Transcript

[Briefing already in progress.]

MS. SCHADLER: For 2001 now we have a growth projection of 0.7 percent, which is still down from the time of the mission where we were looking at something around one and a quarter. So it's still a significant reduction, but slightly less dramatic than—

QUESTIONER: Excuse me. If you say now, do you already take into account September 11th even? Is this the figure right now, I mean, in October?

MS. SCHADLER: Yes. That's the figure now. And that's one of my points, that when I say right now, I really mean today because we're getting news all the time, and I have to say so far I can't think of much of it that's been good. So this number of around 1 percent that we had projected for this year could change, of course, but it's not going to change a lot because too much of the water is already under the bridge. But for next year, there is still room for more downward revision and the projection that we have of around 1 percent right now. A lot depends on news coming out of the United States because that's going to be one component of Germany's recovery, the improvement in export demand. And the news in the United States now is, as you all know, not moving in the direction that we'd like. So a lot depends on that.

The second part of the challenge that we've had on this consultation is searching for an explanation for the suddenness and depth of the slowdown in Germany and, in turn, then how the authorities should be responding to it.

Let me just run briefly through what some of the characteristics of the slowdown in Germany have been.

First, the slowdown predates the slowdown in most of the other euro area countries. Germany was one of the first countries to experience a slowdown in the euro area. The pattern and timing of the slowdown in Germany looks quite similar in many respects to that in the United States. The slowdown has centered on an inventory adjustment and a very sharp change in investment behavior. And that's the same pattern that we see in the United States.

So what does this suggest to us about the causes? Well, to some degree, there has been the external environment deteriorating, but probably also at work are common shocks in the United States and in Germany. The effect of the abrupt change in the technology sector has probably been influenced in Germany, probably not as large as in the United States, but certainly quite significant.

At the same time, consumption growth has done reasonably well through the data that we have right now, and it says to us that the tax cut that was implemented at the beginning of this year has certainly had a beneficial effect in moderating the slowdown.

Employment growth, which had been less strong, even in the late 1980s, than in other euro area countries, faltered relatively early in the slowdown, and that is certainly an explanation for the overall outlook for the economy and the confidence that people have that consumers will continue to hold up the economy.

The other salient characteristic of this slowdown is that it's come at a time when there is relatively little scope for macroeconomic policies to do much to address it. Monetary policy, of course, is handled in the euro area, and it has to take into account euro area considerations. And the fiscal policy is facing a situation where a reduction in the deficit over the medium term is a high priority for the Germans, a priority that we would strongly support. So that it certainly limits the scope for any sort of fiscal support during this downturn. Even though this year we have seen quite significant fiscal stimulus coming from the tax cut, Germany is not well positioned to have a continuous substantial fiscal stimulus to help reverse the slowdown.

So what are our policy recommendations in this environment? Well, first, as some of you who were here yesterday for the euro area press briefing, we certainly see scope for reduction in interest rates, and I would say Germany perhaps more than any other country in Europe is in a position where a cut in interest rates would be highly beneficial.

We attach a great deal of importance to the wage moderation in the forthcoming wage round. There has been an increase in inflation in the last year, which is now subsiding, but the increase in inflation coming from oil prices and food prices could potentially put upward pressure on wages in the forthcoming wage round if wage earners attempted to make up for the loss in their real incomes as a result of these price increases. We feel it's very important that this pressure be resisted and that moderation continue in the current wage round, the wage round that will be coming up early next year.

In terms of fiscal policies, we see in the longer term a need for continued focus on reducing the deficit. But probably the progress toward deficit reduction during this period of weakness is going to have to be less than originally planned, simply because the slowdown is going to affect revenues, it's going to affect cyclical expenditures, and that's going to lead to higher deficits than would otherwise have been the case.

We attached a great deal of importance to structural reform. I know this has become kind of a mantra, particularly in this slowdown when employment growth has reacted very quickly to the [inaudible] prospects. It's really important that Germany press ahead with an agenda for structural reform, particularly to make labor markets more flexible.

That summarizes more or less where we are in our position on the German economy. Let me just say a brief word about the papers that you're getting.

As I said, the projections and the analysis that we've been doing over the last few months has been continuously changing to keep up with the weakening world situation. And, of course, September 11th was a quantum jump in this situation that we saw and the situation that policymakers were going to have to react to.

As a result, the Staff Report, which was issued a few days after September 11th, has information in it, particularly in terms of projections, that is no longer relevant. The Staff Report itself did not take into account the events of September 11th and the events of the German economy.

We did issue a supplement after having one more round of talks with the German authorities in early October. That gives you much more up-to-date information on our position and our interpretation of their position. But even that has now largely been superseded by the events as we look at the effects of the very weak business confidence, for example, and try to assess how that's going to affect the German economy, and as we look at the situation in the United States and see the direction that it's moving in and how that will affect the German economy.

So the supplement is going to be the most updated piece of information you have, but I have to say that events had some effects even past the supplement.

You also have in this bundle a PIN that provides the assessment of the Executive Board on the situation in Germany. And you have some staff studies that were done in support of the consultation. We looked at two issues this year. We looked at wage moderation and its effect on employment growth in Germany, France, Italy, and Spain. We compared the four countries, all of which have had a period during the 1990s of wage moderation with different effects of the [inaudible] on labor markets in each of the respective countries. And we looked also at the fiscal rules, how a government designs rules over the medium term and help guide the process toward the kinds of outcomes that it wants to without sacrificing the year-to-year policy responses to developments such as we've seen in the last few months.

Questions?

QUESTIONER: Could you just walk us through what the latest growth figures are? It seems a bit unclear here.

MS. SCHADLER: I think we endorse—I think we report what the Minister said, what the Ministry reported.

QUESTIONER: What are you projecting for next year?

MS. SCHADLER: Right now we are at around 1 percent.

QUESTIONER: One percent?

MS. SCHADLER: One percent next year, 0.7 percent this year.

QUESTIONER: I just wanted to trace back this year's projection. We're at 0.7 now. It was 0.8 around the time of the WEO, and you said one and a quarter in July during the visit?

MS. SCHADLER: During the visit, one and a quarter.

QUESTIONER: You said there was scope for further downward revision; however, you expected an upturn mid-next year.

MS. SCHADLER: Well, let me clarify. Implicit in the 1 percent projection would be a beginning of the recovery in the middle of 2002. If we have to delay that, if we see, for example, projections in the United States, as new business confidence surveys come out and they didn't show an improvement, we would need to delay the beginning of the upturn. And as you delay it, that pushes growth down next year.

QUESTIONER: Okay. So where would the upturn come from then, in your view?

MS. SCHADLER: Right now where would it come from? As the projections stand at this moment, we have it coming from a turnaround in investment, business confidence generally, and also stemming from better prospects for the world economy, in part led by the fact that the United States was expected—is still expected to experience a recovery in the first half of next year.

But, you know, the IFO result in October was, of course, for us quite a big surprise. The question is, this severe dip in business confidence, it's something that's temporary, it's going to bounce back, and we're going to be back at least at the levels, say, that we saw during the summer. If that happened in November, I think we would feel much more confident about the kind of forecast that we're looking at right now. If we hit the IFO number and it turns out to have stayed around the October number and we will not have seen much recovery, then we would start feeling more uncertain about projecting a recovery for the middle of 2002, and that's the kind of thing that would have to lower the projection figures.

QUESTIONER: With the tax cuts that we had in Germany earlier this year, how much do you think they actually contributed to moderation—I mean, in terms of percentage points of GDP?

MS. SCHADLER: The tax cuts themselves. Bob, would you have a quantitative estimate?

MR. CORKER: Well, the tax cut was one of the largest—I think it was the largest of all the G-7 countries. It's equivalent to 1 percent of GDP. Normally, the kind of fiscal effect is half of that on growth. So it's obviously stopped things being considerably bad. We're only talking about 0.7 percent growth this year. So it would have been probably pretty low without the tax cut.

QUESTIONER: Has this revived the legitimacy of using tax cuts in the way that the U.S. is trying to do as well? There had been a debate from supply siders about the effectiveness of tax cuts as a stimulus measure. Do you think in Germany you had the same argument?

MR. CORKER: Germany's taxes are high. That's for sure. And I think there is a case for supply side [inaudible]. One would think it would be stronger in Germany than it would be in the United States where tax rates are starting from a much lower level. I think it's really too early to sort of make too much sense of the tax cut. We need to see a lot more data before we start to dissect it too closely.

MS. SCHADLER: I'm sure there's a lot of room for debate among economists on that question, and I don't think that this will ever be considered proof. You know, I hate to be an economist, but what you really need is the counterfactual. What would have happened had they not had the tax cut? Which I can assure you people will speculate made absolutely no difference. Maybe even better, the people who think that getting the fiscal position corrected is the most important thing going for Germany. There's just a very big range for debate there.

Our view would be that the cuts had a good, appropriate effect, positive effect at a time when Germany needed it. These numbers are based on historical estimates that suggest that there has always been room for short-term fiscal stimulus.

QUESTIONER: Lastly, is there much scope for further fiscal action at all given the rather grim outlook here at the moment for Germany and given its importance to European growth as a whole?

MS. SCHADLER: Well, it wouldn't come as a surprise to anyone that we have talked with the authorities about bringing forward the tax cut early in 2003. That's a live issue in Germany right now.

The argument for it is simply that it's already factored into Germany's medium-term fiscal adjustment plan. Germany is planning to eliminate its fiscal deficit even with that tax cut, but coming a year later. So in terms of diverging from the medium-term plan, this would be a very small divergence.

The German authorities, when we spoke with them, attached a lot of importance to the credibility of a medium-term plan that sticks to its schedule, providing the confidence to consumers and to the economy in general of sticking to a plan.

Certainly our view was that if the signs of recovery in 2002 are not clear by the end of the year, then the proposal to bring forward the tax cut of 2003 would not be very costly and should be seriously considered.

QUESTIONER: If signs are not clear by the end of this year?

MS. SCHADLER: Yes, right, because it would be bringing the tax cut forward from 2003 to 2002, so it would have to be done soon.

QUESTIONER: How easy or how difficult would that be in the context of political pressure in the European Union to stick to the medium-term plan?

MS. SCHADLER: Difficult. Difficult. The debate is raging, and there are people strongly lined up on both sides. But Germany has been a leader in the Stability and Growth Pact, promoting fiscal discipline and avoiding fiscal adjustment, particularly on the economies that have relatively high fiscal deficits, among which Germany is one. So that's why this is a very careful consideration that needs to be made. Would it hamper the medium-term plans to a destructive extent, or would it be worth doing that?

QUESTIONER: It's a very bad sign. Germany, of all countries, highly disciplined, scraps the program.

MS. SCHADLER: Well, I don't think that anybody is considering scrapping the program. There is a need for medium-term fiscal consolidation. I don't think that there is a single person we spoke to in Germany, in the euro area, in the Fund, anywhere, who would—who does not attach considerable importance to the medium-term program. This is an issue more of timing and of sticking to a schedule within the medium-term program that sees steady progress year to year.

QUESTIONER: Maybe this is another area of theoretical debate, but you've talked about the need for moderation in the next wage negotiation round. How does that affect growth? There's another argument that if you have strong wage growth that enables consumers to spend, it would be helpful to the economy. I'm just wondering from—I can see obviously from an inflation perspective how wage moderation is needed. But from a growth perspective, why would that be important to Germany by next year?

MS. SCHADLER: You know, there are many aspects of this, and you've picked up one important one—two important ones. Certainly we did hear a lot, and we also take seriously the consideration of how the wage developments affect incomes and, in turn, consumption. But in Germany, one of the interesting things about the empirical evidence is that consumption is reasonably closely related to employment growth. When employment growth falters, consumer confidence falters and—you know, even beyond the effects of lower employment on incomes, there's a strong confidence effect.

So lower wage growth has the benefit of supporting employment growth. Lower wages tend to lead to higher employment demand and, therefore, more employment in the economy.

So our concern is that with a very high rate of unemployment already, Germany needs to be very careful to look to the conditions affecting employment demand, how many people businesses want to hire. And from that perspective, we would say that moderate wage growth—this is not no wage growth or any severe adjustment, but we're talking about moderate wage growth in the same kind of behavior that we've seen over the last two years. A continuation of that is the best thing Germany can do to ensure continued—a restoration of the employment growth that we saw in the late '90s and, in turn, the support that would provide for consumption in the economy as a whole.

QUESTIONER: Yes, looking at your staff supplement, it looks like you've trimmed your growth estimate for this year by just a tenth of a percentage point. I'm wondering, given what's happened, why such a small downward revision. Also, is it likely, given your economic projection for next year, that under the national definition of unemployment it's going to get above double digit in Germany?

MR. CORKER: The reason we haven't made much adjustment to 2001 is that most of it's already happened, and we're now in November. We have some data from the first half of the year, and we had some indicators of what was already happening in the third quarter. Even if the fourth quarter turns out to be much weaker than we expect, it will only start shaving another 0.1 or so off growth. It's just a question of arithmetic, really, rather than anything else.

On unemployment, on the growth we've got, we have it pushing around the 4 million mark, which is—

QUESTIONER: It's just around 10 percent.

MR. CORKER: It's around about 10 percent on a national definition. Of course, a national definition gives a rather bleaker number of unemployment than a more harmonized or European definition of unemployment, which would—sort of the definition is close to 7 to 8 percent. So it would be a more consistent measure across Europe. But the headline 4 million was almost reached last month in the data. The number came out at 3.92 million, I think is the number that's been released. But Germany's almost there, anyway.

QUESTIONER: So it's probably going to go around 4 million or above?

MR. CORKER: Yes. Unemployment tends to lag growth; therefore, it will go above 4 million. And I think the Ministry of Labor in Germany has also been acknowledging this.

QUESTIONER: Would there be a need to revise the numbers ahead of the Ottawa meeting?

MS. SCHADLER: The Ottawa meeting? We are in the process of looking at them again. Today and tomorrow, in fact, is the time which we need to finalize the new numbers. So I can't say what's going to happen at the end of those two days. Right now I expect that we're probably going to stick to around 1 percent. That doesn't mean 1 on the dot, but around 1, close to 1.

QUESTIONER: And your updated forecast will be released around Ottawa, you're expecting, or before the interim WEO in December?

MS. SCHADLER: They're going to be released in Ottawa.

MR. CORKER: I'm not sure. We'd have to clarify that. And my understanding, the press conference for the WEO is not until almost Christmas. It's December 19th or something like that. But what gets released around Ottawa, I don't know.

MS. LOTZE: We'll have to see. It's not clear what's going to be released for Ottawa. I mean, if it's country by country—sort of the table that you get with the WEO. The interim WEO will be basically the final revisions of the October WEO, and that will be mid-December.

QUESTIONER: Just for clarification, because you said the projection for this year is 0.7 percent, and here in the summary it says three-quarters of a percent, so that would be 0.75.

MR. CORKER: It's even more confusing. We said 0.8 on the table there.

QUESTIONER: What is the definite figure we should use?

MS. SCHADLER: It's a continuous process of revision. It's very unusual here in that the size of the revisions is just enormous, and the continuity of the revisions is really unprecedented.

MR. CORKER: For alleged transparency reasons, we left the 0.8 on the table because that was the number we had discussed with the Board a few weeks ago. It's a lot of internal trouble to change that number, even though a week later we actually shaved 0.1 off to 0.7. So the number that Susan gave orally is the precise decimal place number of 0.7.

QUESTIONER: You just said there's been no precedent for these quick revisions of forecasts. How come? I mean, okay, there's September 11th, but what makes this downturn so special that there was a need to really revise the numbers over and over again?

MS. SCHADLER: Well, this has been an unusual year. There have been some very major shocks ranging from the food price increases, the eccentric slowdown in the United States, and September 11th. Taken together, we don't see many years where the range of shocks to the economy is as great as we've seen in the last year. And this technology shock, for example, in the United States, which has pretty much required economists to think on their feet as events unfolded, it's very hard—there's not a precedent for that kind of shock. And while that technology shock was less for Germany, it's still an important element in the German experience as well, and those things together are just uncharted territory for us.

QUESTIONER: Is there any sense of embarrassment among forecasters at the IMF? Last fall, the WEO said, quote, that the outlook for this year was the rosiest in a decade. Is there any sense of shame—

[Laughter.]

MS. SCHADLER: Well, we have agonized with this. Obviously, they didn't escape our notice.

First, I think there are a few things at play here, though. One is that the size of, for example, the response to the oil price increase—it's a number that really varies quite a lot, how sensitive an economy is to an oil price increase. There aren't precise estimates of this. And probably we underestimated. We chose an estimate that's certainly on the low side of reality.

You know, looking back, did it look like we missed something? I would say no. I would just say we chose an estimate that reflected where we thought, given Germany's energy dependence and the dependence of the rest of the world on oil prices, was quite realistic.

The technology shock has been, as I said, one that we just don't have a precedent for, and estimating what the size of those effects will be, the size of the stock market effects, the size of the effects of demand for technology-related industries, it's uncharted territory. And, you know, as economists, all we can do really is look at past behavior and project how that could change or how much of it will be relevant in the future. Those are really—those are our only instruments. It's all speculative.

QUESTIONER: After that, would you care to speculate a little more on the first half of next year? First of all, how probable is it that Germany will end up in a recession?

MS. SCHADLER: Well, as I said, we are not projecting a recession.

QUESTIONER: The whole of next year, but if the recession is two quarters—

MS. SCHADLER: No, we're not suggesting a recession. We had—or at least the data that we have right now show that growth in the second quarter of this year was very slightly negative. You know, could you see in the third quarter very slightly negative growth, too, which would, I guess, technically put you in a recession? Well, of course, there's a possibility of that.

But I think this is splitting hairs, and that's really not what this is about. What we really see is a period of low or no growth, starting in the second quarter and moving ahead for several quarters.

Beyond that I wouldn't want to speculate the chance for a recession. I would say where we are right now is our midpoint estimate. It could turn out to be better than what we're saying. It could turn out to be worse. Of course, there's a range of uncertainty around a point estimate, but this is our point estimate. And it's a central estimate at this stage.

QUESTIONER: Can you talk about the extent to which the German economy will be damaged by all the travel disruptions, tourism and so forth, the tourism adverse effects from the aftermath of September 11th? Is this something that would hit Germany hard, or not particularly?

MS. SCHADLER: I wouldn't expect it to be a major effect on the German economy just because of the role of tourism in the Germany economy, and the fact that, you know, when people are not flying places but wanting to drive places, Germany is a driving distance for a very large number of Europeans. But maybe, Bob, do we have any more up-to-date information on tourism in Germany?

MR. CORKER: No. It's not something we focused on, to be quite honest, because I don't think it's really as important to the German economy.

QUESTIONER: Just one question. Those projections, again, for 2002 and 2001, this is the opinion of the staff not of the Board?

MR. CORKER: These are staff projections.

QUESTIONER: We can't say that the Board, Executive Board of the IMF thinks that the growth in Germany in 2002 will be of 1 percent? That's the staff thinking, because you make a difference between what the staff thinks and what the Executive Board thinks.

MS. SCHADLER: Well, the appraisal, the staff appraisal in the Staff Report, the paper that you have, the Staff Report, the staff appraisal is the staff's view. The PIN is the Executive Board's view, which reflects the Executive Board assessment of what the staff was saying. So these are staff projections, but they have been seen by the Executive Board, and unless there is an explicit disagreement that would be noted, they are endorsed by the Executive Board.

QUESTIONER: I don't know if you mentioned it. What's the latest CPI figure for 2002?

MS. SCHADLER: Our latest for 2002 is just below 2 percent?

MR. CORKER: No. For 2002, on average, we have one and a quarter percent.

MS. SCHADLER: One and a quarter, sorry.

MR. CORKER: Yes. At the moment it's 2 percent. As of October it was 2 percent year-on-year, and inflation is still coming down, especially with the [inaudible] of the oil price increase.

QUESTION: So looking at the Staff Report, which is 1.3, no it's about one and a quarter you're saying?

MR. CORKER: Yes.

QUESTIONER: And 2001?

MR. CORKER: 2001, on average—whatever it is in the PIN.

MS. LOTZE: Thank you very much.

[Whereupon, the press briefing was concluded.]