Transcript

WEO Update July 2022 Press Briefing Transcript

July 26, 2022

PARTICIPANTS:

Moderator:

NADYA SABER, Communications Department

Panelists:

PIERRE-OLIVIER GOURINCHAS, Economic Counselor and Director, Research Department

PETYA KOEVA BROOKS, Deputy Director, Research Department

DANIEL LEIGH, Division Chief, Research Department

MS. SABER: Good morning, everyone, and thank you for joining this press conference on the IMF's World Economic Outlook Update. I'm Nadya Saber with the Communications Department and joining me this morning is the IMF's Economic Counsellor and Director of the Research Department, Pierre-Olivier Gourinchas. He is joined virtually by Petya Koeva Brooks, Deputy Director of the Research Department, and Daniel Leigh, Head of the World Economic Studies Division.

Pierre-Olivier will make some remarks, and then we will take your questions. Pierre-Olivier?

MR. GOURINCHAS: Thank you, Nadya, and good morning. The global economy, still reeling from the pandemic and Russia's invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook. Many of the downside risks flagged in our April World Economic Outlook have begun to materialize. Higher than expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions. China's slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year.

Under our baseline forecast, growth slows down from last year's 6.1 percent to 3.2 percent this year, and 2.9 percent next year. Downgrades of 0.4 and 0.7 percentage points from April. The world's three largest economies, the United States, China, and the Euro area, are stalling, with important consequences for the global outlook.

In the United States, reduced household purchasing power and tighter monetary policy will drive growth down to 2.3 percent this year, and 1.0 percent next year. In China, further lockdowns and a deepening real estate crisis pushed growth down to 3.3 percent this year, the slowest in more than four decades, excluding the pandemic. And in the Euro area, growth is revised down to 2.6 percent this year, and 1.2 percent in 2023, reflecting spillovers from the war in Ukraine, and tighter monetary policy.

Despite slowing activity, global inflation has been revised up, in part due to rising food and energy prices. Inflation this year is anticipated to reach 6.6 percent in advanced economies, and 9.5 percent in emerging market and developing economies, and it's projected to remain elevated longer. Inflation has also broadened in many economies, reflecting the impact of cost pressures from disrupted supply chains, and historically tight labor markets.

The risks to the outlook are overwhelmingly tilted to the downside. Let me mention a few of them. First, the war in Ukraine could lead to a sudden stop of European gas flows from Russia. Second, inflation could remain stubbornly high if labor markets remain overly tight, inflation expectations de-anchor, or this inflation proves more costly than expected. Third, tighter global financial conditions could induce a surge in debt distress in emerging market and developing economies.

In a plausible alternative scenario where some of these risks materialize, including a full shutdown of Russian gas flows to Europe, inflation will rise and global growth decelerate further to about 2.6 percent this year, and 2.0 percent next year. Global growth has only been below 2.0 percent only five times since 1970; 1973, 1981-82, 2009, and 2020. Under this scenario, both the United States and the Euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world.

Now, inflation at current levels will present a clear risk for current and future macroeconomic stability and bringing it back to Central Bank targets should be the top priority for policy makers. In response to incoming data, Central Banks of major advance economies are withdrawing monetary support faster than we expected in April, while many emerging market and developing economies had already started raising interest rates last year. The resulting synchronized monetary tightening across countries is historically unprecedented, and its effects are expected to bite, with global growth slowing next year, and inflation decelerating.

Tighter monetary policy will inevitably have real economic costs but delaying it will only exacerbate the hardship. Central Banks that have started tightening should stay the course until inflation is tamed. Targeting fiscal support can help cushion the impact on the most vulnerable, but with government budgets stretched by the pandemic, and the need for an overall disinflationary macroeconomic policy stance of setting targeted support with higher taxes or lower government spending will ensure that fiscal policy does not make the job of monetary policy even harder.

As advanced economies raise interest rates to fight inflation, financial conditions are tightening, especially for their emerging market counterparts. Countries must appropriately use macro-prudential tools to safeguard financial stability. Where flexible exchange rates are insufficient to absorb external shocks, policy makers will need to be ready to implement foreign exchange interventions, or capital flow management measures in a crisis scenario.

Such challenges come at a time when many countries lack fiscal space, with a share of emerging markets and developing economies in or at high risk of debt distress, more than tripling from a decade ago. Higher borrowing costs, diminished credit flows, a stronger dollar, and weaker growth will push even more countries into distress.

Debt resolution mechanisms remain slow and unpredictable, hampered by difficulties in obtaining coordinated agreements from diverse creditors. Recent progress in implementing the Group of 20's Common Framework is anchoring, but further improvements are still urgently needed.

Domestic policies to address the impact of high energy and food prices should focus on those most effected, without distorting prices. Governments should refrain from hoarding food and energy, and instead look to unwind barriers to trade, such as food export bans, which drive world prices higher. As the pandemic continues, governments must step up vaccination campaigns, resolve vaccine distribution bottlenecks, and ensure equitable access to treatment.

Finally, mitigating climate change continues to require prompt multilateral action to limit emissions and raise investments to accelerate the Green transition. The war in Ukraine and soaring energy prices have put pressure on governments to turn to fossil fuels, such as coal, as a stop-gap measure. Policy makers and regulators should ensure that such measures are temporary, and only cover energy shortfalls, not increase emissions overall. Credible and comprehensive climate policies to increase Green energy supply should be accelerated urgently. The energy crisis illustrates how a policy of clean Green energy independence can be compatible with national security objectives.

The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one. Multilateral cooperation will be key in many areas, from climate transition and pandemic preparedness to food security and debt distress. Amid great challenge and strife, strengthening cooperation remains the best way to improve economic prospects for all and mitigate the risk of geo-economic fragmentation. Thank you.

MS. SABER: Thank you so much, Pierre-Olivier. So, now we will turn to your questions, which you can send us online on the IMF Press Center, or on Webex, where we ask that you use the raise hand feature and turn your cameras on when you can.

So, we will start with Webex this morning. We have a question from Maoling from Xinhua.

QUESTIONER: Thank you, Nadya, for taking my question. I want to ask about global trade. The report shows that growth in global trade is going to slow, is likely to be slower than previously expected, both in this year and next year, reflecting the decline in global demand and supply chain problems, and also dollar’s appreciation. So, right now the global trade growth is quite sluggish. I was wondering what's the IMF's suggestions for policy makers to boost global trade. Thank you.

MR. GOURINCHAS: Well thank you, Maoling, and yes, you are right. Global trade has been slowing down. It's expected to grow by about 4.1 percent in 2022, and 3.2 percent in 2023, and his is a significant downward revision compared to our April forecast. In fact, it's even a larger revision than the decline in economic activity, which is not surprising, because often global trade responds more than output. And as you pointed out, the factors behind the slowdown in global trade are both on the demand side, with a slowdown in economic activity on the supply, with also supply disruptions that we've seen in a number of countries, especially China, in the second quarter of this year. And it's also related to the strength of the dollar. Historically, when the dollar is very strong, with a lot of goods invoiced in dollars, it makes them expensive for importers, and therefore there is a decline in demand for these goods.

So, going forward we can anticipate that trade is going to rebound once we have a turnaround in economic activity, and both demand stabilizes and supply expands, and then the dollar sort of stabilizes as well. We will have rebound in global trade, and that may happen beyond 2023.

MS. SABER: Great. Thank you. So, we will continue on Webex. We have a question from Devex from Shabtai Gold.

QUESTIONER: Thank you very much for taking my question. You mentioned the risk to the economy. I was just wondering if you could perhaps unpack that a little bit in terms of what the actual impacts are going to be of these downgrades in terms of what you expect to see investments in health, education, possible social unrest. What do these numbers actually mean for the people in these countries? And when you talk about multilateral cooperation, what could exactly could the G20 for example do to try to act in some sort of countercyclical way against these setbacks? Thank you.

MR. GOURINCHAS: Well thank you for your question, Shabtai. So, you are right. We are entering an environment in which interest rates are increasing. We have tighter financial conditions around the world, but especially for low- and emerging-market economies -- low-income and emerging-market economies. We have slower growth, and that is going to put pressure on fiscal space in a number of countries. And so we have to be worried about capacity of many governments to invest in education, or investment programs, or to support the most vulnerable.

And so here we also know -- you asked about social unrest. We know that in situations where food and security, in particular, increases. There is a correlation with social unrest, and that's certainly one of the downside risks that we highlight in our update.

Now, going forward, there are number of things that the international community can do. It can help in terms of ensuring food security, trying to work on initiatives to guarantee access to food supplies. The G20 is also working on the Common Framework. That is a framework that will facilitate that restructuring for countries whose debts aren't sustainable, so that they can close their financing gap and maybe access IMF funding, or at least restore fiscal stability. So there are a number of initiatives that the global community can do, and is already working on, to try and improve the situation for a number of, especially, the low-income countries around the world.

MS. SABER: Great. Thank you. So we will now take a question from Reuters from David Lawder.

QUESTIONER: Hi. Thank you for taking my question. I just wonder if you could put these forecasts into a bit of perspective. We had, actually, like, lower growth in 2019, 2.8 percent. But, it seems like the economy that you’re describing is a lot more fragile than what we had back at that time, describing the 3 largest economies: U.S., China, E.U. all stalling, teetering on the brink of recession. I just wonder if you can describe, just, sort of, how, you know —- is this a car that’s run out of fuel, and is just sort of coasting along until it stops? Thanks.

MR. GOURINCHAS: Well, thank you, David. Thank you for your question. So, you’re right when seeing the largest economies slowing down significantly in, in our forecast for 2022 and 23. The U.S., China and the Euro area. As you pointed out, the growth area, 2.9 percent —- we’ve had a growth number about equivalent in previous years, in 2019, for instance.

So, this is not a global recession scenario, in our baseline forecast. But we are also worried about a number of downside risk. And that is why, in this update, and a bit unlike previous updates, we’re putting a little bit more emphasis on the alternative scenario. And in the alternative scenario, we look at what would happen if a number of these downside risks, which we view as quite plausible, would materialize. In particular, a full shut down of Russian gas flows to Europe. Or inflation pressures remaining more elevated than they’ve, than they’ve been in the past. And we’ve been repeatedly surprised by the persistence and the broadening of inflation in recent times.

And also, an increase in financial tightening around the world. And so, if you put all these things together, then we get a global economy, as we mentioned in my remarks, that gets close to 2 percent in 2023, where we think, really, a lot of the vulnerabilities are, where you have a lot of slow down happening. And so, 2 percent is really, sort of, a low number for the global economy. That’s a sense where we’re getting close, really close, to a global recession.

MS. SABER: Great. Thank you. So we will continue with Webex. We’ll take a question from Larry Elliott from The Guardian.

QUESTIONER: Thank you. I just wondered whether you could be a bit more specific about how likely the alternative scenario is? I mean, it’s non-negligible. 30 percent chance, 40 percent chance? And, in the event that it does materialize, what are the policy opportunities open to governments. Because you seem to be saying the policy space, both in terms of monetary policy and fiscal policy is somewhat limited.

SPEAKER: No. I guess it’s too, too soon even to say whether you will be making a strategic announcement. At some point, and would you —-

MS. SABER: I’m sorry could we all mute please. I think we’re getting some feedback. Thank you. So you had the question?

MR. GOURINCHAS: I think, Larry, I got your question. You were asking about how likely the alternative scenario is, and what are other policy options. So let me, on the alternative scenario. So we want to think about, you know, if, imagine the probability distribution of different outcomes might involve. We don’t know for sure what will happen. But we have to think about what is likely. And in this particular environment we’re thinking that, well, we have our baseline scenario, but then they are also quite possible. They are not tail risks. And so this is what the alternative scenario is trying to capture. So you can think of the range between the baseline and alternative scenario as, sort of, a range where most of the outcomes might unfold with, maybe, more weight on the baseline and on the alternative scenarios. That’s why it’s a baseline and an alternative scenario.

Now, in terms of policy options, what is really important here is that, in a sense, there’s one overwhelming priority at this point. And it is to bring back price stability in advanced economies and in emerging market as well. Many of them have seen elevated price pressure.

Whether we are in the baseline, or whether we are in the alternative scenario —- in the alternative scenario, inflation pressures are pushing even higher. And there’s even more (inaudible) for central banks and policy makers to really address, address that issue. And this is really critical, because it’s really necessary to plan the seed for future macroeconomic stability. And stable microeconomic environment in the future requires that we bring down inflation in the, in the coming year, year and a half.

MS. SABER: Great, so we will take one more question on Webex, and then we’ll move to the press center. We will take a question from Eric Martin from Bloomberg.

QUESTIONER: Hello. Can you hear me?

MS. SABER: Yes.

QUESTIONER: Okay. Excellent. Dr. Gourinchas, thank you so much for your time, and for doing this briefing and, really interesting. We are in, at this moment. I want to ask you, for all of the challenges that IMF members are facing, last year the IMF issued a record $650 billion in special drawing rights for member countries to deal with the fallout for the Pandemic. Earlier this month, we reported that more than 3 dozen Democrats in Congress, there in Washington, including Senator Elizabeth Warren, have asked President Biden and the U.S., and Treasury, to support a fresh issuance of SDRs. I wanted to ask if this is something that the IMF is considering in light of the pressures that countries are facing, due to Russia’s invasion of Ukraine? And is something that they’ve heard about from the U.S. or other members as something that they would like for the Fund to consider?

MR. GOURINCHAS: Well, hi, and nice to see you again, Eric. Let me just answer this and explain a little bit to our audience. There was, you pointed out, a very large allocation of SDRs that was done in, about a year ago. In August of last year. $650 billion. And that has happened very, very few times in, in the history of the Fund, to have an increase in SDR allocation that way.

Now, SDRs are a complicated instrument. It’s not a panacea. There are a number of limitations on how it can actually help countries. It does help countries, but it’s not a perfect instrument. And so, it’s part of a menu of options that the Fund has, is exploring currently. And there have been some calls by policy makers to, maybe, have another SDR allocation. And this is something that the Fund is certainly going to be looking at. *

[*Editor’s note to reflect correction as of July 26, 2022: " There has been no discussion at the IMF of a further SDR allocation," an IMF spokesperson said. "Despite recent developments and high global uncertainty, it would be premature to conclude that the long-term global need for reserves has changed significantly."]

But I don’t think that this is, certainly, the only discussion that we’re having on the issue of what the Fund can do in the current environment.

MS. SABER: Great. Thank you so much. So now we’ll return to the press center, where we’ve received some country questions. And then we’ll get back to Webex.

We have a question from Keisha Ta-Asan from Business World Philippines, and she’s asking: The ASEAN-5 is estimated to expand by 5.3 percent this year, and by 5.1 in 2023. What is the IMF’s growth projection for the Philippines, Vietnam, Malaysia, Indonesia, and Thailand, for this year and for 2023? Why did the IMF downgrade its 2023 forecast for ASEAN-5?

MR. GOURINCHAS: Well, I will turn this question over to my colleague, Daniel. I will just say that, you know, just as an opening remark, that we know all ASEAN-5 economies are very dependent on the external sector. And in an environment in which the global economy is slowing down, this is going to have, this is going to have an impact on all ASEAN-5 economies. But let me turn it over to Daniel.

MR. LEIGH: Thank you, Pierre-Olivier. Exactly as you said, there is a growth of 5.3 percent this year, and 5.1 percent next year. And this is quite a big recovery from only 3.4 percent in 2021. And that owes to the success of the vaccination campaigns, the strong labor markets in a number of these countries.

But the slowdown in 2023 is a sharper one than we had expected in April. We’ve marked down 2023 by 8 percentage points. And this is, mainly, due to the global shocks that we’ve been talking about here. A slowdown in China, the U.S., E.U. That’s less demand for the exports of these economies’ goods, and also services, including tourism. The increases in interest rates to fight inflation, including in the region as well as abroad, is tightening borrowing costs.

And, for Vietnam, we don’t have a number in this update, but the pattern is similar. There’s a stronger 2022, and a slower 2023. Inflation is also rising in these economies, as in many countries. For 2022, we have a 3 to 7 percent forecast, depending on the country. Due to the various external shocks, including the currency depreciation, which is passing through into the costs of many items.

So that’s the growth and inflation forecast for ASEAN-5.

MS. SABER: Great. Thank you, Daniel. So we will continue on press center. We have a question from Doaa Abdelmoneim, Al Ahram Egypt and she’s asking, what are the expectations for Egypt’s real GDP growth, and other macroeconomic indices, such as inflation and debt? What are the drivers of these expectations? And, if possible, are there any updates on the program with Egypt?

MR. GOURINCHAS: Well, thank you. And on Egypt, the environment is quite challenging. It’s been challenging for a while. And, of course, the elevated food prices are certainly creating some hardships in Egypt. But to give you a little bit more details on the country, let me turn it over to my colleague Petya Koeva Brooks.

MS. KOEVE BROOKS: Thank you very much, Pierre Olivier. Let me start with the numbers. So, in terms of growth, we’re expecting the Egyptian economy to grow by 5.9 this year. And then, slowing down to 4.8 in the coming year. And then, when it comes to inflation, we expect it to be elevated at 8.7 in 2022, and 14 percent in 2023.

Now, when it comes to growth, we actually don’t have a change in the forecast for Fiscal Year 2022, and we have a modest downgrade for 2023, by .2. And, again, the reason for that is we had very strong, we saw very strong upturns prior to the outbreak of the war. And, and that strong activity is upsetting part of the, the negative spillovers which are coming from the war, given that Egypt has, depends on tourism, as well as imports, a lot of wheat.

Now, when it comes to the, the other thing that we’ve observed is capital outflows. And, as part of their response, the authorities have requested assistance from the IMF.

As you know, there was a team from the IMF that was in Egypt in Cairo, at the end of last month, beginning of this one, and had very productive conversations with the authorities. And the close engagement with the authorities is still there. And as the work is being done towards reaching a staff level agreement. Thank you.

MS. SABER: Great. Thank you, Petya. So we will get back to the Webex. We have a question from Anton Chudakov from TASS News Agency.

QUESTIONER: Good morning. Thank you.

MS. SABER: Good morning.

QUESTIONER: Thank you for taking my question. IMF increased the projection for Russia’s GDP in 2022 from -8.5 to -6. Could you please provide some details regarding this analysis? How do you rate (phonetic) Russia’s efforts to deal with the economic consequences of the Western sanctions? Is it possible that the next steps of Russian policymakers will lead to further projection increase in this and next year? Thank you.

MR. GOURINCHAS: Well, thank you, Anton. So you’re absolutely correct. In our latest round of projections that we’re releasing today, we are revising upwards the performance of the Russian economy for 2022. Now, let’s keep in mind that this is still a fairly severe recession that we are anticipating. So the output growth we are expecting for Russia in 2022 is -6 percent.

We expected a larger recession in our April round. And the reason for the difference is that -- there are basically two main reasons. One is that the domestic economy in Russia has been doing fairly well. The measures that were taken at the onset of the war, especially on the financial side, the monetary side, to stabilize the financial sector were quite effective, and they helped support the domestic economy.

And then on the external sector, Russia has seen very strong export revenues over the first half of this year due to the sale of oil and gas to the rest of the world, in particular Europe and elsewhere. And that has also helped support the economic outlook.

Now, going into 2023, on the other hand, our expectation is that the impact of the sanctions that have accompanied the war is going to lead to a further deterioration of economic output in 2023. So we have a revision of the -1.2 percentage point for 2023.

But let me turn it over to Petya actually. Petya might have maybe some more details on this.

MS. KOEVA BROOKS: I don’t have much to add, maybe just to say that domestic demand has been quite resilient. And part of the reasons for that is that the policy measures that were taken were successful in restoring confidence in the financial system, which was not there at the very initial stages of the crisis. And also, there’s been quite a lot of fiscal support, which has underpinned that strength in domestic demand.

MS. SABER: Great, thank you. So we’ll continue with Webex. We have a question from La Nacion from Rafael Mathus.

QUESTIONER: Good morning. Thank you very much for taking my questions. I have a question regarding Argentina. I was hoping you could talk a little bit about the outlook for the economy, and particularly about inflation. There have been some economists that have warned about the risk of hyperinflation in the country. I wanted to know if you share these concerns or if you believe that the current policies are enough to bring down inflation in the country? Thank you.

MR. GOURINCHAS: Well, Rafael, the situation in Argentina is quite preoccupying, of course, as you imagine. One of the major issues is the one you point out. I mean Argentina at this point has an inflation process that is unanchored. Inflation year-on-year in June was at 64 percent if I’m not mistaken. There are expectations it might increase even further beyond that over the course of the year. And of course bringing back inflation and price dynamics to a more stable level, to a more stable microeconomic environment, has to be the absolute priority for the country.

Now, whether the policies that have been put in place so far, whether that’s actually going to deliver this, that remains to be seen. But certainly that’s the issue that needs to be tackled head on.

Petya, any other suggestions on Argentina?

MR. KOEVA BROOKS: Again, I don’t have much to add except to say that, you know, we saw a very strong rebound in activity initially, and the expansion is continuing. But of course the global outlook and the global factors are definitely going to weigh in. So even though our forecasts for growth are not changed, all of the risks are really on the downside. So I think our team is going to have conversations with the authorities in the context of the second review.

MS. SABER: Okay, thank you, Petya. So continuing on Webex, we’ll take a question from Alan Rappeport from The New York Times.

QUESTIONER: Thanks very much for taking my question. Wanted to ask you one on global energy prices, and oil in particular. I was hoping to get your assessment of the feasibility and potential impact of the proposed oil price ceiling on Russian oil, and what would it mean for global oil markets to have two different prices essentially for oil out there, the Russian price and the rest of the market price?

MR. GOURINCHAS: Thanks, Alan. What you’re referring to is the proposal that is being discussed right now in the G7 to implement a price exception on the measures that have been approved by the European countries at the end of last month.

I must say that first, I mean we at the IMF do not comment on prospective sanctions or changes to the sanctions. We try to incorporate in our baseline what has already been announced and incorporate it. And so, as a result, for instance, our current round of updates incorporates the measures that have been announced at the end of last month by the European authorities, but we don’t have an analysis or a position on the price exception.

We consider that the current measures that have been discussed could have an impact on oil prices. Here and I’m talking about the sanctions announced in the last round, so the sanctions on the maritime insurance and financing. But it’s a very complex issue and it’s one that is generating a lot of discussion, so it’s still something that is under discussion right now.

MS. SABER: Great, thank you. So we’ll take one more question on Webex and then get back to the press center. We’ll take a question from Weir Ge from Yicai.

QUESTIONER: Yes, can you hear me?

MS. SABER: Yes.

QUESTIONER: Thank you. I had a question. Wonder if you can elaborate more on the effects of the tighter monetary policies by major central banks on China, and on other emerging markets, and developing economies? And would you elaborate more on like what warning signs we should be pay attention to if the world is risking tipping into a recession? Thank you.

MR. GOURINCHAS: Yes, Weir, so this is a very good question. This is actually one of the things we are most worried about when we think about the downside risk that we’re facing in the coming months and year, the financial tightening, which has been relatively orderly in its impact on especially emerging market economies up until now.

There’s been a lot of differentiation. Spreads have been going up. Interest rates at which countries borrow have been going up. Currencies have been depreciating. But there’s still a lot of market differentiation between, for instance, the commodity exporters versus commodity importers.

Going forward, however, it’s very clear that the tightening by the major central banks is going to have continued effects on the rest of the world. And we can think about basically three channels. First, there’s going to be reduced demand in economic activity at the global level. That’s going to weigh down on countries that rely a lot on the export sector for the growth. That’s going to affect them through this channel.

The tightening in the U.S. and other central banks around the world is also leading to a major appreciation of the U.S. Dollar against emerging market currencies. And that is increasing inflation pressures in those countries. So these countries are facing higher inflation numbers because there is imported inflation. All the price of the imported goods are rising faster because they are expressed in Dollars.

And then there is just the fact that when we have a cycle like this, there is in general what we call flight safety. There is a general tendency by investors to maybe move away from emerging market economies and seek safe havens, invest in U.S. treasuries or in other safe assets around the world. We’ve seen the capital flows moving out of emerging markets in the last four or five months. It’s been quite persistent. There’s been a lot of capital outflow. As I said, it’s been quite orderly until now, but it’s adding a pressure on domestic and sovereign rates. And that’s reducing fiscal space. That’s also making it harder for the private sector to also finance itself.

So all of these things are going to weigh down on emerging market economies, which so far have been, as I’ve said, has been quite orderly. A number of emerging market economies have improved their policy frameworks, the way they implement monetary policy, the way they deploy other instruments, macroprudential instruments to guarantee the stability of the financial sector. So things have not been too disorderly up until now, but of course we are concerned as to whether this might continue in the future.

MS. SABER: So we’ll move to the press center now. We have a question from Neil Macdonald from Channel 4 News ITN. He’s asking why does economic growth in Canada and Japan hold up much better than in other G7 countries?

MR. GOURINCHAS: Well, thank you, Neil. So on Canada, you’re right that the economic activity has been fairly -- I mean in 2022, we’re expecting about 3.4 percent for Canada, and slowing down in 2023 to about 1.8 percent. So there’s still quite a significant slowdown in Canada in 2023, but the 2022 numbers are relatively high.

Now, part of it is that the terms of trade in the environment of high energy prices, this is actually helping and supporting an economy like Canada, which is an important commodity exporter.

Let me bring in my colleague, Petya, on Canada, if she wants to add anything, and then we can talk about Japan.

MS. KOEVA BROOKS: Perhaps just to add that if you look at 2023, we actually have a fairly sizable downward revision to our forecast for Canada by one percentage points. And a big part of that is also the impact of the lower external demand, especially from the U.S., given what a close trading partner the U.S. is.

MR. GOURINCHAS: Now, let me maybe add a few things on Japan. So Japan is in a somewhat different space than a lot of the other advanced economies. It has had a fairly low rebound from the pandemic, and its output growth in 2021 was actually only 1.7 percent. So it didn’t have the very strong rebound we’ve seen in other economies. And it’s still quite a bit below its pre-pandemic output level. So there is a lot of room for catchup, there is a lot of slack in the Japanese economy.

And as a result, they have a slightly different policy mix. The Bank of Japan is still pursuing a fairly accommodating monetary policy by keeping short-term and long-term interest rates fairly low on their yield and control policy and fiscal policy is also quite supportive of economic activity in Japan. So the Japanese economy is sort of been held back, there’s been supply chain disruptions in the first quarter of this year, that have been really rebounding in last year. So they’re growing right now but they are also, you have to take into account where they are coming from.

And let me turn it over to Daniel in case he wants to add a few points.

MR. LEIGH: Thanks, Pierre-Olivier. Yes. For Japan the forecast for this year and for next year we’ve cut it by 0.7 and 0.6 percentage points respectively. And that’s because of the worsening external conditions with China and other major economies slowing down and that’s important for Japan’s exports.

Inflation is also outpacing the growth in peoples’ paychecks and that’s putting downward pressure on consumption. So overall this is quite a sizeable downgrade for Japan. And that’s the forecast.

MS. SABER: Okay. Thank you, Daniel. So we are coming close to the end, I think we have time for about two more questions. So we will turn back to WebEx and take a question from Colby Smith from the FT.

QUESTIONER: Thank you so much for doing this. Just on recession risks in particular as it relates to the U.S. one thing we often hear is the strength of the economy, you know, perhaps makes a soft landing likely even if we have the Fed aggressively raising interest rates. And I’m just curious your views on the resiliency of the U.S. labor market and the potential perhaps for some of the tightness to be relieved from that market without seeing outright job losses.

MR. GOURINCHAS: Well thank you Colby. This is actually one of the questions that a lot of people are spending a lot of time thinking about because you’re exactly right, we have signs of an economy that is slowing down. In fact we had dates, for instance we know that consumption has been slowing down quite a bit in the first quarter and then in May as well, in April and May. We know that there are a number of indictors that the economy was not doing well in the first quarter, the numbers for the second quarter are going to come out by the end of this week.

And at the same time we have this signs that the labor market is doing very strongly, with an unemployment rate of 3.6 percent, it is at the level where it was before the pandemic.

There is an issue with labor force participation that I just want to point out, that it has not completely recovered so there’s still a number of people who have left the labor force in the wake of the pandemic, they have not joined back, and that’s something that is weighing down in terms and adding pressures, if you want, from the perspective of the labor market.

But going forward what we anticipate is that as this monetary policy tightening continues then that’s going to gradually be cooling off also the labor market. And we anticipate that, you know, it’s quite likely that the unemployment rate, for instance by sometime in 2023 might turn around and might start rising as the economy is cooling off. So the labor market we anticipate sort of, you know, line maybe a bit of a delay on what we’re seeing in terms of the output numbers here.

And whether you were asking about soft landing, it’s a very narrow path, if you want. The current environment suggests that the likelihood that the U.S. economy can avoid a recession is actually quite narrow. Under our current projections, for instance, for the U.S. the quarter, Q4 and Q4 growth rate in 2023 is only 0.6 percent. And 0.6 percent, that’s under our baseline. So you see that a small shock at this point could be enough to sort of knock off the U.S. economy of fairly low number and sort of tilt it over into recession. So it’s a very narrow path at this point.

MS. SABER: Okay. Great. Thank you. So we’ll try to take two more questions before wrapping. And we’ll stick with WebEx. We have a question from Stefania from CNBC.

QUESTIONER: Hi, can you hear me?

MS. SABER: Yes.

QUESTIONER: Great. Thank you for taking my question. I was wondering if you have taken into account the political crisis in Italy in your outlook. And is the IMF worried about the future economic prospects of the country considering that Draghi is no longer the leader?

Also, how do you explain the fact that you cap your estimate for next year, and briefly what are your recommendations to the country, whatever the leader might be in the future? Thank you.

MR. GOURINCHAS: Well, Stefania, thank you for this question. I mean clearly there’s been an increase in political uncertainty in Italy. And this is an important juncture for the country because there are a number of, for instance there are a number of reforms and a number of programs that are part of the National Resiliency and Recovery Program that’s these European funds that have been provided to the European Union countries to respond and rebound after the COVID pandemic.

There are a number of these funds, this is quite a large amount for Italy but a number of reforms have to be implemented. And, you know, right now we hope and we certainly hope that these reforms can be carried out. They will be helpful for Italy and whatever government is in power that they will be supporting them.

And so certainly in our baseline estimates that we have for Italy we were, you know, which were established before the recent developments, we saw that our baseline is that this would be implemented.

And so we are saying a fairly sizeable, nevertheless we’re seeing a fairly sizeable slowdown in Italy in growth in 2023 to about 0.7 percent. That’s a full percentage point downward revision compared to our April forecast. And that’s really in the context of first the impact of high energy price and there’s a high dependence on energy and gas for Italy and that is having an effect already. There is also the tightening of financial conditions that is underway both around the world but also in the Euro area with the European Central Bank also increasing interest rates and tightening monetary policy. And then the sort of slowdown in external demand that is having an effect.

Now the Italian economy is supported, there is strong tourism rebound for instance in the first part of the year and that’s expected to continue. And as I’ve said, this National Resiliency and Recovery Program, this provides external funding from the EU to Italy so that’s also supporting economic activity. But the balance of these two effects is still that we are seeing a downward revision for 2023.

MS. SABER: Okay. Great. So we will take a question from Simon Ateba from Today News Africa.

QUESTIONER: Yes. Thank you for taking my question. This is Simon Ateba from Today News Africa in Washington.

I have two questions for you. The first one, you said a lot of things about the U.S. economy. The White House says the U.S. economy is not in a recession, not headed for one. My question for you is quick question. Is the U.S. economy in recession right now, is it headed for one?

And the second question is on Africa. You talked about debt distress for Africa nation. Can you talk a little bit about that? I know that you guys are the IMF, provided Africa nations in 2020 and 2021, more loan than you provided to them in the past 10 years. And now you turn around and you talk about debt distress. So if you can talk a little bit about that and talk about the solution. How can country get this? And do you put part of the blame on the loans that you give us and our nation? Thank you.

MR. GOURINCHAS: Well thank you, Simon, for your question. Let me address first the question on the U.S.

So right now under our baseline the U.S. is not in a recession in 2022. It’s not in a recession in 2023. There’s been a negative growth in the first quarter of this year, we’ll see what the numbers are. But even with the second quarter, even if, I would say if it were negative, that would technically potentially be a recession.

But the recession, in the way it is defined, typically is looking at more than just the output. You want to take into account the strength of the labor market. We were talking about this a little bit earlier. And the general assessment as to whether the economy is in a recession overall is a little bit more complex.

This does not mean that people will not feel that the economy is slowing down and that things are becoming, you know, both more expensive and slowing down. There are certainly signs of that going on and people are feeling it in their pocketbook and in terms of their own personal experience.

Now let me turn to the question you asked about African economies and in particular debt resolution. What we are seeing is, what is very clear is for a number of countries when you have a combination of shocks, and we’ve experienced shocks upon shock here. We had the pandemic; we had the impact of the war and elevated energy and food prices that is hitting a number of countries that don’t have really a lot of fiscal space and many of the low-income countries.

They can get into a situation where their debt is assessed as unsustainable. Meaning that there is a financing gap. And that financing gap needs to be closed. And that requires having the creditors and the country sort of negotiating a reduction in the claims on the country. That’s what the debt restricting process means.

And that process is absolutely vital because if you don’t have a reduction in the claims and debt restructuring, then the countries still saddled with unsustainable liabilities that it has to service and is unable to.

So that process is a process that also unlocks once we have restored debt sustainability it unlocks access to IMF resources. And that’s the point at which the IMF can come in and provide some financial assistance.

So that’s a critical step, and a number of countries are actually currently already under discussions to reduce their external debt. And we can anticipate that others will be doing so. It is important that this process happens as quickly as possible, that countries maybe even be proactive in terms of seeking a debt resolution maybe ahead of rather than waiting until it’s too late. Because when it’s too late then you really have no policy options and no room. But it’s an important part of the process.

Now you’re right, the Fund has a role to play and we are trying to help both in terms of facilitating that debt resolution and then also providing the financial assistance that we can once this is established.

Now let me also turn it back to Daniel who can maybe talk a little bit about the African economies in more detail.

MR. LEIGH: Thanks, Pierre-Olivier. Yes, well most economies in the world are revising, seeing the revision downward for their growth. This is not the case for Sub-Saharan Africa on average we’ve got growth above the world average.

We’ve got 3.8 percent in 2022 and 4 percent in 2023. There’s of course a difference between the oil exporters. We see growth going up this year and then coming down next year because of the boost to oil prices, which are rising 50 percent this year.

But for the oil importers it’s been harder, there’s growth slowing this year because of the higher cost of fertilizer, wheat, and that’s putting pressure on a lot of households. And then there’s a rebound next year.

And the main challenge that we are focusing on is indeed this risk of the debt distress and Pierre-Olivier already spoke to that. Thank you.

MS. SABER: All right. Thank you. So that’s all the time we have for this morning’s press conference on the world economic outlook update. I’d like to thank Pierre-Olivier, Petya, and Daniel for their participation this morning as well as all of you for joining in and sending us your questions.

For more information on the world economic outlook you can visit our website at IMF.org. And we thank you again for watching. See you next time.

Goodbye.