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Speeches & Transcripts

Global Economic Prospects - Media Roundtable Briefing

June 9, 2010

Merrell Tuck, Mr. Lin, Mr. Burns, Ms. Tuck-Primdahl, Mr. Stearns, Mr. Riordan and Ms. Dilek Aykut GEP Update – Media Roundtable

Transcript

MERRELL TUCK: So, we're going to turn now to Justin Yifu Lin. He'll give a brief overview of the big picture, and then we'll hand it over to Andrew Burns for a more detailed presentation of some of the main projections and findings.
 
MR. LIN: Thank you. Welcome to the [session] this morning and the update of the global economic prospect comes at a critical juncture of our time. And according to our forecast, the developing world is likely to have a robust recovery this year, but high-income countries will continue to grow at only about half of the growth rate in the developing countries. And the debt crisis in Greece reminds us the recovery is still fragile.
   
This year, in the Global Economic Prospects, in addition to the traditional forecast, we have run scenarios to show what kind of impact--what happened in Greece and so on, will have on developing countries. The baseline scenario assumes that the debt issue is managed, and also financial market are stabilized. But we also run a scenario that shows the down side risk, assuming that a major crisis erupts and the kind of impact that will be on the developing countries. Also, this kind of scenario is less likely.
   
According to the baseline scenario, developing countries this year is likely to grow at about 6.2 percent. [But] even under the best-line scenario, we are going to encounter higher capital costs as well as sluggish external markets.
   
And for high-income countries, if the worst-case scenario occurred, they are going to have a substantial contraction in their growth rate, and developing countries are likely to have a slight hit. 
 
In addition to this baseline and worst case scenario, I'd like to remind you of the danger of reduction in ODAs. [From] past experiences, whenever there is some crisis in high-income countries, then ODA, the overseas development assistance, those kinds of grants to developing countries may be reduced.
 
If that occurred, if because of the reduction in the ODA, it reduces developing countries' investment in infrastructure in human capital, then that's going to have a long-term impact on the development indicators in developing countries.
 
And our analysis shows, if there was a reduction of even half a percentage in the trend growth rate, it's likely to result in an increase in poverty of 79 million people in [20] years, measured by $2 a day.
 
And even if we use $1.25 poverty line, then it's going to have 26 [more] million people that lost the opportunity to get out of poverty in [20] years' time.
 
And I'd like to report--I just came back from Busan for the G20 Ministerial Meetings and so on, and I'd like to say I am very much encouraged to find that, in the meeting, there's a lot of discussion about the importance of bringing development onto the G20 tables, and with the support of India, China, and South Africa and so on, and I'm sure that the growth will be high on the agenda in parallel to the financial system restructuring as well as fiscal consolidation issues. And issues like reducing poverty, tracking climate changes, and access to finance, and also private sector development are also highly endorsed by the ministries, and I'm sure that when we come to Toronto as well as Seoul for the summit in the coming months, these issues will receive high attention.
 
So, with this, I'd like to give the floor to Andrew and he will give a more detailed report about our forecast.
 
MR. BURNS: Thanks a lot, Justin.
 
I think Justin touched on a lot of the most important issues that are coming out in this report, and what I'd like to do is just concentrate on four main messages that can be found in there.
 
The first is that the acute phase of the crisis is over and we're now going into the longer-term challenge of returning fiscal policy in high-income countries back to a sustainable path. And how successful we are in doing that is going to have an important impact for growth in developing countries and in developed countries, and that's one of the really critical issues.
 
It introduces a lot of uncertainty into the forecasting process. This right now--how the situation in Europe has evolved is very uncertain, and because of that, we're introducing this time around a range of forecasts rather than a point estimate. So, as Justin mentioned, we have global growth growing somewhere between 2.9 and 3.3 percent this year, and accelerating to somewhere between 3.2 and 3.5 percent in 2012, developing countries growing about twice that rate, high-income countries coming in at about 2.1 to 3.3 percent in 2010, accelerating to somewhere between 2.2 and 2.7.
 
Again, that uncertainty really reflecting the lack of clarity of how much impact, what's going on in Europe right now is having on growth prospects there, and the knock-on effects that that might have for developing countries in terms of less demand for their exports, but also in its impacts on financial condition on the willingness on investors to come forward.
 
When we look at the situation in developing countries and how--what different out-turns might impact--in Europe might impact them. We come to the following conclusions, that Europe and Central Asia, that's developing Europe, countries of the former Soviet Bloc and Latin America are the Regions that are most likely to be impacted, that's both because they have strong trade linkages; they're heavy traders with the European countries that are in--at risk, but also because they have strong financial linkages. The banks operating in Europe are very heavily invested and important players in the banking systems in those countries, both in Europe and Central Asia, but also in Latin America.
 
The global economy, as Justin pointed out, is likely to be vulnerable for two reasons, both because of what happens to import demand in Europe, but also if the current situation causes there to be an increase in overall risk aversion, if investors become less willing to invest, they sit on their money a little bit, then we are getting a little bit the same sort of dynamic that we saw in October of 2008 in place, when there's less financial capital flowing around, that's going to have an impact on the capacity of firms to find financing for investment, and that will have an impact on growth. Our expectation is that this is not a scenario that is going to be as abrupt or as brutal as what we observed in October of 2008; rather, it's going to be a factor as the title of this year's GEF fiscal headwinds is likely suggests, it's going--something that's going to slow the pace of the recovery going forward.
 
The third element here is that the--and that's an element where there's a great deal of uncertainty, and that's the extent to which banks in high-income Europe, in France, in Germany, in Belgium are exposed to the sovereign debt in these EU5 countries.
 
If that exposure is significant, then there certainly is a capacity for a debt crisis in any of those countries to have important knock-on effects for the health of those banks, and we've seen what that can do to global growth in a worst-case scenario. So, that's sort of sitting there as an important transmission mechanism in a worst-case scenario which, as Justin pointed out, we see as a low-probability event in this forecast.
 
I think after having said all of that doom and gloom kind of stuff, and we can talk about some of those issues, if you wish, in the question period it's important to recognize that, for the moment, conditions in Europe have not impacted developing countries, at least as far as we're able to measure in terms of growth and only in a limited degree in terms of financial conditions.
 
So, if we look at things like industrial production, industrial production is growing very rapidly through to March in 2010, that's the latest data that we have, it's going about a 10-11 percent rate in developing countries.
 
Same thing for trade, it's expanding very rapidly. These are very positive signs, indications that that recovery that we're observing is going forward at a very rapid rate currently.
 
In terms of market evaluation of developing countries, the CDS spreads, credit default swaps, those--that price of the risk of a default in a developing country, by and large, has not increased. There was a blip at sort of the beginning of May when every--there's a lot of nervousness everywhere--that has since moved out of the system, and for the vast majority of developing countries, there has been no impact from the increase in that risk aversion towards Greece, Portugal, Spain, and Italy, no impact on developing countries. The exception there is limited to a few countries, Argentina and Venezuela being among them, where there are very high debt levels, where there are concerns about the sustainability of fiscal policy in those countries, and they have, as a result, also been affected by that global focus on these particular issues that we're observing right now. But by and large, that's not been an issue.
 
Other encouraging factors going on in the global economy right now is that the recovery in the United States and in Japan, two major motors of global growth, is firming and becoming more broadly based. Initially, this was sort of an export-led inventory cycle bounce-back, fiscally stimulated recovery. Now, we're seeing consumer demand and investment come in and play a larger role, and that's a very encouraging sign, because it really is the signal that these recoveries are becoming self-sustaining, and we're--the risk at least in these countries of a double-dip recession is diminishing rapidly.
 
Different story, unfortunately, in Europe. In Europe, growth, which was initially quite strong in the third and fourth quarters of 2009 has weakened further, and we don't see that strengthening of consumer demand and investment as of yet.
 
When we look at the forward-looking indicator, there were signs that that was likely to strengthen in the second quarter, and so when we were initially doing our forecast we did have a strengthening of growth in the second quarter, but it's our expectation that the current uncertainty is likely to result in a second quarter that is weak in Europe again and, as a result, our expectations for growth in Europe are not as robust as they are for the other high-income countries.
 
The third point that I wanted to make was that, despite the very fast growth rates that we're observing right now, there's still a lot of spare capacity, both in the high-income world and in developing countries. We have capacity utilization rates that are both 10 percentage points lower than they would be at a full employment level. We have high unemployment in the United States, in Europe, but also in developing countries. And with the exception of only one or two countries, most countries are still well below the level of activity that they could be expected to be at if we hadn't gone through this recession. So, there's a lot of catch-up still to do; there's a lot of disruption; there's a lot of unemployment still in the work that has to come out. And so, in that respect, it's unfortunate that we're going through this echo phase of the crisis with these difficulties in Europe because that's going to slow the process by which we make up the lost ground.
 
For developing countries, one of the big hits that occurred with the financial crisis was a reduction in financial flows in developing countries. They went from about $1.2 trillion in 2007, down to less than a quarter of that number to $454 billion in 2009. We expect that to recover, to go from about 2.5 percent of developing country GDP last year to around 3 percent of developing country GDP this year. That is an important recovery, but it's also important to recognize that that's going to be a lot less financing, a lot less investment that developing countries are going to be able to put into place if you compare it with the peak of the boom period when those flows were equivalent to about 8.2 percent of developing country GDP. We're entering into a phase for developing countries where growth is going to be less strong because there's less external financing and there's going to be, as a result, less investment than we observed in the past.
 
Having said that, growth rates which we forecast--that Justin mentioned at about 6 percent for the next 3 years are well above the levels that we saw in the 1970s, the 1980s, the 1990s. And as a result, developing countries are still going to make progress against poverty; they're still going to be in a relatively robust catching-up phase. It's just going to be that, compared with the boom years of the first half of this decade, they are going to be growing somewhat less quickly.
 
While I am talking about developing countries and I think Justin mentioned a point that one of the things that we are concerned about is aid flows to the poorest countries. If we look at what has happened in past crises, in high-income countries, when there's high unemployment, when there's an episode of fiscal consolidation, developed countries tend to cut back on the aid that they provide to developing countries. Now, if you take a look at the number of high-income countries that are in that condition, the depth of the current recession and look at their past behavior, then you could expect, based on past behavior, that aid flows would fall between 20 and 25 percent to developing countries.
 
Now, that would be a serious, very serious situation for these low-income countries. It's not our expectation that we will see that sharp a decline, but it is a recognition and a nice indicator of the extent of risks that is there. Why is it particularly risky at this time? It is because that aid can represent as much as 20 percent of government spending in some of these developing countries and has been an essential molder for the increased investment in both people but also infrastructure that has supported this strengthening growth that we observed over the last 15 years, and if there's a big pullback there, then the impact is not going to be just one year or two years, it is going to be long-term. It is going to mean slower growth; it's going to mean less progress in terms of fighting poverty, and it's going to mean inevitably more deaths, more preventable issues in those countries.
 
So, we're really arguing very strongly--I know Justin was making the case when he was in Korea and elsewhere to keep that level of aid where it is in order to prevent this potentially disastrous negative outturn.
 
Finally, and I think that's the last point that I want to make anyway, is--and it really falls out from that last point, is that countries in high-income countries and in developing countries need to be mindful of the tradeoff that exists between dealing with the short-term costs of the current crisis and the current recession and the long-term consequences of making these cuts in terms of investment.
 
And Justin made the point that even what appears to be a relatively small impact on the trend growth rate of developing countries, if it were to fall by 0.5 percent, so, we're saying going from a 6 percent growth rate in our forecast to a 5.5 percent growth rate, still pretty strong growth. The cumulative impact that that would have in developing countries over a ten-year period is large: It means an additional 26 million people would be living in poverty in 10 years' time. If you used a $2 measure, then it's an additional 76 million.
 
So, it's really critical to keep those levels of assistance up, to keep that investment up, and that will have long-term benefits for developing countries.
 
Anyway, I think that's about what I wanted to say initially, Merrell--
 
MS. TUCK-PRIMDAHL: Okay.
 
MS. TUCK-PRIMDAHL: Thank you very much for that.
       
[INTERUPPTION AND ANNOUNCEMENT ON IMMEDITE EMBARGO LIFT]
 
QUESTION: So, I wondered if you could comment on the situation of Spain. How do you see the situation right now, and also how do you see the Spanish banks?
 
MR. BURNS: Well, our focus in the report is less on what's happening in the high-income countries and the situation there and much more on the potential implications for developing countries, because we're the World Bank.
 
That said, I think that the situation in Spain is obviously very serious. They have extremely high unemployment. I think the government has putting in place and recognizes the issue of putting in place fiscal consolidation reforms that are likely--certainly go in the right direction--are likely to minimize the potential downside risks.
 
If you look at these market indicators, the CDS swaps for Spain, there is indeed a recognition in the marketplace that the situation in Spain is less serious than the situation in Greece or Portugal, for example.
 
QUESTION: What about the Spanish banks you mentioned--[off microphone]--Latin America if European banks are affected.
 
MR. BURNS: Yeah, no, that's certainly an issue that we're concerned about. This, again, is much more something that is sitting at what we economists call a "tail event," a low-probability event. But if there is a serious situation in Spain--so, there is a debt crisis which, at the moment, there certainly isn't, then that could impact Spanish banks, and because the Spanish banks are themselves so active in Latin America, then this could have knock-on effects beyond the trade measures for Latin America, and we outline some of those risks in the report. Beyond that, I'm not sure what I would say.
 
QUESTION: Yeah, sure.
 
Do you think the Spanish Government has taken enough measures to kind of address the crisis, or should they take any additional steps?
 
MR. STEARNS: You know, I can't say that I'm following the situation in terms of what the Spanish Government is doing closely enough to answer that.
 
QUESTION: Thank you. China remains one of the leading [inaudible at 00:24:06] of the global recovery. I'm wondering, do you see that the great crisis will spill over to China, and what do you think is the biggest challenge that China is facing?
 
MR. LIN: Well, so far, our forecast shows the impact on China is somewhat limited. Its main impact may be on the external market. But as you know that China has a very strong domestic stimulus and also boost in the demand, so that should be able to compensate for the likely adverse impact on the external market, and I think that this is not only limited to China, and from our forecast we also show the impact of the debt crisis, the worst scenario of course will be mainly on the high-income countries, and the developing countries impact will be somewhat diminished.
 
MS. TUCK-PRIMDAHL: Any other questions, here.
 
MR. RIORDAN: I can also add to that--
 
MS. TUCK-PRIMDAHL: You need to come to the table so that they can hear you.
 
MR. RIORDAN: Sorry. But to add to that just a bit--
 
MS. TUCK-PRIMDAHL: This is Mick Riordan, who is one of the contributing authors to Global Economic Prospects.
 
MR. RIORDAN: Sure, thank you very much.
 
Still, the European market is still large for East Asia, for China, and the developing countries in East Asia. It's lost share to intra-Asian trade altogether, but it's still some 18 percent of exports with Europe, and as European imports are likely to ease from what we thought they were going to be, there will be some trade, but not very large, for China and for the Region.
 
MS DILEK AYKUT: And if I might add, you know, FDI to China also declined very significantly in 2009, around 45 percent of the markdown certainty and financial problems in the global marketplace. So, it has been affected in terms of external finance.
 
MS. TUCK-PRIMDAHL: Yes.
 
QUESTION: I'm just wondering, when you talk about low-probability event that there would be a major crisis in Europe, I'm wondering what you expect might cause that? Are you basing that more on the hopes that there enough policy action taken within the programs?
 
MR. BURNS: I think that--if we look at the situation in Europe overall, it remains very manageable. I think there is the realization in the political sphere that steps are necessary. They are indeed being taken.
 
We had the German Chancellor announce some fiscal consolidation the other day. I understand that British Government is going to be announcing plans as well, and we have the EU and the IMF having agreed on a program of fiscal consolidation for the Region. So, all of that argues well for us moving through this phase of market nervousness.
 
There are issues, more acute issues in the case of Greece and, to a lesser extent, in Portugal about the capacity of the government to put in place the amount of austerity that is required, and I think that's really where the source of concern lies.
 
Clearly, in terms of the liquidity side of the story, whether they will be able to their debts over the next couple of years, that's been dealt with quite forcefully, it seems to me, by the EU/IMF package that was put in place earlier last month.
 
So, my sense is that all of these are factors that make it relatively unlikely that we see a very serious crisis going forward.
 
JOURNALIST: Can I just follow up on that?
 
MS. TUCK-PRIMDAHL: Can you come to the table? Thanks.
 
JOURNALIST: Sure, I'm sorry. I was trying to file, too.
 
The--you talked about managing the actual--or preventing the actual default of debt with the programs, but your report also notes a market crisis confluence.

MR. BURNS: Sure.
 
MR. RIORDAN: So, are you therefore saying that the program put in by Europe and the backstop measures by the IMF and the European package are sufficient to manage the market's confidence?
 
MR. BURNS: Well, that of course is a question that the markets ultimately will have to answer. If you look at what's been happening at the CDS swaps, then you can see in the case of Italy, in the case of Spain, in the case of Ireland, the market does seem to be satisfied with the steps that have been put into place.
 
If you look at the swaps for Greece, on the other hand, initially, they came down quite sharply, but they've been rising since then, and that's an indication that the market is not convinced that the risk for Greece has been entirely erased at this stage.
 
For Portugal, you have a similar story but much less--much less marked.
 
QUESTION: I would like to ask a question.
 
MS. TUCK-PRIMDAHL: Yes, before your follow-up, if you don't mind, is this Markus Zeiner?

QUESTION: Yes, correct, that's Markus Zeiner with Handelsbatt.
 
MS. TUCK-PRIMDAHL: Zeiner, excuse me. Go ahead.
 
QUESTION: Actually, I would like to follow-up on the other question about the austerity packages that have been adopted in the case of Germany and other countries in Europe were thinking of doing that.
 
You know that there's a debate going on especially between the U.S. and Germany whether it's a good think now to tighten the belt or maybe it's better, actually, to spend more money, and I would like to get your take on that.
 
MR. BURNS: Well, one of the simulations that we did in the report, and you find that--I think it's on Table 9--is to try and take a look at what the implications would be of a low and sort of steady fiscal consolidation versus one that were to occur much more quickly, and the result of that is that certainly for developing countries, the impacts of a sharper more rapid consolidation would be beneficial, even in the short run, and certainly in the long run.
 
That's because the positive impacts in terms of increased financial flows to developing countries, because there would be less demand from the sovereigns in high-income countries would overwhelm the negative impacts from reduced exports because of slower growth in high-income countries during that initial transition period.
 
For the high-income countries, the simulation shows that growth would be slower in initial couple years of fiscal consolidation, but they, too, in the long run, would end up benefiting from such a policy.
 
So, this is where I was saying initially we have this issue about the tradeoff between the short-term pain and the long-term gain in this policy sphere.
 
Clearly, when we're sitting in a relatively uncertain atmosphere where there is this risk, albeit small, of a serious crisis, then this is probably when erring on the side of prudence and putting in more fiscal constraint, even if it has short-term costs in terms of growth is probably the best policy.
 
QUESTION: Thank you.
 
MS. TUCK-PRIMDAHL: And I think it's Table 8 on page 18 that Andrew was referencing. Yes, and you had a follow-up.
 
QUESTION: I just wanted to clarify, you know, for this loan about this E5--
 
MR. BURNS: Yeah.
 
QUESTION: --I assume for your worst case scenario but even if one of those countries [inaudible] would that be the greater cause for concern even if the Greece loan were to [inaudible]?
 
MR. BURNS: I think that the issue that we try to distinguish between it is one of a market-forced default and run on credit to the countries which would be a serious issue versus a controlled and managed restructuring of debt in one or two countries. I think that we can certainly imagine a situation where there were such a restructuring to incur that would not induce the kind of reactions that are implicit in that probability simulation that we run.
 
So, I don't know if that answers your question.
 
QUESTION: [Off microphone.]
 
MR. BURNS: Then you're in a situation which is obviously more difficult, and it really depends again on the market judgment of the sustainability of policy in the remaining countries.
 
I think it certainly argues that the situation in, say, Italy is very different from the situation in Greece, and if you look at the way the market is judging those forms of debt, it, too, also recognizes that distinction. So, it's not clear to me that an individual country running into acute difficulty will necessarily spill over to all of the countries.
 
MS. TUCK-PRIMDAHL: Okay. Are there any other questions? I didn't know if someone else patched in on the phone line.
 
No? Any other questions?
 
Okay. And this started as an embargo briefing, but it is no longer embargoed, and I am sorry about that, but I will do something to emphasize that this is an unacceptable breach of our policy, and we're very sorry that this has disrupted our plans for the timing of our embargo list.
 
So, with that said, let me thank everyone and remind you that all of the material is on our online media briefing center, including the press release in several languages, and we will try to get a transcript of this briefing, and if you have any questions, feel free to contact myself, Merrell Tuck-Primdahl or Rebecca Ong. And then, of course, we also have the experts from the Prospects Team happy to answer your questions, as well.
 
So, thank you very much for attending this briefing.
 
Okay. Thank you.

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