IMF Olivier Blanchard,Global Economic Recovery.Transcript of a Press Briefing on the World Economic Outlook (WEO) Update

SPEAKERS:
Olivier Blanchard
IMF Economic Counsellor and Director of Research Department

MR. BLANCHARD: Speaking about Global Economic recovery

"The recovery continues, but it remains a weak recovery, indeed a bit weaker than we forecast in April. The headline number, namely the revision of the forecast of world growth in 2014 from 3.7 percent in April to 3.4 percent today, makes things look worse than they really are. To a large extent, it reflects something that has already happened, namely the large negative U.S. growth rate in the first quarter. But it is not all due to that. It also reflects a number of small downward revisions, both in advanced and in emerging economies.

The overall story remains largely the same as before:

Advanced economies are still confronted with high levels of public and private debt, which act as brakes on the recovery. These brakes are coming off, but at different rates across countries.

Emerging markets are slowing down from pre-crisis growth rates. They clearly have to address some of the structural problems that they did not address earlier in time and have to take a number of structural reforms. And they have to do this in an environment which is a world environment which is changing due to the normalization of monetary policy in the United States, which has implications for the rest of the world.

So let me start with the U.S. Growth in the first quarter in the U.S., as currently reported, and I must say that the number is so surprising that I would not be surprised if it was revised up when the statistics are available, but the number as it was, was a large negative growth rate of the U.S., far worse than anybody, including us, had forecast. In retrospect, it looks very much like a one-off type of event, which is due to the undoing of eventual accumulation earlier, which is due to unusually harsh weather, so factors which do not have obvious implications for the future, but just explain why growth was so bad in that quarter.

Now to give you a more optimistic view of things, which is, as you know, we have a growth rate for 2014 for the U.S. of 1.7 percent, but if we look at the rest of the year, starting in the second quarter, we have an annual rate, a growth rate of about 3 percent, and for next year, a growth rate also of about 3 percent. So looking forward, growth in the U.S. is reasonably strong.

One of the main policy issues at this point are mostly on the monetary policy side. 

The main one is the speed of monetary policy normalization, and that’s a hard one because there is a lot of uncertainty about, for example, how to interpret the low level of labor participation, uncertainty about what the natural equilibrium unemployment rate is. For the moment, we think the current plans, which is the end of tapering later this year, and then an increase in the policy rate sometime in the middle of next year, are appropriate plans, based on what we know today. But there’s enough uncertainty that we should not be surprised if there was some adjustment which was made along the way—if the policy rate was increased a bit earlier, or a bit later. I think this is the kind of uncertainty that we’re clearly facing.

The other issue that comes from the accomodative monetary policy is the potential for excessive risk taking, due to very low interest rates, the argument being that when safe rates are very low, there is a reach for yield, there is excessive risk taking and the BIS has worries quite a bit about this. So we have looked and we come to a different conclusion which is that it is true that we see, in some financial markets, valuations which are, we think, fairly optimistic.

The reason we are not that worried is that this is happening in an environment where the leverage of the principal actors, the investors, is not very high. So that even if there was an adjustment, say in stock prices, it would not be catastrophic in the sense of leading to bankruptcies of financial actors. It would look a bit like what we saw in 2001 with the bursting of the tech bubble. We don’t have such a bubble, but what happened then is that there was a bursting of the bubble. 

Let me turn to the Euro Area. The numbers are not great. The recovery remains weak and inflation remains far below the implicit target of the ECB, so our forecast for the Euro Area are roughly unchanged from April. It’s 1.1 percent for 2014. It’s 1.5 percent for 2015. These numbers hide a number of differences across countries and not always in the way that you would have predicted them. So for example, we have revised the forecast for Germany on the upside. We have revised the forecast for France on the downside. We have revised the forecast for Spain up, for Italy down. So there is a lot of diversity in the evolution of these different countries. Now this being said, it’s clear that the job is not done in the Euro Area, and that there is a lot more to do, both on the demand and the supply side.

So if you look at most Euro countries at that stage, it is clear that the unemployment rates far exceed reasonable equilibrium rates so that there is a lot of unemployment slack, there is a lot of output slack. Typically you’d have two instruments, fiscal policy, monetary policy. Fiscal space is very limited. Debt levels are high, so the norm would still be fiscal consolidation at the slow rate with fiscal consolidation. So the help has to come from monetary policy. The ECB has taken a number of steps and has introduced a number of measures in the last month, which strike us as potentially very good for demand. It’s too early to tell how these measures are going to work and it may be that if inflation remains very low, more measures should be considered. There’s still a bit of margin to play with.

The point to make here is that monetary policy cannot do the job alone. This is something that central bankers keep repeating, that is correct. In the case of Europe, there are many more things which need to be done in order to increase demand and then increase supply. One thing which is crucial is the asset quality review, which is now in train and run by the ECB to look at the balance sheet of banks and do whatever has to be done in order to make them healthier. That’s a very important process. It will repair the financial intermediation part of the economy, which is playing a central role in slowing down the recovery. And then looking beyond this, there are clearly structural reforms to be taken. The potential growth rate in the Euro Area is very low. It has to be increased. The reforms will vary from country to country. It may be reforms to re-enfranchise the youth; the unemployment rate of the youth is extremely high in many of these countries. It may be to increase competition in the non-tradable sector. It may be in some countries to increase infrastructure spending which could be done and help both demand in the short run and supply in the longer run.

Japan

We have revised our forecasts for Japan to 1.6 percent in 2014. That’s a revision upwards. This reflects I think the success of economics so far. We’re seeing increases in consumption, partly due to the VAT shifts but we’re also seeing increases in investment, which we were not seeing before so there is some reason for optimism here. The fundamental challenge of Japan remains how to both decrease the level of public debt, which is, as you know, extremely high, and increase growth, not only in the short run, through demand measures, but also in the longer run with structural measures.

A glimpse of the difficulty that Japan is facing is reflected in the forecast that we have for Japan in 2015, which is 1.1 percent only and that reflects the fact that one of the factors which is going to lead to lower growth we think is the increase in the consumption tax, which is going to come at the end of the year, showing the difficulty of taking measures to make debt sustainable while maintaining growth. So, so far, so good, but one has to watch out.

Let me turn to emerging market and developing economies. So our forecast for growth for emerging markets and developing economies is 4.6 percent in 2014. That’s a small revision down, and 5.2 percent for 2015, a small revision down, but again, let me emphasize that these are fairly high numbers in the first place and aren’t quite as good as the forecast we had last April, but they are still fairly strong.

Let me not go through the whole set of countries, but just through the largest downward revision relative to the April WEO forecast, is Russia, where we have revised growth for 2014, from 1.3 percent, 2.2 percent, 0.2 percent and for 2015 from 2.3 percent to 1 percent. Some of these revisions actually have been announced earlier, after the April WEO, but before today, but those are revisions relative to the April WEO. What does this reflect? For the moment it reflects a deterioration of business confidence. There is nearly a freeze in investment decisions by domestic investors. There is near freeze in terms of FDI. There are large capital outflows. All this I think is easily explained by the geopolitical uncertainty which affects Russia at this point.

Let me turn to China. So what we have seen there is a slowdown in housing investment. And we think this is going to go on for a while and it's going to have an impact on growth in China. However, the government seeing this slowdown has taken a number of measures, stimulus measures such as railway investment, social housing. In the recent months we have seen an increase in credit flows. We have seen an increase in infrastructure investments, so the government is taking measures to partly offset the effect of the decreasing housing. The result is that our forecast for China is more or less the same as it was in April, around 7.5 percent, so we do not see a major increase in growth in China, in the short run.

This being said, the challenge of China remains the same. They have an economy in which the share of investment is very very large, the share of investment in consumption is small. They have to rebalance and this rebalance is still to come. The plan is to do it, but it really hasn't started on a visible scale. Let me end my presentation by talking about the challenges that face emerging markets and developing economies more generally and I’ll take two.

The first one is to implement structural reforms, to rebalance the economies and re-strengthen their growth.

The second challenge, my last point, facing emerging market countries, is the changing world environment, which comes from the recovery in the U.S. and the normalization of policy. That’s mixed news. On the one hand, recovery in the U.S. implies higher exports from emerging market countries and clearly Mexico is the prime beneficiary of what happens in the U.S. But it also implies that the normalization of monetary policy is going to lead some of the capital flows which had gone to emerging market countries because of very low rates in the U.S. to actually, at least in part, go back to the U.S. And what this means is we are likely to see a tighter financial environment in a number of emerging market countries.

If everything goes well, this will be a relatively smooth process and everybody's hoping that it will be, but given what I said about the complexity of the exit from unconventional monetary policy in the U.S., the uncertainty about the exact timing of the increase in the policy rate, I think you have to expect that there will be bumps in the road, of a type and of a magnitude that we saw in May of 2013. But I think we have to be ready for periods of volatility much higher than what we are now seeing.

So let me conclude. I think in short, the recovery continues. There is no stalling here. But it remains weak and it is still in need of I would say tender and loving care, namely policies to help both on the demand and on the supply side".