Transcript

EUROPEAN DEPARTMENT PRESS BRIEFING: ECONOMIC OUTLOOK IN EUROPE

October 13, 2023

PARTICIPANTS:

Director, European Department

International Monetary Fund

LAURA PAPI

Deputy Director, European Department

International Monetary Fund

OYA CELASUN

Deputy Director, European Department

International Monetary Fund

JOSE LUIS DE HARO

Communications Officer

International Monetary Fund

DE HARO: I want to welcome everyone to this press briefing. We're going to be discussing the European Economic Outlook, and we are accompanied today by Mr. Kammer. He's the Director of the European Department in the IMF.  Also, here with us today are Laura Papi and Oya Celasun.  They are both Deputy Directors at the European Department.  As usual, Mr. Kammer is going to start with some opening remarks, and then we will proceed to take your questions.  Mr. Kammer without further ado, the floor is yours.

KAMMER: So welcome to all of you to today's press conference on the Economic Outlook for Europe. Europe has weathered indeed well a series of unprecedented shocks, the pandemic, and then the energy crisis, which was triggered by Russia's invasion of Ukraine. What we also saw was that severe downside scenarios were avoided, and I would say this is a big accomplishment.  Comparing that when we worked together in last October and the situation looked much different from today.

Europe is now at a turning point.  The continent is grappling with defeating inflation.  It also needs to secure strong and green growth over the longer term.  Europe's economies have slowed this year, as expected.  This reflected tighter macroeconomic policies and high energy costs.  And so far, labor markets have remained strong.  But high frequency indicators also suggest a slowdown in services and a weakening in hiring.  Headline inflation is declining rapidly, but core inflation, which we use as a measure of the underlying inflation pressures, remains persistently high.  In several countries, wage growth has now caught up to inflation or is even exceeding it.  In our growth forecast for this year, advanced European economies are slowing to 0.7 percent, which is down 3.6 percent in 2022.  The slowdown in emerging Europe and here we exclude Belarus, Russia, Turkey, and Ukraine because of the high volatility of data in these countries, is expected to bottom out at 1.1 percent.

Europe's outlook for 2024 is for a gradual recovery.  As prices decline and as wages rise, Europe’s consumers are starting to recoup purchasing power, and that will lift domestic demand.  The strength of this rebound will differ across countries.  Specifically, manufacturing and energy intensive countries will be slower to recover than others.  In advanced European economies, economic growth is forecast to fall to 0.7 this year before some pick up to 1.2 percent next year.  In emerging market European economies, and again excluding Russia, Ukraine, Turkey, and Belarus, we expect after the drop from 4.5 percent from last year to 1.1 percent this year, a recovery to 2.9 percent in 2024.  Headline inflation is projected to decline, and that is thanks to lower energy prices and easing supply chain bottlenecks.  We projected at 5.8 percent on average in advanced European economy this year and 11.9 percent in emerging market European economies.  Again, excluding the four countries. Most countries will not reach their inflation targets before 2025.

 The medium-term growth outlook is also not without challenges.  Europe has grappled with low productivity growth for some time, and the effects of population aging and labor supply constraints are starting to bite.  Geoeconomic fragmentation and the effects of climate change will add to these problems.  In emerging market economies, a failure to raise growth could further delay income convergence with the continent's advanced economies. 

So what can policymakers do to address these issues?  Price and fiscal stability are paramount for countries to prosper in a shock crown world.   Governments also need to tackle longstanding growth problems by creating more flexible and adaptable economy.  Let me tackle these challenges one by one. 

First, we need to end inflation.  Experience from past inflation episode cautions against easing too early.  A central risk to our forecast is higher and more persistent inflation.  Wage growth could prove to be faster than we assume in our baseline projections.  This would push up labor costs and result in higher prices.  We recommend that Central Banks maintain a restrictive monetary policy stance for as long as necessary.  In economies where the current monetary policy stance is loose, policy rates may need to be raised or kept high for longer.

Second, governments need to rebuild or maintain fiscal buffers.  In the first instance, this means that extraordinary fiscal support should be unbound.  And I'm here talking about the cost-of-living packages which were in place to deal with the energy crisis.  But for many countries, more ambitious fiscal consolidation is needed.  And this is especially true where debt ratios are high or rising.  This will require cuts in spending in noncritical areas, better spending targeting, and elimination of tax inefficiencies. 

Third, financial policies should pre-emptively address pockets of financial strain.  Bank profits were boosted by cyclically rising net interest margins.  These should be maintained by increasing capital buffers.  In this way, banks build resilience against cyclical and structural risks to their real estate credit portfolio.  Especially where housing and commercial real estate prices have fallen.  In our view, bank windfall taxes should be avoided as they distort the allocation of credit. 

And finally, structural policies need to address the scars left by the recent crisis and tackle long standing growth problems. A core problem is Europe's weak productivity growth.  Reforms should focus on removing barriers that stand in the way of economic innovation and dynamism.  State aid rules should not be softened and the integrity of the EU single market maintained. Improving worker training and skills matching will be particularly important to facilitate the green transition.  The countries in Central Europe and in Southeastern Europe need to focus on closing investment gaps in infrastructure and in human capital.  This will help attract inward investment and boost growth. 

So let me summarize.  European policymakers need to remain focused on defeating inflation.  Restoring price and fiscal stability are paramount for countries to prosper in a shock down world.  But Europe also needs to tackle well known structural reform agenda in order to secure strong and green growth over the longer term.  Thank you.

DE HARO: Thank you, Alfred. Before we start. I just want to set some ground rules.  If you want to ask a question, please raise your hand.  Wait till I call you.  If I do, please identify yourself and the outlet that you represent.  We will be also formulating questions that we have received online.  I will be formulating those questions on behalf of the reporters.  So I think we can start.  Let's see who can raise your hand.  I'm going to start with Gianluca here. 

QUESTIONER:  I have two questions, if I may.  The IMF downgraded its outlook for the Eurozone. What are the chances for a higher growths than the one you are forecasting now. And we have European Chips Act, the Recovery Fund, the Green Deal.  It's a lot of subsidies. Could they become maybe too many?  Thank you. 

KAMMER: Thank you. Yes, we downgraded the outlook in Europe for this year and next. When you're looking at economic developments this year, what you're seeing is a bit of heterogeneity between various economies.  We see that the countries with manufacturing and energy intensive manufacturing in particular, were hit a bit harder than we had expected from the energy price increase.  And what we also saw is that those countries relying on services did better during the year.  And so that's a pattern which is going to continue.

But what we also saw in the third quarter a general weakening of economic activity, including in services, and also a negative impact on economic sentiment.  So that's something which is going to influence our outlook for 2024.  In terms of the drivers of this outlook, what we expect to see is that we see a decline in headline inflation, an increase in nominal wages.  That means we expect that real incomes, purchasing power of the population is to increase.  And that is going to be the main driver private consumption for growth in 2024.

Now, the bottom line is growth is very sluggish and the recovery is a very slow one, given the severe shock.  But I also should say that when I look at last year where we forecasted for the Euro area this year a growth of 0.5 percent, we upgraded in July of to 0.9 percent and now downgrading to 0.7 percent, and we have the recovery taking place during 2024.  This picture has not changed very much over the last year, so the projections are roughly in line.  And when we are looking at what could be done and what is important and what could actually is a key risk if it's not done, and that is we need to bring inflation down.  And therefore, our strong call on central banks to maintain a restrictive strands for as long as needed in order to bring inflation to target.  So that is very important. 

This also needs to be supported on the fiscal side.  This disinflation effort and this fiscal support is in place if energy packages and cost of living packages are wound back or cut as they are no longer needed in 2024.  So that will support the disinflation process.  So that I think is one important part of the element.  Of course, what we also advise is in the short term and in the longer term, looking at structural reforms and productivity enhancing reforms. And when I look at the short-term in particular, which can make a difference in the short-term already it is with regard to the labor market, increasing participation rates that eliminate some of the supply bottlenecks skilling, reskilling, retraining, et cetera.  But important is to really deal with all of the medium-term challenges and put those elements in place now, because they will have some short-term dividends but definitely dividends in the medium to longer-term in order to move up productivity growth and longer-term growth.

On your second question, it's a rather complex issue.  First, you were speaking about the issue of, I think resilience in Europe and thinking about subsidies, industrial policies in that context.  And what we have seen is resilience of supply chain was an issue in the pandemic.  It again was an issue when we went through the energy crisis triggered by Russia's war in Ukraine, and it's an issue to be addressed.  But our recommendation is to Europe.  Europe has benefited from an open and multilateral trade system and that brought prosperity and big dividends to Europe and the world.  And to build on that in terms of the policy response when looking at the issue of resiliency.  And what we recommend there is diversification is the key response.  If we just see from one concentrated supplier to another concentrated supplier in a shock prone world, that is not necessarily increasing resiliency.  So diversification and there is best to have an open rules based trade system is the number one response for Europe. 

And I come to the second part of the question when we are looking at where you can really strengthen the resilience in Europe, it is to build further on the single market.  The single market has been a growth engine for Europe and the European single market is not completed.  Just when you are looking at some of the architectural issues, and we're looking at banking and capital markets union, that is still incomplete and that would give a boost to growth.  What one needs to be careful therefore is when it comes to state aid, industrial policies and subsidy, is not to fragment this market.  This is the basis and that needs to be built on for resiliency and future growth.  So all actions being undertaken right now by subsidies industrial policies are being used, should not infringe on the single market.  That's important.

Finally, when it comes to subsidy on the green transition, there is a role for subsidies whenever there is market failure and you need to externalities subsidies have a useful role.  But I would also say it needs to be very targeted and they are not a cure all for everything.  And especially when it comes to climate change and you probably also are thinking about the Inflation Reduction Act in the US.  What is key is that this is a common global public good and therefore all stakeholders in the global economic order participate in the resolution of the climate change issues.  And that means Europe is a relatively small emitter, has 7 percent of carbon emissions and therefore one needs to engage with all of these stakeholders.  And Germany has been proposing a carbon club in order to get action from all the key emitters.  And again, within this context, policies, policy responses, should be coordinated.  So this is not a fight against each other, that is a fight against climate change together and with each other.  And the bottom line is a subsidy war amongst these players is in nobody's interest.  Thank you.

QUESTIONER: Mr. Kammer, back in April you had put out an estimate that to defeat inflation, the ECB at least would have to continue raising rates through about mid-2024.  So now you're saying that Central Banks need to maintain a tight policy for as long as necessary.  I was just wondering if that means they still need to continue raising rates?  Just wondering if you can just give us a distinction between those two statements.

KAMMER: Thank you. Happy to do that. So I can be more specific.  Since April we saw a number of rate rises from The Major Centre Bank, from the ECB in particular, but also from The Bank of England.  And when we are looking at the policy rate, both at the ECB as well as The Bank of England, we think they are right now in the right spot.  So we have reached a rate where we are predicting if these rates are being maintained for the ECB into the fourth quarter around that rate of 2024.  We currently forecast and project that the inflation target of 2 percent could be reached in the second half of 2025. 

What we also say is, and that's very important, we have a lot of uncertainty and we have indeed proven again this week that we are living in a very shock prone world.  We need to be flexible, and we need to adjust meeting by meeting our viewer on what inflation dynamics is doing and whether further action is needed on the rate front or whether the disinflation effort is bringing dividends faster.  And one could look at the duration of keeping interest rates high.  But what we also strongly recommend, and we came out with a paper last week where we looked at 100 inflation episodes and we tried to learn the lessons from them is.  When during this period we are getting negative surprises on inflation, we should be ready to stand, ready to be agile and act quickly in order to quench these inflationary forces.  And if we are getting positive surprises, sit tight and don't go into early evening.  We saw time and time again in these lessons that sometimes there was an exuberance that inflation is coming down, that led to premature easing, and then inflation was coming back, picking up again.  And the second disinflation effort is so much more expensive than getting it right for the first time.

Now, when you need to earn and you, by mistake overtighten, the costs are much less than if you make the mistake and ease too early.  And, therefore our recommendation to all of the Central Banks that they need to keep their restrictive stance for a considerable amount of time to be sure that inflation is coming down to target and they should avoid premature easing.  And that applies to Western Europe, and that applies to emerging European market economies as well.  And what we need to watch very carefully there is what happens with wage dynamics.  When we are looking at it.  In the Euro area for instance, if we have nominal wage growth of a bit over 5 percent this year, around 4 percent next year, and we are seeing a further compression in profit shares over this period, going back to profit shares, which we had in place before the pandemic.  This would be a good basis for being confident that we are coming to a 2 percent target in the second half of 2025.

Should unit labor costs increase faster, that could be compensated for by a bigger compression in profit shares or by higher productivity increases than we expect.  But that's the variable we need to look at, because what we saw is when we say core inflation is sticky, we saw first energy prices seeping into core inflation and being responsible for that persistence.  And that is now happening where normal wage increases are seeping into services and core inflation.  So that's the variable to watch.

DE HARO: Thank you, Alfred. I want to take the opportunity to remind everyone that we release a blog authored by Alfred actually talking about inflation and monetary policy and referencing that paper that he mentioned. We're going to go to this side.  Silvia.

QUESTIONER:.  I have two questions, if I may.  The first one on Italy.  Your GDP estimates are well below Italian governments.  So do you think that 1.2 percent could be still feasible, given that most of the recovery and resilient funds benefit yet to deploy their effect?  And the second one is on bank windfall taxes.  You said government should avoid it.  The ECB has been very vocal.   as you know, the Italian government has already modified it.  But what kind of risks do you see, especially for smaller and more regional territorial banks?  Thank you very much.

KAMMER: Thank you. Looking at Italy growth in our projection, so we downgraded at 2023, and most of that was really mechanical, arriving at a rate of 0.7 percent, reflecting what happened in the second quarter, that we had a drop off in investment from the change in the super bonus regime. And that mechanically also leads to a downward revision to 0.7 percent in 2024.  And in addition, of course, what we are also seeing is the impact of monetary tightening, and that reflects our forecast for 2024.  I should say on the growth outlook, we see a rather deep decline in credit, and we see still some risks from the volatility in energy prices.  When you look at the bank of Italy survey, the sentiment is turning more negative.  So the downside risks actually on that projection of 0.7 percent in 2024 have increased. 

Now, your question was, is this growth number the Italian authorities put out of 1.2 percent still achievable?  I would say it's ambitious but feasible.  And I'm saying this because NGO plays a role and if investments are going to take place in 2024, beyond what we are right now expecting, the immediate fiscal impulse could lead to a higher growth, and therefore the 1.2 percent is feasible.  I would, of course, stress that right now we are seeing the risks on the downside.  When it comes to the NGO funds, what is important in Italy and in all other countries, is really that implementation is accelerated, both on the investment side and importantly, also on the structure reform sides.  We forecast that NGO could bring a boost to Europe, increase the level of potential output by one and a half percent.  That's not nothing that is a serious contribution for the medium term.  Italy, like all other countries, is facing implementation issues.  They need to be addressed.  That means some labor shortages, which come in the way, and impact on the capacity to invest should be eased.  We also see in Italy that lots of the projects were delegated and decentralized to the local government level, and they don't have the capacity to actually implement.  Therefore, standardization of tenders of contracts, et cetera, could actually help speed up the implementation there.

So both structural reforms, investment, important for the medium-term growth impetus and also for productivity growth and implementation and capacity constraints should be addressed.  This does not only apply to Italy, that applies to most countries.  And I should also say there's a capacity to implement because most of the funds in Europe actually from the NGO went to those countries who already receive large support from structural budget funds from the EU.  And of course, that again, banks up against capacity limits.

DE HARO: Before we move around, any other question on Italy?

QUESTIONER: Thank you for the briefing.  Two questions, if I may.  You know that European governments have to hand in their budgets by this Sunday, but some have already announced that they're going to breach the 3 percent deficit and not go back to 3 percent in the next couple of years.  Given the current high yield environment, is that a worry for financial stability in Europe? And secondly on Ukraine, in your updated outlook, you do not provide a figure for growth for this year or next.  Can you tell us why that is?  And, also, if you have an estimate of the budget shortfall that Ukraine is facing next year, if we only take into account what has actually been pledged.  Thank you.

KAMMER: Let me start with Ukraine first. For Ukraine over the last year, and also for this year, we gave a range in terms of growth just to be cautious given the high uncertainty of the impact of the war on economic activity. So we expected that growth this year would be between 1 and 3 percent.  We now actually expect, and we will do that in the next few months, to upgrade that growth forecast.  So growth has been stronger than expected in Ukraine reflecting macroeconomic stabilization.  Inflation rate was brought down from 26 percent last year to below 8 percent this year.  Strong reserve holdings and recovering economic activity.  So that is going to happen later this year and we are going to upgrade the growth forecast for Ukraine.

 When it comes to the budget, we have put in place with the international community a $115 billion support package over the next 4 years that has been pledged by the stakeholders and we are implementing that package over time.  And so what we are usually doing with every review under the program, we are then looking when the money is coming in, that budgetary procedures are going to deliver these kind of funds and we're looking have an outlook over the next 12 months in order to secure that financing.  And that is really an ongoing process which is very dynamic and that happens under any fund program from each review.  The first one we completed in June, the next one we expect to be completed by the end of 24.  So that's part of the normal processes.  When it comes to budget pressure, of course in Ukraine, as with any other fund program, we look at the external financing envelope, we look at the ability in terms of domestic financing and of course, we also look at budget in terms of spending as well as tax revenue measures.  And we are also doing that in the case of Ukraine.

With regard to the EU and fiscal consolidation, first, I should say that we see some consolidation in the Euro area taking place in 2023 and we are expecting a further consolidation to take place in 2024.  There will be another reduction in discretionary reduction of 1 percent of potential GDP taking place.  That happens mostly because of phasing out or making more targeted or having less reliance on the cost-of-living packages.  What we also see and what we also have been recommending when you're looking at fiscal consolidation the issue is really in the medium-term, and for the medium-term we will across Europe need to see a very concerted effort in order to deal with the fiscal situation.  And what do I mean by that?  We had a number of years where we had a huge reliance on the state and corporate balance sheets were preserved, household balance sheets were preserved, and of course, that was expensive.  And the debt to GDP ratio is higher than what we had before the pandemic.  We also know that the next shock is going to be around the corner.  And if we want to have a forceful response again on the fiscal side, we need to create these buffers.  And that means that debt to GDP in most countries need to be brought down in the medium-term, not just for debt sustainability issues, but also to create fiscal buffers for the next shock. 

And let me add a third one, in order to just tell you how difficult this exercise is going to be.  We also need to create fiscal space through expenditure rationalization, through tax revenue measures, in order to undertake investment spending, which was already identified as priority.  And I'm thinking here about infrastructure in Eastern Europe.  I'm thinking about the investment required, the public investment required for the green transition and for many countries also stepping up defense spending.  So that space needs to be created.  And so what we need is really a growth friendly fiscal adjustment.  And what we need to have in place is not just fiscal consolidation, we need to actually focus on productivity and growth because that ultimately makes a huge difference.  And for that, countries need to start implementing structural reforms now in order to reap the benefit of higher growth in the medium-term, which will also help on the fiscal side.

QUESTIONER: Jeremy Hunt, the Chancellor of the UK, has just said that IMFs forecasts for the UK are often more wrong than right.  I just wondered if you had any repost and the forecasts were based on figures that didn't include the latest revisions.  So I just wondered if the changes in market rate expectations or the new revisions have actually upgraded the UK since your forecast?

DE HARO: Before Mr. Kammer answers, any other questions on the UK?

QUESTIONER: Hi on that.  So, our Finance Minister, Jeremy Hunt, today has been talking about a fiscal situation that is very tight, mainly due to higher borrowing costs and higher debt interest payments.  He suggested that dealing with that will focus on spending cuts rather than tax rises.  And I wondered if you think that is the right approach?  And a more general question, you talked a lot about dealing with climate change.  In the UK we've seen some rollback of our net zero targets, mainly related to the purchase of electric vehicles.  And I wondered, is it right for governments to delay some net zero targets if it means it lessens the burden on consumers?

KAMMER: So I hand over to Laura for the answers to all of your questions.

PAPI: Thank you. Let me start from the outlook. As you know, for this year we have 0.5 percent, which was slightly upgraded given that we saw quite a bit of resilience in the first part of the year.  And for 2024 we have 0.6, which is a downgrade, because we have started seeing weakness in the high frequency indicators, which we think will carry into 2024, and we have tighter financial conditions than at the last forecast round in July. 

Let me say that for 2024, we are more optimistic than, for example, The Bank of England.  And in terms of our forecast record, we have actually done some analysis of it and compared it with the forecast record of The Bank of England, the Office for Budget Responsibility and Consensus Forecast.  And what we see is that all of these outlets have underestimated the UK growth in recent years.  However, the IMF has not been particularly pessimistic. 

Moving on to fiscal.  So, for this year, the fiscal stance seems appropriate to us.  It helps in the fight against inflation, and we think that there may be even some overperformance in 2023, meaning the deficit could be slightly lower than what was envisaged in the March statement.  We think it's appropriate to save that overperformance.  So we were encouraged by statements by the Chancellor who said that does not envisage tax cuts in the Autumn Statement. 

In terms of the medium-term consolidation, there is a need for consolidation to rebuild buffers, as Mr. Kammer was saying, to be ready for the next shock after years of large deficits and to bring debt down.  We see at the same time some significant spending needs to maintain high quality public services.  So, in health especially, but also education, investment spending, to foster the green transition.  So, as we said in the 2023 Country Report, the Article IV, we have recommended that actually, most of the adjustments should happen on the revenue side, given these spending needs and pension reform.

On the climate targets, as you know, the UK has been at the forefront of global efforts to reduce global emissions.  It has very ambitious targets.  However, some of the measures that were recently implemented, like the one that you mentioned, the delay on the ban on internal combustion vehicles and fossil fuel heating, make it more difficult for the UK to reach its targets, as the Climate Change Committee recently highlighted.  It is important for the UK to stay the course in terms of climate policies and build on its successes.  As we had, again mentioned, at the 2023 Article IV Consultation, we see scope to strengthen carbon taxation and strengthen the ETS system.  Thank you.

DE HARO: Okay, we opened the floor again. We're going to go with a man in the back.

QUESTIONER: Germany is the only EU country which has a shrinking economy this year.  What is the reason for this and what do you recommend the German government should do to boost growth?  Thanks for your do you want to take the question?  Thank you.

CELASUN: Thank you. So, Germany's outlook this year, the forecast very much reflects the energy shock following the shutoff of gas flows from Russia to Germany last year. It has pushed up inflation and that has reduced real wages and consumption.  It has also depressed output in energy intensive industries.  So that's what we are seeing in the German economy.  And monetary policy had to tighten to respond to this high inflation and that is also increasingly weighing on domestic demand.  All in all, we see a contraction of about half a percentage point in 2023 in Germany.  So these shocks are one off shocks, in the sense that they scar the level of output to some extent, but they do not leave a permanent imprint on medium-term growth.

Looking at the medium-term, we see long standing challenges to growth.  Germany has a population that's rapidly aging.  It has lackluster productivity growth.  It actually shares these challenges with many other advanced economies.  And it also has very ambitious commendably, ambitious climate targets.  So, there's quite a few things that Germany must work on.  The essential needs are to boost public infrastructure, essentially green public infrastructure, and digital infrastructure, to boost productivity growth.  There is also a need to keep the skills of the workforce up to date and there are need for structural reforms. Cutting red tape and boosting innovation are the important ones.  Thank you.

DE HARO: Okay, let's continue here. We are going to go here in the front.

QUESTIONER: You said a couple words about Ukraine and prospects.  I just want to ask you about follow up.  How do you assess the risks of further escalation and tensions for the European and global economy associated with the war in Ukraine, including the Black Sea Grain Initiative, the structural damages and other issues?  Thank you. 

KAMMER: So, you give me a chance to deal with an omission when I answer the first question on Ukraine, I should have given a lot of credit to the authorities for actually maintaining macroeconomic stability in such a situation of high uncertainty and really stresses not only in the economy but on the population. You are asking in terms of the spillovers of the war on the rest of the world, and we saw a big spillover last year with the energy price shock and the cutoff of Russian gas, but also then the impact of sanctions on trade relations, and trade related flows. So that has led, as you imagine, to the substantial shock we have experienced in particular in Europe, and that is still with us.  And that also led to scarring, that is the medium-term outward projections for Europe have been affected because of the implications of that.  And for advanced economies, the costs in the medium term are 2 percent of GDP for an emerging market European economies is 3.5 percent of GDP.  So that's what we have already in place.

 And you're right to point to that the risks remain from the war, and that could be an escalation of the war, but that also could be a deepening geoeconomic fragmentation coming from the geopolitical tensions created and triggered by that war.  And that is very difficult to forecast what the impact of those would be and how they would actually and could unfold.  That adds to the uncertainty for the economic outlook and that we need to be ready for, and I think that should be part of a risk management approach and the risk management approach you already see implemented in Europe, when you think about building up a resiliency.  That resiliency would come in in terms of mitigating risks from implications of a further escalation.  But that resiliency also comes in through an increase in further geopolitical tensions globally.  One never knows where the next shock is going to come from.

DE HARO: Okay, we're running out of time, but we're going to get a couple of questions more. let's proceed to this side of the room.

QUESTIONER: I would like to ask about the situation in Spain.  What are your specific recommendations for reducing Spanish debt and deficit and do you think it is possible to apply a tighter fiscal policy with the current political fragmentation?  Thank you.

KAMMER: Maybe I start off and then Laura may add. In general, the situation in Spain is very similar to other European countries. When it comes to the medium-term, we will need fiscal consolidation.  So that needs to be a priority for the government as well and we need to have growth enhancing reforms and structural reform measures in place, which is going to help on the productivity growth in the medium-term.  When it comes to the government formation, and of course, that adds uncertainty on what the policies will be in the medium- term.  And I think one just needs to recognize that this uncertainty is going to persist until we have a new government in place which then will have spelled out its policies in more details.  But Laura, please.

PAPI: So, for 2024, some of the adjustments, an important part of the adjustments can come from the fact that the measures that were taken for the energy crisis and more general cost of living support measures are due to expire. And that is our recommendations that they should be let expired, because as you know, energy prices have normalized to a larger extent. Some of the other possible measures that could be taken for a consolidation also over the medium-term are an expansion of the tax base, for example, reducing tax expenditures related to the VAT.   Where we also see that there could be some other need for reform is on the pension side.  We are encouraged by the safeguards put in the system.  However, there has been a reliance more on revenue than spending measures and we think that spending measures should be brought into the picture because that would favor more the young cohorts.  And that's what you need for the future.

DE HARO: Okay, the last question is going to go to this gentleman here. But before that, we have a question online on Russia, and it goes as follows. The IMF raised its forecast for Russia's GDP growth in 2023 to 2.2 percent.  To what extent does the IMF consider the quality of GDP growth in its forecasts and military spending?  That's less for long term growth than investment in education, for example.  And can you comment on this with regard to Russia in particular?

KAMMER: Yeah, happy to do so. So, what we see in Russia is a considerable fiscal impulse coming from ramping up spending related to the (inaudible) in terms of public government investment as well as government consumption and to add transfers to the population. So that explains that we see positive growth in Russia and that we again upgraded our growth projections.  I should also say that our growth projections is very much in line with the consensus which has caught up to our forecasts.  You're asking exactly the right question.  That is really a short-term impact which you are going to see fueling growth in the economy. 

When we are looking at the longer-term picture on Russia, the outlook is dim because sanctions, because reduction of technological transfer will hurt the productive capacity and productivity growth in the medium-term.  And potential growth, we estimated before the war to be about 1.5 percent of GDP.  We have now downgraded that to 1 percent of GDP.  And what that means is that Russia has stopped converging towards Western European levels of GDP.  So that is quite a change in the outlook of the Russian economy.  So a very different picture when you look at the short term versus the medium and the long term prospect for the Russian economy.

DE HARO: Okay, and as I promised, last question.

QUESTIONER:.  I have two questions.  The Dutch housing market is quite resilient in spite of rising interest rates.  I wonder what the explanation could be, and if you see the same pattern in the rest of Europe? And secondly, what could the potential effects be of the crisis in Israel for the European economy? 

KAMMER: Laura, why don't you start us off on housing markets and the Dutch economy?

PAPI: Yes. So, in some respect, the Dutch housing market is behaving similar to other countries. We have seen cooling of house prices, but as you say, that cooling seems to have already run its course.  Prices seem to be stabilizing or even increasing.  A couple of factors that could provide support.  One is that there is still limited housing supply and that's a factor that we see in several countries.  The other is that wages have started to rise and so purchasing power is coming back.  Now, there's also reason sort of for caution and so needed vigilance on the side of the authorities.  Household indebtedness is relatively high.  Those households have also high assets.  And the banking system and the financial sector has high exposure to the real estate market.  Mitigating factors though, are that the mortgages are long term and mostly at fixed rates.

KAMMER: Maybe one issue to add on housing market developments. In Europe we have seen large price increases over the last decade in a number of countries. Some of them resulted in overvaluations and they start having been corrected in an orderly way.  But despite all of these price increases, we saw little response on the supply side.  And it's that what Europe and many countries need to fix because the supply side issue is impacting negatively on growth.  When you look at affordability of rental housing, in particular, it hurts the young and it hurts urban populations where productivity growth is highest.  And that hurts the potential capacity of the economy.  And so dealing with the supply side, both the general supply of housing and rental units, but also the social housing to ensure affordability is a priority for European countries.

On your question in terms of spillover from Israel and Gaza, there's a lot of uncertainty of how this would unfold and it's difficult at this stage to forecast what the possible implications are going to be.  The bottom line is it's another negative shock and as we have been saying, unfortunately we are living in a very shock prone world and the shocks are hitting us with great surprise and with lot of higher frequency than ever before.  Thank you.

DE HARO: Okay, we are way over time, but I want to thank you on behalf of Laura, Oya, and Mr. Kammer and the whole European Department for attending this briefing. I know that there were questions that were not answered, so please send those questions our way to media@imf.org. And I also want to remind everyone that we will be launching our regional outlook in November.  We will keep you posted.  Thank you very much.