Transcript of October 2022 European Department Press Briefing

Transcript of October 2022 European Department Press Briefing

October 14, 2022

Speakers:

Alfred Kammer
, Director European Department

Meera Louis
, Communications Officer IMF

Ms. Louis:
Good morning and good afternoon for those joining us from Europe. Welcome
to the European press conference. I’m Meera Louis with the Communications
Department. With us here today, we have Alfred Kammer, who is the director
of the European Department. We will start today by opening remarks, and
then we will open up the floor and take your questions. Thank you. Over to
you, Alfred.

Mr. Kammer:
Thanks, Meera. Thank you for coming to the press conference. I’m starting
us off with some remarks. Good morning to you here. And good afternoon to
everybody in Europe who is joining us on the Web. Welcome to today’s press
conference on the economic outlook for Europe coming into 2022.
Good morning, good afternoon and welcome to today’s press conference on
the economic outlook for Europe.

Coming into 2022, thanks to the strength, coordination and solidarity
displayed in policy responses to COVID19, Europe was on its way to exit the
pandemic. Meanwhile, rising inflation was expected to gradually subside as
commodity prices and supply bottlenecks would ease.

But Russia’s invasion of Ukraine changed this picture completely, and it is
now taking a growing toll on Europe’s economies. Gas flows from Russia to
Europe have dropped by over 80 percent relative to 2021. As a result,
energy prices have spiked, and they are unlikely to return to their pre-war
levels soon. This terms-of-trade shock has raised firms’ costs and led to a
cost-of-living crisis. In response to higher and more persistent inflation,
central banks have acted forcefully, and financial conditions have
tightened.

Under these forces, the European outlook has darkened, with growth set to
drop and inflation to remain elevated:

– GDP growth in advanced Europe is forecast to fall from 3.2 percent in
2022 to 0.6 percent in 2023—implying a downward revision for 2023 of 0.7
percentage point from our July World Economic Outlook Update
projections. In emerging European economies, growth is also projected to
decline sharply, from 4.3 percent in 2022 to 1.7 percent in 2023—a downward
revision of 1 percentage point. In the conflict countries, output losses
will be very large; Ukraine will see its GDP contract by over a third in
2022, while in Russia GDP is projected to be about 10 percent lower by 2023
than pre-war forecasts.

– Inflation should decline steadily next year, but it will stay
significantly above central bank objectives. We project headline inflation
at about 6 percent in advanced European economies and 12 percent in
emerging economies in 2023.

Risks to growth are on the downside, and risks to inflation are on the
upside, as shown in our new Regional Economic Outlook, which we will
release on Monday October 24. For example, a complete shutoff of remaining
Russian gas flows to Europe, combined with a cold winter, could result in
gas shortages and rationing, giving rise to GDP losses of up to 3 percent
in some Central and Eastern European economies, and yet another bout of
inflation across the continent.

In the current environment, European policymakers face severe trade-offs
and tough policy choices. They need to bring down inflation while helping
vulnerable households and viable firms cope with the energy crisis.
Policymakers also need to stay nimble and stand ready to adjust policies,
depending on incoming news.

Central banks should continue raising policy rates for now, including in
the euro area. And a tighter monetary policy stance might be needed in
2023, unless the deterioration in economic activity materially reduces
medium-term inflation prospects. As financial conditions tighten, financial
stability risks are resurfacing; regulators should closely monitor
vulnerabilities, such as, for example, by stress-testing banks’ exposures
to weakening household and firm balance sheets.

On fiscal policy, we have two main messages. First, fiscal tightening
should proceed in 2023. Why? Because it needs to work with monetary policy
in the fight against inflation and governments need to rebuild the fiscal
space that has been depleted by the COVID crisis. Second, fiscal policy
also needs to continue to address the cost-of-living crisis, but it needs
to do so more efficiently.

In many European countries, governments have taken measures to dampen the
passthrough of higher energy prices to households and firms to limit their
economic and social costs. However, such measures should be temporary and
will have to become more targeted to make sure their fiscal costs remain
manageable and—this is crucial—to make sure that energy prices encourage
lower energy consumption.

A helpful example of a well-targeted measure is to support low and
middle-income households through lump-sum rebates on their energy bills. A
less efficient alternative is to implement higher tariffs for higher levels
of energy consumption, as some countries have done. While such an approach
is not fully targeted to the vulnerable, it is still a better option than
broad price caps.

Let me give you some numbers to make clear how important a well-targeted
approach is: for 2022, on average across Europe, the cost of living for
households has gone up by over 7 percent due to higher energy prices. IMF
analysis suggests that compensating fully the bottom 20 percent of
households would cost 0.4 percent of GDP, compensating the lower 40 percent
would cost close to 1 percent of GDP. However, the fiscal costs of some of
the existing packages, including new measures being announced, are vastly
larger than these numbers. So, clearly, there is room to provide support
for vulnerable people at lower cost.

Europe’s governments can also be much more efficient in their support of
corporates. Energy security is a European problem; it is best addressed
jointly, with an eye on ensuring a level playing field across the ‘single
market.’

Finally, it remains essential for European policymakers to implement
reforms that do not only relieve energy supply constraints, but also ease
tensions in labor markets, enhance productivity, and expand economic
capacity—including by accelerating implementation of Next Generation EU
programs. Down the road, these measures will raise growth and ease
inflation pressures. In other words, they will help address the two
pressing economic challenges Europe is facing.

The task ahead is immense. But if European policymakers show once again the
strength, coordination and solidarity they were able to muster during the
pandemic, it can be done.

Thank you.

Ms. Louis:
Thank you, Alfred. So now we will open up the floor to questions. You can
send it by the presenter via WebEx. And please, can you? If you’re in the
room, please do identify yourself and your outlet. Thank you. I’ll take the
gentleman here in the front.

Questioner:
As you know, there’s been a change in finance minister back in Britain this
morning and there’s been a U-turn on the fiscal plan. Is that enough to
steady the ship? And what lessons do you think can be learned from this
debacle? And just a final question. Do you think there’s scope for changing
this very costly energy support plan that the UK is planning to put in
place?

Ms. Louis:
Thank you, Jeremy. Are there any other questions in the room on the UK? On
the UK. All right. Excuse me. The gentleman over here?

Questioner:
I just wondered, in addition to what Jeremy has asked you, if you could
reflect on the importance of credibility and stability in governments at
this challenging time, and whether there are concerns that what’s happening
in the UK in terms of the new approach to fiscal measures may find some
contagion in the rest of Europe.

Ms. Louis:
Thank you. If there are no other questions on the UK because we just want
to cluster them. Nobody else. Okay. Alfred.

Mr. Kammer:
On the question on the UK, we understand that the UK authorities are in the
process of recalibrating the fiscal package they have announced and we wait
until we get the details and at that point in time we are going to assess
the package. I should also say that the UK is a country with strong
institutions. We welcome the government’s commitment to involve the Office
of the Budget Responsibility and that the BOE will continue to do what is
needed to address market dysfunction and preserve financial stability. We
welcome the BOE’s continued strong commitment to bring back inflation to
target. We continue to have very close and strong relations to the UK team
and as this budget is being worked out, we will stay engaged.

Ms. Louis:
Thank you, Alfred. Gentleman over there in the white.

Questioner:
I understand that the packages for helping consumers and companies with
their energy costs have actually to meet three criteria. It’s targeted,
temporary and funded. Now we have a plethora of different packages in
Europe. Could you point out what country actually meets all three criteria
or even two or even one?

Mr. Kammer:
So just to be clear, what we are looking for in these packages and why we
are looking for particular principles; one, we indeed suggest that packages
are targeted and addressing the cost of living of the vulnerable segments
of society. And that is important in order to limit the fiscal cost,
because some countries have more limited space than others. But it is also
important in terms of supporting and aligning fiscal policy with monetary
policy. In general, our advice is that fiscal policy should not be
expansionary. And if countries are approving fiscal packages and fiscal
space is tight, there should be offsetting measures. So targeting is very
important. And as I pointed out, we looked at helping out the lowest 40% of
households for 22 in Europe, the average cost would be close to 1% of GDP.
When you’re looking at the average package right now in 2022, it’s 1.8% of
the GDP. So that is fiscally not very efficient. I think the second point,
which is important and a temporary fits into that because the longer these
packages last, of course, the more expensive they’re becoming and they
become a drag on fiscal policy and consolidation efforts which will be
needed. The second part, which is also important, is the design of these
packages so that prices actually can be passed through. Why is that
important and why is that important in particular at this current juncture?
Because of energy security issues. When you are looking at Europe
currently, in July we were, in our outlook, we were concerned about a risk
which could materialize if Russian gas supplies were to be shut off and
there could be rationing required in the winter 23, 24, 22, 23 in a number
of countries and that would lead to steep losses in economic activity. Our
current assessment is that with regard to this, we are on a knife’s edge.
It looks like most countries actually will be able to avoid rationing and
so it can be taken care of with a price mechanism. The issue is still a
risk because if the winter is cold and that is combined with the Russian
gas shut off, some countries may still experience rationing despite having
filled, refilled storage tanks over the summer. And the part of the energy
consumption and energy compression comes in because this is not only a
problem of the winter of 22-23, but the energy security issues will last
through 23 and into the winter of 23-24, because in the summer, gas storage
would need to be replenished and therefore we need Europe-wide compression
in demand of energy that includes gas and electricity. And the European
Commission has suggested some targets. The packages being implemented by
countries should try to achieve these targets by passing on price signals
so that actually gas demand and electricity demand is being reduced. With
regard to particular countries which are standing out, I think we have a
plethora of measures in place across many countries. Many are targeted, but
some of the measures in the same countries are broad-based. So that goes
across Europe. If you are looking at some of the smaller countries which
have less fiscal space, those are usually the countries where we see that
they are the targeting is best and also where the fiscal cost is addressed
as an issue and the fiscal packages are more efficient. So that’s a general
rule when we are looking at these packages.

Ms. Louis:
Thank you. Alfred. Jan from Reuters right here in the front, please.

Questioner:
You mentioned your preferred way of dealing with the energy crisis. Lump
sums to the most vulnerable, etc. and that broad price caps are a bad idea.
But this is exactly what the Europeans are thinking about now. The
commission is to present its proposals next week. And there is big pressure
on price caps on gas. Is this something that the IMF would advise against
or is it all under design?

Mr. Kammer:
Just to be clear, with regard to price caps, there are probably two issues
when we are talking about price caps. First and foremost, we are looking at
individual packages and price caps which are kept in place for household
consumption or for industry consumption. And clearly, in order to get a
price response, sorry, a demand response and cut back on consumption, you
can have targets, you can have voluntary campaigns, but prices will play an
important role in terms of lowering the consumption of households and
enterprises. And I think in terms of some of the new packages which are
being looked at right now, there is an element of becoming more targeted
with these packages to be ensuring that prices are passed through to a
sufficient extent in order to ensure that these demand reduction targets
are being met. And I think that’s a good development. Why is that
important? Because it goes back to the word temporary, and that is also
something we had in place during the pandemic. We thought the epidemic
would initially be over after three months and it took a lot longer to go
through that. And with the energy security situation, this is also not
finished. After this winter, this will take another one and a half years at
least in order to work itself through. So in that sense, these demand
compression parts are very important with regard to a more general price
cap at the European level, that’s something, and purchasing jointly gas
this is something one would need to look closely when the details are
available because there the devil is in the details on how they’re being
designed, whether effective and whether they actually meet the objectives.

Ms. Louis:
Thank you, Alfred. The gentleman there with the glasses. Thank you.

Questioner:
With regards to Turkish economy, what worries you? What worries you the
most? What are the prospects and risks given that it be elections next
year? What will be your recommendations messages for the Turkish
policymakers? And secondly, in contrast to some of the major economies,
Turkish Central Bank is, keeps reducing interest rates as a way to fight
inflation. Do you think this method, so-called turkey economy model could
be successful in reducing inflation? Thank you.

Mr. Kammer
: Turkey had very strong growth during the pandemic, supported by very
stimulative macroeconomic policies. Now also reflecting the effects of the
energy crisis and higher energy costs, the Turkish economy is slowing down.
Our advice on the macroeconomic side remains, as it has been for some, some
while inflation has been increasing throughout the last couple of years. It
is now at 83% in the last month in order to lower inflation. It is
important to implement a tighter monetary policy and that means to increase
interest rates. And coupled with that, again, is what we are seeing, that
macroeconomic policies need to be aligned. And that means given also
limited fiscal space. Fiscal policy in Turkey needs to be tightened in
order to support taking care of bringing down inflation. That has not
happened yet, and we are continuing to recommend this policy mix to the
Turkish authorities.

Ms. Louis:
Thank you, Alfred. The lady there in the white, please.

Questioner:
I would like to know more details about Spain. Miss Petya Cueva said the
other day that the forecast for next year will be better than expected in
this economic outlook because they didn’t consider some data that was
published later. How do you see Spain’s first forecast?

Ms Louis:
Alfred, just staying on Spain, we got another question online, which is on
similar lines and they’re asking in your last REO, you said Spain would be
one of the economies that would better resist the impact of this crisis.
What are the factors that explains this revision of its outlook? Is there a
risk of recession in Spain in 2023?

Mr. Kammer:
With regard to Spain, Spain was deeply affected by the pandemic and had a
deep recession as part of that. They also had a very strong policy response
in order to exiting from this recession. We have forecast growth for 2022
of 4.3%. That also reflects a strong recovery in tourism. And we are now
expecting a slowdown in growth of 1.2% for 2023. Now, as I said, Spain
experienced the largest contraction among major advanced economies in 2020,
and that was reflecting the high reliance on contact intensive sectors. And
therefore, output is not expected to reach pre-pandemic levels until early
2024. The forecast for 2023 reflects a general weakening of demand, tighter
financial conditions, weaker consumer confidence and persistently high
inflation. And that is a story which you’re seeing across the Eurozone.
Now, I should also say that Spain is one of the countries for which we are
not forecasting a technical recession over the next year. Some other
countries will experience technical recession and some will have outright
recession. So Spain will not experience that and Spain’s growth will
actually be stronger than in other European countries.

Ms. Louis:
Thank you, Alfred. So I’m going to turn to WebEx in a bit. If you are on
WebEx, can you please turn on your cameras?

Questioner:
Thank you so much for taking my question. Someone, some experts believe
that while Europe is on the brink of a deep recession, the economic
situation in Russia is improving. Goldman Sachs, for example, indicates
that Russian activity is quite a bit livelier than it is in big European
countries. According to the World Bank, Russian economy is expected to
stabilize in 2024 and grow by 1.6%. Do you agree with these estimates? Is
it right to say that Europe falls into recession but Russia climbs out?
Thank you.

Mr. Kammer:
No, that’s not right. Then when you are looking at the growth developments,
what you’re seeing is that growth in Russia this year and next year is
going to be negative and combined, over those two years, GDP levels will be
lower by ten percentage points than pre-war. So that is a deep recession
Russia has entered. When you’re looking at the global outlook and also the
European outlook, we see a lower growth, but we are not seeing deep
recessions like in Russia. I should, of course, add that Russia’s invasion
of Ukraine caused the higher energy prices, caused a lack of food exports,
and led to increases in prices globally and in particular in Europe, and is
a root cause of the slowdown and the recession we are seeing in some of the
countries.

Ms. Louis:
Thank you, Alfred. So just staying on WebEx.

Questioner:
I thank you very much for taking my question. My question would be about
Italy, as you know, we have an incoming government that’s going to be sworn
in the next few weeks, and you mentioned, and broadly for Europe, an
immense task and balancing financial aid in front of this energy shock and
also the need for fiscal consolidation. So how big is this, how immense is
this task for Italy, especially given the challenges that it faces being
the second most hit country by the energy shock after Germany and given its
high debt, that’s already facing some difficulties as you can see in the
spread of Italy’s speedy piece against booms. And are you confident about
that trajectory? How confident are you about that, about the debt going
down? Thank you.

Mr. Kammer:
So Italy is actually going to face a complex policy environment. On your
first point, our recommendation to Italy is the same as to other countries
with regard to the design of packages to have to targeted, to be efficient
and to the extent possible find offsetting measures in the budget in order
to finance these packages and at the same time have to price signal work so
that demand is being compressed for energy and gas. Although I should say
that the, uh, the risk of rationing which we had projected for Italy, is
greatly reduced due to the very strong policy response by the authorities,
in particular with regard to increasing the supply of gas to Italy. So that
helps Italy and that helps Europe. Now, on the other issues, you have been
raising bit lower growth and with increasing interest rates, Italy, of
course, will need to be very focused on its fiscal stance. It will need to
be very focused on bringing the debt to GDP ratio down, as the previous
government has been focusing on as an objective. And given recent
developments, that will require a more ambitious fiscal effort in the
future. But we suggest, of course, as part of that is to eliminate low
quality public spending, broadening the tax base. And what is very
important for Italy, but not only for Italy, but also for other countries
in Europe, is to really move forward on structural reforms, because
structural reforms will increase productivity. They will increase growth.
And they will help on energy security and the energy transition. The Next
Generation EU fund is an excellent instrument in terms of helping and
supporting countries on that road. And I think the implementation of the
Next Generation EU fund is also critically important for Italy.

Ms. Louis:
Thank you, Alfred. Any other questions in the room? The gentleman over
there. Third row.

Questioner:
Thank you. I had a question about the forecast for the Netherlands. So it’s
above average growth. And there were two questions for me about that,
because we are quite tied to the German economy, which will be in recession
in 2023. And also we have a big housing sector and a lot of mortgages which
are, of course, vulnerable for interest rate increases. So are the risks
more at the downside for the Netherlands, you think, or. Yeah, well, that’s
basically my question. So how big is the possibility to we will end up in a
recession like Germany? That’s basically my point.

Mr. Kammer:
So first of all, the Netherlands had a very strong recovery from the
pandemic, reflecting good and proper policymaking. You’re right, the
exposure of the Netherlands to the external demand factors is an important
risk. Then when you are looking at our forecast, that already includes
lower demand from Germany as a spillover to the Netherlands. So that is
already in the forecast. But of course, if in general economic activity in
Europe or in the US or in China were to weaken further, that would affect
the economic outlook of the Netherlands. With regard to the housing issue,
that is an issue which is also more prevalent across other European
countries that we have high house prices and I would say frothy housing
markets. That is something which needs to be very closely watched by all
regulators over the next few years as we see tightening financial
conditions. I should say, with regard to the Netherlands, we welcome the
stricter conditions they have been implementing with regard to mortgage
loans from January 22. I think they’re very important. We also welcome that
the authorities are vigilant and closely observing housing market
developments and also the increase in interest rates on the stability of
the market. And another point which applies to the Netherlands, but applies
also more broadly to other European countries which have frothy housing
markets, that is a general issue, that supply needs to be increased and
that has been an issue for some while. And that to some extent reflects all
the development in the housing market. So it is not just a reflection of
that we had interest rates low for longer, but it also reflects that supply
has not been increasing commensurately with demand and so supply side needs
to be an important element of the policy response. That doesn’t immediately
deal with any stability risks, but that is a longer-term issue that needs
to be addressed not only in the Netherlands, but more broadly in a number
of European countries.

Ms. Louis:
Thank you, Alfred. I see we have a couple of questions online. We have one
coming in from CNN Greece. Greece has avoided reducing fuel taxes and thus
the country currently has one of the highest fuel prices in the Eurozone.
At the same time, the subsidy scheme chosen was not enough to lower fuel
prices. Given these fiscal constraints, what does the IMF propose?

Mr. Kammer:
Yeah, I think our advice to Greece is very similar to the advice we are
giving to other European countries. Indeed, taking broad based price
measures, caps, tax reduction is not the way to go. Instead, we are
advocating targeted, if possible, lump sum transfers to divide honorably in
order to deal with the increased cost of living. They should be temporary,
and that is particularly important for countries which have limited fiscal
space or who need to reduce the debt over time.

Ms. Louis:
Thank you. We also have another one that just came in. He asks you, what
are your assessments of the current situation and a prediction for the next
year for the Western Balkans region, especially Bosnia and Herzegovina? And
what do you see as the biggest challenges ahead? Inflation, fall of GDP,
other factors?

Mr. Kammer:
The situation in the Western Balkans is similar to what we are seeing
across Europe. We are also seeing a weakening of growth that reflects
tighter financing conditions, that reflects the impact of higher energy
costs, which affects both firms and households in terms of consumption
demand. I think that an added element we are seeing in the region, which
the policymakers are very well aware of, that financing, external financing
is becoming more difficult to obtain. And so access to external financing
and also spreads have increased and that will complicate the policy making
environment in the region now. But we also suggest for the region more
generally is to focus really on structural reforms which are generating
growth in the long term, but also deal with supply bottlenecks, which
should help on the energy side.

Ms. Louis:

Thank you. I think that’s all we have for now. Thank you, Alfred. And if
you need anything else, please feel free to reach out to us bilaterally.
And we will be happy to help. Thank you for joining us. Take care.