Saturday, January 31, 2015

IMF Press Briefing on World Outlook

On January 20th the IMF had a press briefing on its 2015 World Outlook. You can read the full briefing here. An interesting note is that the briefing was held in Beijing. The reason stated was to acknowledge "the growing importance of China and this part of the world". The 2010 IMF reforms giving China more voting power are not passed so the IMF probably wants to do all it can to show China they are respected. Later this year we can expect the IMF will add the Yuan into the SDR currency basket.

Below are a couple of Q&A's from the press briefing which mostly centered on the impact of much lower oil prices on the global economy. After that we will add a few comments.
MR. BLANCHARD: Thank you Christoph. Good morning to all of you. Let me give you the basic theme of this update. The global economy is going through strong and complex cross currents. On the one hand, major economies are benefitting from the decline in the price of oil. But on the other, in many parts of the world, lower long-run prospects adversely affect demand, adversely affect investment, and resulting - to continue with the current analogy - in a very strong undertow.
The upshot for the global economy is that while we expect growth in 2015 to be stronger than in 2014, we have revised our forecast for 2015 down a bit. So, you get this mixed message - growth is better this year than last year; we expect growth to be better this year than last year, but not quite as good as we hoped for. More specifically, our forecast for global growth in 2015 is 3.5 percent, which is 0.2 percent more than in 2014 but is 0.3 percent less than the forecast we had for WEO this year as of last October. For 2016, we forecast 3.7 percent growth. Again, a further increase in growth; but again, here we have revised down our forecast relative to where we were in October 2014.
. . . .
QUESTIONER: .. a quick comment about the Switzerland, the franc, last week please. As you know, it caused financial volatility. How could the Switzerland central bank play a better role in communicating to the market?
MR. BLANCHARD: So, let me make a number of remarks about what happened last week to the Swiss franc and the implications that I see. I think I see two things. The first one is that it reminds us of the strength of capital flows, inflows/outflows, and in particular what we call safe haven flows, which is that when investors become more risk averse, you get very large movements and countries can be nearly overwhelmed with the inflows or the outflows. This was clearly what was happening to Switzerland. So I think we are in a world in which these are going to happen, and the way to handle this is through probably by letting exchange rates adjust. But clearly in the case of Switzerland, they had decided that the appreciation which came from the inflows was getting too strong and they had put, what we call a floor, which is they basically had decided to peg.
So I think the second lesson is that when you peg, it’s difficult to exit from a peg in a clean way. They have been accused of having done this unexpectedly but they had no choice. If you announce you’re going to do it, you’ll get the speculation, the purchase of the currency before you actually are ready to move. So, there had to be an unexpected component to it. It clearly created some turmoil, and it is an example of some of the things which can happen in the coming year. We have focused very much on the exit from unconditional monetary policy in the US. I tend to think that it might be smooth, but events like what happened last week may well happen in one form or another throughout the coming years.
. . . .
MR. ROSENBERG: I’ll take one online question. The question is whether further stimulus from the ECB through quantitative easing will help the European economy.
MR. BLANCHARD: I think that the effect of quantitative easing have to a large extent already happened. The investors have known for a while that this was likely to come, and this has already led to a flattening of the Euro curve in the eurozone indicating the anticipation of QE and is probably behind much of the depreciation of the Euro. So in a way, QE has already worked.
Now for it to actually work, it has to be that when the ECB announces it, it corresponds to the expectations of investors, more or less. The risk is that it’s too small and the investors will be disappointed, and some of what happened will be reversed. My expectation is that the ECB will do something more or less consistent with what investors have anticipated. Therefore, the effects we have seen will continue. But in a way, the effects have already happened.
 . . . .
QUESTIONER: I wanted to know if the recent volatility in the markets will push back the Fed to raise their hikes in the long term? Because you were talking about mid-year. Do you see that being pushed back?
MR. BLANCHARD: I cannot speak for the Fed. But my sense is that if anything, volatility in the markets, say due to what happened in Switzerland, suggests that predictability of monetary policy is of the essence. So if anything, I suspect this will lead the Fed to be extremely clear about what its intentions are and not change the date that they have in mind, unless events force them to.
My added comments:
A big takeaway I see in this briefing is how the IMF does not see all the problems in the world as unmanageable. In this Q&A session there is question after question about various big potential problems. The IMF response mostly goes like this:
"Yes, that is a potential problem. But it's not anything unexpected. There are always risks, but the problem should be manageable."
Of course we wouldn't expect the IMF to say "the world is heading for a huge financial crisis that no one can solve". What the IMF has been doing over the past year is issuing warnings about risks that can lead to a new financial crisis and urging central banks to act in a coordinated way to avoid a crisis. They continually urge central banks to be clear in communicating to the markets and to not surprise them.
However, when the Swiss National Bank found that impossible to do, all that advice was completely disregarded. In this briefing the IMF says that was OK this time and that the SNB "had no choice." We need to keep that in mind in terms of relying on what central banks say they are going to do. Some who relied on what the SNB had said were financially destroyed.

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