Transcript

Transcript of a Press Briefing by Simon Johnson, Economic Counsellor and Director of Research, on the Spring 2008 World Economic Outlook

April 9, 2008

MR. MURRAY: Good day. My name is William Murray, Chief of Media Relations here at the IMF. This is the Spring 2008 World Economic Outlook press briefing. I want to welcome everyone on our webcast, both on the public website and via the Media Briefing Center.

Let me briefly introduce the participants today before we go into the briefing. In the center of the table is Simon Johnson, our Economic Counsellor and Director of Research; Charles Collyns, the Deputy Director of Research; and Subir Lall of the World Economic Studies Division.

Before Simon has some brief opening remarks, which we will post on the Media Briefing Center for the press, let me just make a brief statement on behalf the Media Relations Division and the IMF's External Relations Department. We were saddened to learn in the last few days that Jan Kristiansen, a veteran and former correspondent of Agence France Presse, has passed away. We were saddened to hear this news and we extend our condolences to Jan's widow. He was a veteran of IMF and World Bank meetings, and we are certainly going to miss him.

With that, let me turn the table over to Simon. Thanks.

MR. JOHNSON: Thank you, Bill.

The global economy has grown at a remarkably rapid pace over the past five years. However, for reasons that I will explain in a moment, we now expect global growth will slow to 3.7 percent in 2008; that is half a percentage point lower than our January quarterly update forecast, and well below the 4.9 percent growth seen in 2007. Our projected growth rate for the annual average growth in 2009 is 3.8 percent, but I would stress that we expect a recovery to take place during 2009.

In the United States, economic growth has nearly stalled. Against the backdrop of weak financial market confidence, we expect consumption to remain sluggish in the coming quarters due to deteriorating labor market conditions, slow growth in disposable incomes, higher energy costs, and tighter constraints on household borrowing.

Notwithstanding aggressive easing by the Federal Reserve and a timely fiscal stimulus package, significant strains in housing and credit markets are like to be protracted. House prices continue to fall, and a large inventory overhang suggests the housing correction will continue for some time. Key financial markets also remain strained with rising defaults, higher interest rates spreads, and tightening lending standards. This is squeezing credit and seems likely to dampen domestic spending, including investment.

On an annual basis, we expect growth will slow to 0.5 percent in 2008 and 0.6 percent in 2009. Projections on a fourth quarter-over-fourth-quarter basis gives a better sense of the slowdown. On that basis, U.S. output is projected to decline by 0.7 percent in 2008. We also expect a gradual recovery back toward potential beginning in 2009.

Growth in the Euro Area also slowed at the end of last year, and for 2008 we project growth will moderate to 1.4 percent. Activity is slowing partly through weaker external demand due to the U.S. downturn and a stronger euro, as well as from continued financial market strains and rising energy costs. Housing downturns have also started to affect some European countries.

Japan has been less directly affected by global financial disruptions and recent indicators have been solid, though weaker external demand prospects and some softness in domestic spending are expected to weigh on growth. We expect growth to slow from 2.1 percent in 2007 to 1.4 percent in 2008.

For emerging and developing economies, direct effects from the U.S. downturn and financial strains have, to date, been much less pronounced than in past episodes. Stronger policy frameworks, rising intra-regional trade, productivity gains, and high commodity prices have contributed to their resilience. Growth is expected to slow to 6 3/4 percent in 2008, down from almost 8 percent in 2007. Nevertheless, growth would remain above trend in all major regions.

Although activity is slowing, inflation pressures have picked up around the globe mainly reflecting sharp increases in food and energy prices. Commodity markets have remained buoyant overall and, in many cases, have touched new highs, reflecting the still strong demand from emerging economies, such as India and China, sluggish supply responses, and the increasing attractiveness of commodities as an asset class. The resulting inflation pressures are particularly intense for emerging economies, where food and energy account for a large share of their consumption baskets and where growth has held up reasonably well.

Let me turn to the risks around these projections. On balance, these lie somewhat to the downside.

The principal downside risk comes from the possibility that financial strains could deepen. Sentiment in financial markets has improved in recent weeks since the Federal Reserve's strong actions with regard to investment banks. But we have seen how strains in markets can quickly become reinforcing, and the possibility of a negative spiral or "financial decelerator" remains real.

At the same time, inflation risks remain a concern for both advanced and developing economies, particularly in the context of rising energy and food prices, and high commodity prices more generally.

In addition, while the improvement in the U.S. current account is helping to address global imbalances and we think the dollar adjustment remains orderly, we are concerned by the uneven pattern of exchange rate movement around the world. Some large surplus countries have experienced appreciation in their real effective exchange rates over the past 12 months. But large current account surpluses still need to be addressed, and the framework established just over a year ago by the Multilateral Consultation remains relevant. In fact, one key goal of that Consultation was precisely to prevent any potential global downturn from becoming a more serious worldwide recession.

Speaking with regard to the medium term—that is, the likely tendency of currencies to move over the next five years—our view is that the dollar, in real effective terms, is now closer to its equilibrium value than at any time since the late 1990s, although it remains still somewhat on the strong side. Viewed in the same terms, the euro, in a major development since last fall's World Economic Outlook, is now more definitely on the strong side. The yen remains undervalued, and the Chinese renminbi remains considerably or substantially undervalued.

Finally, let me comment briefly on some policy implications of this global assessment. A key message is that, with continuing tensions and uncertainties prevailing in global markets, policymakers in both advanced and emerging economies need to respond to a potentially quickly changing balance of risks. In addition, in our view, now is the time when prudent governments will draw up contingent plans to guard against deeper "tail risks."

Priority must be given to containing financial disruptions in a durable manner. As was discussed at yesterday's press conference on our Global Financial Stability Report, a key focus must continue to be recognizing losses quickly and rebuilding financial capital.

Macroeconomic policies can play a complementary role in supporting demand and limiting the negative interaction between financial markets and the real economy.

Monetary policy remains the first line of defense. Central banks in several advanced economies, notably the United states, have appropriately eased policy rates as their growth outlooks have worsened, and may need to continue easing until their economies find a firmer footing. In the Euro Area, current inflation remains uncomfortably high, but we expect that inflation will come down over the relevant roughly two-year policy horizon in the context of slower growth. This should provide some room for future policy easing on the part of the European Central Bank.

Fiscal policy is the second line of defense. The U.S. fiscal stimulus, for example, looks likely to provide timely support in the second half of this year. However, the use of fiscal space, where available, should be temporary and not jeopardize efforts aimed at consolidating public finances over the medium term.

Given the risk of negative interplay between housing and credit markets, the so-called third line of defense—namely, the use of public sector balance sheets—may be needed to support housing and financial markets.

In the United States, steps have already been taken to ensure the availability of mortgage financing and to stem systemic risk, but more may be needed before financial and housing markets find completely stable ground.

We also cannot ignore the international aspects of the current financial crisis. Given the cross-border dimensions of exposures and counterparty risks, solutions implemented in national silos may not be adequate to resolving an underlying global problem of capital adequacy in the financial system.

In many emerging and developing economies, the challenge remains to manage inflation and overheating risks, but it will be important to respond flexibly if global downside risks intensify.

Finally, as a way to reduce global pressure on food and energy prices, more open trade policies in those products would be a good start. Less insular biofuels policy in advanced economies would help relieve some pressure. At the same time, we encourage countries to avoid raising taxes or imposing quotas on their food exports. These reduce incentives for domestic producers and also increase international prices.

Finally, in conclusion, I would like to say that my blog at IMF.org is again up and running. Please invite your readers and listeners to ask questions or post comments there. To make things a little more interesting, while I have been speaking, I have put up a post regarding what I regard as the key messages from this morning's discussions. Thank you very much.

QUESTION: Thank you. We had minutes from the Fed just yesterday that suggested that the U.S. economy would grow above its trend rate in 2009. Your forecast says, on an annual basis, it will grow 0.6 percent. So, there is clearly some fairly significant difference in your analysis.

I wonder if you could both tell us what that 2009 number looks like on a Q4-to-Q4 basis, and also explain to the extent that there is a gap between the Fed's return to trend-base case-and your 0.6 base case, what it is that explains your more pessimistic view about the pace of the recovery in the U.S.

MR. JOHNSON: Thanks for the question. I am only going to discuss our forecast; I am not sure I know enough details of other people's forecasts to really speak directly to that.

Our view is that, as you said correctly, there will be some recovery in 2009, but a somewhat slow recovery. I think we see this as due, in part, to the continuing problems with housing; I mentioned already the overhang of housing inventory. But we also think there is a broader weakening of the economy affecting consumers and consumption.

We expect that there will be some weakness in the labor market that will be very much associated with that. So, we do think this is a mild contraction. We think it will be a relatively slow recovery.

QUESTION: Inaudible.

MR. JOHNSON: Q4-to-Q4 is 1.6 percent for 2009 over 2008 in our forecasts.

QUESTION: On the question about the comparison between your forecasts and other people's, I am afraid your outlook for the U.K. is considered to be less pessimistic—more pessimistic than the government's. The Chancellor is expecting a recovery to something like trend next year. I just wondered if you could explain what the sort of dynamic is in the U.K. Is the housing market the key to that?

MR. JOHNSON: Again, I am not sure I know enough about other specific forecasts to comment. I would note that the consensus forecast for the U.K. which came out in the middle of March was 1.7 percent for 2008 and we are at 1.6 percent, so that is pretty close to consensus. We are expecting a new consensus to come out shortly that will presumably reflect global developments since early March, which had been fairly significant.

With regard to the overall dynamic in the U.K., I should have said at the beginning that regional questions are being addressed by my colleagues here, and the responsibility on Western Europe lies with Charles.

So, Charles, will you take some specifics on that?

MR. COLLYNS: Sure. Thank you, Simon.

I think in the U.K. there are a number of factors, both domestic factors and external factors, that will be holding back the economy in the next year or so. Certainly, the housing market, as you mentioned, is going to be a drag on the economy. We do see housing prices softening already and we see potential that the housing correction will continue with impact on consumption. We also see the U.K. being affected by tightening financial constraints related to the turmoil in financial markets.

Externally, the U.K. is also going to be affected by the slowdown in the U.S. and the slower growth in the Euro Area; two thirds of the U.K.'s exports go to those two areas. In general, our forecast for 2009, as Simon just mentioned, is lower than most other people have it for the United States, and that then tends to feed through into lower forecasts for Europe and elsewhere to be consistent with our global view.

QUESTION: Third strike and I am out. Same thing. Russia is in a relatively strong position these days and yet you have revised your earlier figures downward a little bit. I would like to know why, what are the specific factors for that.

MR. JOHNSON: Questions on Russia and that part of the world are being handled by my colleague, Subir Lall.

MR. LALL: Yes, growth in Russia still is expected to remain quite strong, and certainly domestic demand is very strong. That being said, we also see some signs of cooling in the economy, but as yet, for domestic demand, the outlook remains very strong. I would not read too much in the specific numbers in terms of the pattern. Particularly as long as high oil prices are sustained, the overall outlook for Russia remains very positive.

Thank you.

QUESTION: You are expecting rather significant slowing growth in Germany from 1.4 percent this year to 1 percent next year. Could you please elaborate on this?

MR. COLLYNS: Germany, of all the Euro Area countries, has been most dependent on its external performance in recent years for its growth. Germany is being affected by the slowdown in the U.S. that we foresee. The hope would be that domestic demand would begin to take up that slack, but up to now we see continued softness in retail sales, for example. With the financial tensions that we have highlighted, we do not see a strong pick-up in consumption. So, essentially Germany will be slowing because of a weakening in the external position without much additional support from the domestic side.

QUESTION: You expect for Spain 1.8 percent growth in 2008 and 1.7 percent growth in 2009. So, that is a downward trend. Before, I think it was an upward trend in 2008 to 2009. So, do you expect the Spanish economy to keep falling down after that or we can expect a little recovery?

Thank you.

MR. COLLYNS: We are seeing a recovery getting underway in 2009, first in the U.S., which would help to support the global economy. So, by 2010, we should be seeing the global economy moving much more in line with trend.

In that context, we would also expect the Spanish economy to strengthen by 2010, but we do see a soft period in 2008 and 2009. Spain's growth would still be above the average for the Euro Area, but nevertheless, I think Spain will be affected both by the housing correction and by the financial tensions. So, we do see a period of slower growth.

MR. MURRAY: I am going to take a question here from the Media Briefing Center, because we do have a number of people monitoring via that. This is a question regarding inflation. At what point will concerns about inflation become more important than concerns about growth? More specifically, at what point should the Fed stop easing?

MR. JOHNSON: As I already said, inflation is a concern at this point globally. We think that the financial turmoil has had an unfortunate side effect of pushing up commodity prices, and this has led to higher inflationary pressure in many parts of the world.

Nevertheless, because we think the U.S. economy is slowing considerably, we think that will take the edge off the inflationary pressure in the United States. We think the Fed's position on this is the right one and one we fully support.

We do recognize in other parts of the world the dynamics are different. We recognize that there are potential second-round effects, so-called, in the Eurozone. We also recognize that emerging markets may have more difficulty containing inflation.

So, our point is that authorities should keep in mind the necessity of reacting quickly if the downside risks materialize, but we think inflation continues to be a problem of great significance in emerging markets and arguably in some industrial countries.

QUESTION: We saw your figures for growth in Italy which are very low, 0.3 in both 2008 and 2009. Someone in Europe said that you are too pessimistic about growth in Italy. Can you explain your view, and do you have any suggestions for the new government which is to come in about a couple of weeks?

MR. COLLYNS: Well, unfortunately, growth in Italy has slowed in the fourth quarter of 2007, and I think most forecasters at this point are expecting growth in Italy this year and next to be rather slow. We are not that far below the official forecasts made a number of months ago. We are also pretty much in line with the consensus for this year.

We do see Italy being affected in the same way as other countries by the slowdown in the U.S., by the financial strains, and by the stronger euro. Italy's longer-term growth performance has not been as strong as some other parts of the Euro Area, and particularly Germany. So, clearly there is an important policy agenda for the new government that comes in.

I think our policy recommendations are fairly well-known. We hope that there will be continued progress toward fiscal consolidation. There has been good progress made last year toward improving and strengthening Italy's medium-term position, and we think it is important that that progress be sustained.

We also think it is important that Italy continue to make progress with its structural reforms to transform the supply side of the economy, to provide greater potential growth for the economy. I would mention implementation of the services directive, public divestment, and increasing competition more generally in both product and service markets.

QUESTION: Your estimate for growth in 2008 for Brazil is one of the only two that are actually revised upwards in relation to your own estimates of January. Could you please give me your assessment of why that is the case in Brazil?

MR. COLLYNS: As you know, the Brazilian economy has been doing very well over the last year or so. The fourth quarter outcome in 2007 in Brazil was stronger than we had anticipated, so overall growth is 5 1/2 percent in 2007. That provides some carry over into 2008 in terms of the annual growth number.

We see the Brazilian economy continuing to do well on the basis of disciplined macroeconomic policies, and greater credibility. It is really very encouraging, the degree to which Brazil, like other Latin American economies, has been much more resilient in the face of the U.S. downturn and the financial strains.

Nevertheless, as we emphasized in our report, Brazil will be affected by spillovers from a slower U.S. economy. So, we do see the Brazilian economy slowing into 2008 and 2009. But that slowdown was coming from a higher level than we had before.

QUESTION: Inaudible.

MR. COLLYNS: Right. We did not have the full information about 2007 when we did our January forecasts.

MR. MURRAY: Thanks, Charles.

I am going to take one from the Media Briefing Center. This is a question from Reuters; it is regarding Australia.

The IMF has cut its forecasts for Australia. Can you please elaborate on your reasons for this?

MR. JOHNSON: Well, we think Australia, as everyone else in the world, is being affected by the global downturn. At the same time, I would stress that there remain inflationary pressures in Australia, and we think that the authorities are rightly focused on containing inflation. We think the increase in interest rates in both February and March were appropriate.

Australia, of course, is a strong commodity exporter and they are grappling with the effects of the world economy slowing at the same time as commodity prices remain high or even moving higher. So, we think their policy stance remains completely appropriate.

QUESTION: The report makes reference to the need for fiscal policy to reinforce what is going on in the Monetary Fund in order to ease the current problems. In the U.K., we are up against a fiscal deficit which is about 3 percent of GDP, and has been rising quite strongly. I wondered if you had any thoughts on what U.K. fiscal policy might do in order to ease the prospect of a very sharp slowdown.

MR. JOHNSON: Let me speak to the general point and then Charles will take the U.K. specifics. What we have said in the report and what we are saying today is that fiscal policy is a potential second line of defense that can and should be used when monetary policy is not sufficient to deal with the macroeconomic issues of the day, particularly a global slowdown, but that depends very much on two things. The first is what you can call "fiscal space," so what is the level of current deficit and debt of a country.

It is obviously the case that some countries have more fiscal space than others. In the report, we tried to take you through some of that detail. It also depends on what you might call "macroeconomic space," so to what extent you have an issue with inflation and worries about inflation expectations, for example, becoming de-anchored.

I would stress that that is very important. There are situations where countries have fiscal space, but they have an inflationary issue and that is why we are talking about the pressures coming from higher commodity prices, because those are restricting the room not just for monetary policy, but also for fiscal policy to be effective.

This is also why we are talking about the potential need for a third line of defense in general terms, because sometimes it may be the case that monetary policy may be insufficient, fiscal policy may not be fully available and, therefore, one has to consider all the alternatives that a responsible government has at its disposal.

Let me ask Charles to take up the specific U.K. points.

MR. COLLYNS: You are certainly right that there has been an upward drift in the fiscal deficit in the U.K. last year and this year in the context of a slowing economy.

Nevertheless, I think there would be some fiscal space to allow some fiscal support for the economy, for example by letting the automatic stabilizers work, although clearly the government will need to be careful to make sure that its short-term fiscal policy is consistent with its fiscal policy rules framework and, in particular, the limit on net public sector debt at 40 percent. But we do see some room at least at this point for letting the automatic stabilizers work.

QUESTION: I just wanted to ask a question about your third line of defense. When does using public coffers to support financial housing become a bailout? What kind of balance do authorities need to strike?

MR. JOHNSON: I think the word "balance" in your question is absolutely key. Obviously, when you use public money in any fashion, you have to be careful about how that changes incentives for people moving forward, and that is going to be very much about the kind of terms that shareholders and creditors get when you come in to rescue either an institution or support of a particular asset class, for example by ensuring there is liquidity in that asset class.

I think that this is something you have to look at very much on a case-by-case basis. We at the IMF are always on the side of wanting to minimize issues of so-called moral hazard, so we are always trying to advocate that money be used in a careful way, in a way that does not distort incentives going forward.

Nevertheless, we recognize that in many instances, you know, you have to make decisions quickly and there are difficult choices to be made, so there is no such thing as a perfect rescue operation. You have to watch out for the financial system and you have to watch out for your overall economic prospects, the way in which they are tied to what we are calling the "financial decelerator" in this current financial situation, and that is of preeminent importance. That is why we are linking the use of public money very much to these lines of defense. Monetary policy is the first line of defense and must remain the first set of tools which are used, and we think that it is still, it remains effective in most countries in the world. Fiscal policy can be used and should be used where appropriate, but as part of that package, public money can be used and is being used in sensible ways to prevent the problems from getting worse.

QUESTION: I am just hoping for a comment on the Financial Stability Forum proposals to increase financial disclosure. Obviously, the IMF is part of the Forum. How far will that go toward improving financial stability, and what is the likelihood that the second and third line of defense will have to kick in on a more global scale?

MR. JOHNSON: Thanks for the question. I think the issues of the Financial Stability Forum, which you are quite right that the IMF participates in, were addressed at length yesterday in the Global Financial Stability Report and that discussion.

Let me just say briefly here that we fully support the move toward greater disclosure, and we think that marking to market and continuing to recognize losses is an important part of how the financial system operates. In fact, in my opening remarks, I stressed that even before we get to the macroeconomic policies, we are dealing with a set of issues that have originated in and around the financial system, and they need to be addressed in and around the financial system.

However, that will take some time, and that is why we need to think about macroeconomic policy; that is why the Fed has eased—in our view, appropriately—and that is why the U.S. authorities are using fiscal policy appropriately. That is why public money is also being used to some extent in this context.

We think these are much broader issues, much broader policies that need to be considered around the world. But we would absolutely agree that, first and foremost, you need to work on the issues of the financial system which have brought us to this point.

QUESTION: What projection does your forecast contain for home price declines in the United States through 2008, and do you see any sign of a bottom in the housing market in the U.S. and in Western Europe?

MR. JOHNSON: It is a very good question and it does strike to the heart of the matter. We were stressing that the problems are not just in-house; we think it is in the consumer sector more broadly. But we do agree that housing and what happens to house prices is of fundamental importance directly, because it affects consumption and the way it spills over through the financial system.

We expect that the house price decline in our forecast between 2007 and 2008 to be somewhere in the order of 14 to 20 percent; that is the decline through the end of 2008. That is a fairly large decline by historical standards in the United States; it is a very large decline. It is not unprecedented compared to the experience of other advanced economies in the past 30, or so, years, but it is very unusual for the United States.

Our forecast is based on the reasoning and the thinking that this will play out in the United States much as it has played out in other industrial countries that have encountered significant declines in house prices.

QUESTION: Inaudible. .

MR. COLLYNS: Just to clarify, the range that Simon mentioned depends on the indicator that you use. The upper end of the range is based on the Case-Shiller index, which, as you said, declined 10 percent in 2007. So, we are forecasting another 10 percent in 2008 on a Case-Shiller basis.

MR. MURRAY: I am just going to turn to the Media Briefing Center. This is, I think, a question for Subir. Do you support the decoupling theory in Southeast Asia where countries, such as the Philippines, would be able to moderate the impact of a slump in exports to the U.S. by increasing intra-regional trade?

MR. LALL: Thank you. Well, to some extent, the way we have framed the debate on decoupling is that we actually see some divergence in the performance of emerging and developing economies in general rather than decoupling, especially because international trade links have actually grown and financial links particularly in Asia have grown, so a decoupling is perhaps not the right way to frame the question.

Coming to the specifics of the Philippines, growth was very strong last year. We do expect some moderation this year, but remaining at fairly high levels, in fact higher than what it was two years ago. Intra-regional trade certainly helps, and again, in Asia more generally, there is a lot more trade now to nontraditional export destinations, so we are not just talking about the U.S. and Europe. It does help, but that is more a medium-term issue. As that increases, that should certainly buffer the impact of the slowdown seen in the United States. But based on recent research done in this area, the links remain quite strong.

In the Philippines, in particular, though, there is some scope for monetary policy to absorb the impact, but, as I said, growth still is going to moderate from the very high level last year, but remain quite resilient.

MR. MURRAY: Thanks, Subir. We are on a roll with Asia questions right now on the Media Briefing Center, and this one is on China.

What kind of impact will China suffer from the current financial crisis and U.S. recession? How should China deal with the challenge?

MR. JOHNSON: I will take that question. We think that there will be some impact on Chinese growth from the global slowdown. We think that the right policy response will be to allow some exchange rate appreciation. We think that there is considerable scope for in that way containing the inflationary impact of higher commodity prices and some domestic sources of inflation.

In the context of rebalancing the Chinese economy, which is something that the Chinese authorities have been emphasizing now for sometime, we think there is scope for both tightening monetary policy and easing on fiscal policy. We recognize that there are inflation concerns and we recognize that global growth is slowing down, but we think because of China's exchange rate situation, they have some particular scope for dealing with this combination of circumstances in a way that will both help them and help sustain global growth.

QUESTION: You have mentioned that you expect a slow U.S. recovery. Your figures for 2008 and 2009 are barely perceptible economic expansion. Your chart in the back of the book shows the U.S. growing at 3.2 percent in 2013. So, my question is, beyond 2009, how long does the U.S. remain below potential? How slow a recovery do you actually see?

MR. JOHNSON: Thanks. It is a moderately slow recovery, but it is a recovery in 2009. It is a move back toward potential in 2009. I gave the Q4-Q4 number, and that is 1.6 percent. I think it would be a reasonable expectation, say, in 2010 that U.S. growth would move back to be above potential.

QUESTION: I have another question about the policy response related to Spain actually. Spain has high inflation and you forecast 4 percent for this year, and it has room for some kind of fiscal stimulus. So, I wonder what will your recommendation be for Spain, because you have corrected the growth by almost a percentage point since October.

Also in the report you mentioned that it may come under stress because of this housing sector. So, what is your recommendation there on that front on the financial system of Spain? Thank you.

MR. COLLYNS: On Spain, we do think there is fiscal space. Spain has had very successful fiscal consolidation over recent years. Recently, the government has already introduced substantial fiscal support for the economy this year. We think that is very appropriate to help the economy deal with the situation.

I think the housing correction will be a substantial drag on the economy for some time, as we indicate in the report. We do think that there has been an unsustainable boom in the housing sector in Spain, and that house prices will need to adjust and that residential investment will need to adjust and that will be a drag on the economy.

But the fiscal support, I think, will help to contain that. As I said before, Spain will continue to grow above the average rate in the Euro Area. The financial system in Spain is in quite good shape. Certainly, it is being affected by the financial tensions, but Spanish banks have solid capital positions. We do not see them being particularly affected. They do not have much exposure to the subprime problem. So, we do not see a particular source of problems in that area.

But I would say that I think more generally, there is room in Spain, as elsewhere in Europe, to move ahead with structural reforms to increase the flexibility of labor markets, to increase competition in product and service markets, and I think that would also help to provide the basis for stronger growth over the medium term.

QUESTION: The World Economic Outlook contains the first-ever examination of climate change on economies. Can you speak to that section a little and how you expect climate change, what impact you expect climate change to have on economies and markets in the coming years?

MR. JOHNSON: Yes, that was the focus of the press conference we had last week, actually, but I am happy and I think perhaps we should talk directly about the issues in more detail.

Let me just say briefly that we think this is an important issue. We think it is an important medium-term issue, and we think the macroeconomics of climate change are something to which we should now be paying attention both in terms of how it may affect the world, and that is something we spend some time on in the chapter, but also thinking through the potential macroeconomic consequences of various schemes or proposals to mitigate or address climate change in general and carbon emissions in particular.

The goods news is that there are some sensible plans out there that, while they would incur some cost, it is a relatively small cost, and particularly if the schemes are well designed in such a way that they can bring as many countries on board as possible, and establish a credible rising price of carbon emissions, starting low and rising over time and keep to that commitment, then we think the problem is actually quite straightforward to address in a reasonably cost-effective manner.

But let us talk about that more separately.

MR. MURRAY: Yes, come up to the IMF Press Desk and we will arrange for you to sit down with some of the authors of that analysis.

QUESTION: I remember sitting here a year ago and you saying that you did not think that the financial tail would wag the economic dog. Now, today, you are saying that the world faces a one-in-four chance of a recession. How are we to know that you are not being overly pessimistic this year while you were being overly optimistic last year?

MR. JOHNSON: Well, I think that is a fair question. I think that we make a forecast and any forecast can be wrong; most forecasts presumably are wrong. We are giving you an honest assessment of how we see the world today.

I think that everyone has learned a great deal about financial dogs and their tails, and how exactly those worked over the past year. So, on the basis of what we know today, this is our best forecast. Do ask me again next year about how we have done.

QUESTION: About African countries, can you tell me a little more about the situation and about your recommendation, please?

MR. LALL: We see the outlook for Africa as very positive in general, and there are a number of reasons for that. First, of course, is that commodity markets continue to remain very well supported and that helps both the oil exporters and the other countries. Of course, the regional effects are also very strong.

In addition, because of macroeconomic stabilization and improvements in institutions over the last few years, that is yielding a pay-off right now. There is strong domestic investment; domestic demand remains very strong. There are also stronger private capital inflows relative to the past. So, the outlook for Africa remains quite strong under these circumstances.

Of course, the reform agenda is not complete yet and so, going forward, the main challenges are to further entrench the improvements in macroeconomic frameworks and in fiscal policy. Of course, the inflation challenges which you asked about are a general challenge across the globe. So, one would have to discuss this on a case-by-case basis. In some cases, monetary policy will have some room to deal with inflationary pressures.

As Simon mentioned earlier, the general template of monetary and fiscal policies applies equally to Africa as well, and especially to rein-in overheating pressures, which are also the source of inflation in some of the countries, in addition to higher food and fuel prices.

MR. MURRAY: Great. Thanks, Subir.

I want to thank you all for joining us today. Thanks to Simon Johnson, Charles Collyns, and again, Subir Lall. Thank you very much.