has turned around and I think the Japanese economy is on the path to recovery.
The worry is that if it stumbles again then confidence is very fragile and there is a lack of a lot of policy tools to deal with another downward movement in the economy. So, it is particularly important at this stage of the Japanese economy, given the weakness we have seen in the decade of the 1990s, to get the recovery moving on a self-sustaining basis.
We think that that is in progress. We believe that monetary policy needs to continue to support that recovery by maintaining the zero interest rate policy and by standing ready to provide additional monetary support through injections of liquidity by purchasing assets other than short-term financial assets, including possibly foreign exchange assets if the yen comes under significant further upward pressure.
That is not because we think the Japanese economy will not recover but because we believe it is very important to assure that that recovery is well grounded. Then, obviously, at some point, perhaps later this year, when it is clear that a sustainable recovery is in progress, then one could consider moving away from the zero interest rate policy but certainly not for the time being.
A QUESTIONER: I have two questions on monetary policy. What strategy do you prefer? A question on asset prices and asset price inflation. Isn't it better to put money targeting in the strategy? And to the ECB. The forward-looking monetary policy of the ECB means that we have to raise interest rates, the ECB says, and you are very cautious in this direction.
And the third question. What is the risk on oil prices, if they will rise in the next year, not as you in your outlook say they are falling.
MR. MUSSA: Let me respond briefly to your first and third questions and call upon Mr. Larsen to take up the issue of the ECB's monetary policy more specifically.
Inflation generally is a monetary phenomenon, I think, when we think about inflation in terms of the general price level of goods and services. Asset price inflation is much less clearly a monetary phenomenon. Although I think it does need to be recognized that some of the asset price inflation that we have seen around the world, not just in the United States but around the world over the past year, has probably been related to the fairly generous supply of liquidity that was pumped out by the world's leading central banks. And we think rightly so in view of the difficulties which the global economy was experiencing in 1997 and 1998. That being recognized, it is desirable, nevertheless, it probably has had a consequence of helping to boost asset prices.
As Mr. Larsen said in his opening remarks, we do not believe that monetary policy should target asset prices. Certainly not in the same sense that monetary policy targets, as its key objective, keeping the inflation rate of goods and services prices relatively low and stable.
There are circumstances, clearly, when asset prices become an important concern of monetary policy, most importantly because asset prices are an important indicator of the future likely performance of the economy. So, in the United States where demand growth in the U.S. economy has clearly been proceeding more rapidly than at a sustainable pace, the strength in asset prices is a key signal to the Federal Reserve that continued strong demand growth appears likely, at least in the near term, and is one of the reasons why in looking at the complex of data that they examine, that they have taken decisions to tighten monetary policy beginning in the summer of last year.
We think that some further, at least moderate, steps of monetary tightening are called for in the United States. Not for the purpose of targeting asset prices or seeking to dump the stock market, but because the stock market, in addition to a number of other indicators, is suggesting growing imbalances in the U.S. economy that make it appropriate for monetary policy here to move to a somewhat tighter stance.
Now, on the issue of oil prices, there is, in fact, I think it is a box in the WEO--Tam, you may want to say a little bit more about that after Flemming does it--discusses the risks arising from possible fluctuations in oil prices, both on the upside and on the downside.
MR. LARSEN: On the monetary policy stance of the ECB, last year growth was clearly slowing in the euro area, partly because of the impact of the emerging market crisis and partly because of the general faltering of confidence around the world because of the downturn in financial markets.
And the ECB appropriately eased monetary conditions under those circumstances as did, of course, the Federal Reserve and many other central banks around the world. And that is one of the reasons why the slow-down last year became a relatively modest one and why we are now experiencing again a pick-up in domestic demand.
In this situation it is perfectly normal that the ECB is beginning to unwind the extra stimulus that was necessary last year. And looking ahead, if this recovery does turn out to be significantly stronger than expected it would also be normal for the ECB to gradually notch up interest rates further as we go ahead in order to make sure that the excellent price performance continues also during the period ahead which would help prolong the expansion.
At the same time, we are of the view that the underlying inflationary pressures in the euro area remain extremely moderate. Headline inflation has been picking up because of the temporary effects of the rise in oil prices, but underlying inflation, excluding oil and food price increases, remains barely above 1 percent. And, clearly, doesn't look likely to accelerate much during the period ahead. And in this situation, we think that the ECB should move only very gradually during the period ahead unless, of course, new information suggests that inflation is picking up more than we expect at present, but this seems very unlikely.
Now, with respect to concerns about asset prices, it is true that asset prices have been picking up also in the euro area, particularly in the property market in some of the smaller European countries. This is not something that monetary policy in the euro area as a whole can reasonably be expected to deal with. Such localized inflationary problems need to be addressed through the policy instruments that are available to the individual member States, which is primarily in the area of fiscal policy and there we would like to see somewhat tighter fiscal policy being pursued in those euro area countries that are close to or maybe already experiencing some degree of overheating.
MR. MUSSA: Tam, do you have something to add on oil prices?
MR. BAYOUMI: Yes. On the subject of oil prices, we have a section on commodity prices. We spent quite a long time discussing oil prices in Chapter 2. And we also have a box there which specifically discusses oil prices.
One of the points made there is that it is very difficult to use past price behavior to predict future price movements in commodity prices, which tend to be run very much by both demand and, in particular, supply effects. In this respect, obviously the recent agreement by OPEC to increase oil production probably does indicate that the rapid rises in oil prices are unlikely to continue.
And the other point to be made is that while there was this very rapid rise in oil prices, if you look to the futures market the medium-term prediction of where oil prices would be stayed relatively stable compared to the spot price and, therefore, our prediction of falling oil prices is, in fact, based on these market predictions.
A QUESTIONER: I have a question about the section of the WEO on poverty where you--and in response also to Mr. Mussa's remarks this morning--where you say that there are certain countries--not all developing countries but some of them--who have, who are now experiencing greater poverty relatively and, in some cases, absolutely than they were many years ago. Is this in any way an admission that the international financial institutions and many of the industrialized countries that lend to these poorer nations have not done their job well enough?
MR. MUSSA: I think the point of the chapter really is that responsibility in this area spreads to many. The principle responsibility, of course, must rest with the countries, the societies, themselves. The international community--and here I would include the international financial institutions as a key player but not the only player--also plays an important, though necessarily secondary role.
And, so, some of the responsibility for some of the failures that have been observed certainly does rest at the hands of the international community, I would say, including the international financial institutions.
I think both the Fund and the World Bank have been reasonably forthright in recognizing important deficiencies in some of their past programs and policies. But as we do emphasize in the chapter, in the end success or failure is the success or failure of these countries or societies.
A QUESTIONER: In the WEO you have an interesting section: The Alternative Scenario, which basically suggests economic growth could be faster than forecast.
Bearing in mind the imperfections of economic forecasting, this is likely to actually happen. So, are you saying that monetary authorities have done too little, too late, and really should be stomping on the brakes a great deal harder if the hard landing isn't to come about?
MR. MUSSA: Mr. Larsen may want to add a little bit more on the alternative scenario. We think the baseline which is described in the main WEO forecast is the most likely outcome. But there clearly are risks. And we think the most important risk scenario is that growth in the short-term will be somewhat stronger than we now anticipate, particularly in those countries and especially in the United States, where the economy is already pretty much at the limits of what it can do in a sustainable way. And if growth is stronger in the short-term in those economies, then probably we will need a stronger monetary policy reaction to cool the economy off. And then over the next two or three years we would see a weaker outcome in terms of world growth especially in those economies which would need to undertake tighter policies.
And there is some risk that that alternative scenario will turn out to be the true outcome. But we still think that the WEO baseline is the most likely at this stage.
Flemming, do you have anything to add?
MR. LARSEN: Well, if you had perfect foresight and you had known that the world economy was picking up as strongly as expected you might, of course, not have eased monetary policy quite as much as you did last year, in which case there would not have been a need to tighten now. So, it becomes very complicated this question of whether the central banks are behind the curve.
I think given the uncertainties, the central banks have dealt with a difficult situation very well last year. It did help to produce a faster and stronger turn-around in the global upswing than we and basically everybody else had expected.
At present, it is quite likely that the upswing will prove to be stronger, as past experience, indeed, suggests, which might point in the direction of some further monetary tightening during the period ahead.
A QUESTIONER: On the anniversary of your 30th WEO, Mr. Flemming, have you done an assessment of how accurate your predictions have been in the past and particularly in looking at turning points in the economy when things will turn down or when things will turn up?
MR. LARSEN: We have actually done such assessments regularly in the past and there are references to those assessments in this box on the alternative scenario. Those analyses, I think, are not terribly reassuring. Forecasting is a very difficult business. There is a huge degree of uncertainty. Even in forecasts for the current year, for year 2000, there is a huge degree of uncertainty.
Take the example of last year, as late as January/February, we still thought that 1999 would be the trough, the weakest year of the recession following the emerging market crisis.
Instead, it became the first year of recovery in the world economy, not only in the emerging market countries, which we had expected, but also in the world economy more generally.
So, there is a huge degree of uncertainty in individual forecasts for individual countries in any given year. The world business cycle is subject to a huge degree of uncertainty, the turning points are notoriously difficult to predict and this is an experience that is shared by basically all forecasters. The private sector is not generally better than the official sector.
And this, of course, must be taken into account in policy formulation. It does require, I think, a degree of flexibility and willingness to change the course of policies when required by unexpected economic developments.
A QUESTIONER: I notice you said South Africa has had an improved economic outlook over the last year, but for many countries in Southern Africa, the same can't be said for them. What are your prospects for the Southern Africa region and the outlook generally there?
MR. MUSSA: Well, of course, South Africa is far and away the dominant economy in Southern Africa, and after quite weak performance of the economy over the past year and a half or so, we are seeing now--and we expect to continue to see--a strengthening of growth in South Africa itself.
I am not sufficiently familiar myself with Botswana and Namibia and so forth to have specific forecasts for them. Obviously, Mozambique is suffering severe problems as a consequence of the flood, so the outcome there is clearly going to be quite distressing.
A QUESTIONER: I'd like to ask about the United States. You're talking about the imbalances and the widening current account deficit, and your figures show a wider current account deficit. How worried are you that this will not be financeable and that the doomsday scenario you have in your alternative scenario, that side of it will actually come out?
MR. MUSSA: Well, the alternative scenario is not a doomsday scenario. It involves a rather moderate slowdown in growth in the U.S. and elsewhere in the world. I could construct a doomsday scenario, but Flemming prevents me from doing that.
When we think about the sustainability of the U.S. current account balance, I think it's important to put that in a medium-term context. A U.S. current account deficit of 4 percent of GDP running on for as long as the eye can see with the U.S. net debtor position growing from 15 percent of GDP to 50 percent of GDP over the next decade or decade and a half, that does not look like a sustainable scenario.
Now, one of the nice things about things that are not sustainable is that they don't happen. So we anticipate that there will be a downward correction in the magnitude of the U.S. current account deficit, as we say, over the medium term, let us say over the next four or five years, to a deficit more on the order of 1 to 2 percent of U.S. GDP rather than 4 percent of U.S. GDP.
So if we're talking about a correction of 2 to 3 percentage points of GDP, let's say, spread out over a four-year time horizon, that means a correction on average each year of something like three-quarters of a percent of GDP. And in order for that to happen in the U.S. economy, rather than having domestic demand grow a percentage point per year faster than domestic output, we need to see it grow three-quarters of a percentage point slower than domestic output.
Potential output growth in the U.S. is now, I think, widely believed to be in the range of 3.5 percent per year or something like that. So we would need to see demand growth slow to 3 percent per year or something slightly less than that.
That is by no means a disaster scenario. It is, however, demand growth in the U.S. economy significantly less rapid than what we've seen over the past two to three years. And we think that that does need to happen on average over the next four or five years to bring the U.S. current account deficit down to a level that would be more consistent with what would be financeable and sustainable in the medium term.
A QUESTIONER: Mr. Mussa, in your answer to the question on the Japanese economy, you sounded fairly positive about a recovery taking place there. However, in the WEO itself, you use words such as "halting" and "fragile" in the context of the Japanese recovery. You've also downgraded your expectation or your forecasts for the Japanese economy both for this year and next year significantly.
Could you say, do you think that the recovery is halting and fragile and why you think so and why you've downgraded your forecast? And, also, could you just talk about your outlook for private consumption in Japan? Do you think it has turned the corner and is contributing to a self-sustaining recovery at this time? Or if not, what suggestions would you give to Japanese authorities to make it so?
MR. MUSSA: I think "halting" is the right word to describe the Japanese economic recovery. I think a recovery did begin late '98 or early '99, and the first half of last year, according to the reported GDP results, and was really quite strong. First quarter GDP growth at an annualized rate was nearly 6 percent, and the second quarter was reported at about 4 percent.
Then we had two negative quarters for the third quarter and the fourth quarter, largely because of the weakness in consumption and because the impetus to demand growth that had been provided by increases in public investment spending in late '98 and the first half of '99 was reversed in the last two quarters. So it's been jerky, up and then down.
I think the down part of it in the fourth quarter was probably exaggerated, and I hope when we get revised figures, either sooner or later, that we will see a more even pattern. But there's no doubt that the Japanese economy weakened in the second half of last year after strengthening in the first half, and weakness in consumption as well as the shift from stimulus to retraction in public investment spending were key elements of that.
The key issue, I think, with respect to consumption spending is the confidence of Japanese consumers. The Japanese economy has grown very slowly in this decade. It's grown only about 1 percent per year in the decade of the 1990s, after much stronger performance in all the earlier decades of the post-war period. And as a consequence of two recessions in this decade, and an unexpected and quite severe one beginning in '97 and the Asian crisis problems and the banking sector problems and the rest of it, Japanese consumers have become--and households have become--more worried about their economic future. And that has been one of the things that has been restraining the growth of consumption.
In order to rebuild confidence, we need to get a few quarters where it's clear that we're getting positive movement in the Japanese economy, and then confidence will begin to recover.
That is why we have argued fairly consistently that the Japanese Government needs to maintain fiscal support on a more consistent basis to make a positive contribution to economic growth, and why monetary policy needs to be as stimulative as possible.
Once confidence is restored on the basis of experience with the economy actually moving forward on a consistent basis, then I think we will see consumption spending begin to rise, both in absolute terms and relative to household incomes.
Japan is not a poor country. Japan is still a very rich country, and once Japanese consumers do begin to recover confidence, I think we will see demand by consumers begin to recover.
A QUESTIONER: A double question, actually. How would you suggest correcting the ODA down trend? And do you think that Europe needs a more flexible labor market in order to keep up the pace of growth? And, of course, especially my question relates to Italy and Southern Italy for this flexibility.
MR. MUSSA: Well, I guess to correct the down trend in official development assistance, the action that is clearly required is action by the advanced industrial countries, and I think particularly the United States. So I guess the specific advice I would give is that all the demonstrators who are planning to be outside the Fund and the Bank should instead go up to Capitol Hill.
MR. LARSEN: On the labor market, yes, we do think that Europe would benefit from more flexible labor markets. I think it is quite clear when we look across the advanced economies right now and also across the economies within the euro area, that those countries that have made the most progress in reforming their labor markets and have the most flexible labor markets, they are also the countries that seem to be growing the fastest.
There may be other factors that are contributing, but if Europe is going to achieve stronger economic growth in the future than was achieved in the '90s, which was quite mediocre, actually, in most of the euro area, and also experience more job creation and reduce unemployment rates, then a crucial element in that will be the further reforms and increased flexibility of the European labor markets.
A QUESTIONER: Two questions. One is on the U.S. economy. My short-term memory is notoriously unreliable, but I seem to remember almost every other WEO for the last few years saying that the U.S. economy is about to slow down this year. I just wonder what you think the dynamics of that slowdown are going to be. What is actually going to slow it down and prevent the hard-landing scenario that you say is a possibility though not a probability? And I wonder whether you can put some sort of probability on that. Is it one in ten, one in three, the chance of a hard landing in the U.S.?
The second thing is just specifically about the U.K. You say that the recent budget was regrettably procyclical. Are you suggesting that the Chancellor of the Exchequer should have actually tightened fiscal policy in the budget rather than loosen it?
MR. MUSSA: Well, first, on the U.S. economy, we, like I think all other forecasters, have for the last three years forecasted a slowdown that has not materialized. Instead, growth seems to get stronger rather than weaker.
What is likely to bring about a slowdown in the U.S. economy? Well, there are, aside from economic policy, a couple of factors that are likely to contribute to some slowing of growth, particularly on the demand side where it is needed. If the U.S. economy grows rapidly because productivity growth is particularly strong, that's fine. But if we're getting demand growth that substantially exceeds potential output growth in the U.S. economy, that's a problem. So what's going to slow it on the demand side?
Well, consumer spending undoubtedly has been boosted in the last two or three years until relatively recently by, real income gains that consumers enjoyed in 1998 from the drop in world oil and other commodity prices. That has been reversed. And as consumers find that they have less money in their pocket because they're putting it in their gas tank, there's going to be some effect in slowing consumer spending.
Also, there was a good deal of mortgage refinancing up until nine months or so ago that was putting additional disposable income in consumers' pockets, and that has largely faded as well.
Other things, automobile purchases in the U.S. economy in March hit an annual rate of 18 million units. Now, my friends who are economists in the auto industry think the sustainable pace of automobile purchases is somewhere between 15 and 16 million units. So automobile purchases are not going to just keep on growing and growing and growing to 20 million units at an annual rate. There are factors other than policy that are likely to slow things down.
Then on the policy front, we have seen the Federal Reserve move to a significantly tighter monetary policy. Further monetary policy tightening is broadly anticipated, and I think is needed, and I believe will come.
The question of how much policy tightening will be needed to slow down demand growth enough to reduce it to a sustainable pace is a big question mark. And that's an important part of the question mark with respect to the "hard landing."
If we're talking about 6.5 to perhaps 7 percent on the Federal funds rate by late this year, then I think we're still in the relatively soft-landing scenario. And I think the probability of that is two-thirds or better.
It is possible, however, that inflationary pressures have been artificially suppressed in the U.S. economy by the earlier weakness of commodity prices and by unusually restrained wage growth, which now appears to be, that restraint, somewhat eroding. And we will discover later this year that, in fact, inflationary pressures are significantly stronger than we now have any evidence that they are. And then a more dramatic tightening of monetary policy may be called for.
There is no way to know now that that will, in fact, be needed, and it would be a mistake on the part of the Federal Reserve to tighten so much to crush the economy without really hard evidence that inflationary pressures are picking up.
So there is a risk, and we're just going to need to wait and see. As I say, I think the best guess is that with some moderate additional monetary tightening, together with the other factors that will naturally slow the U.S. economy, that will be enough.
Now, I remember when my old boss, Ronald Reagan, got a really tough question on the budget, he said--he turned to David Stockman and said, "Well, Dave, that one's for you." So, Flemming, on the U.K. budget?
MR. LARSEN: I don't think it is that tough. The U.K., just like the U.S., is now experiencing its longest expansion on record. This is very much because of the strengths of macroeconomic policies in the '90s, a very firm budgetary policy, and a monetary policy that has been flexible and geared toward the achievement and maintenance of price stability. And this is the key reason why the expansion has been so long and so strong and why the slowdown last year was relatively modest.
But it is precisely because of the strengths of this expansion that there are some concerns about the potential upward pressure on inflation and, of course, also about the strengths of the exchange rate. And in this situation, ideally the role of fiscal policy should be to lean against the wind, certainly not to be contributing to demand growth, and ideally to be somewhat on the tight side. And our preliminary analysis of the new budget doesn't seem to meet this test. I think at the margin the budget is going to be contributing to demand growth the next couple of years. This is not a huge expansion, but at the margin it is going a little bit in the wrong direction from the perspective of easing the pressure on monetary policy and easing the pressure on the exchange rate.
A QUESTIONER: You have a table in the WEO, which has not been published, but I looked at it, on discrepancies in the current account imbalances. And I would like to know what it means for your forecast, for the sustainability of the imbalances, if you have a discrepancy of $281 billion. Could it be that there is an underreporting of exports? Could it be that the American deficit doesn't really look so bad? What is the explanation?
MR. MUSSA: We don't know. That's why it is a discrepancy. Mr. Larsen and Mr. Bayoumi may want to come in on this as well.
Let me comment, first of all, on the facts. It's not only that we have a global current account discrepancy; that is to say, we have a global current account deficit. We are net importing from the extraterrestrials if you believe the officially reported results.
MR. MUSSA: But that global discrepancy has grown from 1997, when it was very low, to what we now estimate for 1999. And in the projections, it's projected to grow even more--up to $300 billion or something like that by 2004. And, indeed, the counterpart of most of the expansion of the U.S. current account deficit, when you add up the rest of the world, is the expansion of the global discrepancy. So it's not that Europe or Japan or Asia is exporting more to the United States, it's all coming from the great beyond, which is evidence that it should no doubt be reported in the National Enquirer of the existence of extraterrestrials.
This does pose an analytical problem in interpreting both what is going on in the world economy and in making assessments of appropriate economic policies. My personal view is we probably are getting underreporting of exports as the principal source of the growing global current account discrepancy.
We know in our forecast and when we look at the private-sector forecast as well, that there is a phenomenon of global export pessimism; that you look at what is projected in terms of the share of each country's exports in total global exports. And virtually everybody's export share is shrinking. That sort of can't be arithmetically. So probably there is export pessimism. We think, not because of that, but also for other reasons, that that's probably an indication that suggests global growth is likely to be stronger than is now being estimated; that we are, in fact, underestimating the likely growth of exports and that we are going to find, when the numbers are finally in, that global output growth is actually stronger than what we are now estimating.
I would say with respect to the U.S. current account deficit, it is, of course, possible that some of the growth in the U.S. current account deficit is measurement error. Most countries, and the United States I don't think is an exception in this regard, are somewhat better at recording imports than they are at recording exports. However, it cannot reasonably be the case that most of the growth of the U.S. current account deficit is a measurement problem. The very strong growth of total demand in the U.S. economy and the very strong foreign exchange value of the dollar, those two things, if you put them in a sort of standard estimating model, would tell you that we should have expected to see most of the growth of the U.S. current account deficit that we actually measure in the numbers.
So I don't think the U.S. current account deficit's growth is largely an illusion. I suspect that the global current account discrepancy is partly attributable to the U.S., but it also must be partly and importantly attributable to errors of measurement that occur elsewhere in the world economy.
Flemming or Tam, do you have anything to add?
MR. BAYOUMI: Just one little thing. By the way, the current account discrepancy is actually, of course, in Table 6 of the tables that are actually in the WEO. We actually had a reference in the text to a table which is not included, and we provided those. But it is actually in Table 6.
A QUESTIONER: All the time we say whenever the U.S. has a cold, we have pneumonia. So what can we expect if there is a hard-landing in the U.S. economy, since we have a very, very weak banking system and a stagnant agenda of reforms? Thank you.
MR. MUSSA: Well, of course, Mexico is having a presidential election this summer, so I would not normally anticipate that this would be a time in the political calendar when there would be a great deal of new action on the reform agenda. However, I would think that a new administration will probably look much more seriously at the reform agenda, and particularly early in its tenure. And we will need to see what the new Mexican government wants to pursue.
In that regard, I think the macroeconomic policy situation in Mexico is actually quite good. The fiscal deficit is under good control. The inflation rate is running now around 10 percent, having reached 51 percent in the aftermath of the devaluation during 1995. There remain substantial problems in the banking sector that need to be more forcefully addressed. But it is clearly the fact that the Mexican economy has recovered very strongly from the deep recession of 1995, notwithstanding the fact that these problems in the banking sector have been there all along.
So they do need to be addressed, they do need to be an important part of the reform agenda going forward, particularly after the presidential election. There are a number of other microeconomic reforms that I think will be important to provide a stronger basis for sustainable growth in Mexico, but we think the macroeconomic situation is in good shape. And the flexibility of the exchange rate I think gives Mexico an added dimension of flexibility to respond to some external shocks.
That being said, if there is a hard landing in the United States, and I mean something harder than the alternative scenario, then this is going to be a problem that the Mexican economy will need to deal with and no doubt it will have some negative impact south of the border.
A QUESTIONER: Just returning quickly to the U.K. budget and the situation of the economy in Britain, two questions really. Even if fiscal policy had been neutral in Britain, would it be fair to say that you think the Bank of England needs to increase interest rates?
And, secondly, do you think the British government has behaved irresponsibly by increasing spending at a time when economic growth is so strong?
MR. MUSSA: The Bank of England, of course, began to retighten monetary policy well before the new budget was announced, and I think that those moves were properly undertaken in view not of what was happening to the actual inflation rate, but in view of the clear strengthening of the economy and indications that inflationary pressures in the future would be rising above the prescribed target unless actions to firm monetary policy were undertaken.
As Mr. Larsen indicated, ideally, in these circumstances, it would be desirable for fiscal policy to take some of the burden off of monetary policy and move to a modestly tighter rather than a modestly easier stance. That is not happening. And I would characterize that as regrettable, but not catastrophic. And I would also emphasize that the U.K. is not the only important country where this phenomenon is taking place.
There are a couple of other European countries where I think, if anything, the imbalances that are developing, the overheating that is developing, is a more serious problem than in the United Kingdom and where there is not the independent capacity to manipulate monetary policy to deal with that problem, where fiscal policy is failing to pursue the constructive role that it should be playing. In the United Kingdom, at least, monetary policy is there to do the job. It probably has a little bit more work to do than would be the case if fiscal policy was a little more helpful at this stage.
A QUESTIONER: Early in the report, one of the risks that you highlight is the imbalance among the G-3 currencies. I wonder if you could talk about how those imbalances have come to be and the scenarios about how they could be unwound, either smoothly and orderly or in a disorderly fashion, which you highlight is a risk if the markets get the bit between their teeth.
MR. MUSSA: First, I think it's important to understand that the growing imbalances, particularly the growing U.S. current account imbalance, are a complex phenomena that reflect many different forces.
Second, it needs to be emphasized that up to this point the growth of that imbalance has been, all things considered, a good thing for the U.S. and the world economy, not a bad thing. Demand growth in the U.S. economy has been particularly strong and, indeed, stronger than output growth, which has also been quite strong, at a time when output growth and demand growth were, in general, quite weak in the rest of the world economy. So the U.S. has helped to keep the rest of the world economy moving forward, more in line with their potential than would otherwise have been the case.
At the same time, the U.S. economy has been growing strongly partly because of strong productivity growth, which is partly again the consequence of quite high levels of investment in the U.S. economy. And that investment has been financed, and increasingly so over the last few years, by imports of foreign savings rather than domestic savings. Gross investment as a share of GDP is on the order of 17 or 18 percent, and about 20 percent of that, about a fifth of that, is financed by imports of foreign savings.
And if we take investment on the net basis rather than on a gross basis, then we are talking about more like 40 percent of net investment in the U.S. economy is financed by foreign savings. And that has not been a bad thing.
The difficulty going forward is that U.S. importing 4 percent of GDP, $400 billion a year, is probably not something that can go on for a very long period of time. Especially now as the rest of the world economy is beginning to pick up and investment in the rest of the world economy is beginning to pick up, the large inflow of foreign savings that had been available to the U.S. probably is not going to be quite so generously available going forward. Again, that will not be a bad thing to the extent that it reflects a strengthening of growth and a strengthening of investment in the rest of the world.
So the ideal way of seeing the current account imbalances being reduced is to see a moderate slowing of demand growth in the U.S. economy to something a little bit below the potential output growth of the U.S. economy, so not demand growth of 5 percent, which is what we saw last year, but demand growth of 3 percent or a little bit less. At the same time, we need to see demand growth in the rest of the world economy pick up to something above potential output growth and for two reasons: One because most of the rest of the world economy has output below potential and needs to push it up to potential, and also they need to make their side of the contribution to the reduction in the global current account imbalances.
We are now beginning to see the evidence of that pick-up of demand growth in the euro area, more uncertain in Japan, but we are also seeing it in emerging Asia and in Latin America. It needs, however, to be sustained beyond 2000, to 2001, 2002, 2003, 2004, if we are going to get the necessary desirable reduction of global current account imbalances.
And even more important than that, because that is really a secondary issue, if we are going to get the type of projections that are in the WEO for the medium and longer term of global output growth exceeding modestly 4 percent for four or five years running. And in order for that to happen, that is not primarily an issue of monetary policy. Monetary policy needs to be managed carefully to avoid excesses of inflation, which then lead to the need for sharp monetary tightening.
But in terms of keeping output growth going on a sustainable basis and at a somewhat stronger rate than we've seen in the 1990s in Europe and Japan, their structural reforms remain the key question. And I will cite only one figure to you, in that regard, with respect to Europe: In 1980, the employment-to-adult population ratio in the United States was 5 percentage points higher than in Western Europe, largely reflecting cultural differences. Today, the employment population ratio for the adult population in the United States is 15 percentage points higher than in Europe.
If they could get back to 5 percent or even 7 or 8 percent, which is not just reducing cyclical unemployment, it's reducing structural unemployment and getting labor force participation rates upward, then we could see a much longer, better sustained expansion in Europe and a much better basis for the European economies and societies to face the key challenge of rapidly aging populations, which will beset them particularly in the second and third decades of this century.
MR. HACCHE: Let me mention, finally, again that the WEO Report and this briefing are embargoed until 10:30 this morning. And I will also remind you that the acting Managing Director, Mr. Stanley Fischer, will be giving a press briefing here tomorrow at 9 a.m.
[Whereupon, at 9:36 a.m., the press conference was adjourned.]
IMF EXTERNAL RELATIONS DEPARTMENT