Transcript of October 2021 European Press Briefing

October 20, 2021

PARTICIPANTS:

ALFRED KAMMER

Director, European Department, IMF

RAPHAEL ANSPACH

Communications Officer, IMF

 

* * * * *


MR. ANSPACH: Good morning, everyone. Welcome to the IMF’s European Department Press Conference on the Regional Economic Outlook for Europe. Thank you very much for joining us. I’m Raphael Anspach of the Communication Department of the IMF. I’m delighted to be joined by Alfred Kammer, the Director of the European Department. Alfred will have some initial remarks summarizing our regional economic outlook, and then we’ll be happy to hear questions after that. So, with that, Alfred, the floor is yours.

MR. KAMMER: Thank you, Raphael. Good morning, good afternoon, and welcome to today’s press conference releasing our regional economic outlook for Europe. And, increasingly, resilient recovery is taking hold across Europe thanks to substantive policy support measures over the past year and a half. Advanced European economies are set to expand by 5.2 percent in 2021, 0.3 percentage points of GDP higher than the expected in our July update, and emerging market economies will hit 6 percent -- an upgrade of 1.1 percentage points. Mobility and activity are increasing steadily thanks to the rollout of vaccines and social adaptation.

That said, we must be vigilant as the COVID-19 virus remains a risk. The recovery remains bumpy and is clouded by uncertainty. Supply chains are disrupted; energy prices are very high again; some durable goods are hard to find; and the prices are rising. Bumps in production and prices reflect challenges of restarting the global economy and the still dangerous virus.

This is playing out even with the successful policy response which protected corporate and house balance sheets and made such a strong restart out of the economy possible. Policymakers now face two challenges: responding to inflation, scaling back and shifting fiscal policy. While much attention is being paid to the challenge posed by inflation, the task facing policymakers with regard to fiscal policy is much more difficult.

On addressing inflation, the issue is not new and is well understood by central banks. You may recall that the European economy went through a similar experience with inflation soon after the global financial crisis. Energy has been the biggest driver of recent consumer price increases. This largely reflects the strong rebound of economic activity which has returned oil prices into the range that prevailed during pre-COVID years.

Furthermore, supplies have not been able to rebound as fast, and we are also seeing disruptions in supply chains and elevated transport costs that are contributing to high levels of inflation. We expect these factors to subside in the course of 2022. This combined with other factors are causing price levels but not inflation to shift. Indeed, for the latter to happen, there would have to be an acceleration in [wage] inflation, which is not currently in our baseline.

Our view is that monetary policy in most economies should remain highly accommodative because employment has yet to reach pre-crisis levels, and there are few signs that price increases are translating into broad-based pressures. Premature action in these cases would hurt the recovery and counter inflation objectives.

In contrast, in several emerging European economies, we see a strong recovery and inflation expectations are rising. Here, a gradual scaling back of monetary accommodation is warranted. Asset purchases can be phased out and a normalization of rates can be signaled or initiated.

Now to fiscal policy across Europe. Scaling back fiscal policy requires careful advanced planning. We project a major reduction in the 2022 fiscal deficits in many advanced European economies, mainly reflecting the expiration of pandemic-support measures. However, the pace of fiscal withdrawal is appropriate depends automatically on extrinsic strength of the recovery. This is very hard to chart in these bumpy times. Where the recovery to stall as fiscal policy is scaled back, monetary policy, the first response to shocks would have little ammunition left in most advanced European economies.

The pace of fiscal withdrawal, therefore, needs to be carefully tuned to counter specific developments, and needs to guard against the risk of undercutting the momentum of the recovery. Fiscal policy should also shift to underpin the economic transformation. Temporary investment incentives and hiring subsidies can both enhance workforce skills and quickly bring people back to jobs. Social safety nets and labor market institutions will need to be adapted to changes, including from accelerating automation that could potentially raise inequality and undermine social cohesion.

Other challenges facing policymakers include posting productivity growth, tackling the problems posed by aging populations, filling gaps in green and digital infrastructure, and coordinating and implementing policies for the green transition. Advancing on all of these fronts with the right balance is a tall order but the stakes are high. A successful orchestration of policies could bring forward an inclusive, innovative, and green growth monetary and fiscal policy space we need for the future. Thank you.

Online question: I was wondering if the Fund had a view on European fiscal policy with the EU yet to decide on how to reform its budget rules, and the UK preparing to launch a new program of tax rises and spending cuts? So, two questions there: the EU, its budget rules, and on the UK, the launch of the new program of tax rises and spending cuts.

MR. KAMMER: Yeah. So, first on fiscal policy. We see quite an adjustment next year. For advanced economies, fiscal deficit will decrease by four percentage points, for emerging European economies by one percentage point. This pivot is right because what we are seeing is that emergency lifelines and support programs, which were essential during the pandemic, can be phased out and they can be retargeted to support specific sectors and support, very much important, the reallocation of capital and deliver to expanding sectors from those sectors which are contracting. This fiscal [pivot] needs to be carefully orchestrated, because right now demand support is strong through private consumption. We don’t know whether this is going to materialize also in 2022. So, fiscal policy needs to be carefully calibrated to the circumstances at hand during this time.

On the fiscal rules, we have been advocating that the fiscal rules of the European Union should be reformed. They are very complex, and we have been asking to make them simpler. That means they would be easier to monitor; to enforce; and to communicate. When you’re thinking about compliance issue, layers of union-wide rules meshed with national rules overlap and sometimes lead to inconsistency which has led to a lot of discretion in terms of applying these rules and has not achieved one objective, and that objective was to tighten fiscal policy during good times in order to rebuild buffers so that we’re ready for bad times. And when we are looking down the road, clearly from 2023 on, fiscal policy needs to consolidate, especially in high-debt countries, to put debt on a downward trajectory. And for that to happen, a rule set supporting these consolidation paths would be essential.

On the specific question on the UK. The UK has been adjusting its fiscal stance over the crisis, always tuning it to how the pandemic, how the virus moved, and how best to support the economy. We are seeing that there are pressing spending needs now going forward in terms of health reforms; in terms of investment into climate mitigation; and also, in rescaling the workforce. The UK government wants to tackle these pressing issues, and we welcome this very much.

And on the fiscal side, they also have been proposing progressive taxation which is a welcomed step in order to deal with this. And we also welcome very much, as we have advised for oil countries, the medium-term fiscal consolidation plan to be clear in that, to communicate that early, so that there is certainty on how this fiscal consolidation works. So, this medium-term fiscal consolidation framework in the UK is also very much welcomed by us.

Online question: How can the growth projections in Europe be affected by the energy crisis the continent is experiencing now? Can you elaborate a bit on the last part of the report dealing with the reallocation of labor because of COVID-19? What kind of policies could be put in place by European governments?

MR. KAMMER: We are expecting the inflation surge, which we are seeing right now, to fade out in 2022 next year, and therefore we would actually expect that there is very little impact in the medium term on productive capacity and the production of the economy. I think more important at this stage is what will happen with supply chain issues, whether these will be overcome. Again, our expectation is that that should happen in 2022. But it brings me to your second point, which is very important. And that is also in terms of supporting to shift in demand and changes in demand and supply and capacity limitations we have been experiencing. It will be very important to focus in the transition, but also in the medium term, on labor reallocation in the economy. Why? Because we are expecting to see actually quite substantial amount of needs to reallocate labor from low-skilled and shrinking sectors to expanding sectors. And the low-skilled sectors like hospitality industries, they were really hard hit during the crisis, and we see an increase in manufacturing and IT and communication, which we expect to expand in the future.

So, this is a transition issue, and we're expecting in our baseline that about 1.5 percent of the labor force in the lowest-skilled sector will be set free, and there is a need for additional labor in the high-skill sectors of about 1 percent of employment there. It's a transition issue, but it's also a medium term issue, because we know that automation will continue, and automation will accelerate, and that will add to these pressures in the labor market. And it is important because we need active policy to address these issues, to facilitate the labor reallocation, and it's not going to be easy. Because labor workers need to be skilled up, need to be retrained in order to be able to transition to higher skilled jobs. And that needs to be a focus of policies during the transition period, but also much in the medium term.

Questioner: Thank you for taking the question. I wanted to ask a follow-up. Alfred, you mentioned about supply chains and the issues that we're facing there. Obviously, a lot of policy makers, you know, President Biden the other day tried to make some suggestions of things that we can to do ease this problem, but I'm just wondering sort of what your view is in terms of what policy makers -- the options that they have to try to make this go away faster. Isn't this just a question of market-driven mismatch of supply and demand here, and much of this is in the hands of private companies that run ports, logistics companies that run container ships and all of that. What can policymakers do to try to ease this, given that it's been a, you know, an economic slowdown problem for Europe and the advanced economies? Thanks.

MR. KAMMER: So, the surprising disruptions are [result] and are pandemic-driven. Initially, we--with a strong rebound of the economy, and also with some supply capacity actually reduced. We saw a supply and demand mismatch, but we also saw issues of bottlenecks in the supply chain which materialized. And some of these supply chain bottlenecks, especially in transportation, they can be addressed with policies, and these policies are the right ones to deal with those. And as you have mentioned, much of the rebalancing of the supply chain in terms of demand shift, which are going to be permanent in the medium term, should be and we expect to be taken care of by the market.

I think another important part in all of this is to strengthen the supply chains. It means investment in infrastructure. It also means we need to make supply chains more resilient. That doesn't mean on-shoring and homeshoring, that means a diversification of the supply chain. And then yet, looking at the medium term summation of the economy, by going greener, by going more digital, will have more of these adjustments which are necessary, and they require infrastructure investment and they require that the market to adjust. So, it's going to be a very complex issue. The market will deal with some of it, but government policy can support adjusting well, especially on the infrastructure side.

Online question: How do you assess current fiscal policy of the Russian authorities given the sanctions, the energy crisis in Europe, and the pandemic ?

MR. KAMMER: First, we'll say that Russia experienced in 2020 a relatively shallow recession and has rebounded also very strongly in 2021. And Russia had the right set of qualities in place during the crisis supporting this rebound and this recovery. And fiscal policy was supportive, and so was monetary policy. And that has led to a strong recovery, which is now taking place. So the settings were right during the crisis. For the medium term, I think what is important for Russia, and we have been saying this in the past, [there] needs to be a focus on structure reforms of the economy in order to increase productivity and step up growth. This is the biggest Achilles' heel of the Russian economy going forward.

Online question: what is your opinion of the decree on the electricity sector in Spain as the only way to control the electricity tariffs?

MR. KAMMER: Yeah. So, the -- in particular, the gas price increases in Europe also have been affecting the electricity market, and very much so in Spain, because Spain is following dynamic pricing. That means any price shock to the production of energy will lead to a very quick transmission to the retail sector. So, the Spanish economy took some measures in order to reduce this impact of this, what we believe is a temporary price spikes, which should fade out in the second quarter of next year, in order to protect the vulnerable in the population. But it raises a broader issue, and it raises an issue of the whole climate transition, and that means that we need to invest in energy storage, we need to invest in energy production, and in order to avoid transition problems going from the current economy to a more green economy. That applies to Spain, but that is a much broader issue for Europe, and it's a broader issue also worldwide.

Online question: I would like to ask you if you think the Portuguese government is being too optimistic on their macroeconomic projections, given that they differ from the IMF's? Also, how do you see the Portuguese recovery taking place in the next years and the sectors that will have a better performance?

MR. KAMMER: What we see across Europe is a lot of uncertainty with regard to projections and forecasts. So, I'm not surprised that Portugal is one of many countries where we have a slightly different forecast. But also, in some other countries, represents that a different set of data were taken into account. But so far, the Portuguese economy has responded to the measures in place and is going from a rebound to strong recovery in the second half of this year continuing 2022.

And Portugal has a lot of its economy invested in tourism that has been hit particularly hard. In our studies, we are seeing that some of labor have been freed in the low skilled sectors. This will also be an issue for Portugal going forward.

In the medium term, Portugal is immensely helped by the Next Generation EU Fund which will help transform the economy and help increase growth and productivity by investments in the green transition and digitalization of the economy. And also, through the structural reforms which the government had set out. So, this will be an important part of the crisis response next year but will also be very important for the medium term. And implementation of the Next Generation EU Fund is going to be crucial in order to lift up growth and get a strong boost for the medium term in terms of productivity improvements.

Online question: How big is the inflation risk and what should be Ukraine's policy response to mitigate it?

MR. KAMMER: Ukraine has been responding to the crisis, to the COVID crisis very well. That included the economic crisis, that included support on the fiscal side, but it also reflected a very accommodative monetary policy. And the crisis in 2020 was also relatively shallow compared to other countries in the region. And inflation, including supported by the minimum wage hike at the beginning of the year has been picking up considerably.

The response of the national bank was absolutely right. They started tightening monetary policy and we believe that they need to maintain a tight monetary policy in order to ensure that inflation expectations are not being de-anchored and contain the second round of the price shocks they have experienced during this year.

QUESTIONER: Thank you, Alfred for doing this. I would like to ask a question regarding Greece. Although with the answers you give as we have understood your basic accommodation remarks. Greece already has a large budget deficit and trade deficit. Given the pandemic and the energy crisis, do you see additional risks for the country, and do you believe that the growth prospects will keep the debt on a sustainable trajectory? Thank you.

MR. KAMMER: Greece is really not that different from any of the other European countries during the pandemic, including through the crisis response. On the fiscal side, debt levels were ratcheted up and are higher and so we need to deal with them in terms of consolidation on the fiscal side in the medium term.

On the outlook for Greece, again, very similar in terms of external shocks which may materialize. These are how quickly are the sectors which have been most damaged by the COVID crisis are coming back. The Next Generation EU Fund and these investments, they are going to help. With regard to supply chain issues, again, they will also affect Greece and one needs to deal with those.

And then the issue is with regard to supporting the medium term through the right measures on the structural reform side. And there Greece has set out a program that needs to be implemented and that is expected to deliver if implemented on strengthening the Greek economy and also helping in regard to debt consolidation.

QUESTIONER: Thank you for taking my question. Director, can you comment on the general situation in the Western Balkans region and if you can offer any specific comments on the countries here in the region for this year and for the next year. And also, what would be your recommendations for the countries here in the region? Thank you.

MR. KAMMER: So, the Western Balkan countries and Bosnia Herzegovina have been hit hard by the crisis. And they also responded on the monetary side with easing financial conditions. They responded with fiscal support in order to lessen the economic impact of the crisis. And some countries in the region have actually also in place now a relatively strong recovery.

They have also been helped in general by the easier financing conditions and also through support of the IMF initially through our emergency support programs which allowed fiscal spending to take place. And now during the summer, reflecting the SDR reallocations which they put to good use in terms of dealing with the crisis. And North Macedonia is a case in point which is using the SDR reallocation to deal with the health and also with the economic crisis. Both these conditions have helped these economies to respond.

In terms of risks, there is one big onside risk for the Western Balkans, and these are the low vaccination rates. They are about 30 percent of the population being vaccinated and that was a game changer for other countries where vaccination rates are really going high. Because it allowed mobility to take place, it allowed consumer confidence to increase, and it allowed to adapt to living with the virus and therefore bringing the economy back, as we saw. And low vaccination rates, expose you to future infection waves and that is a risk in terms of this economy. So, the countries in the region are very aware of this risk. It is an issue mostly of vaccine hesitancy. That is an issue in other countries as well and that's something where government communication needs to work on. Because it's not only benefitting the individual, it's going to benefit the whole country, the whole economy and also globally to increase vaccination rates.

Because what you see is if the world is not vaccinated and if you're not controlling this pandemic, we will always get shocks from countries where we need to have lockdowns. We may get supply chain interruption from these countries, and it could reverberate through the global economy and that also matters for the Western Balkans.

QUESTIONER: I have a question on inflation. Do you fear any inflationary spiral in Europe? With a pickup in consumer prices leading to wage increases that could inflate more of the level of consumer prices. And for you, a more technical question maybe. What is the potential for wage increases in France, in Germany, in Italy without endangering the level of consumer prices in Europe?

MR. KAMMER: So, we don't anticipate at this stage -- expect any inflation spiral in Europe. The high inflation which we are seeing right now is really driven by -- the main driver is an increase in energy prices. And expect that to fade out during 2022. We have an increase in oil prices. Oil prices actually are going back to pre-pandemic levels because of the strong demand which is taking place, and you would expect that.

Second, we have this issue on natural gas prices, which increased five times over the last year, which is quite substantial. That is an issue of supply/demand mismatch. This is an issue of long, hot summers, cold winters, and increased supply needs there. It is an issue of renewables which, in some spaces, were not available and the gas need to kick-in. And it's more broadly at the global issue because the gas market is connected. We also expect these gas prices to -- these spikes -- to fade away in the second quarter of 2022.

Supply chain disruptions and demand supply mismatches is another part of the inflation story which we are seeing. Again, we would expect as the economies are normalizing given this restart -- this strong rebound and the strong recovery -- that these price effects will disappear. And finally, in Europe, there have been a number of particular issues in the Euro area. The German VAT cut, which is in the inflation numbers, will also go away.

So, on the inflation side, these are factors which we believe will fade out in 2022. Monetary policy can do nothing against them. On the supply side -- we have been discussing in a previous intervention -- some measures can be taken. But you point to the important part which we need to watch very carefully, and that is, are we getting second round effects Are we getting these price increases move into wage increases? For the Euro area that is not something we expect, simply because we have lots of slack in the labor market still. Hours worked are still 3 percent less than what we had before the crisis. And in general, the underlying inflationary momentum in the Euro area is just not there. And, so, the expectation is that in the medium term, inflation will increase to 1.8 percent. That would still be below ECB's target. So, not a concern at this stage for the Euro area.

And you also know that if these concerns were to arise, the ECB can react. We know what to do with inflation, the tools are in place to react to these kind of pressures if they were to materialize.

Different story in the emerging European economies. What we see there is they had higher underlying growth and higher inflation going into the crisis. They had shallow recessions and they have a very strong rebound. So, European emerging economies are not like global emerging economies. They're doing slightly better than the advanced European economies. But that also means they're saddled with some of the issues on the inflation side. And what we see there is that some inflation expectations in these countries have inched up. There is, because it's less slack in the labor market and some already at full employment, there is a higher likelihood that could translate into wage increases and give rise to the price spiral which you have been mentioning. And for these countries, they have taken action. They have either initiated or signaled that they would initiate a tightening cycle to go back to policy rates which prevailed before the crisis, and we also recommend that they are tapering their asset purchase programs and stopping them all together.

So, for these countries, the second-round effects are certainly issues, and these Central Banks are extremely vigilant and they're taking action already, but even in those countries, we would expect that focus needs to be on anchoring inflation expectations. But again, these price increases with this monetary policy response, these should taper out and we should not see large second-round effects after we see the action by Central Banks.

Online question: Which countries should keep their fiscal support longer than currently forecasted, and is France's government's fiscal trajectory too loose or too tight?

MR. KAMMER: So, very difficult question and also very country specific. The advice and also very data dependent. If we learned one thing is that there is going to be a lot of uncertainty over the next year. That reflects uncertainty on how the virus develop. But it's also an uncertainty on how bumpy the restart of the global economy is going to be. This is the first time that we have this almost synchronized restart of a global economy. We've seen bumps which we need to deal with, and we are expecting these bumps to take place. And what we have been recommending to all countries is to be agile on fiscal support side. Yes, to pivot from emergency lines to more targeted support, and support labor reallocation, but also to stand ready if aggregate demand is not strong enough and is not carrying over from '21 to '22 to take that into account, when they're adjust fiscal policy stance.

So, what we see for France is a very strong policy response on the fiscal side to the crisis. The French authorities have also very supportive fiscal stance in place for next year to be support and think it's adequate. And they're also shifting to more target support as we have been recommending. So, this is the right policy pivot to take in France.

What is also important is to start talking about the medium term and medium-term fiscal consolidation plans as we do with all countries in the region because debt has been ratcheted up and we now need to bring that down because we need build fiscal buffers. The next crisis, unfortunately, is always just around the corner. And, in order to have a fiscal response for this next crisis, we need to build these fiscal buffers and that is also an issue for France, and therefore, France will need to consolidate in the medium term and reduce debt level in the medium term.

MR. ANSPACH: Thanks very much, Alfred. So, with that, we're going to conclude this press conference. Thanks to you for joining us today and hope to see you soon. Stay well. Stay safe. Thank you.

MR. KAMMER: Thank you.

* * * * *

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Raphael Anspach

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson