Transcript

Conference Call on the International Monetary Fund’s Group of 20 Surveillance Note

March 19, 2009

MODERATOR: Thanks for joining us. Just let me go over the ground rules very briefly. This is a backgrounder on the G-20 note and supporting documents that we posted yesterday evening on the Media Briefing Center. Those documents and this briefing are embargoed until 9:30 a.m. Washington time, that's 1330 GMT, approximately one hour from now. I would like the speakers to be identified as Senior IMF Officials in your stories.

All of the people in the room right now have had a role in the preparation of this G-20 Surveillance Note and the various supporting documents that you now have.

SENIOR IMF OFFICIAL: Good morning. I'll just say a few words to introduce the reports that we are releasing this morning. These reports were prepared as input for the G-20 meeting of Finance Ministers and Governors that took place last weekend. The first and main report provides an update on the Fund's staff's assessments of global economic prospects and policies. Then we also have a report that provides a stocktaking of policies taken by the G-20 countries to address the global banking crisis.

On the global outlook, the report presented to the G-20 a preliminary overview of a new set of global projections that will be released with our Spring 2009 World Economic Outlook report in the week beginning April 20, that is just before the spring IMFC meetings. We are still in the midst of the forecast round at this point and the projections are still evolving. That is why at this point we provide a range for our projections of global growth in 2009 and 2010 and provide country information only for the very largest economies. The spring WEO will provide the usual full and comprehensive set of projections country by country.

While the forecast round is not yet complete, it is clear that the global economy is likely to contract for the first time since the Second World War in 2009. At this point, we expect global GDP to decline between half a percent and 1 percent in 2009 before recovery gradually gets underway in 2010. The major advanced economies, the United States, the Euro Area and Japan, are all suffering severe recessions. The emerging and developing economies are slowing abruptly and many of these are also likely to see falls in activity in 2009.

This outlook represents a substantial further downward revision to our global projections since we released our January 2009 WEO Quarterly Update. This downgrade essentially reflects two assessments. First, the data for the fourth quarter of 2008 and for early 2009 show an even sharper contraction in output and trade than we had anticipated earlier as negative interactions between the real and financial sectors have intensified. We now estimate that global GDP contracted by an extraordinary 5 percent at an annualized rate in the fourth quarter of 2008. Moreover, global output continues to decline at a similar pace in the current quarter based on recent data on industrial production, business and household sentiment and trade.

Second, progress in putting in place policies to deal with the financial crisis has been slow and financial strains are likely to place a continuing drag on activity. Credit conditions remain severely impaired and uncertainty about bank balance sheets remains high impeding a return of market confidence. We do still see a global recovery getting gradually underway in 2010, but I should emphasize that the turnaround depends on strong policy implementation. First and foremost, there will be no enduring recovery until financial-sector stability is restored. This will require determined and well-coordinated policy implementation by financial authorities. The essential elements include credible recognition of losses in problem assets, public support for the recapitalization of weak but still viable banks and for the effective resolution of insolvent banks. It will be important for greater international coordination of financial-sector policies to avoid unintended cross-border spillovers. It will also be important that actions taken be consistent with a long-term vision of a healthy, efficient and dynamic financial system.

Second, continued expansionary macroeconomic policies will be needed to support global aggregate demand and break adverse feedback loops between real and financial sectors. Central banks have in many cases already lowered policy interest rates close to zero and are now exploring unconventional approaches to support credit creation. Moreover, fiscal policy must play a central role in supporting demand while remaining consistent with medium-term sustainability. The report provides a careful assessment of the fiscal stimulus that is being provided by G-20 countries that suggests that while substantial stimulus is being provided in 2009, additional initiatives will be needed to sustain fiscal support for the global economy in 2010 by countries with fiscal space.

Third, and this is my final point, it will be important for emerging and developing economies to balance the need to support domestic demand in the face of sharp declines in exports with the risks of accentuating capital outflows and undermining financial stability. A number of emerging economies in the G-20 have built up policy space through responsible policy management and have been in a position to ease monetary and fiscal policies to provide countercyclical support. However, many countries have much less room to maneuver. They face difficult external situations where capital flows have reversed and may need to tighten policies to reduce risks of a capital account crisis. In this context, it will be important to make sure that large-scale financial support is available as needed from official resources, including from the Fund, to help countries deal with difficult external financial conditions.

QUESTION: I'm just curious. Is there any risk that the forecast in April might end up being blow the ranges that you've given for 2009-2010?

SENIOR IMF OFFICIAL: As we cite in the report, there are certainly considerable downside risks remaining to the forecast. We give our best sense of where we think the forecasts will end up, but if the downside risks intensify in a severe way over the next months, then we will be adjusting our forecasts. We give a narrow range for 2009 because there is much more data available for 2009. The 2010 forecast is subject to much greater uncertainty. The risks on 2010 are substantially larger than for 2009.

QUESTION: I had a question about the American banking efforts. The section mentioned that there was insufficient detail in the American plan, that not much had been spelt out yet and as a result markets were still very skittish. I was wondering if you could outline a little further what are the risks of the Americans more cautious approach in formulating policy? And realistically speaking, when would you expect to see -- when would you hope to see more derails?

SENIOR IMF OFFICIAL: I think that the risk today is simply one of the market continuing to be uncertain of how the troubled assets, particularly the toxic assets that are held on both the books of American banks and foreign banks that have purchased them, will ultimately be dealt with. I don't expect a delay in addressing these assets will cause a shock to the system. As you know, resolving the troubled assets is something that the U.S. authorities have struggled with, both in the previous administration and this administration. We do not have any inside information on when the plan that is being worked on by the Treasury will be announced, but presumably in the not-too-distant future.

QUESTION: There's a whole variety of possible numbers for "stimulus." You were talking about how there was a substantial stimulus in 2009 although not the IMF recommendations and a lot less for 2010. When you consider or think of stimulus, does that translate to discretionary spending in the terminology of the paper? There's this issue of automatic stabilizers and whether they should be counted too. A second question, for 2010 you're talking about a recovery of 1-1/2 to 2-1/2 percent. That is still by traditional IMF standards a recession, no?

SENIOR IMF OFFICIAL: I'll take the stimulus question first. The focus of the 2 percent has been on discretionary measures to respond to the crisis, so in the notes you'll see two tables at the end. The first one is an accounting note of how countries have responded with new discretionary measures which we consider to be crisis related and were not included in let's say the baseline of the pre-crisis period. But the note does try to go a little bit beyond that and as you mentioned take into account automatic stabilizers and other effects which will have an important impact on aggregate demand and eventually on growth and that's really laid out in the second table. So the second table reflects an average of the discretionary measures taken over 2008, 2009 and 2010, brings in our estimates of the automatic stabilizers and then also includes other things that are going on. In some countries the other category is somewhat larger and that may reflect particular country-specific effects so that in one country you may have somewhat sharper declines in assets feeding through to the fiscal balance, in other countries there may be fiscal rules or there may be limited financing and the countries have to adjust somewhat. So we've tried to cover both discretionary measures taken in response to the crisis and the broader fiscal policy through different channels.

QUESTION: On 2010, I don't want to get into the semantics of what exactly is a recession, but certainly you're right to observe that growth would be very low by past standards, well below potential for the global economy. I think it's probably more illuminating to look at the fourth quarter to fourth quarter growth rates which are given in the final column of the table on page 8. There you will see that at least there is positive growth emerging in the major advanced economies, the U.S., Euro Area and Japan in 2010, so in that sense, those economies are coming out of recessions on the basis of standard definitions, but certainly global growth in the range of 2 to 3 percent is far below the rates that we have observed in recent years and considerably below what we would see as potential for the global economy. We don't really see the global economy getting back to anything like its past performance until beyond 2010 given the likelihood that there will be continuing deleveraging in the financial sector lending against credit creation for some considerable period of time. This is not going to be a rapid rebound as has been seen in previous global business cycles. This is fully consistent with the experience that we've seen after major banking crises in individual countries, but this time it's playing out at a global level.

QUESTION: May I have just one other follow-up on the stimulus question? The Europeans as you know when they deal with the charge of whether they've done enough will toss in the automatic stabilizers and then you get a larger number of course. But why do you think discretionary is the more important determinant?

SENIOR IMF OFFICIAL: I wouldn't say that we're suggesting that discretionary is the more important determinant. I think we want to look at both. Certainly countries will have fiscal space or room to do a bit more and we've argued throughout the note that those countries should do more. Other countries will not be in a position to do more in some respects because they do have larger automatic stabilizers. So I think the distinction comes between crisis response and discretionary action, and more broadly just assessing the effects of fiscal policy and dealing with the crisis and then we look at the broader figures. So again I think when countries are able to respond more to sustained global demand, and again we've looked at this 2 percent benchmark globally across the globe, this is the key indicator.

QUESTION: And that again is the key indicator because it's crisis related?

SENIOR IMF OFFICIAL: It's crisis related. Certainly the automatic stabilizer is also crisis related, but again when countries can do more to help sustain global aggregate demand, they should do more and that's why we've also focused on the discretionary part.

QUESTION: I'm interested in the emerging markets. You talk about capital account pressures and so on and I see the growth you're projecting is pretty low but still not in recession. Are you quite clear that these countries won't go into recession? The other question I have is do you have any figures for us on what the tally is for rollover debt or maturing debt coming due this year? The World Bank has put out figures. I was wondering if you have any.

SENIOR IMF OFFICIAL: As we make clear on this report, emerging markets are being affected by three channels, through commodity prices, financial constraints and weak external demand and different regions are being affected differently. We have individual numbers in the context of the WEO, but we still see growth coming down quite sharply in 2009 in the range of 1.5 to 2.5 and then you have a modest recovery in 2010. So while growth is slowing down, different regions are being affected differently depending upon how the transmission affects each country in the region. The other question was on rollover rates?

QUESTION: On the rollover?

SENIOR IMF OFFICIAL: I think we do have an estimate of rollover rates but I think it will come out more in the context of the GFSR where we have some tentative numbers. These numbers are still preliminary, but we do have some numbers. And the G-20 note itself provides us some indication of what the rollover rates were in previous crises and based on that we have some estimates for how we see rollover rates in this period.

QUESTION: I have a follow-up. Where do you think in 2010 the recovery is going to come from? Is it going to come from the advanced economies or do you think the recovery could come from the emerging economies?

SENIOR IMF OFFICIAL: I think the experience will be different around the world. We do see the advanced economies turning around in 2010 and growing at a moderate pace. I think the emerging economies will depend on the situation. For example, China is already putting very substantial stimulus and we are already seeing some signs of a firming of activity in China, which is very welcome. However, other emerging economies that rely for example on commodity exports or on exports of manufacturing goods to the advanced economies will find it very difficult to recover in any sustained way until we see the recovery coming in the advanced economies.

QUESTION: I have two questions as well. One, there have been signs in the United States of some perhaps bottoming out or positive signs. There was this report on consumption, the construction I think it was last month, and so some people are expressing some optimism. I wonder if you could comment on that if that's well-founded or not. Then on the issue just to follow-up on Bob Davis's question of the stimulus, do you think that Europe should do more? Is that your message that Europe should enact stimulus packages for next year that they have announced, and specifically on Spain, do you care to comment, my home country? Thank you.

SENIOR IMF OFFICIAL: Let me take the first part of your question on whether we see some signs of optimism in recent data. Certainly there are some positive notes. As you mentioned, the retail sales numbers have been somewhat stronger than expected. Some signs of stabilization at least of industrial sentiment, some signs of improvement in the housing market, but these are very preliminary numbers. This is based on 1 or 2 month's data, and some of the other numbers are still very negative, for example, on industrial production and trade. We do expect going ahead that the numbers should be getting better. The projection that we have for the United States is based on a view that the rate of decline will moderate after a very steep decline in the fourth quarter of last year. We see the present quarter, the first quarter of 2009, as again being very weak. But going ahead, the rate of decline should moderate particularly as the fiscal stimulus takes effect, and as the Federal Reserve's monetary and credit actions have an impact on improving the supply of credit. So the recent data are consistent with the view that the downturn is beginning to find some support, but clearly there are going to be difficult days ahead and we're not out of this by any means.

SENIOR IMF OFFICIAL: On the second question of whether should Europe do more, the message of the note I think is clear that the outlook is weaker going forward. It looks like the recession is going to be more protracted. The balance of the risks are on the downside. And in 2010 where it looks like there will be a need to continue to sustain demand, most of the fiscal stimulus represents carryover from announcements that are really targeted for 2009 in terms of lags of spending programs and in terms of investment. Whether Europe should do more, certainly Europe has bigger automatic stabilizers which has been an argument. On the other hand, they have done rather less than we think is necessary in terms of the 2 percent target. We'd certainly want to look on a country-by-country basis. Not all countries in Europe will be in a position to do more. Some have less fiscal space than others given debt levels or given other concerns. So some countries in Europe should do more certainly in the broader context to help sustain demand through 2010.

On Spain in particular, Spain has announced big packages in 2008 and 2009, and again to our knowledge there's not that much yet identified for 2010 in terms of new measures. There is some carryover of the measures that have been announced thus far. So indeed Spain would fall into the category of countries that should consider whether they can do more next year.

MODERATOR: I'm going to take the unusual step of posing some questions, or really clarifications that have been submitted via email [by a journalist ] unable to login to the conference call. I'm going to ask these questions. I think they're aimed mostly at our Fiscal Affairs Department. Let me read them and we can clarify as we go along her series of questions. “On the fiscal stimulus figures released today especially Table 2 of the appendix, can I interpret the footnote to mean that the last column of "Other Expansion" for the U.K. is the lending, et cetera, to prop up banks?” She also asks, she notes that “this is listed as negative 2.9 percent, which I assume is consistent with the estimates on the costs of the crisis released by the Fund a few weeks ago.” We had that out a few weeks ago. Additionally, she's got a series of questions so bear with me, additionally she asks, “am I also right in thinking we haven't had a country-by-country breakdown of fiscal expansion broken down by automatic stabilizers and discretionary, et cetera, before” other than what was embedded in the January fiscal paper that we released? Let's take those. She dropped me another email, but I think that's a good place to start.

SENIOR IMF OFFICIAL: I'll start with the last question. This is correct, we haven't given a country-by-country breakdown of this type before. It does reflect our efforts to strengthen our monitoring of fiscal policy reactions to the crisis and to move beyond only looking at the discretionary effects, to look more broadly at all of the fiscal policy channels and how they're affecting global aggregate demand. Focusing now on the U.K., I wouldn't say that this reflects the lending efforts directly. When there are loans that are being made or supports to sectors, this is not included in the fiscal deficit initially unless there's a clear unlikelihood that those assets would be recovered. So when this a case of the government acquiring a claim on either banks or industrial companies, that's not yet counted in the overall balance figures. In fact, what this represents for the U.K. in some part is the U.K.'s greater reliance than some of the other countries, the G-20 countries, on the financial sector as a source of growth and of fiscal revenues and our team for the U.K. sees that revenues from the financial sector, corporate income taxes from the financial sector, will be affected more than in some other countries. So to a large extent this reflects a stronger impact. It's a similar factor. It's not the lending though. It's the channel of corporate income taxes from the financial sector that's probably the biggest explanation.

MODERATOR: Thanks. Last, a follow-up and then I'll turn the floor over again to other journalists. She also wants to double-check Table 2. She's asking if she's reading it correctly. “Excluding Russia and Saudi Arabia, is it correct to say that the U.K. has had the largest increase in government borrowing since 2007 of any of the G-20 economies,” i.e., she's calling it “extra borrowing of 6 percent of GDP on average in the 2008-2010 period compared to an average of 3.8 percent?” She wants to know if that's correct.

SENIOR IMF OFFICIAL: That's the correct interpretation.

QUESTION: My question was comparable to one that was asked earlier about signs of recovery and we were addressing specifically the U.S. But I was wondering when do you see some positive signs for example like in housing where maybe starts turn up as they just did, what would you look for in terms of the continuity of that? Is there a chance that you could have a couple of months and then it just falls back? What sort of pattern would you need to see in something like the consumer spending side and the housing side to feel pretty confident that a recovery is beginning?

SENIOR IMF OFFICIAL: Certainly you're right to suggest that one shouldn't put too much weight on just 1 or 2 months of data, you need a sustained period of data. The pickup in housing starts was in fact dominated by a pickup in starts on multifamily dwellings which is particularly volatile, so one should put fairly low weight on that. I also note that one would need to see improvement in a broad variety of areas of the economy because there is always a danger that there may be some improved dynamics in some sectors like the housing sector, but weaknesses lingering elsewhere could then undermine those dynamics. For example, if the financial conditions were to deteriorate further, then that deterioration could undercut any temporary or any tentative recovery in the housing sector. So it is important to act to deal across the economy with the serious issues that it's facing. In particular, we really don't see a sustained recovery occurring until the strains on the financial sector have been decisively dealt with.

MODERATOR: How are we doing on questions? Are there any other questions or we'll wrap this up? That's it then. Thank you very much. If you do have any questions before the embargo expires in 30 minutes, or after the embargo expires, drop an email to media@imf.org and we will follow-up. Again thanks for joining us today and I look forward to speaking to you in the future.