April 22, 2022
MEERA LOUIS, Communications Officer IMF
ALFRED KAMMER, Director, European Department IMF
P R O C E E D I N G S
MS. LOUIS: Good morning and welcome to the European press conference, and good afternoon to those joining us from Europe. I’m Meera Louis with the Communications Department, and with us today we have Alfred Kammer who is the director of the European department.
And so, Alfred would begin with a few remarks. And then we’ll turn over the floor to you. Please do send us your questions via WebEx or just raise your hand and we will call on you. So, with that, Alfred, over to you.
MR. KAMMER: Okay. Thank you. Good morning, good afternoon, and welcome to all of you to our press conference today where we release our regional economic outlook for Europe. The humanitarian catastrophe in Ukraine is reverberating across Europe. Some 5 million refugees have already fled the fighting in the largest exodus the continent has seen since the Second World War.
The greatest numbers of flowed across borders to Poland, Romania, Hungary, and Moldova. The war is a serious setback to Europe’s strong, yet incomplete, recovery from the pandemic. It left private consumption and investment well-below pre-coronavirus forecasts, even as fiscal and monetary support underpinned an impressive rebound in employment almost to the levels last seen before the pandemic.
Spiking energy and food prices are now cutting into household consumption and foreign profits, while economic uncertainty is poised to restrain investment. The war is a reminder, too, of how Europe must do more to improve energy security, notably, by expanding renewed resources and improving efficiency.
Reflecting these challenges, or regional economic outlook lowers the growth forecast for Europe. For advance economies, we cut our growth project by 1 percentage point to 3 percent in 2022 from those in the January world economic outlook update.
For emerging economies, and we are including here Belarus, Russia, Turkey, and Ukraine, we have cut projected growth by 1.5 percentage points to 3.2 percent.
Severing nation economies such as France, Germany, Italy, and the United Kingdom are project to barely expand, or even contract for two straight quarters this year. Activity in Russia is forecast to shrink by 8.5 percent, and in Ukraine by 35 percent.
So, what should monetary and fiscal policy make us do? The war is a supply shock that reduces economic output and raises prices. Indeed, we forecast inflation will accelerate to 5.5 percent in advance economies, and to 9 percent in emerging European economies, excluding Belarus, Russia, Turkey, and Ukraine. Those forecasts are up by 2.2 and 3.4 percentage points, respectively, from our January projections.
Monetary policy must balance the need to contain inflation with the need to limit losses in output. Much of the current pressure on prices is driven by forces beyond the control of central banks, such as shocks to energy and food markets, and supply chain disruptions. But monetary policy, in many countries, should still stay the course of normalizing their policy stands to help anchor inflation expectations and ward off domestic drivers of inflation such as too high wage increases.
But possibly, governments should engage with social partners to prevent wage price spirals, including by making sufficient support available to households and firms that are struggling to afford more expensive commodities.
To cope with the supply shock, automatic fiscal stabilizers such as higher unemployment insurance and lower tax payments should be allowed to operate freely. These measures will appropriately widen fiscal deficits as growth prospect weaken. Due to the actual pressures on public finances in some countries, and that is not surprising.
That said, fiscal policy may have to do more to support economies if major risks materialize. Much of the repressions will be more acute in several countries that are opening their borders to refugees. For example, in Poland, which is hosting almost 3 million, or Moldova where the number of refuges is very high relative to the population. This underlines the need to share the costs of humanitarian relief fairly among EU members.
For non-member hosts, assistance by multilateral and regional partners should help manage costs. Particularly, the public finances are already stretched. The war and its aftermath will act to distract from challenges facing post-pandemic Europe.
In Ukraine, social and economic infrastructure destroyed by the war will need to be repaired, which will require large financial flows from donors. Reconstruction and resettlement will help refugees return and economic growth to rebound.
Improving energy security calls for policies to strengthen resilience and accelerate the transition to greener forms of energy. Promoting new growth engines and factory reallocation requires active and passive labor markets and education policies to improve labor conditions, lower transition costs, and enhance workforce skills. So, these are my opening remarks. Over to you, Meera.
MS. LOUIS: Thank you, Alfred. So, I see there are a couple of people who have already joined us on WebEx. I’m also seeing some questions coming into the press center.
So, let’s start with Ukraine Inform. [Yarislav]?
QUESTION: Hello. Thank you. Thank you for the opportunity. My question is, obviously, about Ukraine. Recently Kristalina Georgieva confirmed the IMF’s priority to support filling the financing gap in Ukraine for 5 billion in the following months. In addition to the Administered Account for Ukraine, what instruments and funds can the IMF provide to meet this need?
And, also in this context, does the Fund ready to support Ukraine’s request to IMF members to allocate 10 percent of the SDR for this purpose? Thank you.
MS. LOUIS: Thank you. Alfred?
MR. KAMMER: Let me give you a bit of wide perspective. I should say the economic management from the Minister of Finance and from the National Bank of Ukraine was exemplary during this period of the Russian invasion so far. From day one, they put in place emergency measures which protected the exchange rate, which made sure the prices were not going out of control, which prevented capital account outflows. And during the whole period, they have managed well to maintain macroeconomic stability.
Together with the Ukrainian authorities, we have identified a budgetary financing gap of 5 billion for the next two months. That’s a result of lower tax revenue. They are now below 50 percent of the pre-war time. But it’s also a reflection of much increase spending to deal with the demands of the war. And, also, to deal with 7 million displaced people in Ukraine. So, the international community stepped in early on. For instance, the IMF provided emergency assistance of $1.4 billion immediately in March. This help the Ukrainian government maintaining macroeconomic stability and the World Bank, the EU also participated substantially in support of Ukraine. We have a number of facilities available where a donor can avail themselves to provide funding to Ukraine. One would be the IMF Administered Account. Another one is the Mali Donor Trust Fund of the World Bank and there will be also the EU Solidarity Fund. So, there’re vehicles where donors can support via multilateral facilities, the Ukrainian government. The Ukrainian government is now very keen to support the economic recovery in those parts of the country where economic activity can continue. I think this is one very important priority for the government. This will help normalization, as will create output and growth and this will help the displaced people. But giving these people exceptional support will still be needed to help budgetary financing gap and the Ukrainian authorities have appealed to the international community to help fill this financing gap and it can have several forms. We are proposing that most of the support will be provided in grant form. There are various things that can happen including by members to provide support with the SDRs.
MS. LOUIS: Thank you, Alfred. I also see online Paola Tamma from Politico Europe. Paola.
Question: Thank you very Meera. I have two questions if I may. One is that you write that some of Europe’s largest economies are projecting very weak or even negative quarterly growth in mid-2022. So, I’d like to ask for which countries do you project negative growth and for which a technical recession. And then secondly, since the start of this week the IMF has been very forcefully saying that Central Banks should be acting decisively and communicating clearly. Do you think that is ECB likely to have to tighten further and faster than is currently planned. Thank you very much.
MS. LOUIS: Thank you, Paula. And also, just to add we’ve got several questions on the ECB as well. So, we have Nick Peterson from FT, we have Jan Baunmann from SRF. We also had Jan Stupczewsky from Reuters, all pretty much asking similar questions as, you know, on the inflationary outlook, you know, should the ECB begin tightening, is there a recession? is there a risk of de-anchoring inflation expectations. So, all pretty much similar lines.
MR. KAMMER: Okay. So, let me start with the issue of growth in Europe. Exiting the pandemic in 2022, we actually forecast a very strong growth in -– for this year before we hit the war of Ukraine. I think that’s an important part to understand, that we entered this period with strong growth. We have revised downward our growth forecast and what we see is that the growth momentum which we had in 2021 is actually providing relatively comfortable growth figures for 2022, for all of the major economies. But that hides one fact. And the fact which it hides is that because of the including of the war, growth during 2022 is flat in most of the major economies except for Spain. And that means that over a period of a few quarters, growth will be around 0, could be a bit above, could be a bit below, and it shows that there is some weakness in the economy which policymakers need to be aware of. But 2022 is still carried by this strong growth of -– from 2021.
Going to your question on the monetary policy part. Our recommendation to the ECB is to stay on the path of normalization and to keep the pace of normalization, which is right now reflected and priced into the market. The war created additional pressures on energy prices. The war amplified further pressures on supply and demand mismatches. And did make it more important for central banks in general to carefully assess and watch that inflation expectations are not being de-anchored. And that second-round effect increases in wages are being kept in check so that we are not ending up with a wage price spiral. And I think this is something that applies to all central banks in Europe and that this common policy advice we have. What it also means is in case we see a de-anchoring of inflation expectation, or we see that wage increases are larger than expected, at that point in time, that would call for an increase in the pace of normalization including for the ECB. But it could also be that aggregate demand softness and output and growth are less than we are forecasting, and that the medium-term inflation target or the inflation rate is lower again than what you’re forecasting and on – under these circumstances, they may need to be a reduction in the pace of normalization or even a pause in the normalization. And I think that plays into the issue of that we have large uncertainty, how the economy will deal with the shock we had with Ukraine and whether we are getting new shocks that during this period. And as many of our Central Banks have said, that means that monetary policy decisions will need to be data dependent. So, that’s for the ECB mainly. When we are looking at the European — eastern European Central Banks. They are in a more difficult situation and their policy normalization will need to continue clearly and sometimes they will even need to be stepped up given the new pressures which we’re having from increase in prices.
MS. LOUIS: Thank you Alfred. Now we go Domenico Conti from ANSA. Dominico.
Question: Hello. Thanks, Meera. Thank you for this chance. I have a couple of questions. Both related to Russia actually. One is whether the IMF has an estimate of the possible impact of a total energy embargo on the European countries that are most dependent on Russian energy such as Italy or Germany. And the second question is what your assessment is of possible Russian sovereign default which is actually a possibility based on what’s happening. Thank you very much.
MR. KAMMER: Yeah. On your first question, energy security is a big issue and we’ve seen undertaking in the European countries to bring themselves of dependency from Russian gas, oil, and coal. What we also see is –- we’re looking at some of the possible downside scenarios and in our Regional Economic Outlook, we look at what is going to happen if Russian gas flows would stop and you have two scenarios there which you’re seeing and two scenarios are showing that for the first six months that would be manageable by Europe but in the winter time, at that point in time there would be shortages emerging. And these shortages of course would have significant impact on the economies and the economic activities. They would reduce on an annual basis gas deliveries by 12 percent. So, we looked at this ensuring that economic impact and we have scenario which we are outlining in our verging economic outlook that also shows what would happen if we have confidence effect, if we have further financial tightening and that scenario suggest that we might have an impact on Europe of 3 percentage points decline in GDP. So, the impact would be from the baseline at 3 percentage points decline and that’s a significant impact. I should say that this impact will be different from country to country so it will be again asymmetric, and it depends on the energy intensity and the gas intensity of countries and how much gas could revert to electricity consumption. So, for those countries which are more dependent on Russian gas the impact will be more significant. And I think that’s the message we have been sending that this is a downside risk which needs to be -– the risks to the extent possible needs to be mitigated before it arises. What I should say is that there some – so for Italy which is more dependent currently on Russian gas that would mean a higher impact and for some of the other countries. But this is not a risk which one needs to wait and set for. One can take action now, and I think we are seeing this action being taken by European countries already including by Italy. Looking for alternative supply of energy and Italy has made steps in that direction. Looking at the demand side which means including public opinions or as in Italy, trying to achieve a reduction in heating and cooling in order to decrease the demand on energy. It requires to establish a bottom-up contingency plans so that if that situation about to arise that can put in these plans to limit the damage to the economy. And I should also say it will depend on the solidarity between European countries and also that means how that impact will be particular countries will depend on whether there is a sharing of gas and energy in place in order to mitigate some of these effects for particular countries. So, many of these steps can be taken and they be taken now in order to limit any economic impact of such a scenario to arise.
Two more points. One is a lot of uncertainty about these kinds of estimates and just shows how difficult it is to see how the protective capacity of the economies will be affected, and I think the oil has been very sensitized on how very little shocks to supply’s chain can have actually large repercussions for the economy. And I think that’s important to remember. And I think the second point I would like to make is that it is very important to already reflect some of these risk mitigation measures in current policy. What does that mean. It means that current price hikes on the electricity, on the gas side to the extent possible should be passed through to consumers. To get that price signal and to get that reaction on demand. Of course, that also means that vital groups should be protected and many of the European countries are providing targeted and temporary subsidies to that effect. And it also means that there’s something for now and that there will be something for managing a large shock that arise within the embargo on gas imports from Russia. It means to protect affected firms and those which are viable. And we have many pandemic programs tried in place in order to provide damage to the productive capacity of the economy and the cascading of bankruptcies.
Ms. LOUIS: So, just staying on Russia. I also see Anton from TASS. Anton?
Question: Yeah, good morning to everyone. Thank you for taking my question as some follow-up for Russian default question. I’m just interested in your projections for potential technical default that Russia may face because of enforced western sanctions. What impact would be — would this have on countries that are the economically dependent on Russia and what would be their consequences for Russia itself? Thank you.
MR. KAMMER: Yeah, I think I take these two questions together. I think with regard to a Russian default on the debt, one thing to note that the outstanding Russian sovereign debt is relatively small in global terms. This is a total outstanding debt of $60 billion. Also, market prices reflect the default probabilities already, so that should give some comfort in terms of financial stability risks. What that also means for the Russian government that it would and will be difficult always to regain market access following such an episode and that usually will take time. While Russia at this stage doesn’t have any market financing needs and so that is a lesser risk of — for the Russian government, but it has important implications also for the corporates. The amount of corporate debt total extended debt in Russia outstanding is over $400 billion and these developments will also make it more difficult for corporates to obtain credit and that will be of much more significant impact to the Russian economy.
MS. LOUIS: Thank you, Alfred. We are getting a lot of questions online as well. So, let me take one that’s come from Brussels, again he’s going back with this is, like, an EU question, so big picture with the war in Ukraine posing new challenges to supply chains, do you think it would be better if EU governments continue supporting the government as before? So, basically, he’s asking do — does the fiscal policy need to be tweaked?
MR. KAMMER: Yeah, let me also provide a bit of context to that question. When we are looking at the fiscal policy stance before the war, what we saw and what we see in the numbers is quite a decline in budget deficits across the Europe for 2022. This reflected mostly elimination of many of the emergency programs, which were implemented as a response to the pandemic and that is a very sensible thing, of course to do. This also reflected and the strong recovery and strong tax revenue. And I would say it was funded with still support on the supply side to help along labor reallocation. That fiscal stance before the war was appropriate, it was accommodative, and it was efficient in order to help exit from the pandemic.
So, what you’re seeing now after the war is increases in spending that reflect subsidies on the energy side to targeted groups that also reflects spending for refugees, and for some countries this spending requirements can be rather large. For instance, Poland is spending on refugees by between zero point five and one percent of GDP and so that is not negligible. And so, what you’re seeing is a more expansionary fiscal stance in Europe for this year. We think this is appropriate. We also think this is efficient in order to support the recovery and unless some of the downside risks materialize, this is the fiscal stance, which should be maintained at no additional aggregated advance support will be required.
So, why do I make this point before I come to the question because of the big part — big parts of the policy strategy exiting the pandemic and also now exiting the implications of the war in Ukraine is to come out with economies intact and with strong growth. Because growth will be a key ingredient in terms of building a fiscal purpose again and consolidating the fiscal side starting for many countries in 2023 because started already in 2022.
So, the current consolidation, we believe that fiscal consolidation should start for most countries where it has not started yet in 2023, unless, of course, the downside risks materialize. What is important part of this consolidation is that medium term plans should be announced as early as possible, and they should be communicated well. And I think when I spoke to you last time, we also had this question and my rationale for fiscal consolidation was countries need to be built fiscal buffers in good times because we know that we get major crisis every five to ten years. I think I was wrong on the five to ten years. We got another major crisis that in half a year and I think that, again, puts emphasis on that when we are coming out and manage this new shock there is a premium on fiscal consolidation to establish those buffers to be ready for the next crisis and also to work on measures, which improve and increase the resilience of the economy to shocks.
MS. LOUIS: Thank you. I’m now going to switch a little bit. I’m seeing a lot of country specific questions, so we’ll switch gears a little bit. I’m going to start with a question from Portugal. He asks the Portuguese government plans to cut the deficit from 2.8 percent of GDP in 2021 to one point nine percent of GDP next year. Is this the best approach given that we’re seeing all these war effects?
MR. KAMMER: So, what the Portuguese government is doing is pretty much in line with what many other governments are doing. They are taking out emergency programs, they, having targeted support for vulnerable groups and that explains the reduction in the fiscal deficit on a net basis. It also is a result of strong growth, which happened and tax revenues, which are coming. So, this is absolutely appropriate and in line with what other countries are doing.
MS. LOUIS: Thank you very much. Now, we will turn back to Webex. I see some maybe country specific questions. Sarah Collins from the independent Ireland?
QUESTION: Thanks, Meera. Hi, yeah, Sarah Collins from the Irish Independent. It is about Ireland. Given Ireland is the fastest growing EU economy according to your forecast this year, does the government have more fiscal space maybe to do more to aid Ukrainian refugees? And I ask that with the fact in mind that there’s quite a serious housing crisis here and the government has announced that many of the people who pledged help for Ukrainian refugees have started to withdraw it now. Thanks.
MR. KAMMER: Sorry. Can you repeat that last part? I did not understand it.
QUESTION: Oh, yeah, sorry. It’s just to say that many of the people who originally pledged rooms for refugees here and pledged say holiday homes are starting to withdraw their pledges because they’re just unable to meet them. Thanks. –
MR. KAMMER: Yeah, so as I said, what we saw all across Europe, there is a lot of solidarity and a lot of actions in order to help refugees and to bring refugees in. And I think the country outstanding in all of this, with 3 million refugees received is Poland. And Poland, I think, has followed a similar model as Ireland to provide private housing, private hosting of refugees to deal with the sudden inflows. And certainty, Ireland has the fiscal space to deal with these pressures from the refugee crisis. I think one important problem, which is faced by Ireland, and which is also faced by many other European economies, is that housing supply is rather pressured already, and that puts a premium on finding actually physical housing stock for refugees.
And I think that is a problem in the short term, and I think that is something which needs to be dealt with on a country-by-country basis. But I should also say it’s coming on top of what we are seeing in many European countries, that housing markets are super tight, and we have been advocating for quite some while, including for Ireland, that housing supply needs to be increased and that is for the own population because of the pressures.
And that means rezoning. That means increased building of social housing. But that also means in some countries to take measures on the demand side in order to stop the pressure. So, the refugee crisis comes on top of that, but I’m hopeful that this can be managed along those lines. I should also say in this respect that when you are talking to the Ukrainian government, they are making a very strong case of economic recovery in Ukraine to provide the economic conditions not only for helping the displaced people, 7 million in Ukraine right now, but they want to provide these economic conditions in Ukraine for the refugees to return as soon as possible. So, I think that strategy will also help and will mitigate over time the pressures on housing generated in European countries.
MS LOUIS: Thank you, Alfred. Now let’s turn to the UK. I see Phil Aldrick from Bloomberg.
QUESTION: Yes. Hi there. Thanks very much. And just one quick question, and then I’ve got another one. You said that there are countries which see two quarters, consecutive quarters of recession. You mentioned Germany, France and UK. Could you just clarify which countries specifically see two negative quarters this year? And UK specifically, the forecast is for inflation to be very sticky compared with all other G7 nations in 2023.
So above it’s around 5.5 percent in 2023, and it’s below 3 percent in every other G7 nation. I just wondered what accounts for this stickiness of this inflation in the UK? Is it because we’re an open economy? Why are we finding it harder to deal with, that bring inflation down compared with, say, Germany, which obviously has a bigger exposure to gas markets? So those are the main ones. If you can say something about business investment and why your business investment forecast for the UK are down, that would be great.
MS LOUIS: And Alfred just before we go down to that, we also had a question on Germany, a similar question that came in from The Telegraph, also in the UK. Again, asking about, you know, Germany is currently in a recession. Why has Germany been the hardest hit by the current economic headwinds? So, he’s also touching on that.
MR. KAMMER: So, with regard to your first question. All major European economies, except for Spain, are at around zero growth, some a bit above, some a bit below. And there is a risk that some of them could enter a technical recession, a mild technical recession, I should say, in 2022. But there’s so much uncertainty in these numbers. When you look at quarterly developments, they are very volatile. Even when you look at annual projections, the numbers and the changes are very stark.
So, to predict a recession in a particular country, I would say these countries are at risk of a recession. But under the baseline, these would be mild recession happening there. Why is Germany more effected than some of the other countries? Germany was still dealing with supply chain problems going into the Ukraine war and Germany supply chain problems also have been amplified by the war in Ukraine. And I think that’s one explanation for what is happening now. And particularly the automobile sector has been affected quite significantly last year because of supply chain issues. With regard to your second question on the UK inflation. We expect that the 12-month end period inflation rate will registered said about 7.5 percent at end 2022 as energy shocks, supply chain disruptions and demand supply imbalances, including in the labor market, continue to bite.
But on this inflation, we expect that it is going to take place only gradually with the 12-month rate declining to 3 1/2 percent by the end of 2023, which would produce an average inflation rate of 5.4 percent in our forecast for 2023. So, this gradual decline would reflect second round affects with tight labor markets, leading to some risk catch-up, and from seeking to preserve a profit margin.
When you’re looking at the UK and when you’re looking at the inflation side, you see actually that this is a very difficult situation for policymakers to deal with, and there’s no easy way for policymakers to navigate this complexity.
What they are facing is they have the energy price, shocks, and the magnitude of the energy price increase from the Euro Area to deal with. And at the same time, they are dealing with what we see in the U.S., the tight labor market, the demand pressures, and the pressures to increase wages.
So, you could say for policymakers, this is the worst of the two worlds to deal with. So, a difficult and complex issue for policymakers to navigate.
MS. LOUIS: Thank you, Alfred. I’m afraid we’re running out of time, so we will just stay with one last question. And this comes in from Jan Luka from Il Sole 24 Ore. And this is a rather broader question and applies to the Euro Zone, staying in this section.
And he asks what is the probability for recession in the Euro Zone in case of a total embargo on energy imports from Russia?
MR. KAMMER: Yes. I think I, to some extent, answered this question already. That a total embargo would have a significant effect on growth in the Euro Zone. And the estimated, in our WEO scenario analysis, that such a shock, with confidence effect, could reduce GDP by 3 percentage points. When you’re looking at estimate of this shock, it could be larger. Some estimates are that such a shock could be smaller, but it’s going to be significant.
With regard to the impact, it will be heterogenous and asymmetric, and the impact will be very different from country-to-country, depending on the gas intensity, and also the intensity of the gas electricity link.
But needless to say, such a shock would be a significant shock, and therefore, our recommendation to prepare for such a possibility. And that is, I think, just good risk management to mitigate as much as possible before a shock like that may materialize, given the significance on economic activity.
MS. LOUIS: Thank you, Alfred. And I’m afraid we’ve run out of time, and we’ve got to wrap up now. Apologies to those we couldn’t get to. We’re happy to get back to you bilaterally later, so feel free to reach out. And, again, thank you so much for joining us today and stay safe.