Transcript

Transcript of October 2022 European Department Press Briefing

October 14, 2022

Speakers:

Alfred Kammer , Director European Department

Meera Louis , Communications Officer IMF

Ms. Louis: Good morning and good afternoon for those joining us from Europe. Welcome to the European press conference. I'm Meera Louis with the Communications Department. With us here today, we have Alfred Kammer, who is the director of the European Department. We will start today by opening remarks, and then we will open up the floor and take your questions. Thank you. Over to you, Alfred.

Mr. Kammer: Thanks, Meera. Thank you for coming to the press conference. I'm starting us off with some remarks. Good morning to you here. And good afternoon to everybody in Europe who is joining us on the Web. Welcome to today's press conference on the economic outlook for Europe coming into 2022. Good morning, good afternoon and welcome to today’s press conference on the economic outlook for Europe.

Coming into 2022, thanks to the strength, coordination and solidarity displayed in policy responses to COVID19, Europe was on its way to exit the pandemic. Meanwhile, rising inflation was expected to gradually subside as commodity prices and supply bottlenecks would ease.

But Russia’s invasion of Ukraine changed this picture completely, and it is now taking a growing toll on Europe’s economies. Gas flows from Russia to Europe have dropped by over 80 percent relative to 2021. As a result, energy prices have spiked, and they are unlikely to return to their pre-war levels soon. This terms-of-trade shock has raised firms’ costs and led to a cost-of-living crisis. In response to higher and more persistent inflation, central banks have acted forcefully, and financial conditions have tightened.

Under these forces, the European outlook has darkened, with growth set to drop and inflation to remain elevated:

- GDP growth in advanced Europe is forecast to fall from 3.2 percent in 2022 to 0.6 percent in 2023—implying a downward revision for 2023 of 0.7 percentage point from our July World Economic Outlook Update projections. In emerging European economies, growth is also projected to decline sharply, from 4.3 percent in 2022 to 1.7 percent in 2023—a downward revision of 1 percentage point. In the conflict countries, output losses will be very large; Ukraine will see its GDP contract by over a third in 2022, while in Russia GDP is projected to be about 10 percent lower by 2023 than pre-war forecasts.

- Inflation should decline steadily next year, but it will stay significantly above central bank objectives. We project headline inflation at about 6 percent in advanced European economies and 12 percent in emerging economies in 2023.

Risks to growth are on the downside, and risks to inflation are on the upside, as shown in our new Regional Economic Outlook, which we will release on Monday October 24. For example, a complete shutoff of remaining Russian gas flows to Europe, combined with a cold winter, could result in gas shortages and rationing, giving rise to GDP losses of up to 3 percent in some Central and Eastern European economies, and yet another bout of inflation across the continent.

In the current environment, European policymakers face severe trade-offs and tough policy choices. They need to bring down inflation while helping vulnerable households and viable firms cope with the energy crisis. Policymakers also need to stay nimble and stand ready to adjust policies, depending on incoming news.

Central banks should continue raising policy rates for now, including in the euro area. And a tighter monetary policy stance might be needed in 2023, unless the deterioration in economic activity materially reduces medium-term inflation prospects. As financial conditions tighten, financial stability risks are resurfacing; regulators should closely monitor vulnerabilities, such as, for example, by stress-testing banks’ exposures to weakening household and firm balance sheets.

On fiscal policy, we have two main messages. First, fiscal tightening should proceed in 2023. Why? Because it needs to work with monetary policy in the fight against inflation and governments need to rebuild the fiscal space that has been depleted by the COVID crisis. Second, fiscal policy also needs to continue to address the cost-of-living crisis, but it needs to do so more efficiently.

In many European countries, governments have taken measures to dampen the passthrough of higher energy prices to households and firms to limit their economic and social costs. However, such measures should be temporary and will have to become more targeted to make sure their fiscal costs remain manageable and—this is crucial—to make sure that energy prices encourage lower energy consumption.

A helpful example of a well-targeted measure is to support low and middle-income households through lump-sum rebates on their energy bills. A less efficient alternative is to implement higher tariffs for higher levels of energy consumption, as some countries have done. While such an approach is not fully targeted to the vulnerable, it is still a better option than broad price caps.

Let me give you some numbers to make clear how important a well-targeted approach is: for 2022, on average across Europe, the cost of living for households has gone up by over 7 percent due to higher energy prices. IMF analysis suggests that compensating fully the bottom 20 percent of households would cost 0.4 percent of GDP, compensating the lower 40 percent would cost close to 1 percent of GDP. However, the fiscal costs of some of the existing packages, including new measures being announced, are vastly larger than these numbers. So, clearly, there is room to provide support for vulnerable people at lower cost.

Europe’s governments can also be much more efficient in their support of corporates. Energy security is a European problem; it is best addressed jointly, with an eye on ensuring a level playing field across the ‘single market.’

Finally, it remains essential for European policymakers to implement reforms that do not only relieve energy supply constraints, but also ease tensions in labor markets, enhance productivity, and expand economic capacity—including by accelerating implementation of Next Generation EU programs. Down the road, these measures will raise growth and ease inflation pressures. In other words, they will help address the two pressing economic challenges Europe is facing.

The task ahead is immense. But if European policymakers show once again the strength, coordination and solidarity they were able to muster during the pandemic, it can be done.

Thank you.

Ms. Louis: Thank you, Alfred. So now we will open up the floor to questions. You can send it by the presenter via WebEx. And please, can you? If you're in the room, please do identify yourself and your outlet. Thank you. I'll take the gentleman here in the front.

Questioner: As you know, there's been a change in finance minister back in Britain this morning and there's been a U-turn on the fiscal plan. Is that enough to steady the ship? And what lessons do you think can be learned from this debacle? And just a final question. Do you think there's scope for changing this very costly energy support plan that the UK is planning to put in place?

Ms. Louis: Thank you, Jeremy. Are there any other questions in the room on the UK? On the UK. All right. Excuse me. The gentleman over here?

Questioner: I just wondered, in addition to what Jeremy has asked you, if you could reflect on the importance of credibility and stability in governments at this challenging time, and whether there are concerns that what's happening in the UK in terms of the new approach to fiscal measures may find some contagion in the rest of Europe.

Ms. Louis: Thank you. If there are no other questions on the UK because we just want to cluster them. Nobody else. Okay. Alfred.

Mr. Kammer: On the question on the UK, we understand that the UK authorities are in the process of recalibrating the fiscal package they have announced and we wait until we get the details and at that point in time we are going to assess the package. I should also say that the UK is a country with strong institutions. We welcome the government's commitment to involve the Office of the Budget Responsibility and that the BOE will continue to do what is needed to address market dysfunction and preserve financial stability. We welcome the BOE’s continued strong commitment to bring back inflation to target. We continue to have very close and strong relations to the UK team and as this budget is being worked out, we will stay engaged.

Ms. Louis: Thank you, Alfred. Gentleman over there in the white.

Questioner: I understand that the packages for helping consumers and companies with their energy costs have actually to meet three criteria. It's targeted, temporary and funded. Now we have a plethora of different packages in Europe. Could you point out what country actually meets all three criteria or even two or even one?

Mr. Kammer: So just to be clear, what we are looking for in these packages and why we are looking for particular principles; one, we indeed suggest that packages are targeted and addressing the cost of living of the vulnerable segments of society. And that is important in order to limit the fiscal cost, because some countries have more limited space than others. But it is also important in terms of supporting and aligning fiscal policy with monetary policy. In general, our advice is that fiscal policy should not be expansionary. And if countries are approving fiscal packages and fiscal space is tight, there should be offsetting measures. So targeting is very important. And as I pointed out, we looked at helping out the lowest 40% of households for 22 in Europe, the average cost would be close to 1% of GDP. When you're looking at the average package right now in 2022, it's 1.8% of the GDP. So that is fiscally not very efficient. I think the second point, which is important and a temporary fits into that because the longer these packages last, of course, the more expensive they're becoming and they become a drag on fiscal policy and consolidation efforts which will be needed. The second part, which is also important, is the design of these packages so that prices actually can be passed through. Why is that important and why is that important in particular at this current juncture? Because of energy security issues. When you are looking at Europe currently, in July we were, in our outlook, we were concerned about a risk which could materialize if Russian gas supplies were to be shut off and there could be rationing required in the winter 23, 24, 22, 23 in a number of countries and that would lead to steep losses in economic activity. Our current assessment is that with regard to this, we are on a knife's edge. It looks like most countries actually will be able to avoid rationing and so it can be taken care of with a price mechanism. The issue is still a risk because if the winter is cold and that is combined with the Russian gas shut off, some countries may still experience rationing despite having filled, refilled storage tanks over the summer. And the part of the energy consumption and energy compression comes in because this is not only a problem of the winter of 22-23, but the energy security issues will last through 23 and into the winter of 23-24, because in the summer, gas storage would need to be replenished and therefore we need Europe-wide compression in demand of energy that includes gas and electricity. And the European Commission has suggested some targets. The packages being implemented by countries should try to achieve these targets by passing on price signals so that actually gas demand and electricity demand is being reduced. With regard to particular countries which are standing out, I think we have a plethora of measures in place across many countries. Many are targeted, but some of the measures in the same countries are broad-based. So that goes across Europe. If you are looking at some of the smaller countries which have less fiscal space, those are usually the countries where we see that they are the targeting is best and also where the fiscal cost is addressed as an issue and the fiscal packages are more efficient. So that's a general rule when we are looking at these packages.

Ms. Louis: Thank you. Alfred. Jan from Reuters right here in the front, please.

Questioner: You mentioned your preferred way of dealing with the energy crisis. Lump sums to the most vulnerable, etc. and that broad price caps are a bad idea. But this is exactly what the Europeans are thinking about now. The commission is to present its proposals next week. And there is big pressure on price caps on gas. Is this something that the IMF would advise against or is it all under design?

Mr. Kammer: Just to be clear, with regard to price caps, there are probably two issues when we are talking about price caps. First and foremost, we are looking at individual packages and price caps which are kept in place for household consumption or for industry consumption. And clearly, in order to get a price response, sorry, a demand response and cut back on consumption, you can have targets, you can have voluntary campaigns, but prices will play an important role in terms of lowering the consumption of households and enterprises. And I think in terms of some of the new packages which are being looked at right now, there is an element of becoming more targeted with these packages to be ensuring that prices are passed through to a sufficient extent in order to ensure that these demand reduction targets are being met. And I think that's a good development. Why is that important? Because it goes back to the word temporary, and that is also something we had in place during the pandemic. We thought the epidemic would initially be over after three months and it took a lot longer to go through that. And with the energy security situation, this is also not finished. After this winter, this will take another one and a half years at least in order to work itself through. So in that sense, these demand compression parts are very important with regard to a more general price cap at the European level, that's something, and purchasing jointly gas this is something one would need to look closely when the details are available because there the devil is in the details on how they're being designed, whether effective and whether they actually meet the objectives.

Ms. Louis: Thank you, Alfred. The gentleman there with the glasses. Thank you.

Questioner: With regards to Turkish economy, what worries you? What worries you the most? What are the prospects and risks given that it be elections next year? What will be your recommendations messages for the Turkish policymakers? And secondly, in contrast to some of the major economies, Turkish Central Bank is, keeps reducing interest rates as a way to fight inflation. Do you think this method, so-called turkey economy model could be successful in reducing inflation? Thank you.

Mr. Kammer : Turkey had very strong growth during the pandemic, supported by very stimulative macroeconomic policies. Now also reflecting the effects of the energy crisis and higher energy costs, the Turkish economy is slowing down. Our advice on the macroeconomic side remains, as it has been for some, some while inflation has been increasing throughout the last couple of years. It is now at 83% in the last month in order to lower inflation. It is important to implement a tighter monetary policy and that means to increase interest rates. And coupled with that, again, is what we are seeing, that macroeconomic policies need to be aligned. And that means given also limited fiscal space. Fiscal policy in Turkey needs to be tightened in order to support taking care of bringing down inflation. That has not happened yet, and we are continuing to recommend this policy mix to the Turkish authorities.

Ms. Louis: Thank you, Alfred. The lady there in the white, please.

Questioner: I would like to know more details about Spain. Miss Petya Cueva said the other day that the forecast for next year will be better than expected in this economic outlook because they didn't consider some data that was published later. How do you see Spain's first forecast?

Ms Louis: Alfred, just staying on Spain, we got another question online, which is on similar lines and they're asking in your last REO, you said Spain would be one of the economies that would better resist the impact of this crisis. What are the factors that explains this revision of its outlook? Is there a risk of recession in Spain in 2023?

Mr. Kammer: With regard to Spain, Spain was deeply affected by the pandemic and had a deep recession as part of that. They also had a very strong policy response in order to exiting from this recession. We have forecast growth for 2022 of 4.3%. That also reflects a strong recovery in tourism. And we are now expecting a slowdown in growth of 1.2% for 2023. Now, as I said, Spain experienced the largest contraction among major advanced economies in 2020, and that was reflecting the high reliance on contact intensive sectors. And therefore, output is not expected to reach pre-pandemic levels until early 2024. The forecast for 2023 reflects a general weakening of demand, tighter financial conditions, weaker consumer confidence and persistently high inflation. And that is a story which you're seeing across the Eurozone. Now, I should also say that Spain is one of the countries for which we are not forecasting a technical recession over the next year. Some other countries will experience technical recession and some will have outright recession. So Spain will not experience that and Spain's growth will actually be stronger than in other European countries.

Ms. Louis: Thank you, Alfred. So I'm going to turn to WebEx in a bit. If you are on WebEx, can you please turn on your cameras?

Questioner: Thank you so much for taking my question. Someone, some experts believe that while Europe is on the brink of a deep recession, the economic situation in Russia is improving. Goldman Sachs, for example, indicates that Russian activity is quite a bit livelier than it is in big European countries. According to the World Bank, Russian economy is expected to stabilize in 2024 and grow by 1.6%. Do you agree with these estimates? Is it right to say that Europe falls into recession but Russia climbs out? Thank you.

Mr. Kammer: No, that's not right. Then when you are looking at the growth developments, what you're seeing is that growth in Russia this year and next year is going to be negative and combined, over those two years, GDP levels will be lower by ten percentage points than pre-war. So that is a deep recession Russia has entered. When you're looking at the global outlook and also the European outlook, we see a lower growth, but we are not seeing deep recessions like in Russia. I should, of course, add that Russia's invasion of Ukraine caused the higher energy prices, caused a lack of food exports, and led to increases in prices globally and in particular in Europe, and is a root cause of the slowdown and the recession we are seeing in some of the countries.

Ms. Louis: Thank you, Alfred. So just staying on WebEx.

Questioner: I thank you very much for taking my question. My question would be about Italy, as you know, we have an incoming government that's going to be sworn in the next few weeks, and you mentioned, and broadly for Europe, an immense task and balancing financial aid in front of this energy shock and also the need for fiscal consolidation. So how big is this, how immense is this task for Italy, especially given the challenges that it faces being the second most hit country by the energy shock after Germany and given its high debt, that's already facing some difficulties as you can see in the spread of Italy's speedy piece against booms. And are you confident about that trajectory? How confident are you about that, about the debt going down? Thank you.

Mr. Kammer: So Italy is actually going to face a complex policy environment. On your first point, our recommendation to Italy is the same as to other countries with regard to the design of packages to have to targeted, to be efficient and to the extent possible find offsetting measures in the budget in order to finance these packages and at the same time have to price signal work so that demand is being compressed for energy and gas. Although I should say that the, uh, the risk of rationing which we had projected for Italy, is greatly reduced due to the very strong policy response by the authorities, in particular with regard to increasing the supply of gas to Italy. So that helps Italy and that helps Europe. Now, on the other issues, you have been raising bit lower growth and with increasing interest rates, Italy, of course, will need to be very focused on its fiscal stance. It will need to be very focused on bringing the debt to GDP ratio down, as the previous government has been focusing on as an objective. And given recent developments, that will require a more ambitious fiscal effort in the future. But we suggest, of course, as part of that is to eliminate low quality public spending, broadening the tax base. And what is very important for Italy, but not only for Italy, but also for other countries in Europe, is to really move forward on structural reforms, because structural reforms will increase productivity. They will increase growth. And they will help on energy security and the energy transition. The Next Generation EU fund is an excellent instrument in terms of helping and supporting countries on that road. And I think the implementation of the Next Generation EU fund is also critically important for Italy.

Ms. Louis: Thank you, Alfred. Any other questions in the room? The gentleman over there. Third row.

Questioner: Thank you. I had a question about the forecast for the Netherlands. So it's above average growth. And there were two questions for me about that, because we are quite tied to the German economy, which will be in recession in 2023. And also we have a big housing sector and a lot of mortgages which are, of course, vulnerable for interest rate increases. So are the risks more at the downside for the Netherlands, you think, or. Yeah, well, that's basically my question. So how big is the possibility to we will end up in a recession like Germany? That's basically my point.

Mr. Kammer: So first of all, the Netherlands had a very strong recovery from the pandemic, reflecting good and proper policymaking. You're right, the exposure of the Netherlands to the external demand factors is an important risk. Then when you are looking at our forecast, that already includes lower demand from Germany as a spillover to the Netherlands. So that is already in the forecast. But of course, if in general economic activity in Europe or in the US or in China were to weaken further, that would affect the economic outlook of the Netherlands. With regard to the housing issue, that is an issue which is also more prevalent across other European countries that we have high house prices and I would say frothy housing markets. That is something which needs to be very closely watched by all regulators over the next few years as we see tightening financial conditions. I should say, with regard to the Netherlands, we welcome the stricter conditions they have been implementing with regard to mortgage loans from January 22. I think they're very important. We also welcome that the authorities are vigilant and closely observing housing market developments and also the increase in interest rates on the stability of the market. And another point which applies to the Netherlands, but applies also more broadly to other European countries which have frothy housing markets, that is a general issue, that supply needs to be increased and that has been an issue for some while. And that to some extent reflects all the development in the housing market. So it is not just a reflection of that we had interest rates low for longer, but it also reflects that supply has not been increasing commensurately with demand and so supply side needs to be an important element of the policy response. That doesn't immediately deal with any stability risks, but that is a longer-term issue that needs to be addressed not only in the Netherlands, but more broadly in a number of European countries.

Ms. Louis: Thank you, Alfred. I see we have a couple of questions online. We have one coming in from CNN Greece. Greece has avoided reducing fuel taxes and thus the country currently has one of the highest fuel prices in the Eurozone. At the same time, the subsidy scheme chosen was not enough to lower fuel prices. Given these fiscal constraints, what does the IMF propose?

Mr. Kammer: Yeah, I think our advice to Greece is very similar to the advice we are giving to other European countries. Indeed, taking broad based price measures, caps, tax reduction is not the way to go. Instead, we are advocating targeted, if possible, lump sum transfers to divide honorably in order to deal with the increased cost of living. They should be temporary, and that is particularly important for countries which have limited fiscal space or who need to reduce the debt over time.

Ms. Louis: Thank you. We also have another one that just came in. He asks you, what are your assessments of the current situation and a prediction for the next year for the Western Balkans region, especially Bosnia and Herzegovina? And what do you see as the biggest challenges ahead? Inflation, fall of GDP, other factors?

Mr. Kammer: The situation in the Western Balkans is similar to what we are seeing across Europe. We are also seeing a weakening of growth that reflects tighter financing conditions, that reflects the impact of higher energy costs, which affects both firms and households in terms of consumption demand. I think that an added element we are seeing in the region, which the policymakers are very well aware of, that financing, external financing is becoming more difficult to obtain. And so access to external financing and also spreads have increased and that will complicate the policy making environment in the region now. But we also suggest for the region more generally is to focus really on structural reforms which are generating growth in the long term, but also deal with supply bottlenecks, which should help on the energy side.

Thank you. I think that's all we have for now. Thank you, Alfred. And if you need anything else, please feel free to reach out to us bilaterally. And we will be happy to help. Thank you for joining us. Take care.