July 23, 2019

Gita Gopinath, IMF Economic Counsellor and Director, Research Department

Gian Maria Milesi-Ferretti, Deputy Director, Research Department

Raphael Anspach, Senior Communications Officer (moderator)

MR. ANSPACH: Welcome everybody. Welcome to this press conference of the International Monetary Fund on the occasion of the release of the world economic outlook. We are pleased to have you here. We thank you for being with us today. This conference will be held in Spanish and English, with simultaneous translation in both languages. Let me introduce the speakers of today's press conference. To my right is Ms. Gita Gopinath, the Head of the IMF’s Research Department and Chief Economist of the IMF. To her immediate right is Mr. Gian Maria Milesi-Ferretti, the Deputy Head of the IMF's Research Department. Gita will have some introductory remarks, and then we'll be happy to take your questions. With that, Gita, the floor is yours.

MS. GOPINATH: Thank you. Good morning. And thank you so much for coming. In our July update of the World Economic Outlook, we are revising downward our projection for global growth to 3.2 percent for 2019, and 3.5 percent for 2020.

While this is a modest revision of 0.1 percentage points for both years, it comes on top of previous significant revisions done more recently. The revision for 2019 reflects negative surprises for growth in emerging markets and developing economies that offset positive surprises for some advanced economies.

Growth is projected to improve between 2019 and 2020, however, close to 70 percent of this improvement relies on an improvement in growth performance in stressed emerging market and developing economies and is therefore subject to high uncertainty.

Global growth is sluggish and precarious but it does not have to be this way, because some of this is self-inflicted. Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent U.S.-China trade truce. Technology tensions have erupted threatening global technology supply chains, and the prospects of a No Deal Brexit have increased.

The negative consequences of policy uncertainty is visible in the diverging trends between the manufacturing and services sector, and the significant weakness in global trade. Manufacturing Purchasing Managers' Indices continue to decline alongside worsening business sentiment as businesses hold off on investing in the face of high uncertainty. Global trade growth which moves closely with investment slowed to a 0.5 percent in the first quarter of 2019, its slowest pace since 2012. On the other hand, the services sector is holding up and consumer sentiment is strong as unemployment rates touch record lows, and wage incomes rise in some economies. Among advanced economies, the U.S., Japan, U.K. and the Euro Area grew faster than expected in the first quarter of 2019, however, some of the factors behind this, such as stronger inventory buildups, are transitory and momentum going forward is expected to be weaker, especially for countries reliant on external demand.

Owing to first quarter upward revisions, especially for the U.S., we are raising our projections for advanced economies slightly, by 0.1 percentage points for 2019, and that is to 1.9 percent.

Going forward, growth is projected to slow to 1.7 percent as the effects of fiscal stimulus taper off on the U.S., and weak productivity growth and aging demographics dampen long-run prospects for advanced economies.

In emerging markets and developing economies growth is being revised down by 0.3 percentage points in 2019 to 4.1 percent, and by 0.1 percentage points for 2020 to 4.7 percent. The downward revisions for 2019 are almost across the board for the major economies, though for varied reasons. In China the slight revision downwards reflects, in part, the higher tariffs imposed by the U.S. on China in May, while the more significant revisions in India and Brazil reflect weaker than expected domestic demand. For commodity exporters, supply disruptions such as in Russia and Chile, and sanctions in Iran have led to downward revisions despite the near-term improvement in outlook for oil prices. The projected recovery in growth between 2019 and 2020 in emerging market and developing economies relies on improved growth outcomes in stressed economies such Argentina, Turkey, Iran and Venezuela, and therefore is subject to significant uncertainty. Financial conditions in the U.S. and in the Euro Area have improved since April as the U.S. Federal Reserve and the European Central Bank have adopted more accommodative stance for monetary policy. Emerging markets and developing economies have benefited from this monetary easing in major economies, but they have also faced volatile risk sentiment associated with trade tensions. On net financial conditions for this group, are about the same as in April. Low-income developing countries that previously received mainly stable foreign direct investment flows, now receive significant portfolio flows which tend to be volatile in nature, as the search for yield in low interest rate environments reaches frontier markets. A major downside risk to the outlook remains an escalation of trade and technology tensions that can significantly disrupt global supply chains. The combined effects of tariffs imposed last year and potential tariffs envisaged in May between the U.S. and China can reduce the level of global GDP in 2020 by 0.5 percent. Further, a surprise and durable worsening of financial sentiment can expose financial vulnerabilities built up over years of low interest rates, while disinflationary pressures can lead to difficulties in debt servicing for borrowers.

Other significant risks include a surprise slowdown in China, the lack of recovery in the Euro Area, a No Deal Brexit and an escalation of geopolitical tensions. With global growth subdued and downside risks dominating the outlook, the global economy remains at a delicate juncture. It is therefore essential that tariffs are not used to target bilateral trade balances or as general purpose tool to address international disagreements.

To help resolve conflicts the rules-based multilateral trading system should be strengthened and modernized to encompass areas such as digital services, subsidies and technology transfers. Monetary policy should remain accommodative, especially where inflation is softening below target, but it needs to be accompanied by sound trade policies, that would lift the outlook and reduce downside risks. With persistently low interest rates macroprudential tools should be deployed to ensure that financial risks do not build up. Fiscal policy should balance growth, equity, and sustainability concerns including protecting society’s most vulnerable. Countries with fiscal space should invest in physical and social infrastructure to raise long-run potential growth. In the event of a severe downturn, a synchronized move toward more accommodative fiscal policies should complement monetary easing subject, again, to country-specific circumstances. Lastly, the need for greater global cooperation is ever urgent. In addition to resolving trade and technology tensions, countries need to work together to address major issues such as climate change, international taxation, cybersecurity, corruption and the opportunities and challenges posed by of newly-emerging digital payment technologies. Thank you.

MR. ANSPACH: Thank you very much, Gita. We will now come to your questions. We'll try to take as many as possible. And let me also encourage those of you watching us online to submit your questions at media@imf.org. With that, I'm going to move first here to the floor. Any questions from the floor, I'm going to go to the lady in the back. Yes, please?

QUESTIONER: A question on Chile. In the report you said that you revised slightly down the projection for Chile. Why is this and how much percentage are you revising down the [growth] for our country? And what can you say about the main economic situation in Chile to consider that slowing down?

MS. GOPINATH: We are revising down growth for Chile by 0.2 percent to 3.2 percent in 2019. This is a reflection of weaknesses in the first quarter, in the first half of this year that was tied some to disruptions in the mining sector, but also to weaker external demand. Now, we expect a recovery in the second-half of 2019, we should also be aided with accommodative policies, especially for instance the cut in the monetary policy rates of 50 basis points, but also the announced acceleration of investment projects. So, those combinations should raise our projections going forward, and in fact we've raised our projections for 2020 by about 0.2 percent points.

QUESTIONER: You’ve revised the projection for Latin America downwards a lot, so is there something in the region in particular, maybe are there tendencies for all the countries?

MS. GOPINATH: So, indeed for Latin America we've revised downward our projections. We've had significant downward revisions for Brazil, Mexico, but also we have distressed economies like Venezuela. The factors are varied. There's no one reason for it. The factors can be very idiosyncratic. Some of it of course reflects the common trade tensions and the weaknesses in external demand, but then if you look at specific countries, for instance, in Brazil there's still uncertainty associated with fiscal reform and that weighed on the outlook especially in the first half. Similarly, Mexico, there is policy uncertainty. We've seen weakness in Mexico both in investment and in consumption. In Venezuela of course it's a humanitarian crisis, economic crisis, a political crisis. So, the factors do vary across countries. Overall, they're also being subjected to the negative impact of weaker global demand.

QUESTIONER: Can we have the exact figures or for our outlook or projections for Peru and Colombia?

MR. MILESI-FERRETTI: So, these have been more resilient economies compared to the larger economies in the region, where we've had more significant downgrades. So, our forecast for Colombia is virtually unchanged compared to what we had in April. It's like 0.1 difference either away, I think it's 3.4%, 3.7% for 2019 and 2020. We have a modest downward revision for Peru for 2019, minus-0.2%. We have to recognize that I mean, the country has had a number of shocks, I mean, clearly the consequences of the Odebrecht bankruptcy and, you know, the associated corruption issues that had surfaced had an impact. There has been some delay in investment projects, in public investment projects, and that takes a bit of a toll on activity. The price of commodities has been slightly weakening as well, so you have a combination of factors at play. But overall the economy has been quite resilient. I mean, we still have a growth forecast which is close 4 percent in a region where all the weak countries are struggling. So, I would say, you know, both countries and Chile are clearly on the positive side in this more gloomy, regional environment.

QUESTIONER: There was no mention of recession in this update but it was there in April. Any reason for that?

MS. GOPINATH: We had no mention of recession even in the April Outlook, so this is very much in line with the April projections. We do not have a recession in our baseline. We expect to see the global economy recover between 2019 and 2020 somewhat. But again, we do highlight that there are significant downside risks, and the recovery relies on recoveries in stressed, emerging and developing economies, and therefore there is significant uncertainty around that.

QUESTIONER: [On Chile] I want to ask, if you have to measure between internal and external situations or factors, considering the 0.2% [reduction] of the projections to 2019. Is it's local or is it external [factors]?

MS. GOPINATH: For Chile, it is an economy that does rely on what's happening with world demand. It does depend on what's happening to copper prices, because copper is one of the biggest exports for Chile. So, what happens with China’s demand matters, and that certainly has had an impact on demand for Chile, but also more generally, within the region, if you look at non-commodity exports, the weakening of growth within the region has had an impact. At the same time, as I mentioned previously, there are domestic issues and there were some on the mining sector that was an important factor. But again, with the accommodative policies on the monetary policy and fiscal front, we expect recovery in the second half.

MR. ANSPACH: I'm going to take a couple of questions online, and then we'll move back to the room. Our first question comes from our colleagues in Mexico, and the question is: whether our forecast for Mexico also has downside risks to that current outlook? So, whether there's a risk that the growth may be falling further?

MS. GOPINATH: With Mexico one of the important factors behind the downward revision has to do with weakened investment and consumption, partly resulting from policy uncertainty on the reform front. In terms of downside risk, several of the downside risk that I mentioned with respect to trade tensions, with respect to a sudden change in financial risk sentiment, these are important factors that can impact Mexico's growth projections. You wanted to add something?

MR. MILESI-FERRETTI: Maybe I can add, along similar lines, Mexico is a very open economy, and is very sensitive to what happens in the United States, and hence clearly a faster slowdown in the United States will take a toll on Mexico, but also given the strong ties, it's very sensitive to tensions with the United States, as we've seen more recently with the spat on -- the issues related to immigration. Those are clearly possible negative external shocks. Also, Mexico is a manufacturing powerhouse, and the global manufacturing is slowing. So a weakening global trade, more generally can take a toll on the manufacturing sector, even though Mexico may benefit indirectly in some way from trade diversion if more tensions surface between the United States and China given, the pretty the diversified set of manufacturing exports that Mexico produces.

MR. ANSPACH: Thank you, Gian Maria. I'm going to take another question here online. This is also on an emerging market, India. The question is, "The IMF has revised in this growth forecast downwards for both the fiscal year '20 and '21. What has changed between the April WEO and now that warranted this further cut?"

MS. GOPINATH: So, in the case of India, there was weaker than expected domestic demand, there was weakness that was fairly broad-based in investment, and in consumption in the first question of this year, and that has led to the downward revisions both for 2019 and 2020. Now, some of this was a reflection of the run-up to the elections and the uncertainty associated with that, there were also some tightening of financial conditions, especially for borrowing by small and medium enterprises. But we expect some of that to improve in the near term, and that along with the more accommodative monetary policy and fiscal policy of the Indian Government should remove some of the downside risks.

QUESTIONER: What do you think about the [policies] from the Government of China that decide to open the financial sector to foreign investments?

MS. GOPINATH: So, China has been undertaking reforms including opening up to foreign investments, so this is a part of the ongoing reforms as they open up their economies, liberalize their economies.

I think the important policy issue for them to handle will be on the trade front, and with trade tensions we would hope that both the U.S. and China would find a way to quickly resolve their tensions, and at the same time, that both countries also work towards improving the rules-based multilateral trading system.

QUESTIONER: I'd like to know if the slowdown of the Chilean economy is owed to external factors, or if there's an assessment of the structural reform such as the tax reforms which are delayed in Congress, for example?

MR. MILESI-FERRETTI: I would say that evidently when there are important structural reforms being discussed but not yet approved there is uncertainty. There could be an impact on investment to see if investors are waiting on the sidelines to see if the reforms are approved, and in which way they are adopted. But I would say that looking forward this would an upside risk, a possibility for the economy to grow at a faster pace if reforms are adopted with overall consensus in the country. But I would say that the factors mentioned by Gita before, weakness in the first half of the year in the mining sector, for example, and trade partners that have suffered significant downturns, these are the factors that have mostly hurt our growth projections for Chile.

We know that Chile has received a large immigration wave, and obviously, there's also the consequence of the tragedy in Venezuela, and obviously those migrants could work and contribute to the Chilean economy, so the trend GDP could go up. Obviously, there are costs associated with the integration of this population, but it's a different case, the Venezuelan migration is totally different to other cases, such as in Europe where the differences in educational levels and human capital are different conditions.

MR. ANSPACH: One more question about Japan. The question is, "What is the outlook for Japan? And why was there a downward revision?"

MS. GOPINATH: Japan is also impacted by what is happening with external demand, global demand. In addition we have the increase in VAT that is expected towards the end of this year. But that's going to be offset somewhat with positive fiscal stimulus. So on net we have a small downward revision.

QUESTIONER: Could you explain why you have a slightly more positive outlook than the Chilean Central Bank and the Finance Ministry about the Chilean economy? What are the factors behind your slightly more positive view?

MS. GOPINATH: This is our assessment on the outlook for Chile. We factored in the monetary policy easing, we've taken into account the fact that there is going to be an acceleration of investment projects. Of course we will follow the data, as they come in, quickly. There's always the risk of a downside development, but right now that is our projection.

MR. ANSPACH: Well, if there are no further questions, and we don't have further questions online, we will bring this press conference to a close. We would like to thank you for being here, and thank the Central Bank of Chile for its cooperation with us. So, thank you very much. And, good day.