Washington, D.C.Tuesday, October 7, 2014
SPEAKERS:Olivier BlanchardIMF Economic Counsellor and Director of Research DepartmentGian Maria Milesi-FerrettiDeputy Director, Research Department, IMFThomas HelblingChief of the World Economic Studies Division, Research Department, IMFRuppa DuttaguptaDeputy Division Chief, the World Economic Studies DivisionIsmaila DiengSenior Communications Officer, Communications Department, IMF
Mr. DIENG: Good morning, everyone. Welcome to the launch of the 2014 World Economic Outlook. I am Ismaila Dieng from the Communications Department. Joining us today, Mr. Olivier Blanchard, Director of the Research Department; to his left, Gian Maria Milesi-Ferretti, Deputy Director of the Research Department; to Mr. Blanchard’s right, Thomas Helbling, the World Economic Studies Division here at the IMF, and Rupa Duttagupta.
Mr. Blanchard will start with some short opening remarks and then we will open it up to questions. Olivier.
Mr. BLANCHARD: Thank you. Good morning, good afternoon, good evening to those who are listening from afar. The recovery continues but it is weak and it is uneven. I assume you have all seen the basic numbers by now, but let me just give them to you again.
So, we forecast world growth to be 3.3 percent in 2014, down 0.1 percent from our July forecast, and 3.8 percent in 2015, which is down 0.2 percent from our July forecast. These are small revisions but they are small revisions starting with already fairly low numbers. I think that is the picture which emerges.
I have always been a bit skeptical of this world growth number. In this case, I think it is potentially misleading in the sense that it hides different evolutions across different countries, and more so now, I think, than in the recent past. You have some countries which have recovered or nearly recovered, and then you have others which are still very much struggling. So, one needs to go and look at it more or less country by country.
Looking around the world, economies are subject at this stage to two main forces, one from the past. They have to deal with the legacies of the financial crisis, be it debt overhangs for governments, for banks, for corporations; be it high unemployment. So, that is the force from the past. Then they have to deal with the force from the future, at least the anticipated future, which is that potential growth rates are either low or have been revised down. It is not only important for the future, but these worse prospects about the future are leading to investment-consumption decisions today, which, in turn, lead to low growth.
So, you have these two forces at work, but because these two forces are playing in different countries to different degrees, the economic evolutions are becoming more differentiated. So, with this in mind, let me take you on the usual quick tour of the world.
So, among advanced countries, the United States and the United Kingdom, in particular, are leaving the financial crisis behind and are achieving decent growth. But even for them, the potential growth that they are facing in the future is clearly lower than it was, say, in the early 2000s.
Now, turning to Japan, Japan is growing, but high public debt inherited from the past—that is the legacy—together with very low potential growth—this is the future—are raising major macroeconomic and fiscal challenges.
Turning finally to the Eurozone, growth in the Eurozone nearly stalled earlier this year, even in the core. While this reflects, in part, temporary factors, both legacies—so, the past—primarily in the South and low potential growth nearly everywhere in the Eurozone are playing a role in slowing down the recovery.
So, let me turn to emerging economies. There, the second factor is clearly the most important one, which is the revision of potential growth. I have decided to give you a few numbers and you can read them in the WEO, but I find this a fairly striking number, which is that for emerging market economies as a whole, potential growth is now forecast to be 1.5 percent lower than it was in 2011. That is a fairly major change in the landscape.
Again, when you look at emerging markets, differentiation across countries is the rule, just as for advanced economies. If you take China, China is maintaining high growth despite the end of a housing boom and a credit boom, and we have not changed our forecasts for China.
But, looking forward, rebalancing from investment to consumption is likely to imply slightly lower growth, and this reflected in our forecast, but this must be seen as a healthy development rather than a failure.
To turn to India, India has recovered from its relative slump. Thanks, in part, to policy and renewal of confidence, growth is expected to exceed 5 percent again.
By contrast, if you look at some other countries, things are not so good. Uncertain investment prospects in Russia even before the Ukraine crisis had already led to low growth and the Ukraine crisis has made it worse, and we basically put it nearly no growth there this year. In Brazil, uncertain prospects and low investment also have led us to forecast very, very low growth.
Just to finish on this tour of the world, we often do not talk about them but there is an aspect of the world which is more reassuring, which is the performance of the low-income developing countries, which continue—not all of them, but most of them—to do remarkably well, and this despite the slowdown in commodity prices. Again, to give you numbers here, we forecast their growth rate, the growth rate of low-income developing countries, to be 6.1 percent in 2014, 6.5 percent in 2015. These are high growth rates. Now, let me turn to downside risks, and clearly they are present. I will pick on three of them. The first one is that the long period of low interest rates has led to some search for yield, and financial markets may be too complacent about the future. One should not overplay these risks. Clearly, policymakers should be on the lookout.
What is the right set of tools in that context? It is clearly macroprudential tools rather than interest rates, but one may worry that, given that some of them have not been used in the past, they may not be up to the task, so the risk is there.
The second risk is geopolitical; geopolitical risks have become more relevant. So far, there is little evidence that the Ukraine crisis has had measurable effects beyond the affected countries and their immediate neighbors. Maybe the numbers for Germany which just came out suggest that there is some confidence effect in Germany, but at this stage it is speculation.
Nor has turmoil in the Middle East affected either the level of the volatility of energy prices very much energy prices are low and volatility is also very low. Clearly, the risk that these risks intensify in the future is there and they could clearly have major effects on the world economy.
Let me turn to the third and last risk, which is the stalling of the recovery in the euro area, the risk that demand weakens further and that low inflation turns into deflation. As you know, this is not our baseline, as we believe that fundamentals are slowly improving, but if it were to happen, it would clearly be a major issue confronting normally the Eurozone, obviously, but the world as a whole.
So, this takes me to the last part, which is policy implications. Let me start with advanced economies. In advanced economies, policies must deal both with the legacies of the crisis and, looking forward, address the issue of low potential growth.
So, with respect to legacies, while major focus has been on improving bank balance sheets, and much progress has been made, there is debt overhang in other dimensions of some economies, debt overhang of firms, debt overhang of households, and these will remain an issue in a number of countries for some time to come. So, so long as demand remains weak for these reasons and for others, monetary accommodation and low interest rates remain of the essence.
The weak recovery in the euro area has triggered a new debate about the stance of fiscal policy, so let me say a few words about that. The low spreads on sovereign bonds suggest that the fiscal consolidation of the past few years has led financial investors to believe that the current fiscal tasks are sustainable. This credibility, which was acquired at a high price, should not be threatened.
Now, this does not mean that there is no scope for fiscal policy to sustain the recovery. As we argue in one of the analytical chapters of the WEO, Chapter 3, infrastructure investment, even if debt-financed, may well be justified and can help demand in the short run and supply in the longer run. It may even be doable without an increase in the debt-to-GDP ratio. So, this can be done. If the risk of stalling were to materialize, then clearly the Eurozone countries/governments should be ready to do more.
Let me turn to the last part of my discussion of implications for policies, which is looking not backwards but looking forward about potential growth. One obviously wishes that potential growth were higher. This would not only be good for itself, high growth, as long as it does not come with more inequality, but it would make the fiscal and the financial challenges much easier to handle, must less daunting.
Now, increasing potential output, let alone increasing potential growth, is a very tall order, and expectations as to what can be done should remain realistic. Yet in most countries, specific structural reforms can help. The challenge for both advanced and emerging market countries is to go beyond the general mantra of more structural reforms, but to identify which reforms are mostly needed at this point and which reforms are politically feasible. That is a challenge facing each individual country and the answers are probably different country by country.
To conclude, and more generally, I think the challenge for policymakers at this point is to re-establish confidence for a clear plan to deal both with the legacies of the crisis and the challenge of low potential growth. Thank you.
Mr. DIENG: Thank you, Olivier. We will now open it for questions. Please identify yourself and your organization.
QUESTIONER: My question is about the role of China in emerging markets. In the report in April, the IMF gave a kind of evaluation saying that every 1 percent rise in the Chinese economy gives an immediate increase of 0.1 percent of emerging market economic growth. So, what is your evaluation of the China’s economic growth in emerging markets now? Is it increasing or declining?
Ms. DUTTAGUPTA: As you know, our current forecast for China is for GDP growth to be about 7.4 percent this year and gradually slowing down to about 6.3 over the medium term. You are right that China plays a big role in emerging market growth not only through its direct trade but also through commodity prices. Overall, despite the slowdown, the share of China in world economy in purchasing power parity terms is still very high, and that, even slightly slower growth, would mean that it will contribute very significantly to emerging market growth going forward.
QUESTIONER: I wonder whether you could explore a bit how much you buy into the theory of secular stagnation. It is mentioned a couple of times in the WEO. If you look back to before the crisis, the world economy had its four fastest years of growth since the early 1970s and you say that subsequently you have been revising down your forecast ever since. Do you think this is just a temporary phenomenon that we borrowed growth in the future or has something more structural gone on? If so, what is it?
Mr. BLANCHARD: Unfortunately, I think there is a semantic issue which makes the discussion more confusing than it should, but let me try to clarify it. I think people, when they talk about secular stagnation, talk about two different things. The first thing is the potential growth rate of the world economy looking forward and the fact that it may well lower than it was in the past. That is a statement about the supply side of the economy. Indeed, I think here it is reasonable to think that potential growth for the world, potential growth in most countries, is going to be lower than it was, say, in the early 2000s. That is one set of issues. The other interpretation, which I think is the way, for example, Larry Summers used the word, is not that. It is the issue of, whatever potential output is, the ability of using demand policies or maintaining demand so as to achieve that level of output. So, this is a question about the ability of demand to actually be strong enough to maintain that level of potential output.
Here, the way the discussion has evolved is in terms of what is the interest rate which is needed in order to sustain enough demand, to achieve demand equal to potential output. That is something that we had started looking at before actually this came to the scene and we had a chapter in the last World Economic Outlook in which we looked at the evolution of the world real interest rate both in the past and looking forward. We concluded that, indeed, the interest rate which might be needed to sustain enough demand in the future to maintain potential output might be very low.
When the interest rate is very low, then this has two implications. The first one is that very easily we may fall again into the liquidity trap, but the other, which has been explored, in particular, in the GFSR and elsewhere, is that very low interest rates for a very long period of time tend to lead to financial risks. People basically take more and more risk and the economy becomes more and more risky.
So, these are the two issues. On the slowdown in potential growth, the evidence is, yes, for the moment it is there. On whether we will be able to get back to potential output, increase demand enough to get to potential output, I think we do not know yet. Again, our baseline is yes, but there is a risk that it may be difficult.
QUESTIONER: A question on Russia and Ukraine. Can you try to quantify for us in terms of economic growth the effect of the Ukrainian crisis and of the sanctions and counter sanctions on Russia? You mentioned Germany in your opening remarks. Can you elaborate on that?
Mr. HELBLING: On Russia, we have for this year 0.2 percent growth and for next year 0.5 growth. It is at this point difficult to disentangle the effects of sanctions versus effects of confidence. Both operate in the same direction. Clearly, in the short term, tensions have hurt confidence. They have made an already difficult investment environment worse. Looking forward, we do not expect any fast change in that period. So, mostly going forward, some of the sanctions or uncertainty about the extent of the sanctions to which they will affect investment and the ability of foreign investors to participate in projects in Russia will lead to very tepid investment going forward.
About Germany, the confidence effects on Germany are frequently mentioned. I think it is at this point difficult to establish. If you just look at the extent of trade relations between Germany and Russia, it is that 3 percent of German exports go to Russia. We also note that German exports to Russia have already slowed last year, reflecting already slowing investment growth last year. I would venture that confidence or the lack of confidence, the lack of readiness to undertake investment is a broader phenomenon. So, to disentangle a general act of confidence in companies to invest going forward, given a number of difficulties in the global economy and to separate that strictly from the Russia-Ukraine situation, we believe is difficult.
Mr. BLANCHARD: This is clearly where the forensics of the last German manufacturing number will be important to actually see exactly where investment declined and whether it is related in some way to Russia.
QUESTIONER: In April, the political scene was impacting growth and now I want to know if there is any change of the outlook on Egypt six months on.
Mr. HELBLING: So far, the situation remains similar to where we were in April. I think the situation remains difficult in Egypt, in many Middle Eastern countries more generally. I think specifically in Egypt the political situation has begun to stabilize. Some economic stabilization has been achieved. In particular, fiscal consolidation has started, which we thought was important to re-establish confidence, also for investors going forward.
There have been difficult reforms undertaken which have been advocated for many years. So, these we would see as the first steps for an improved future. Clearly, more needs to be done to create an economic environment for growth and jobs going forward.
QUESTIONER: You say that there is a risk the rebound may fail to materialize and that low, actual and potential growth could further complicate the challenges of high debt and private debt. You also outlined the lower growth outlook and the complacency in financial markets. Given that outlook, are you not sowing the seeds for more debt problems in the future by encouraging this infrastructure, this debt-financed infrastructure push?
Secondly, on Ukraine, the IMF is probably the most optimistic of the range of forecasts out there, forecasting growth to rebound next year. The World Bank has cut the outlook for contraction next year. Why is the IMF so optimistic about Ukraine?
Mr. BLANCHARD: On the first question, I think it is one of the ironies of macroeconomics. When you see people in trouble because they have too much debt, the solution is actually to create more debt somewhere, typically through government debt, in order to start the economy again, have growth going and allow people to get out of their trouble through income growth rather than by reducing debt. I think the situation which we have been for the last five years is that, to deal with the debt problem, which was killing demand, we had to increase demand elsewhere in order to help the economy recover and allow people that were too much in debt to re-establish sustainability. This is an irony but it is a general economic principle that sometimes creating more debt is indeed the right way to deal with a private debt problem.
Mr. HELBLING: On Ukraine, indeed our forecasts are not as pessimistic as those of others. Let me just emphasize that forecasting at the juncture where Ukraine is, it is difficult to foresee a major contraction this year, broadly similar to what others have. There is some optimism in our baseline, as emphasized in the WEO, that geopolitical tensions will ease, which then would lay the ground for possibly a strong rebound. So, in that sense, our forecasts live up to the expectation that there will be an easing of geopolitical tensions going forward.
QUESTIONER: I would like to know about the credit the European Union asked the IMF to pay, to give to Ukraine to be able to pay their gas account to Russia, about 1 billion, I think, if that was now affirmed. The other question is, what is your opinion on the asset-backed security purchase that the Eurozone Central Bank is planning and the idea that they might buy or they will buy lower quality bonds from the Southern European countries?
Mr. HELBLING: On the first question, the selling of debt of Ukraine toward Russia for gas purchases, that will be discussed in the context of upcoming program negotiations with Ukraine. At this point, we cannot comment or analyze the situation.
Mr. BLANCHARD: The ABS program, we think that it can make a difference. We think that one of the difficulties in Europe today is credit to small- and medium-sized enterprises. We think that an ABS market, a good, healthy ABS market would be useful. This is a market in which the spreads are still sometimes quite large, so we think that the ECB can indeed help by developing that program.
QUESTIONER: The size of the uncertain prospects and lower investment that you cited, are there any other causes for the revised-down figures for the growth of the Brazilian economy from 1.3 to 0.3 percent, and do you see the risk of a recession in Brazil?
Mr. MILESI-FERRETTI: The downward revisions in part reflect outcomes; that is, we got two consecutive quarters of growth that was negative. Those quarters matter a lot, of course, for determining what the outcome is going to be in 2014. This is why we have pared down our forecast of growth to 0.3 percent this year. We think it was, as you mentioned, weakness in investment, weakness in business confidence. Clearly, political uncertainty may have played a role. This will be resolved very soon. So, that would bode well, say, for some recovery in investment next year. But we have a recovery which is still quite tentative, with growth of about 1.4 percent only for next year.
We have to take into account that Brazil had to tighten monetary policy considerably over the past year or so to fight inflationary pressures. The impact of tighter monetary policy is, given that inflation has still failed to decline, it is likely to stay around, also because of the lags with which monetary policy operates, and that would tend to compress domestic demand.
Finally, the external environment for Brazil remains overall okay, but it is a bit less favorable than it was a few years ago. The terms of trade has declined a little bit. Demand for commodities is not growing at the same pace as it was a few years ago. This shows, for example, by the fact that the current account deficit has widened to about 3 1/2 percent. So, all these factors put together imply an outlook that is still of modest growth, clearly below the medium-term capacity to grow of Brazil.
Now, on recession, it depends on how you define a recession. We had two consecutive quarters of negative growth. Some countries define a recession as two consecutive quarters of negative growth. But rather than focusing on whether growth is minus 0.1 or plus 0.1, we want to focus on what is the overall growth outlook. I think it remains relatively weak for Brazil; it remains relatively weak for the region as a whole. We hope that the resolution of political uncertainty and eventually inflation hopefully starting to come down after the tightening of monetary policy will encourage, will spur confidence and help a rebound in economic activity.
QUESTIONER: You talked about the low-income developing countries’ projections for growth: for 2014, growth of 6.1 percent; 2015, 6.5 percent. Is this taken into consideration? The fact that a lot of these low-income countries come from Africa, the Ebola virus disease in West Africa, the crisis in Eastern Africa and Southern Africa, if all these are taken into consideration, then really what is your economic outlook? Could you be more specific in talking about these low-income countries and about these regions on the continent?
Ms. DUTTAGUPTA: Let me just make a comment more generally about sub-Saharan Africa since you mentioned that. Overall, our view is that the region will continue to grow at a strong pace. Growth was about 5.1 percent last year and we project growth to remain at that level and, in fact, pick up next year. Of course, there are a few countries where the stress from ongoing political tension continues to impose major challenges.
Now, turning to the second part of your question on Ebola, besides the humanitarian effects, it has had a very strong negative effect on the three countries that were worst hit by the epidemic, basically Sierra Leone, Liberia and Guinea. Their growth effects are already part of our overall baseline forecast.
As you know, the IMF has recently approved and disbursed additional financial assistance to these countries, a total of 130 million as part of their ongoing programs. We think this is needed, given that fiscal costs will also be high in order to respond to the crisis. Overall, based on our current assessments, we think the spillover effects from Ebola are relatively limited, but we continue to monitor the situation.
ONLINE QUESTIONER: How can Spain avoid the high risk of deflation?
Mr. HELBLING: Technically speaking, Spain has experienced deflation over the past few months in the sense that inflation has been negative, but I think overall, if you look at our baseline forecast, we think Spain is on the way out into recovery. Growth has surprised on the upside. We think that reforms in the labor market, balance sheet repair in particularly the banking sector have paved the way forward. In that broader context, we think that Spain will suffer or go through problems with low inflation, as other euro area countries, but it will not be deflation.
Mr. BLANCHARD: Given the low level of inflation in the euro area as a whole, and given that Spain needs to increase competitiveness, it needs to have very low inflation and maybe even deflation. We were very worried that deflation would lead to high real interest rates and low internal demand. The good news about Spain is that, although at this stage growth is not very strong, it is positive. It is based not only on exports but also on internal demand, and that is very good news.
Now, this being said, let us again say that it would be much better if euro area inflation was higher because Spain would be able to increase competitiveness without having to go for deflation.
QUESTIONER: You revised the forecast for Slovenia upwards. What were the main reasons for that and what do you expect from the new government?
Mr. HELBLING: The main reason for the upward revision in the forecast is an improving external environment. In the World Economic Outlook, we see a mildly strong recovery in the euro area, in the main trading partners. I think for the new government, we would particularly hope that banking reform and financial sector reform will continue and thereby also pave the way for stronger domestic demand.
QUESTIONER: The next President of the European Commission, Jean-Claude Juncker, is planning a 300 billion euro investment package. Would you say that it is a good fix to the recovery problem in Europe? How should it be financed? As you know, there is a very strong debate about how to finance that and should we pile more debt to finance investments in the future.
Mr. BLANCHARD: So, this is the issue taken up at a more general level in one of the chapters of the World Economic Outlook. Let me repeat something I said in my introductory remarks, which is, at this stage, we think the case for infrastructure investment is very strong because it can be done in an economy which has underemployed labor and underemployed capital so it is not displacing other activity. And it can be done and financed at very low interest rates.
In a number of countries, there are clearly infrastructure needs which have not been tended to over the last decade. So, it seems to us that there is a large number of countries where the economic case for more infrastructure investment is strong. It would help in the short run with demand and it would help increase potential output in the medium run.
Now, this being said, how it is done within Europe, in particular within the Eurozone, for example, is for the governments and for the European Commission to work out. The Juncker Plan is one example. We are not going to comment on that particular plan, but in general we are very much in favor of something which would increase infrastructure investment in Europe.
ONLINE QUESTIONER: What would you see as the biggest concern regarding growth in Japan for the next 6-12 months?
Ms. DUTTAGUPTA: Our baseline forecast for Japan’s growth is in the range of 0.9 and 0.8 percent this year and next year. The biggest priority would be to ensure that the third arrow of Abenomics, structural reforms, is implemented. This, we think, would not only help improve potential growth, but also have strong confidence effects–more labor market reform, addressing the duality in the labor market, product market reform, deregulation of agriculture and services, all these would really help pull up growth, which is key to bringing down Japan’s high debt level.
Mr. BLANCHARD: Let me expand a bit on that. The challenge of Japan is very clear, which is that, given the level of debt they have, they have to have some fiscal consolidation. They cannot let the debt-to-GDP continue to increase. So, they have to do that.
At the same time, they need to sustain growth. The issue how they do both. The way you do both is by having private demand being strong enough. What does it mean? It means you do very well on exports and/or you do very well on private consumption, private investment. Here the news is mixed. There has been a large depreciation of the yen, but it has not yet led to a large increase in exports. It has gone more into the margins of exporters rather than the volume of exports. So, the results are not as good as one might have hoped.
On consumption investment, numbers are difficult to read because of the introduction of the VAT. Again, private demand is not very strong. So, looking forward, Japan has to achieve stronger private demand. How does it do it? Exactly, as Rupa said, it is basically the three arrows. It needs to continue to have very expansionary monetary policy; it needs to have very carefully calibrated fiscal adjustment; and it needs structural reforms. Potential growth in Japan is very, very low. So, the only way they are going to grow faster is by increasing potential growth. This is the challenge of Japan.
QUESTIONER: The question is specifically on the interest rate environment. The United States has been increasing its growth at a pace even more rapid than the outlook is saying for the last quarters. Markets are beginning a movement in search of yield and the FOREX of emerging markets is under pressure. Which are the scenarios for this increase in the medium term for the next year? Is this increase expected to be accelerating growth continuous in the pace that it is now?
Mr. MILESI-FERRETTI: Our forecast for the United States is for the recent strong pickup in growth to continue into the rest of 2014 and 2015. With this forecast, we expect a lift-off from the zero bound of the short-term interest rate by, say, the middle of next year. Our forecast incorporates a projection of increasing long-term interest rates. They reflect the fact that we approach the period of normalization of monetary policy. This is in our baseline forecast and it is in the baseline forecast of the United States’ trading partners.
Now, what are the effects coming from the U.S.? Well, you have a positive effect that is coming from stronger U.S. growth and it is an effect that you can actually see already in data from Mexico; you really see the pattern of growth reflecting what has happened in the U.S. over the past two or three quarters.
Going forward, clearly you have a positive effect coming from stronger demand from the U.S. and you are going to have some negative effect coming from somewhat tighter financial conditions. To the extent that the increase in interest rates is driven by faster growth in the U.S., we think that overall the effect is going to be beneficial; it is going to be positive for emerging markets. Of course, policymakers in emerging markets need to be ready to deal with potential bumps on the road in the process of interest rate normalization in the U.S., increases in interest rates which may turn out to be more rapid than we expect, with more volatility than we currently observe. In that context, a very stable macro environment, exchange rate flexibility to absorb shocks, and a very credible macroeconomic policy framework remain really crucial elements of support and defense against these external risks.
Mr. DIENG: Thank you. This brings an end to our press confidence today. We will see tomorrow for the launch of the GFSR. Thank you very much.