Speech

World Economic Outlook Press Conference (Tokyo)-- Opening Remarks, Kenneth Rogoff, Economic Counselor and Director of Research, IMF

October 9, 2002

Ladies and Gentlemen, greetings.

I am here today to present the latest issue of the International Monetary Fund's biennial publication The World Economic Outlook: Prospects and Policy Issues. Although our baseline is still for a global recovery, it is likely to be less strong than we had earlier anticipated. Our projection for 2002 global growth is 2.8%, exactly the same as we had last April. For 2003, however, our global estimate has been marked down to 3.7%, 3 tenths of a percent lower than we had thought five months ago. This is against the background of a sell-off in global equity markets, a decline in investor risk appetite, softer than expected indicators of activity for the past few months, further market turmoil in parts of Latin America, and heightened risk and uncertainty of conflict.

While perhaps disappointing, 3.7% is near the potential growth rate for the global economy, and far above the 2.2% reached in 2001. Our expectations of recovery are based on the still substantial monetary stimulus in the pipeline, and a continuing inventory rebound. Importantly, despite the slow recovery, we still read the evidence as supportive of the view that the productivity boom resulting from the tech revolution is real.

World trade growth of only 2.2% this year represents a setback in pace of global economic integration, far below the heady days of 12.6% growth in 2000. Still, for 2003, we project trade growth to return to a more normal level of 6.1%. The World Economic Outlook also includes analytic background chapters, which feature an in-depth analysis of the linkages between integration of goods and capital markets, as well as analysis of the sustainability (or should I say unsustainability) of the present constellation of global current account imbalances, as well as essays on the costs of agricultural protection and financial market vulnerabilities in emerging markets.

World inflation is projected at a modern era low: For industrialized countries, 1.4% in 2002 and 1.7% in 2003. Taking into account technical factors such as how new products are accounted for, the industrialized-country inflation numbers are virtually the moral equivalent of zero inflation. Whereas we do not think it likely that the kind of deflation Japan has experienced will be widespread, and the baseline is clearly for inflation in most countries, the risks are more balanced than at any time in recent memory. However, to paraphrase the American novelist Mark Twain, rumors of the death of inflation have been greatly exaggerated, and the world's central banks must remain vigilant to avoid a slow but sustained rise over the longer term. For developing countries, inflation is projected at 5.6% in 2002 and 6.0% in 2003, higher than in the industrial countries but still reasonably low.

Turning to regional growth projections, growth in the United States is projected at 2.2% for 2002 and 2.6% for 2003, with the latter at the low end of market expectations. We note the still low level of consumer sentiment, the sharp drop in equity prices, uncertainty over conflagration in the Middle East, and still weak evidence of the eventual recovery in business fixed investment. We agree with the Federal Reserve's current policy stance that indicates a bias towards easing. On fiscal policy, medium-term budget consolidation should now be the central goal, a prescription that increasingly applies across much of the globe, as even countries with relatively strong fiscal positions have seen them weakened over the course of the downturn.

For the Euro area, our forecast is for growth of 0.9 percent in 2002 and 2.3% in 2003. The main short-term concern in Europe is that domestic demand is extremely weak, and insufficient to fuel the recovery. Europe has enormous potential for growth, and the phenomenon of the US having higher productivity growth is a relatively recent one (post 1995). However, as long as Europe fails to adequately reinvigorate its inflexible labor markets and better prepare to deal with its rapidly aging population, its growth rate will likely continue to lag. From a global perspective, especially with respect to reducing risks due to global current account imbalances, faster growth in Europe would be highly desirable.

Right now, the slowest growing major economy is Japan, where growth is projected at minus 0.5% for 2002, and plus 1.1% for 2003. Japan appears to be emerging from its third recession in a decade. However, there is no guarantee against another similarly bad decade absent a determined effort to address the nation's core economic problems: the need for profound bank and corporate restructuring, together with decisive steps to finally end a historic period of deflation, unprecedented among industrialized countries since World War II. To reinvigorate the Japanese economy on a lasting basis, banks' loan portfolios need to be cleaned up quickly and fully, and corporate reforms need to pick up pace. And more aggressive monetary easing is needed to pull away from the deflationary drag.

Japan's best opportunity to take decisive action to restore growth is right now. The cost of muddling through to reform the economy over the past decade has been very high. The anemic growth the inaction has brought has translated into a 10 percent fall in output per person in Japan relative to Europe over the past decade, and by considerably more relative to the U.S. If the present opportunity isn't seized then, over the next decade, we could well be looking at another 10 percent decline in Japanese living standards compared to those in Europe and the U.S. — or even much worse.

Growth in developing countries is expected to recover to 4.2 percent this year, and to 5.2 percent next year. Clearly, these projections, especially the one for next year, rest on continuing recovery in industrial countries, and slower than anticipated growth in the major economies would dampen prospects for developing countries. Downside risks are greatest in Latin America, where financial markets have been rocked by political developments and renewed concerns about long-standing macroeconomic vulnerabilities. The persisting economic difficulties in most countries in the region, and their continuing vulnerability to external financial crisis underscores at least one basic fact—that there is no elixir that, if applied, will easily restore sustained high growth. At the same time, important lessons can also be drawn. Developing sound institutions helps economic performance; weak institutions dampen it. Also, openness to trade is important for long-term growth. Financial integration is important also, not least to support trade, but there are nuances. Foreign direct investment and portfolio investment flows are unambiguously beneficial for growth. Debt-creating capital inflows, however, particularly those of a short-term nature, can increase an economy's vulnerability to financial crisis. Indeed, experience over the past decade with surges and sudden stops in short-term capital flows suggests that a rethink of what constitutes prudent debt levels may be in order.

Overall, we are cautiously optimistic about a global recovery with the emphasis on caution.

And now I will take your questions on the World Economic Outlook.