Transcript

Transcript of a Press Conference on the Updates of the International Monetary Fund's Global Financial Stability Report and World Economic Outlook

January 26, 2010

Webcast of the press conference

MR. MURRAY: Good day. I’m William Murray, chief of Media Relations at the IMF. And this is our live briefing on the latest update of the World Economic Outlook and the Global Financial Stability Report.

Joining us today is Olivier Blanchard, Economic Counsellor and Director of Research; José Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department; and with us is Jörg Decressin, Assistant Director of the Research Department’s World Economic Outlook; and Jan Brockmeijer, Deputy Director of the Monetary and Capital Markets Department.

Olivier and José will have some brief opening remarks and then we’re happy to take your questions, both here in the room and online.

Olivier?

MR. BLANCHARD: Thank you, Bill. Good morning. Global prospects have definitely improved since we last met in October. The world economy is recovering. We project world growth to be about 4 percent in 2010, 4.3 percent in 2011. The recovery remains, however, largely policy-driven and it is increasingly a multi-speed recovery. We have, in a sense, moved from a remarkably synchronized global downturn to a more differentiated global recovery. So let me develop these themes further.

Looking around the world, it is useful to focus on three main groups of countries. The first group is composed of major advanced economies where the recovery is underway, but remains sluggish by past standards. The U.S., the major countries of the Euro area, and Japan are all forecast to have positive growth for both 2010 and 2011. But this growth will barely be enough to reduce the output gap and unemployment will remain high.

In the U.S., growth in 2010 will still be largely driven by inventory investment on the one hand and fiscal policy on the other. And the challenge remains to durably replace these sources of growth by sustained growth in private demand, be it consummation, investment, or exports. Without completing the relay to private demand, a strong and lasting recovery cannot be achieved. Very similar issues arise for both Europe and Japan.

The second group of countries is composed of the major emerging-market countries, notably China and India. Both countries are expected to achieve high growth rates, broadly in line with their potential, for both 2010 and 2011. Other emerging economies with strong trade links with China are also directly benefiting from its growth. Now, growth in China is still partly based on a very strong fiscal stimulus and credit easing, but the prospects for robust growth of private demand appear very good and, therefore, we think recovery is likely to be sustained.

Now, there’s a third group of countries that is composed of countries that, in some way, are paying for past excesses. This group includes both some advanced countries, including some Euro-area members, and a number of emerging-market countries, in particular in Central and Eastern Europe. Many of these countries experienced credit and housing booms and large current account deficits before the crisis, and would have faced a difficult adjustment even in the absence of a crisis. But the crisis made the adjustment even harder and these countries are expected to have another year of negative growth in 2010.

Even this division between three groups still doesn’t do justice to the diversity of experience that we see around the world. For example, most Latin American countries are also recovering well, although at a pace slower than Asia. Oil and commodity producers are benefiting from the recovery of oil and commodity prices. And low-income countries are also benefiting from the recovery of exports.

Now, clearly, many challenges remain to achieve a stronger sustained and more balanced recovery. In most advanced countries it is still too early to exit from the fiscal and monetary measures taken during the crisis, but it is not too early to prepare. In general, exit should make fiscal consolidation rather than increasing interest rates the top priority. Each extra year of large deficits becomes more costly, adding to the amount that will be needed to reverse to meet the long-term challenges to public finances. Monetary policy can respond more flexibly as needed.

And now that the more acute phase of the financial crisis is behind us, some of the liquidity and guaranty measures put in place by central banks can be phased out. And indeed, this is already well underway.

In emerging-market economies, many countries are returning to potential and exit can take place earlier. Here, again, to the extent that these countries have large fiscal deficits, reducing them should be a priority. But in some cases, avoiding overheating and the emergence of asset price bubbles may require an early tightening of monetary policy.

Finally, the unbalanced nature of the recovery raises also a number of specific challenges and risks. The first one is oil prices. One may worry that fast growth in emerging-market countries will lead to another sharp increase in oil prices such as we saw in 2008, choking the recovery in advanced countries. Now, substantial inventories of oil and spare capacity in oil production lead us to believe that this risk is, in fact, quite limited.

The second issue is capital flows. Low interest rates in advanced economies and strong local growth prospects are pulling capital into a number of emerging-market countries. This is largely for the better, in line with stronger returns to investment in these countries. It also gives these countries more room to consolidate fiscal positions where needed, while lowering interest rates to maintain growth. But capital flows also involve some risks. While in a number of emerging-market countries exchange rates seem undervalued from a medium-term perspective, what we have learned is that strong flows may lead to too strong or too rapid an appreciation and to unhealthy credit booms or asset bubbles. Thus, depending on the circumstances, tighter macro prudential regulation aimed at limiting financial excesses, together with a build-up of reserves and market-based capital controls on inflows, can be part of the appropriate response.

Let me end by repeating the basic message of this update: The world economy is recovering, but making sure that this recovery is both balanced and sustained raises serious policy challenges, both at the national level and at the international level.

Thank you very much.

MR. MURRAY: Thank you, Olivier.

José?

MR. VIÑALS: Thank you, Bill. Good morning. Today I would like to brief you about the status of the global financial system, where we see the risks and the challenges that policymakers face as they attempt to address these risks, and the issues involved in putting a new regulatory framework into place. Let me begin with the status of global financial markets.

The good news is that there has been an overall further reduction in systemic risks. Notwithstanding the recent sell-off, financial markets have recovered strongly since their troughs, risk appetite has returned, equity markets have improved, and capital markets have reopened. This owes much to the encouraging signs of a global economic recovery, as Olivier has just explained, and to the significant support being provided by macroeconomic and financial policies. As a result, prices across a wide range of assets have rebounded sharply off their historic lows and many asset classes are now above their pre-Lehman levels.

Even with this overall improvement, however, the repaired financial system is by no means complete and financial stability remains fragile. In this respect, I envisage the following main challenges.

A major challenge continues to be the restoration of the health of the banking system and getting credit flowing again. The de-leveraging process is still underway and the job of policymakers is to ensure that it remains orderly and doesn’t undermine the recovery. But what does this mean exactly? I think it means several things.

First, despite the progress that banks have made in raising capital, substantial additional capital is required. They have to replace the capital lost due to write-downs, some of which are now coming from commercial real estate exposures in line with our early estimates. But banks must also build sufficient buffers to be able to extend new loans again to well-qualified borrowers while complying with the new capital standards that both regulators and markets will apply.

Policymakers need to keep these capital needs in mind when overseeing compensation and dividend policy for institutions under their supervision to ensure that there is sufficient capital held back from their ongoing operations.

Second, banks will need to continue to meet potential funding challenges. There is a wall of maturities looming ahead from 2011 to 2013, which is the legacy of shortened maturities of bank debt during the crisis. Any retrenchment in confidence between now and then could weaken banks’ ability to rollover this debt and thus banks need to proactively lengthen their funding maturities.

And third, efforts to restructure weak banks and dissolve insolvent ones need to continue. This part of the process has slacked and the banking system cannot be considered healthy until this is complete.

Let me turn now to another major challenge, which was also mentioned by Olivier before, which is that facing emerging-market policymakers. While bank flows to emerging markets have yet to recover in most regions, the rebound in portfolio inflows is putting upward pressure on exchange rates and has raised concerns that they may be leading to asset price bubbles. And this is complicating the implementation of monetary and exchange rate policies, particularly in those countries with less flexible exchange rate regimes. At this point, however, we see that the inflows have not yet led to significant and widespread asset price inflation, although there are some countries and markets where pressures have increased significantly. And property price inflation is within historical norms with a few localized exceptions.

That said, policymakers cannot afford to be complacent since the liquidity generated by inflows could still fuel an excessive expansion of credit and unsustainable asset price increases. Thus the priority is to address capital inflows through macroeconomic policies, including through exchange rate flexibility, prudential policies, and so on. The situation may also require these countries to exit their supportive policies somewhat earlier compared to those countries where recoveries are weaker.

A final issue that requires the attention of policymakers is sovereign risks and the potential to undermine financial stability. Financial market participants are increasingly focusing on fiscal sustainability among some advanced economies. The considerably higher deficits will result in a substantial increase in an issuance of government debt in major areas over the next two or three years relative to the long run average. At a minimum, there is the potential that public debt issuance in coming years crowds out private sector credit growth, gradually increasing interest rates for private borrowers and putting a drag on economic recovery. And a more serious risk is from a rapid increase in interest rates as investors recognize early on in this process the implications of the burgeoning public debt burdens. To address this issue, public sector risks will need to be reduced through credible and forceful fiscal consolidation strategies, and this is all the more important as continued deterioration in the public finances could, at some point, result in a substantial loss of investor confidence in some sovereign issuers.

Let me turn now to regulation. A key goal is to reform regulation so as to put in place a financial system that is safer and, at the same time, sufficiently dynamic and innovative to support sustainable growth. Achieving this balance between safety and dynamism will not be easy. Moreover, policymakers will need to time the transition in a way that doesn’t jeopardize the current recovery.

In this regard let me mention some implementation issues that require special attention concerning the new regulations. Policymakers need to be mindful of the costs associated with uncertainty about future regulation as it will hinder financial institutions’ plans regarding their business lines and credit provision. At the same time, there is a need to carefully assess the overall impact of the new regulations which will take some time.

In addition, it continues to be vitally important that once agreement is reached on the regulatory front, that international implementation of the new framework takes place at an adequate pace and that differences across countries are minimized to avoid an unlevel playing field and regulatory arbitrage that could compromise financial stability.

Lastly, we must ensure that we have a well-supervised financial system in which micro and macro prudential regulations complement one another and help to mitigate systemic risks. Only then can we ensure the financial system does its job of intermediating flows from savers to borrowers in ways that sustain economic growth and financial stability.

To end, let me summarize the four key messages that I’ve tried to convey to you. First, although systemic risk keeps coming down, financial stability remains fragile and thus needs continuing attention in many advanced economies in a number of emerging-market countries. Second, increased public debt levels and the associated financial needs of governments, particularly in advanced countries, are a growing concern, and they need to be forcefully addressed through effective fiscal consolidation strategies to avoid becoming a drag on the recovery and, in some cases, negatively affecting financial stability. Third, some emerging-markets may need to exit earlier from their financial—from their supportive policies to deal with rapid capital inflows. And finally, it is essential to put into place through appropriate regulation and supervision without undue delay, a new financial system that is safer and, at the same time, preserves the necessary dynamism to support sustained growth.

Thank you.

QUESTION: Would you comment on the crescendo of efforts in the last few days by the U.S. Congress, Administration, and independent policy groups to wean the United States away from its growing borrowing needs and with the threat that one of these fine days the Chinese may reduce their lending? And in that regard, the number of gurus who are suggesting that China is at risk of a serious market bubble, does that have any merit in your view?

MR. DECRESSIN: We don’t see a serious risk of a market bubble in China. Asset prices in some specific sectors, in some specific regions of China may be frothy, but there certainly is no widespread asset price bubble.

In terms of the challenge presented by the U.S. borrowing, households have already increased their savings rate, weaning themselves off leverage. And probably the savings rate will have some further to rise, and that explains our forecast for a fairly subdued recovery in the U.S. relative to what we have seen in the past after such deep downturns.

QUESTION: Two questions about the U.S. Well, two questions about growth rather.

The first is it’s a fairly rapid, fairly big increase in your projection for growth compared to just a few months ago. I mean, you’re increasing it in 2010 by nearly a percentage point. And I’m wondering in that few months what changed in your view.

And secondly, among the advanced countries the U.S., as far as I can see, is the only one where you projected to grow more rapidly in 2007 and then have a downward slope—2007, sorry—2010 and a downward slope in 2011. Why is that?

MR. DECRESSIN: Well, what changed? First, we had a series of growth outcomes in the third quarter that were a good deal stronger than what we had expected. Moreover, a number of indicators, both in advanced and emerging economies, for the fourth quarter looked better than what we expected, foreboding higher growth rates than what we had in our October WEO. So that has led us to mark up the third and fourth quarter of 2009, which has carryover effects into 2010.

But then we’ve also marked up our 2010 quarterly growth rates in most areas of the world because we see a more rapid return of confidence than what we had expected. This is always very difficult to forecast. We had steep fall in confidence in response to the crisis the effect of which on growth we had actually underestimated when the economy was coming down. And so now we are seeing a snapback that is somewhat stronger than what we had in our forecast. So that’s an important factor.

The second important factor is that the healing of financial markets is proceeding faster than what we had expected. The recovery of asset prices is going better.

And the third is that in some countries, although that’s a more mixed story, the labor market is holding up better. Not in the U.S., but in a number of European countries, for example, the labor market is showing signs of resilience that are stronger than what we had expected.

And let me add a fourth point, which is the emerging-market economies. The emerging-market economies have really surprised us on the upside, both while the global economy was going down, but also now that it’s coming up. You’re now seeing already solid domestic demand growth in countries such as China, India, Indonesia, but also Brazil. Emerging Asia is already operating above the pre-crisis output level. So together these four factors explain our upward revision.

Now, you wondered about the U.S. Why do we have some slowdown in the growth rates for 2011? Well, that is related to the phasing of the fiscal stimulus and the way it’s deployed. That fiscal stimulus will have a diminishing effect as we move into 2011, and that explains the small slowdown in the growth rate, although we continue to expect the banking and financial sector in general to improve and help the economy move along.

MR. BLANCHARD: Let me add a footnote to this. I mean, as you know, in the third quarter, the U.S. economy actually did a bit worse than we had forecast. But the two reasons behind it was that there was much less inventory investment than had been anticipated, which is bad news for that quarter, but good news for the following ones. And this was partly offset—only partly offset—by stronger consumption than had been expected. When it comes to consumption the big issue is how much is transitory due to the special schemes which have been put in place and how much reflects more permanent changes in consumer behavior. And our assessment is that it’s some of both, and so that’s why basically we’ve revised the forecast up for 2010.

But if you look at the growth composition, which is not given in the WEO update, you will see that in 2010 inventory investment and public spending still play a major role. And as we think that these things have to come to an end and be phased out, then the question is what’s going to happen to private demand? And I think the fact that we are much less confident about growth in 2011 than we are in 2010 explains the revisions.

QUESTION: I wanted to ask you to comment on the prospects for Ukraine and the Baltic countries. They seem to still be vulnerable and I wonder what they can do to begin recovery.

MR. DECRESSIN: I’m sorry, we don’t have new figures for the Ukraine and the Baltics, so all I can say here is that obviously they will be benefiting from the improved outlook that we have in the rest of the world.

MR. MURRAY: Just a little service note here. The WEO updates that we do every—in between the semiannual WEOs are scaled down versions, so you’re not going to have as comprehensive a country spray as you would get with the spring and autumn WEOs. Let me go to the online center. We have a question on the UK. The question is, “The disappointingly weak outturn in UK growth in Q4, shown by official stats released today, is that an argument for the Bank of England’s Monetary Policy Committee to look through the current inflation spike and to maintain the present emergency settings of policy for the foreseeable future?”

MR. DECRESSIN: In general, monetary policy should always be guided by price developments over the medium run, so one to three years ahead, not temporary inflation spikes. So if you had asked me that question yesterday, I would have said, the MPC should look through this and that its monetary policy stance is appropriately accommodative. Now, of course, the Q4 data were weaker than we expected, so that argument holds all the more.

MR. MURRAY: Thanks, Jörg.

Go to the back of the room until another question pops up on my screen. The gentleman right here.

QUESTION: I’d like to ask you a question about balance of fiscal stimulus.

It’s been a mantra of the Fund and most economists that it would be a mistake to remove fiscal stimulus too soon. How do you know? What do you look at to know that it’s time to move towards balance?

I’m thinking here of the United States 70 years ago, when the United States went from extreme stimulus to balance and went back into recession.

MR. BLANCHARD: I think the answer is actually quite straightforward: You know it when you see it, which is that you do it when you see private demand starting to grow from reasons which are not directly related to policy. When this happens, then you can consolidate the fiscal position. You can’t do it before, and I think that’s one of the lessons of history is that if you do it before private demand has recovered, then you go back to where you were before.

But the answer is as soon as, for example, for the U.S., we see either consumption or investment—I think it’s more likely to come from investment than from consumption—or exports pick up for reasons which you think are likely to last for a while. Then that’s the time to actually exit.

Now, that doesn’t mean, as José has insisted and we insist at the Fund, that we shouldn’t be thinking about it now. One has to be ready to do it and one has to have a plan which is consistent with fiscal stability in the medium run. But when you actually start consolidating is when you see the private sector take the relay from public demand, not before.

MR. VIÑALS: I think that the two things are very complementary in the sense that if you are now providing a fiscal stimulus because the economy still needs it and, at the same time, you are convincing markets that you will be exiting at the right pace whenever circumstances allow it, I think that this is going to be confidence-enhancing and this is also going to have a favorable impact on the economic recovery. So I think that the two things must be seen as part of an overall consistent policy package.

MR. MURRAY: Okay, thanks, José, and thanks, Olivier.

I’ll take another question from the Media Briefing Center and then I’ll get to the press here in the room: “Could you please elaborate on the very strong upward revision regarding Germany’s growth in 2010?”

MR. DECRESSIN: Yes, for 2010, we are now forecasting 1.5 percent growth in Germany, which is a 1.2 percent upward revision. So it’s a large upward revision, definitely.

And if you want to decompose it, then the upward revision is one-third due to better growth numbers in the third quarter of 2009 and one-third due to additional fiscal stimulus in 2010 relative to what we had projected in the October WEO. The remaining third is due to stronger external demand for Germany. In this regard, the strong recovery, for example, in the emerging economies, notably Asia, it’s very important for a country that is heavily dependent on exports, especially exports of investment goods.

MR. MURRAY: Okay, –This is another question from the Media Briefing Center, again in Europe. So we’ll keep it focused on that continent for the moment.

“Spain is the only major country that will remain in recession this year. You have also improved your growth forecast there by the smallest amount. Can you explain what makes you pessimistic about Spain and what the country should do to accelerate growth?”

MR. DECRESSIN: I don’t think we’re pessimistic about Spain. I think our forecast is realistic.

There are two factors here: On the one hand, external demand is proving stronger, and this is of course good for Spain. But then the domestic dynamics are weaker than what we had expected, and the economy on the domestic front is facing some really major challenges.

One is to reorient a large amount of resources that were for a long time devoted to construction toward other sectors. This has raised major challenges within the labor market, causing a large increase in unemployment that will weigh for quite some time on consumption. Moreover, the country is also struggling with reestablishing competitiveness that has been lost during the long boom before this recession. So that makes us think that it will take longer for Spain to climb out of this recession than it will take other countries.

Now, what does the government need to do? They’ve already deployed fiscal stimulus to a very large extent, and we applaud this, and this has made a major difference.

What is critical is that labor market adjustment in Spain proceeds to a larger extent through price adjustment rather than quantity adjustment. So what is needed is more wage flexibility. This is needed to restart employment but also to reestablish competitiveness, and that is in many ways the key challenge facing the country right now.

QUESTION: I would like to ask a question on banks. You were talking about the costs associated with regulatory uncertainty. Are you concerned about the political environment and the possible punishment measures applying to banks and all this outrage on bonuses and so on?

MR. VIÑALS: Well, I think it’s very important, as I mentioned, that one keeps an appropriate balance between the need for going to a safer financial system over the medium term that is capable of supporting growth, but in the short term one needs to introduce these measures in a way that takes into account existing economic conditions.

And also, I think it is very important in the world of globalized finance in which we live that the approaches taken by countries are internationally consistent. And to that extent, over the past year or so, there has been a very intensive effort that has been conducted under the mandate of the G-20 and has been carried out by the Financial Stability Board precisely to depoliticize the planning and the design of the new regulation, and to put in place at the right time in an internationally consistent manner all these new regulations.

And this is a process which is significantly advanced. Very recently, there was a public communiqué explaining what measures are envisaged in order to reinforce the situation of banks in terms of capital, in terms of liquidity, in terms of lower leverage and so on, and there are other streams of work which are being developed in order to have a well planned and carefully designed regulation which can achieve its purpose.

So I would say that, yes, it’s very important to have a medium-term view and to introduce whatever changes are needed in the different countries in a way which is internationally consistent, and this is why regulators of all the countries involved in the Financial Stability Board have been working together for more than a year in order to have these plans in place. So I think it’s very, very important that one keeps this medium-term orientation and that one depoliticizes the regulatory plans.

QUESTION: Just, you’d mentioned the high unemployment in the U.S. in particular and while you also talked about keeping stimulus in place through 2010. Is there anything in addition that you think the U.S. government or central bank should do to combat the high unemployment levels?

MR. BLANCHARD: Well, first, clearly interest rates should be kept low as long as needed. Then whether the fiscal stimuli are the right size or not, I think is a country-by-country decision. But I think what was missing in your question was the importance of monetary policy, keeping interest rates low for longer.

QUESTION: Can you give us a sense of your predictions for India? And there will be a second question also.

MR. DECRESSIN: As Mr. Blanchard already said, India is one of those countries where we’re seeing a pretty strong rebound. The growth rate we are forecasting is around 8 percent for both 2010 and 2011. We’re seeing a fairly strong recovery in domestic demand but also support from the external. In the third quarter of 2009, growth already accelerated to around 8 percent, and so we expect that broadly to be maintained.

It’s one of the countries where indicators, such as industrial production, the PMIs, exports, are all quite favorable.

QUESTION: How is the growth affected in countries like Afghanistan, Pakistan, where there is a lot of extremism and (inaudible) over there? Can you give us a brief update?

MR. DECRESSIN: We don’t have an updated forecast here for Afghanistan and Pakistan.

MR. MURRAY: That will be in the spring—let me take a question from the Media Briefing Center, then we’ll get back to the room.

It’s a capital controls question. “On capital flows into emerging economies, we’ve seen some countries, Brazil in particular, adopt policies to try to slow those flows. Should advanced economies employ regulatory tools to cool capital flows in cases where they perceive a potential threat to financial stability?”

MR. BLANCHARD: One potential answer to reducing capital flows would be to increase interest rates in advanced countries, but I think that would be unwise. It’s clear that interest rates in advanced countries have to remain very low if these countries are to return to robust growth, and advanced country growth is essential for world growth. So I don’t think that’s the way to go.

Can you prevent capital from leaving a country such as the U.S. or the U.K. or any other major advanced country? You cannot. It’s clear that if there is going to be gate keeping it has to be at the receiving end, not at the starting point.

MR. VIÑALS: Well, just to say that regardless of what type of shock affects the financial system in the future the important thing is that it is resilient, either being a shock coming from capital flows or any other sources. From that viewpoint again, the new regulations that are being developed precisely try to build a safer and a more resilient financial system in all economies in the world, but particularly that would benefit those that had been most affected by the financial crisis. So that is something that would help deal also with any type of financial stability implications of shocks coming from the capital account.

QUESTION: Concerning the WEO, I would like to know, where do you place North Africa? Do you place it within Africa or within the Middle East?

And also, I would like to know your appreciation concerning the growth in North Africa. Thank you.

MR. DECRESSIN: The answer is partly in Africa and partly in the Middle East. In general, the situation in North Africa is of course benefitting from the recovery in external demand elsewhere in the world, in Asia or in the U.S. and so forth, but also of course the recovery of commodity prices has been helpful.

In general, Africa has managed to weather this major global recession much better than previous global recessions, and that is a testament to improved policy frameworks in Africa.

MR. MURRAY: That’s good. If you wait after the briefing, we’ll get you a quick answer on that.

QUESTION: Do you expect a monetary tightening in Brazil because the forecast for 2010 is bigger than 2011?

MR. DECRESSIN: We don’t want to comment specifically on monetary policy in Brazil. I mean obviously the central bank will have to do what it has to do in order to keep inflation on target, and that’s what we support.

QUESTION: Why do you expect the slowdown in the growth in Brazil?

MR. DECRESSIN: A slowdown in the growth in the Brazil?

QUESTIONER: Yes, from 4.

MR. DECRESSIN: Yes, what you have here is a pretty strong rebound now, helped by policy stimulus. This really pushes also up the annual average growth rate in 2010. But then as we move into 2011, the support from policies will gradually diminish.

You’ve also received a push now from recovering commodity prices, which helps, and that explains why we have some slowdown in Brazil as we move further out on the projection horizon.

MR. BLANCHARD: One way of making Jörg’s point is to look not at the year-on-year projections but at the Q4-to-Q4 projections, and then you’ll see that the growth rates we have projected for Brazil, for both 2010 and 2011, are very similar.

QUESTION: You mentioned that there’s no asset price bubble in China, but I was wondering if you could specify which countries do you expect to have to deal with surging inflows with some kind of policy measures, including maybe capital restrictions, capital controls.

MR. DECRESSIN: At this stage, you see rapid, very rapid credit growth only in China, and the Chinese authorities are taking measures to rein this in, and this is appropriate.

Credit growth in many other parts of the world is actually still quite subdued, and obviously one would have to watch this closely. If asset prices continue to increase very rapidly and at the same time there’s a reacceleration in credit growth, which would suggest that maybe leverage is driving some of this asset price increases, then this wouldn’t be a recovery but may be a boom in asset prices. That might be then the point where policymakers might have to take some action. But we are still a good time away from this.

MR. BROCKMEIJER: Let me just add one or two words on this. We have, of course, seen very rapid inflows into emerging markets, many coming from investment funds. The impression we have is that most of it is what they call real money investment and not so much leveraged in nature. That is an important consideration because the extent of leverage to some extent determines also the extent of contagion if markets start reversing.

So there are, of course, several asset markets in Asia but also in Australia, for instance, increasing quite rapidly, but on the whole we feel that the flows as yet are fairly stable in nature. Thank you.

QUESTION: I was interested to understand, what do you think made the difference for Italy in your projection from October? I see a pretty interesting difference.

MR. DECRESSIN: First, it’s a similar story I have told already at various times. So I’m sorry, it’s not going to be an interesting answer.

But it’s really that the 2009 Q3, the third quarter, was better than what we had expected in the October WEO. We also have in our WEO a stronger forecast for the fourth quarter, and then there is the general improvement in the outlook for external demand for Italian products that’s driving our upward revision.

MR. MURRAY: Okay, I’m going to take a question from the Media Briefing Center and then come back to the gentleman in the back of the room.

It’s on Central America and the Caribbean. “Could you address the outlook for Central America and the Caribbean in the context of this latest WEO?”

MR. DECRESSIN: We don’t have a specific new forecast for Central America and the Caribbean, but for the Western Hemisphere as a whole we’ve marked up our growth rates by a fair amount. Again, we’ve been surprised on the upside in the third quarter where growth has finally turned positive in a large array of Latin American countries. In Brazil, it had already started earlier. So we’re seeing a more vigorous recovery than what we had expected.

That said, as of the third quarter, growth in Latin America was still below pre-crisis levels. So the recovery is proceeding not as fast as in Asia, where in the third quarter it was already appreciably above the pre-crisis level. We expect growth in Latin America to consolidate because domestic demand is fairly vigorous, and the demand from other countries in the world will also help support the recovery going forward.

MR. MURRAY: Thanks, Jörg.

We’re going to take a final question from the Media Briefing Center and then one final question here from the room. I think we’re going to wrap this up.

A question on Turkey, straightforward, “What are the prospects for Turkey?”

MR. DECRESSIN: Again, Turkey is not in our WEO update, so we don’t have a new growth forecast for Turkey, but obviously a better world makes for better prospects for Turkey.

QUESTION: I see you’ve adjusted your forecast for Japan for 2011 slightly downwards as compared to the rest of Asia. Could you speak a little bit about what went into this adjustment?

MR. DECRESSIN: Japan is clearly doing quite well with respect to its export sector. So if you look at industrial production and exports in general, these are clearly strong points of the economy. But domestic demand has been worse than what we expected., The country is struggling with some deflationary forces that have reappeared.

We think that the budget, the fiscal 2010 budget, will provide a valuable lift, although we still need to really look at the detail there. And the risks for deflationary spiral are low. Some people are talking about this, but we believe that this is not an issue because you haven’t had a strong collapse in housing prices, and balance sheets of households and firms are stronger than they were many years ago because they have been rebuilt successfully.

But on the whole, the dynamics of domestic demand remain weak still, and that led us to revise our forecast slightly down.

MR. MURRAY: Very good. Thank you, everybody, for joining us today. We will have a full transcript of this briefing on our external web site later today.

I’d like to thank everybody here in the room, those joining us online. Thanks to Olivier Blanchard, José Viñals, Jan Brockmeijer and Jörg Decressin. Thanks for joining us today.