Transcript

WEO Update July 2023 Press Briefing Transcript

July 25, 2023

PARTICIPANTS:

Moderator:

JOSE LUIS DE HARO

Communications Department

Panelists:

PIERRE-OLIVIER GOURINCHAS

Chief Economist and Director, Research Department

DANIEL LEIGH

Division Chief, Research Department

PETYA KOEVA BROOKS

Deputy Director, Research Department

* * * * *

P R O C E E D I N G S

MR. DE HARO: So, good morning to those who are here in the room with us, and welcome to those who are joining us online. I'm Jose Luis De Haro with the Communications Department here at the International Monetary Fund, and we're gathered here today for the launch of the World Economic Outlook, also known as WEO, update.

I hope that by this time you all had access to a copy of the document. If not, I would encourage you to go to our website, IMF.org, there you will find the WEO update, the blog authored by Pierre-Olivier, and many other assets, such as some of the data underlying our charts and tables.

As you can see, joining us here today are Pierre-Olivier Gourinchas, he's the Economic Counselor and the Director of the Research Department. Next to him are Petya Koeva Brooks, Deputy Director of the Research Department, and Daniel Leigh, Division Chief, also at the Research Department.

Before we start, I would like to make two quick points, for those who are unfamiliar with the World Economic Outlook cycle. We publish two updates throughout the year, one in January and another one in July. These updates only include a limited number of countries to which we offer a revised outlook. That said, we include a full outlook for the global economy, the risk to our baseline, and of course our policy recommendations, and it is only during our spring meetings in April and annual meetings in October that we published a full edition of the World Economic Outlook, including a full data set and analytical chapters. Pierre-Olivier, Petya, and Daniel are here to discuss the World Economic Outlook and its content in detail.

That said, if you have any specific questions, some country programs, staff-level agreements, negotiations, or questions of this nature, I would encourage you to reach out to us bilaterally to media@IMF.org so we can point you in the right direction on how to answer these questions.

I think I talked enough, so let me stop here, and pass the floor to Pierre-Olivier.

MR. GOURINCHAS: Well, thank you, Jose, and welcome, everyone. I'm going to offer a few brief remarks before we get to the Q&A.

The global economy continues to gradually recover from the pandemic and Russia's invasion of Ukraine, but it is not yet out of the woods. The COVID-19 health crisis is officially over, supply chain disruptions have returned to pre-pandemic levels, economic activity in the first quarter of the year proved resilient, and labor markets are quite tight in many places. Energy and food prices have come down faster than expected from the war-induced peaks. And financial instability following the March banking turmoil remains contained thanks to forceful actions by the U.S. and Swiss authorities.

Under our baseline forecast, growth will slow down slightly less than projected, from 3.5 percent last year to 3 percent this year, a 0.2 percentage point upward revision for 2023. The slowdown is especially concentrated in advanced economies, where growth will fall from 2.7 percent last year to 1.5 percent this year. By contrast, growth in emerging market and developing economies will remain stable at 4 percent this year and 4.1 percent next year.

Now, this masks significant differences between countries and regions, with emerging and developing Asia growing strongly at 5.3 percent this year, while many commodity producers will suffer from a decline in export revenues. At the same time, global inflation is projected to decline slightly faster than projected in April, from 8.7 percent last year to 6.8 percent this year, a 0.2 percentage point downward revision.

Now, stronger growth and lower inflation than expected are welcome news, suggesting the global economy is headed in the right direction. Yet growth remains low by historical standards, and while some adverse risks have moderated, the balance remains tilted to the downside, and it is too early to celebrate. There are growing signs that global activity is losing momentum. The global tightening of monetary policy has brought interest rates into contractionary territory. This has started to weigh down on activity, slowing the growth of credit to the nonfinancial sector, increasing households' and firms' interest payments, and putting pressure on real estate markets.

In the U.S., excess savings from the pandemic-related transfers which helped households weather the cost-of-living crisis are all but depleted.

In China, the recovery following the reopening of its economy, shows signs of losing steam, where there are continued concerns about the property sector.

Second core inflation, which excludes energy and food prices, remains well above central bank targets, and is expected to decline only gradually. In advanced economies, core inflation is expected to remain unchanged at 5.1 percent this year before declining to 3.1 percent in 2024. Clearly, the battle against inflation is not yet won.

Key to inflation's persistence will be labor market developments and wage profit dynamics. Despite tight labor markets, overall wage inflation has increased, but remains behind price inflation in most countries. The reason is simple and has little to do with so called greedflation. Prices adjust upwards faster than wages when nominal demand far exceeds what the economy can produce. As a result, real wages have declined. If labor markets remain strong, we should expect and welcome real wages recovering lost ground. Indeed the gap between nominal wage growth and price inflation has started to close. Because firms' profit margins have grown robustly in the last two years, we remain confident that there is room to accommodate the rebound in real wages without triggering a wage price spiral. With inflation expectations well-anchored in major economies and the economy slowing, market pressures should help contain the passthrough from labor cost to prices.

Now, despite monetary policy tightening and the slowdown in bank lending, financial conditions have eased since the banking stress in March. Equity market valuation surged, and the dollar depreciated further, driven by market expectations of a more benign path for U.S. interest rates and stronger risk appetite. This provided some relief to emerging and developing countries. Going forward, there is a danger of a sharp repricing, should inflation surprise to the upside or global risk appetite deteriorate, with higher borrowing costs and increased debt distress.

Hopefully, with inflation starting to recede, we have entered the final stage of the inflationary cycle that started in 2021. But hope is not a policy, and the touchdown may prove quite difficult to execute. Risk to inflation are now more balanced, and most major economies are less likely to need additional outsized increases in policy rates. Yet, it remains critical to avoid easing monetary policy until underlying inflation shows clear signs of sustained cooling, and we're not there yet. All the while, central banks have continued to monitor the financial system, and stand ready to use their other tools to maintain financial stability.

Now, after years of heavy fiscal support and rising interest rates, debt service is now increasing as a share of government revenues, for both advanced and emerging markets. It is now time to gradually restore fiscal buffers and put debt dynamics on a more sustainable footing. This will help safeguard financial stability, and will reinforce the overall credibility of the disinflation strategy. This is not a call for generalized austerity. The pace and composition of fiscal consolidation should be mindful of the strength of private demand, while protecting the most vulnerable.

Yet, some consolidation measures seem entirely appropriate. For instance, where energy prices are back to their pre-pandemic levels, fiscal measures such as energy subsidies should be phased out.

Now, fiscal space is also key to implement many needed structural reforms. This is especially important, since prospects for medium-term growth in income per capita have dimmed over the past decade. The slowdown is sharper for low- and middle-income economies relative to high-income ones. In other words, prospects for catching up to higher living standards have diminished markedly. At the same time, elevated debt levels are preventing many low-income and frontier economies from making the investments they need to grow faster, with high risks of debt distress in many places.

Now, some of the slowdown in growth reflects the spillover of harmful policies. The rise of geoeconomic fragmentation, with the global economy potentially splitting into rival blocks, will most harm emerging and developing economies that are more reliant on integrated global economy, direct investment, and technology transfers. Insufficient progress on the climate position will also leave poorer countries more exposed to increasingly severe climate shocks and rising temperatures, even as they account for a small fraction of global emissions.

On all of these issue, multilateral cooperation remains the best way to ensure safe and prosperous economy for all. Thank you.

MR. DE HARO: Thank you, Pierre-Olivier. And before we open the floor to your questions, I want to remind some ground rules. If you want to ask a question here in the room or via Webex, please raise your hand, wait 'til I call you. If I do, please identify yourself, the outlet that you represent. Also, I want to remind the people in the room to turn on your mic so everybody can hear your question. I will try to balance things between people in the room, Webex, and the press center, so everybody gets to ask a question. We have a limited time, so I ask you to be concise. We can start. Let us start here in the room with Andrea Shalal, Reuters.

QUESTIONER: Hi, thank you, Andrea Shalal with Reuters, thank you so much for doing this. Pierre-Olivier, I want to ask you about the growing signs that momentum is slowing. Can you say a few words about the medium-term outlook, and where you see the trajectory of growth growing in -- in the coming years, and what the biggest challenges are from your point of view, but also how that could be changed, like, how could that momentum -- how could that be -- momentum be revitalized?

MR. GOURINCHAS: Yes, I can say a few words about that, Andrea, thank you for the question, it's really an important one.

There are two components to the slowdown that we're seeing. There is near-term slowdown that we're saying, the slowdown in growth to 3 percent this year, and also 3 percent next year, and some of this is on the back of tightening monetary policy that is designed to cool off the aggravated economy and bring back inflation towards central bank targets. But if we extend the horizon and we look further than that to the four, five years out, and we have these projections in our World Economic Outlook, we also see that those gross numbers remaining fairly low. We have a five-year outgrowth that is around also about 3 percent. That is more worrisome, because it's suggesting that there is slowdown in underlying productivity growth, which is really the key engine for improvements in standards of living, and it's also we need more growth in order to be able to finance some of the biggest challenges were facing.

Now, what are some of the reasons for this, well, to be fair, this is a question that a lot of people are thinking about, and we don't yet have the answer, we are actively working on this.

But we can already think about some drivers. Some of it is related probably to the aging population and slowdown in population growth. Some of it is also related probably to the slowdown in the convergence of lower-income economies or emerging market economies to the frontier. And some of it could be also related to the impact of the pandemic, the scarring that we had during the pandemic, years of schooling lost, lost investment, governments that have invested heavily to protect their economies but now don't have necessarily the fiscal resources to engage in the next round of structural reforms.

All of these factors are sort of weighing together. On top of that, you have also the risk that I've mentioned in my opening remarks of increasing fragmentation that would dislocate further to global economy and would weigh down on growth for emerging and developing economies.

QUESTIONER: I've been wondering what could kickstart -- what could give fresh impetus to that momentum, like, what could -- what could happen? Like, if fragmentation is reversed, or, you know, what --

MR. GOURINCHAS: Well, a number of structural reforms would certainly help. We mentioned a few in our update. For instance, reforms that would increase labor force participation, that would reduce the duality in labor markets in many countries, or increase woman's labor force participation, increasing schooling, increasing human capital, all of these things certainly go in the right direction. Certain types of reform that would spur investment, especially if we think about, for instance, what is needed on the green transition, the fact that you have to invest in the green sectors of the economy, that could also be an engine of growth going forward. So, we are exploring -- as I said, we're exploring some of these questions now. We don't have a definite answer, but clearly defining the space and opening the space for structural reforms that will unleash some -- some potential growth will be -- will be key here.

MR. DE HARO: Okay, I'm going to take another question in the room, and then I will go to the press center. I'm going to go here in the first room, Colby, in the first row, then I will go back to the people we have.

QUESTIONER: Thank you so much. Colby Smith with the financial times. I'm curious how much of the moderation in headline and core inflation you'd attribute to the actions central banks have taken over the last year and a half or so, or if it's simply just a reflection of a reversal of some of the temporary price pressures stemming from the war in Ukraine and -- and the pandemic, and what does that then suggest about the path forward, getting from core inflation at these current levels back down to 2 percent, and the cost associated with that?

MR. DE HARO: Pierre-Olivier?

MR. GOURINCHAS: Mm-hmm?

MR. DE HARO: I have a couple questions kind of related here in the press center. One comes from the telegraph, it says, you talk about dangers of inflation remaining stubbornly high, will the collapse of the recent Black Sea grain deal and India's rice export ban usher in another wave of inflation, delay expected fails -- falls?
And then we have another question from Greg Quinn, Market News Service International, investors have to spend most of the year betting that the Fed and other central bans will cut interest rates, why do you say rates can only fall next year?

MR. GOURINCHAS: All right, so, that's a lot of questions, let me address them in turn. When we think about, so, we have this decline in headline inflation, and a lot of that is coming from the decline in energy prices and food prices. So, some of this is, in a sense, related to the slowdown in global activity. So, that's indirectly related to the tightening of monetary policy that is bringing down growth to 3 percent, and we know that demand for energy and for commodities is related to global level of activity. So, indirectly, some of the decline in energy prices is coming from the action of monetary policy. But at this stage, I would say one of the big achievement of monetary policy and tightening rates has been not so much in bringing, you know, energy prices down, they’ve been coming down not just because of monetary policy, but because the energy crisis is behind us, to some extent. But it's been very important in keeping inflation expectation anchored. And so the counterfactual that I like to have in the back of my mind is, if monetary policy had not been tightening the way it has been tightening in the last year, we would probably have a private sector that would be saying, “Well, no one is doing anything about inflation. So, why should we expect inflation to be coming down?” And we would be looking at a very different environment. So, monetary policy has been very helpful in containing inflation expectations.

Then going forward, what we're seeing is, monetary policy is already taking a chunk out of economic activity. We're seeing the increase in interest payments. We're seeing the contraction in lending. We're seeing signs that the economy is cooling off, and that's going to help bring down the sort of underlying inflation pressures back to Central Bank targets. So, it's already had some effect and will continue to have some effect.

Now, on the questions that came from WebEx on the Black Sea Grain Initiative, I mean, it's very clear that the Black Sea Grain Initiative was very instrumental in making sure that there would be ample grain supply to the world in the last year. And there are estimates of about 33 million tons of grain that were shipped from Ukraine to the rest of the world. And it helped keep price pressures on food and grain prices lower.

Now, the same -- now that this grain deal has been suspended, the same mechanics works in reverse, and it's likely to put upward pressure on food prices. And we have some estimates that we're looking at, you know, in terms of how much of the supply is going to be withdrawn and what is the elasticity of prices to the reduction in demand? And we're still assessing where we are going to land. But we would be thinking that somewhere in the range of 10%, 15% increase in prices of grains is a reasonable estimate, although we'll have to see exactly how this is going to unfold.

Now, in terms of the Federal Reserve and why we're saying that monetary policy needs to remain tight even if it doesn't mean increasing very much compared to where it is, the reason is very simple. It's related to the underlying inflation pressures. We have core inflation in the US. For instance, the core inflation is expected at 4.9% for 2023. That's still 2.5 times above the Central Bank target. So, there is a need for monetary policy to remain in contractionary territory, especially given the strength of the economy and the strength of the underlying demand.

MR. DE HARO: I think I see Weier from Yicai News on WebEx, where if you hear me, you can unmute and ask your question.

QUESTIONER: Yes. Thank you, Jose. A question on China: China's leader pledged to step up policy support for the economy, demanded efforts to actively expand domestic demand. And the government also unveiled more measures to revive a private economy. So, we would like to hear your thoughts on the stimulus program and any policy recommendations. Thank you.

MR. GOURINCHAS: Well, thank you. So, China has been rebounding strongly after the reopening of the economy in the end of last year, and the first quarter was very strong. But it's true that we've seen some weakening of economic activity in the second quarter. And the growth numbers that we have reflect that expected weakening, going forward –- a weakening that has two components, really.

One is related to, still, the problems in the real estate sector, in the property sector that is weighing down on consumer confidence, but also a relatively low growth in the global economy with 3% growth. That means also less demand for Chinese goods. So, the external side is also a little bit on the weak side.

Now, on the measures that the Chinese government could take, let me turn over to my colleague, Daniel, who can provide some additional elements.

MR. LEIGH: Thank you. We see the measures that the authorities have taken to strengthen confidence in the real estate sector and their extension to 2025 as a positive step. And to further strengthen the growth momentum, more could be done, in particular to make sure that those presold properties are delivered and that there is targeted support to families. That could really raise confidence, strengthen consumption, with positive implications, also, for the region.

MR. DE HARO: Okay. Let's see. Let's go to the second row --

QUESTIONER: Thanks, Jose. Thank you for this press conference. I understand that the latest numbers of the IMF regarding Argentina point to a recession this year. I was hoping if you could share the latest projections for the country. And also, Pierre-Olivier, we are in an election year. I was hoping you could tell us a little bit about, how should the next government address the current challenges facing the economy? Thanks.

MR. DE HARO: Before you answer, Pierre-Olivier, we have plenty of questions on Argentina, and I see Liliana Franco on WebEx. So, please, Liliana, come in.

QUESTIONER: Good morning. Good morning. I have a question related. Yesterday, the Economy Minister, Sergio Massa, said that this Thursday would be released the staff-level agreement to the public. I would like to know, is that correct? And furthermore, when the Board will meet to analyze the Argentine program? Thank you.

MR. DE HARO: Thank you, Liliana. I think that these kind of questions should be treated bilaterally and definitely we will get you -- we will try to get you an answer on those. But regarding the outlook for Argentina, we have also another question in the Press Center from Martin from Infobae. I would like to know your growth and inflation projections for Argentina for 2023 and 2024, if you are concerned about the country having one of the highest inflation rates in the world and how it should be lower. Thank you.

MR. GOURINCHAS: Well, thank you. So, first, I mean, I should start by acknowledging that Argentina is facing a very difficult situation, particularly that's made worse by the drought, the agricultural drought it has been facing in the last year or so. On the updated numbers, let me turn it over to Petya Koeva Brooks, who can provide some details.

MS. BROOKS: Sure. So, for this year, indeed, we have revised our growth numbers to - 3 [NOTE: THIS NUMBER WAS CORRECTED TO -2.5 DURING THE PRESS CONFERENCE]. And that was a fairly significant downward revision. And pretty much the reason for that was the one that Pierre-Olivier already mentioned. It was the drought. And the agricultural production and its revival is also what's behind the projected rebound of growth in 2024 to 3% [NOTE: THIS NUMBER WAS CORRECTED TO 2.8].

Now, when it comes to inflation, we are projecting inflation to be at 120 at the end of the year. And that is predicated on implementing the macroeconomic policies that have been agreed upon. So, again, this requires some moderation in the inflation rates in order to reach this 120 -- and again, predicated on type macroeconomic policies. Let me stop there.

MR. DE HARO: Okay. So, I have a -- before we move regions, I want to stay in Latin America. There's a question about the outlook behind Latin America and the Caribbean, and then we have also a specific question on Brazil. It comes from Agencia Estado. Brazil received the best revision from IMF for the GDP’s growth this year between the countries. The first quarter was pushed by agriculture. But the next one be so good? After concluding the mission in the country, IMF recommended to Brazil major fiscal rigor. What's behind Brazil's outlook? So, Latin American outlook and then Brazil outlook.

MR. GOURINCHAS: All right. Let me say a few words, and then I'll turn it over to Daniel. So, on Latin America, there's been -- in general for the region, there's been resilience. There's been some resilience but slowing resilience in sort of domestic demand. So, this is why we're seeing some of this slowdown. This is a region that has also -- many countries have tightened their policy rates starting earlier than many advanced economies, and sometimes increasing rates much more than other countries. And that's also weighing down on economic activity.

And then some of the countries are also suffering from the decline in some of the commodity prices that are weighing down on their export sector. Daniel.

MR. LEIGH: I'll defer to Petya on that.

MR. GOURINCHAS: Sorry, Petya. That's right.

MS. BROOKS: So, when it comes to Brazil, we did see fairly strong growth last year at about 2.9. So, this year, we do have a bit of a slowdown, to 2.1. But as the question implied, this was already a fairly significant upward revision. The upward revision was 1.2, which is indeed one of the larger ones that we've seen this time around. The reason for the upward revision was very much the bumper crops and the agricultural production, which surprised very much on the upside in the first quarter. And this was in spite of manufacturing and services being fairly subdued during that period. So, looking into ’24, we are expecting growth to slow down to 1.2.

At the same time, Brazil is one of the countries that hiked rates -- among the first. Inflation is coming down. Headline inflation has turned. A core is more sticky. But at the same time, we are expecting it to converge gradually to the target.

MR. DE HARO: Thank you. Thank you very much. I'm going to go to Lalit.

QUESTIONER: Thank you for doing this. I wanted to ask you about India's -- there has been slight upward revision in India's projections. Can you give us some reasons for that? And also, what impact the global inflation have on India's decision to restrict export of certain categories of rice last week.

MR. DE HARO: Before we continue with questions about India, I just want to make a clarification on Argentina. The growth number for 2023, it's -2.5%.

Okay. So, we have more questions on India on the Press Center that goes as follows: What more can be done to push growth in emerging markets and developing economies, especially India? And then what is your expectation of inflation in India? And do you expect Central Bank to cut rates in 2024?

MR. GOURINCHAS: So, let me offer a few remarks on India, and this time, I will turn to Daniel. So, we have a slight upward revision for growth in 2023 -- is about 0.2 percentage point. India remains an economy that is growing quite strongly. I mean, it's coming down from really a very strong year in 2022, at 7.2%. That was also revised upwards, by the way -- but still slow down, but still fairly strong growth and fairly strong momentum. Daniel will provide some additional details.

Let me just say one word on the food export restrictions, because I think that's an important point. It goes back, also, to the conversation we were having earlier on the Black Sea grain deal. In the current environment, these types of restrictions are likely to exacerbate volatility on food prices in the rest of the world. And they can also lead to retaliatory measures. So, they are certainly something that we would encourage the removal of these type of export restrictions, because they can be harmful globally.

MR. LEIGH: Thank you. So, India is a country with growth -- very strong and continuing to be strong. It's about -- 1/6 of total global growth is accounted for by India right this year, and inflation is back inside the target range in our estimates.

For 2023, we have a forecast of 6.1% growth for India. That's well above the regional average of 5.3%. It's moderating after a very strong 2022. But we have an upside revision of 0.2 percentage points for 2023. And that's really the knock-on effect of a very strong ending for 2024 with government and private investment.

Now, for the inflation forecast, we have 4.9% for this year, and that's well inside the 2 to 6 target band. Food prices -- easing is what has contributed to that, but also the strong actions by the Reserve Bank of India, which raised rates. And we see this need to continue to balance the pressures for inflation and output to make sure that inflation stays inside that target range, as we expect it will.

MR. DE HARO: Okay. We're going to go back to -- let's go here.

QUESTIONER: Barry Wood, RTHK in Hong Kong. You mentioned the risk of splitting into rival blocks. Could you say more about that -- its characteristics, its implications for the world economy? And looking ahead, in terms of G20 policy coordination, how does that potentially impact that?

MR. GOURINCHAS: Should I answer –-

MR. DE HARO: Yeah.

MR. GOURINCHAS: Okay. So, this geoeconomic fragmentation risk is something that we have spent quite a bit of time thinking about and doing a fair amount of analytical work at the Fund in general, in the Research Department in particular.

There are a number of channels that we think are particularly relevant. So, there is a trade channel, and we see the increase in in trade restrictions that have been imposed by countries on one another. That started before the last year and a half, but it's accelerated and it's likely to lead to -- you know, have some negative impact on trade flows. And you can think about either some type of export restrictions or tariffs or other measures that are implemented. There is an impact in terms of direct investment, also, that is quite important.

And that's something that we've studied at length in one of the analytical chapters of our last report in April. And there, one of the key takeaways is we already see direct investment increasingly being determined by geopolitical proximity between countries rather than geographical proximity. So, you are likely to invest more in countries that are geopolitically close rather than just nearby.

And then third, and that's something that we are also exploring and that gets to the point you were raising about coordination and the G20, there is an impact through commodity prices because the distribution of natural resources is not uniform. Some countries are endowed with natural resources, some countries are not. And of course, for the global economy to function, then these natural resources, these commodities need to be traded, need to be flowing.

This is especially relevant when we think beyond just energy, but when we think about the climate transition. The need for critical minerals is going to be a first order need in order to produce the batteries, the solar panels, et cetera that we need for electrifying and greening our energy production. And that raises the question of whether we're going to be able to do that if the economy becomes separated into blocks that are not trading these kind of critical components. So, that's an area where, of course, coordination, collaboration is absolutely needed in the G20 and the other fora and, you know, places like the IMF have a role to play.

MR. DE HARO: Thank you, Pierre-Olivier. I have a couple of questions regarding Spain from the Press Center. They go as follows: Why are you improving the projection for the Spanish economy? And what is your forecast for Spanish inflation? Also, questions regarding the elections on Sunday, does this uncertainty going to affect the outlook for Spain? Is there any question in the room for Spain? No? So, go ahead, please.

MR. GOURINCHAS: Well, so let me start from maybe from the Euro area and then get to Spain because I think will -- so, what we have for the Euro area is overall we have projections are largely unchanged from our previous round. So, you know, we have growth slowing down quite sharply from last year, 3.5 percent to 0.9 percent.

But this sort of lack of change hides a lot of differences across different countries. And what we see when we unpack this is you have countries like Germany, for instance, that are slowing down quite a bit from last year and even are in negative growth territory according to our projections for the year, mildly so.

And then you have countries that are doing better. And Spain is among the countries that is doing better with both in the case of Spain something that is quite important to note because it's not so common is both an improvement in terms of the growth projections, they are for this year projected at 2.5 percent. So, that's a 1 percentage point upward revision. It's quite strong. And part of this is related to the strength of tourism and that's a general theme that we see in our report is we've had this rotation of global demand. Initially as the economies reopened, there was a strong demand for goods. But people were not travelling, people were not going out necessarily as much so, services remained depressed.

And then in the second phase, we had an increase in services. People started traveling again, going out, and then the demand for goods sort of tapered off. And so, these demands for services is having a strong impact on countries that are a destination for tourism. We see that for Spain. We see that for Italy at the same time.

The second notable thing about Spain is that in fact it's doing well on growth, but it's also doing well on inflation. We've had a downward revision for its inflation numbers is also quite sizeable. Headline inflation is expected to be only 3.2 percent this year, which is well below the average inflation in other European economies.

MR. DE HARO: Okay. We are running out of time. I'm going to try to get one question here in the room and then I have two questions from the Press Center. Shu?

QUESTIONER: Thank you, Jose. Thank you very much taking all my questions. And my question is on Japan, China, and according to the report, you revised up Japanese economy by .1 percent quite starting this year because of pent up demand and expensive policy. But I'm wondering could these factors be a lasting or sustainable number driver?

And second question is on China and not only Japan, but also China now seems to be quite facing deflationary pressures and what is your view on such development in Eastern Asian countries' economies, especially compared with the list of the world major U.S. or European countries? Thank you.

MR. GOURINCHAS: So, on Japan first. So, in Japan we've had as you point out a mild upward revision in 2023. The Japanese economy is actually one of the few advanced economies that is doing better in 2023 than in 2022. We're expecting 1.4 percent growth in 2023, for Japan and expected to moderate.

The risk in the Japanese economy and I think you alluded to that is we're seeing inflation pressures increasing. There is upside risk to inflation. Inflation, of course, in the case of Japan we're starting from a situation where inflation has been too low for very, very long, not hitting the 2 percent target and well below it.

And now, we're in a situation where inflation is above the inflation target and the question is whether it will remain there or whether it will be coming back down towards inflation target on its own. And right now, the risk is probably on the upside that maybe inflation pressures will continue to remain above the target. We had a fairly strong wage negotiation round in the spring in Japan.

And so, our advice for the Japanese authorities there is that right now the monetary policy can remain accommodating but it needs to prepare itself for the need to maybe start tightening. And for that our recommendation is to be a bit more flexible and maybe move away from the yield curve control that it has.

Now, on China maybe let me turn it back to Daniel.

MR. LEIGH: Thank you. The question about China's inflation is it relates to the fact that we revised down Chinese inflation by almost 0.9 percentage points to 1.1 percent to 2023. This is one of the only countries in the world right now where inflation is below the target rate. This also given China's large size, means that global inflation is actually revised down for this year. So, it's such a large revision.

And what is behind this is really subdued core inflation. There is a significant slack in the Chinese economy. You know, consumption is still below the pre-pandemic trend. Unemployment has gone up particularly for youth unemployment above 20 percent. So, in this context also falling energy prices, which has further spread to lower inflation throughout the economy. We've got pretty low inflation this year. We think this will increase next year to about 1.9 percent in China as these effects fade.

But it's appropriate the central bank, you know, eased monetary policy and to make sure that inflation does come back towards the target level.

MR. DE HARO: Okay. Let's go for one more here and then we will go to the Press Center. I ask you to be brief because I'm trying to squeeze all the regions and we need to finish in the next five, 10 minutes.

QUESTIONER: Thank you. Just one follow-up on Germany because I was wondering what is the largest factor for Germany's slowdown? Is it the slowing down of productivity? Is it the energy prices? Is it altogether? And what short-term stimulus measures, short term you think would make sense at this point? Thank you.

MR. GOURINCHAS: Yes. Petya, would you like to take Germany?

MS. BROOKS: Sure. We have downgraded the forecast for Germany for this year to -0.3 from earlier in April. Now, we are also talking about we are having, you know, this path where the economy was growing relatively well last year, 1.8, -0.3 this year. And so, the question is what's behind this?

Well, a big part of this slowdown is related to the negative impact that inflation is having on real incomes. So, real income is less. And, of course, there is the monetary tightening, which is happening at the euro area level, which is very much needed in order to tackle inflation. So, financing conditions are tighter.

So, that's in a nutshell the story behind the slowdown. We are expecting the second quarter to be somewhat stronger and for this relatively sluggish growth rates to continue for the rest of the year. Now, all of that being said, looking forward to 2024, we are expecting growth to recover to 1.3.

QUESTIONER: And on the measures? Sorry.

MS. BROOKS: On the measures, we actually think that, you know, there had been measures provided in terms of to help households to help with the energy crisis which occurred. More generally, we think that these measures now that the energy prices are back to more normal levels, these measures should be allowed to kind of to be retired over time. And I think, you know, ultimately, you know, when we look at the fiscal situation, we do think that the broader level, that it's important to restore buffers and to look ahead in that. Thank you.

MR. DE HARO: Okay. We have two last questions and I'm going to try to bundle because they are from regions that we haven’t touched. We go to the Middle East. There we have Doaa Abdel-Moneim from Al-Ahram. What are the IMF's projections for Egypt's growth, inflation, and debt under the new WEO report? Then we have a similar question coming from a colleague. And then, I'm going to turn to Sub Saharan Africa, we have a question from Daily Monitor in Uganda who asks, how serious is climate change affecting the global economy? Climate change is affecting every country or region in the world. In what way is this affecting especially African countries? And what is your outlook for Sub Saharan Africa? So, first we will go to Egypt then the outlook for Sub Saharan Africa and then we can finish with the climate. And we are done.

MR. GOURINCHAS: Okay. Petya, can I turn to you for Egypt?

MS. BROOKS: Yes, I will answer the question on Egypt. So, the Egyptian economy is slowing. We have had growth rates of the order of 6.7 last year in 2022. We are projecting this year's growth to be 3.7 and then going up to 4.1 in 2024. Our forecast for this year is actually unchanged relative to where it was in April.

Now, this lower growth in 2024 is mostly because of the lack of effects flexibility and the shortages that have developed in the effects market in Egypt, which is making it difficult for imports to happen. It also have dampened investor confidence.

When it comes to inflation, I think we have seen relatively high inflation rates. We are projecting inflation at 24.4 percent this year, rising to 32 in 2024. And a big part of that is because of the depreciation of the currency and all of this is underpinning our advice to have policies which restore the macroeconomic balances and also get inflation under control. And perhaps the most important thing is to allow more flexibility in the effects market. I'll stop here.

MR. DE HARO: Sub Saharan Africa.

MR. GOURINCHAS: Yeah, so and let me just say a word on Sub Saharan Africa and then I'll ask Daniel also to chime in. So, we have for the whole region we have growth that is slowing a bit from 2022 to 2023 from 3.9 to 3.5 percent. That's a very mild downward revision for 2023, about 0.1 percentage points. So, this is a growth number that is kind of on the low side. I mean, I was talking about earlier about the fact that this is not an environment of very strong robust growth and this is certainly one of the regions where we see that. It's very different from emerging Asia, for instance.

The question was also about the impact of climate change. I mean, it's certainly the case that we are seeing more extreme climate events and some of these can have strong macroeconomic consequences. We've seen -- we've talked about the draught in Argentina. We can think about the floods in Pakistan. We can think about the impact of temperatures rising on agricultural yields in general and agricultural production. So, this is certainly something that is very important especially for countries that have very little fiscal space, very small buffers with which they can address some of that volatility in food prices. And that's causing in many of these countries situations of food insecurity. They were particularly acute last year. They are a little bit less acute now because food prices have been coming down. But that remains an important risk going forward. And climate change is certainly something that is aggravating that phenomenon.

Daniel, anything on Uganda or?

MR. LEIGH: No, this is one of those countries where we don't have a new forecast this time and I think you summarized it very well.

MR. DE HARO: Okay. So, thank you Pierre-Olivier, Petya, and Daniel for your time. Also, to all of you for attending this press briefing on behalf of the Research Department and the Communications Department here at the IMF. I want to remind you that our Annual Meetings in October will take place in Marrakesh this year. And we hope to see all of you there where we will also launch a full edition of the World Economic Outlook.

Also, if you have any questions, comments, please feel free to send them my way at media@IMF.org. Please enjoy the rest of your day.