Latest IMF projections for World Output

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". 

Eyeing Freeport's Indonesia copper exports, China smelters freeze spot buys

 Chinese copper smelters are holding off on spot purchases of raw material concentrate, betting they can charge higher processing fees on imports once Freeport-McMoRan Inc resumes exports from Indonesia, sources at smelters and traders said.

Indonesia said on Friday it expects to sign a memorandum of understanding with U.S. miner Freeport on Friday that would allow it to ship 756,000 tonnes of copper concentrate in the second half of the year. A resumption of the exports has been anticipated by the copper market.
Chinese smelters, the world's biggest importers of copper concentrate, buy up to half of their requirements in the spot market, and a postponement of purchases will force trading houses and other sellers to find alternative buyers.

The sellers will also have to fork out more to the smelters in spot processing fees once Freeport's concentrates from Indonesia hit the market.

Sellers of concentrate pay treatment and refining charges

(TC/RCs) to the smelters to convert the raw material into refined metal, with the charges deducted from the smelters' sale prices. The charges rise or fall in line with concentrate supply.

"Freeport's resuming exports would have a big impact. TC/RCs could jump to $110/11 cents immediately after the Freeport restarting," said an executive at a state-backed copper smelter in China, who declined to be named because he was not authorised to talk to media.

The executive said his firm was going to put purchase of spot concentrate on hold while waiting for Freeport's exports from Indonesia to resume. It was not immediately clear when the exports would restart.

A trading manager at a large state-owned smelter also expects spot TC/RCs to rise to about $110 per tonne and 11 cents per pound shortly after Freeport's restarting. Those levels of the processing fees were last seen in March.


ASIAN BUYING

Chinese smelters had already started reducing purchases of spot concentrate since late May, betting on Freeport resuming exports in the third quarter and on a rise in TC/RCs. But TC/RCs have continued to fall since then because of strong spot buying by other Asian smelters, traders and the smelter sources said.

Sellers this week offered to pay TC/RCs of $84-$90 per tonne and 8.4-9 cents per pound for spot standard, clean copper concentrates to China, compared to around $100 and 10 cents in late May.

The offers were also lower than the $95.5 and 9.55 cents paid by Anglo-Australian miner BHP Billiton to at least one large Chinese smelter for term concentrate shipments in the second half of 2014.

The trading manager at the large state-owned smelter said the firm was likely to buy two to three shipments of spot concentrate imports if TC/RCs rose to $100-$110 and 10-11 cents.

China's copper concentrate imports surged 47 percent on-year to nearly 1 million tonnes in June, the third-highest monthly number ever.
The jump in June imports was due to increased arrivals of term shipments, the smelter sources said.

Source: Reuters

Freeport set to resume Indonesian copper exports

Freeport-McMoRan Inc clinched a deal with the Indonesian government on Friday allowing the miner to resume copper concentrate exports from the country, effectively ending a six-month tax dispute and paving the way for more miners to follow suit.

Freeport, which is expected to export 756,000 tonnes of copper concentrate in the second half of this year, received its permit from the trade ministry on Friday after signing a memorandum of understanding (MoU) with the government, Freeport Indonesia CEO Rozik Soetjipto said.

With its export permit in the bag, Indonesia's top copper miner said it will resume full operations immediately, with concentrate shipments expected to resume next month from Grasberg, one of the world's largest copper mines.

"In terms of permitting, everything is OK," Soetjipto said.

"We still have to load the ship, and this may take a few days."

Freeport shares were up 1.79 percent on the New York Stock Exchange on Friday.

The company will now be subject to higher royalties, which will increase to 4 percent for copper and 3.75 percent for gold, up from 3.5 percent and 1 percent respectively, and the U.S.-based miner will also have to pay export duties on shipments until it builds a smelter in the Southeast Asian nation.

In January, the government introduced a controversial escalating tax on metal concentrates that climbed to 60 percent by 2017. Under a revision of the tax, Freeport will pay a 7.5 percent duty on its copper concentrate exports, but that rate falls as it spends on its smelter, hitting zero once investment in the project exceeds 30 percent of total cost.

The deal is expected to take some of the pressure off President-elect Joko Widodo, who has said resolving the dispute, which has sapped government mining revenues, would be one of his top priorities when he takes power in October.

The export tax was meant to force miners to develop local mineral processing facilities, allowing the government to derive bigger returns from Indonesia's mineral resources.

But rather than pay it, most miners stopped exporting from Southeast Asia's biggest economy, resulting in $1.3 billion in lost copper concentrate shipments. It also led Indonesia's second-biggest copper producer, Newmont Mining Corp, to file for international arbitration earlier this month over the new export rules it said were in breach of its contract.

A spokesman for Newmont Mining Corp , which owns the Batu Hijau mine on the Indonesian island of Sumbawa, said it is in talks with the government on a separate MoU that would allow it to resume operations at its massive copper mine.

"We are encouraged by the news about Freeport, which we hope will pave the way for construction of a copper smelter and lead to an economically sustainable resolution of the export ban," Newmont spokesman Omar Jabara said.

Freeport currently smelts some 30 to 40 percent of its output from its Grasberg mine at a copper smelter in Gresik, East Java. The company has previously said it plans to work with Indonesia's state-owned miner Aneka Tambang (Antam) to build the country's second copper smelter.

It is not clear whether that project will be ready before Indonesia's ban on concentrate exports begins in less than three years time.

Source: Reuters

Copper under pressure from Indonesia supply prospects

Copper slipped on Wednesday, under pressure from the prospect of increased supplies from Indonesia, but further falls were limited by encouraging economic data from top consumer China.

Benchmark London Metal Exchange copper dipped after news that supply could improve with Indonesia potentially exempting some shipments of concentrate from its export ban.

Copper hit an intraday high of $7,198.25 per tonne, not far from a 4-1/2 month high of $7,212 hit in early July, before trading at $7,132 a tonne at 1418 GMT, down 0.4 percent.

"We had a good day yesterday on the back of Chinese PMI data, which boosted all the base metals. Today is about consolidating gains for copper," said Vivienne Lloyd, base metals analyst at Macquarie.

China's factory activity expanded at its fastest in 18 months in July, data showed on Thursday, reinforcing confidence over the demand outlook from the world's top copper consumer.

"Copper had a strong day yesterday but is more muted today. It's encountering resistance just below $7,200/t currently and I'm not sure the fundamentals are strong enough to push it through that line."

Freeport-McMoRan Inc and Indonesia reached a deal over a contract dispute that is expected to pave the way for a resumption of copper exports after a six-month stoppage, a company executive said on Friday.
After signing the memorandum of understanding, Freeport Indonesia CEO Rozik Soetjipto told reporters he hoped copper concentrate exports could resume as early as August.

"If they are able to resume output at full capacity, this could provide modest near-term downside to the copper price over the next few months," Matthew Kates at Nomura said in a daily note.

Goldman Sachs said it expects copper to underperform other base metal prices over the next 12 months, citing the metal's heavy exposure to China's property sector, which it expects to remain bearish this year and next.

LME lead rose to its highest since December at $2,279 a tonne on Friday as investors bought the contract that has underperformed its peers on growing economic optimism over China. It later pared gains to trade at $2,267, up 1.4 percent.

LME zinc traded at $2,395 a tonne, up 0.3 percent on Thursday's close to hit a fifth consecutive three-year top.

Source: Reuters

Oil slips below $107 as ample supply outweighs risk premium

Oil fell below $107 a barrel on Friday as plentiful supply outweighed concerns over conflicts in the Middle East and Ukraine.

Brent crude for September delivery traded 18 cents lower at $106.89 a barrel by 1400 GMT. The contract had closed 96 cents lower on Thursday.

"There is ample prompt supply of crude oil, but the geopolitics in Ukraine, Gaza, Iraq and Libya is providing support," said Olivier Jakob, an analyst at Petromatrix in Zug, Switzerland.

He added that poor refining margins in Europe pointed to slack demand in the region.

U.S. crude for September delivery underperformed, falling 87 cents to $101.14 a barrel, after settling $1.05 lower.

Traders said that higher-than-expected gasoline stocks at the U.S. oil hub in Cushing, Oklahoma had led to lower refinery margins and an expectation that currently robust demand from U.S. plants would dry up.

German business sentiment fell for a third consecutive month in July, suggesting firms in Europe's largest economy are worried about global political crises.

In Libya, oil production has risen to 500,000 barrels per day, but there is no progress on reopening its Brega oil port after an agreement to end a protest there, a spokesman for state-run National Oil Corporation said.

Authorities in Gaza said Israeli forces shelled a shelter at a U.N.-run school on Thursday, killing at least 15 people as the Palestinian death toll in the conflict exceeded 760 and attempts at a truce remained elusive.

Members of the European Union on Thursday considered proposals targeting state-owned Russian banks vital to Moscow's faltering economy in what would be the most serious sanctions so far over the Ukraine crisis. 

U.S. ECONOMY, OIL INVENTORIES

Oil prices were also supported by U.S. Labor Department unemployment data, which suggested the economic recovery remained on track with initial weekly jobless claims at their lowest since February 2006.

However, the International Monetary Fund cut its 2014 forecast for global economic growth to take into account weakness early in the year in the United States and China, the world's two biggest economies.
Oil inventories in Cushing fell another 163,000 barrels over the four days to July 22, data from Genscape Inc showed on Thursday, deepening a slump that had already dragged stockpiles to their lowest in six years.

Drawdowns at Cushing - delivery point for West Texas Intermediate contracts - have dropped stocks there to near what traders consider to be minimum operating levels, fuelling a sharp rise in prompt U.S. crude oil prices.
Source: Reuters

EU reaches preliminary deal on economic sanctions against Russia

European Union ambassadors reached a preliminary agreement on Friday to push ahead with hard-hitting economic sanctions against Russia over the Ukraine crisis but details remained to be worked out, diplomats said.

The 28-nation EU has toughened its stance towards Moscow since last week's downing of a Malaysian airliner in an area of eastern Ukraine held by Russian-backed separatists.

After a discussion that lasted all day Thursday and part of Friday, ambassadors asked the EU's executive Commission to draw up a legal text setting out economic sanctions that the EU would impose for possible agreement next week.

Key measures suggested by the Commission included closing EU capital markets to state-owned Russian banks, an embargo on arms sales to Moscow and restrictions on the supply of energy and dual-use technologies. They would not affect current supplies of oil, gas and other commodities from Russia, diplomats said.

One EU official said there was "an overall preliminary agreement on the concept" but ambassadors would hold more discussions next week on the basis of the legal text.

Maja Kocijancic, spokeswoman for EU foreign policy chief Catherine Ashton, said there was still work to be done.

"The direction of travel here is very clear but we are still travelling," she told reporters.

It was not immediately clear if the legal text would include all the options identified by the Commission. But EU officials said it would cover all four areas where sanctions have been proposed - restrictions on Russian access to European financial markets, defence and energy technology and equipment useful for both defence or civilian purposes.

Separately, the EU was due to publish later on Friday the names of 15 individuals and 18 entities, including companies, subject to asset freezes for their role in supporting Russia's annexation of Crimea and destabilisation of eastern Ukraine.


"STOP ARMING SEPARATISTS"

Member states will scrutinise the draft legal text over the weekend and give their feedback to the Commission on Monday, one diplomat said. A revised draft may be adopted on Tuesday, he said.

Remaining stumbling blocks were over issues such as existing contracts as well as on a so-called "off-ramp" - how to scale back sanctions if Russia began to play a more constructive role in de-escalating the situation in Ukraine, the diplomat said.

Dutch Prime Minister Mark Rutte, whose country is seen as having a key role in shaping the EU response because it lost 194 citizens in the plane crash, said he would back sanctions unless Moscow halts weapons supplies to the rebels.

"We want as a country that has acquired a certain moral obligation as a result of this tragedy to promote Europe taking a common line on this," he told a parliamentary committee in The Hague.

"All indications are that Russia is continuing to arm the separatists," Rutte said, telling lawmakers he had spoken six times to Russian President Vladimir Putin since the disaster.

"There's an easy way out for Russia: to distance themselves from the separatists, and stop arming them."

The issue of upholding existing contracts with Russia is sensitive for France, which has agreed to sell Mistral helicopter carriers in a 1.2 billion euro ($1.61 billion) deal.

Another difficulty is balancing the pain of imposing the sanctions among EU member states. Britain is strong in financial services, Germany in technology and machinery, France in arms sales, while Italy is heavily dependent on Russia for energy.

"To a degree everyone is reverting to trying to protect their own national interests from harm," a senior European diplomat said.

It remains to be decided whether a special summit of EU leaders will be needed to approve the proposals. European Council President Herman Van Rompuy is expected to contact leaders to consult them on the way forward, an EU source said.

European Commission spokesman Jonathan Todd said the economic sanctions would require a "political level decision" but it was up to member countries to decide "whether or not the heads of state or government would actually physically have to come to Brussels and sit in a room to give their agreement."

Under proposals put forward by the Commission, the EU would target state-owned Russian banks vital to financing Moscow's faltering economy.

Under the proposal, European investors would be banned from buying new debt or shares of banks owned 50 percent or more by the state. These banks raised almost half their 15.8 billion euro ($21.29 billion) capital needs on EU markets last year.

The EU is also weighing restricting exports of technology for deep-sea drilling, shale oil and Arctic energy exploration.

Source: Reuters

The European equity markets are moving mostly to the downside in afternoon action

The European equity markets are moving mostly to the downside in afternoon action, following a disappointing read on German business sentiment, while geopolitical concerns continue to fester and the International Monetary Fund lowered its global growth outlook. The German Ifo Business Climate Index-a survey of 7,000 executives-declined for a third-straight month to 108.0 in July, from 109.7 in June, and compared to the 109.4 rechwaading that economists had anticipated.
The U.K. FTSE 100 Index is dipping 0.1%, Germany's DAX Index is declining 0.5%, France's CAC-40 Index is decreasing 0.8%, Italy's FTSE MIB Index is moving 0.3% lower, and Switzerland's Swiss Market Index is trading 0.4% to the downside, while Spain's IBEX 35 Index is increasing 0.5%.

Source: Schwab

Orders for durable U.S. goods rose 0.7% in June

 Orders for durable U.S. goods rose 0.7% in June amid gains in most categories, the Commerce Department said Friday. Economists surveyed by MarketWatch had expected durable-goods orders to rise 0.2%. Stripping out defense, orders rose 0.7%. Bookings excluding the volatile transportation sector were up 0.8%. Orders for core capital goods - a measure of business investment - climbed 1.4% in June after a revised 1.2% decline in May. Shipments of core capital goods, a category used to calculate quarterly economic growth, fell 1% in June.

Source: Marketwatch