IMF board discusses annual review of US economy

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International Monetary Fund press conference with Managing Director Christine Lagarde on the preliminary findings of its annual Article IV Consultation with the U.S. A team of IMF economists has been assessing the state of the U.S. economy and holding discussions with government and central bank...



Transcript
Okay good morning, everyone and welcome to this briefing on behalf of the international monetary fund on the occasion of the staff concluding statement on the united states article for consultation, i think the document has been distributed to you already, so you've had a chance to look at That this morning, we will be on the record and i'm very pleased that we have with us the managing director o ...
the imf, madame christine lagarde. We also have to my immediate right, alejandra werner, who is the director of our western hemisphere department. We have also have the deputy director of that department and mission chief for the united states, nigel cho, just immediately to the right of themanaging director and way over on. The far right is daniel leigh, who is the deputy division chief in the north american division? So we'll get to your questions as soon as we can immediately after opening remarks from the managing director, and let me just say that the managing directors just about to step onto a plane, to go to japan for the g20 meeting. So she will be leaving us after she makes some opening remarks and the rest of us will stay to take your questions, madame lagarde, so thank you, jerry and good morning to all of you. Let me just start by remembering that today is june. The 6th on june, the 6th 2019 there'sa lot that the americans can be proud of, and not just because of the illustrious pass for having led that journey to freedom that liberated most of europe and which is being celebrated today on its 75th anniversary, but clearly also For leading this unbelievable multilateral efforts that took the life of so many and brought life and light to so many others. Now i'm saying that because, obviously, in addition to that, the americans can be very proud of the economy as it stands today. In a matter of a few weeks, the us economy will be in the longest expansion in recorded history, and this is an important achievement that is driven by a robust private sectordemand and by policy choices that have held spur growth and job creation. Speaking of jobs, unemployment is at levels not seen since the late 60s and wages and households incomes are rising as well, and this is happening at a time when inflation pressures in the us remains very subdued. Our assessment is that the economy will grow this year at about 2. 6 percent and next year at around 2 %, and this represents an increase from our initial growth forecast by 0.

3 %. So lots of positives and a lot to be proud of on the economic front and the economic indicators are saying so. But if we look at a few other indicators which actually matter the social indicatorsthere is a lot of room for improvement, we see a challenging picture. Average life expectancy has trended downwards in recent years. Income and wealth polarization have increased social mobility as steadily eroded. Education and health outcomes are suboptimal and while the poverty rate is falling, it remains higher than in any other advanced economies. So we believe that more attention should be paid to promoting inclusive and sustainable growth. More attention to be paid to social out come into line with the macroeconomic, very good developments that we see and they are policies that can actually achieve that. There are many policies and we've mentioned them over the course of our previous article for reviews. So i will mentiona few of those which we believe would actually rally. The support of many instituting paid family leave comes to mind, expanding the very effective earned income tax credit that the world envies the united states, helping working family with child and dependent care. All of these would provide a lifeline to families and help support social mobility by making it easier for them to enter the workforce and pursue a fulfilling career and speaking of life expectancy.

We would like to highlight the important work that is underway by the federal state and municipal governments across the country to tackle the current opioid crisis in the u. s. The human cost of this epidemic are tragic and while we knowthat there is no easy solution, it is rightly a bipartisan priority of the administration and of congress economic indicators, social indicators. If we now turn to markets over the first few months of this year, financial market conditions have improved markedly. This is good for near-term growth, reducing the cost and increasing access to financing. But obviously we are concerned about the risk of an abrupt reversal of financial market conditions that could represent a material downside risks in the us and in particular, a sudden tightening of financial conditions could interact adversely with the high level of private public, corporate households and sovereign Debt and could create a feedback loop that would also weigh on reel activity andjob creations, not to mention the fact that if that was to happen, it would not only have an impact in the us economy, but it would also have spillover effects beyond the borders of This country now, let me say, a few words about debt. We have highlighted in past consultation that the us public debt is on an unsustainable path. We believe that policy adjustments are needed in order to lower the fiscal deficit and to put public debt on a gradual downward path over the medium term, and they are yet again a range of possible options. However, in our view, any successful package will likely require steps to address the expected increases in entitlement spending onhealth and on social security. It would also include raising indirect taxation and instituting, as we have said many times before, a federal carbon tax. Turning to monetary policy, as you know earlier this year, the federal reserve, as indicated that it was pausing its process of raising interest rates.

We fully agree with that approach and believe that this will give policymakers time to gorge the balance of risks, to both inflation unemployment outcome and to build a clearer picture of whether further adjustments in the federal funds rates are warranted. Whatever the developments, we believe that it will be important for the fed to continue to be exclusively data dependent and to continue to communicate well as ithas on its assessment of the economic situation and its expectations for future monetary policy. Let me now close with something that is much talked about, and that has to do obviously with trade. We believe that for the global economy to actually function well, it needs to be able to rely on a more open, more stable, more transparent, more predictable and rules-based international trade system, and, as such, it will be essential for the us and all its trading partners, including The likes of china, mexico and others to agree on a new system to agree to eliminate the distortions that put a brake on growth and that not only will affect the economy of those countries directlyimpacted, but will also have spillover effects way beyond the shores of those Countries - and we very strongly believe that a better integrated international trading system is actually conducive to that sustainable, strong and balanced growth. That is so much needed and, as i've said many times, nobody wins a trade war and everybody suffers. With this brief remarks, i will exit the scene. I will join colleagues in fukuoka, japan and i'm sure that we will be discussing these findings as well as many other economic considerations that, obviously you are familiar with. Thank you very much and i'll leave it to you. Four questions to my eminent caliz. Thank you. Thank you very much. Madame lagarde, okay sowe'll turn to questions in the room and i know we have many colleagues watching us online as well.

But let's turn to your questions in the room. Please try and keep them succinct and we'll try and take as many as we can so questions please good morning, hi good morning. Thank you gary. My question is so like the reporter mentioned the trade tensions, but i'm wondering this. The technology decoupling between us and china take consideration in this report. Can we quantify the impact of that potential decoupling which might have potential impact on not only us and china, but the global technology co-development i just wan na. How do you see that gon na influence of the useconomy? Thank you so i mean. Certainly, we think that those issues are important, they're much more difficult for us, i think, to model than the trade tariffs we've been looking at trying to think about how to model those things, but it's quite complicated. I think we have a reasonably good read on how much trade disruptions can distort both the us economy and the global economy and lead to headwinds to growth, and we put out some of that work in in april 2019. We, oh, i think we have not yet put out work on the technology, but it's something we're looking at and working on. Thank you, nigel rafael from argentina. In the report, you speakabout spillover effects from the trade war to other countries.

I wonder if you could elaborate a little bit on what could be the potential spillover effects to the hemisphere and particularly argentina. Thanks i mean in in several studies. We have looked at different channels of of transmission, i mean, obviously they you have the direct channel through the tray that the different countries involved in trade negotiations, the impact it can have to third countries, and we saw some of those effects in play last year, especially With agricultural producers that saw an increase in their export so to some of these countries overall, and especially given the increasing uncertainty that we are seeing the effect of uncertaintyon investment. Our estimates show that for almost all the third countries, once this uncertainty and market effects are taken into account, everybody loses and although you can have just summarizing some trade aversion and this trade aversion effects can be positive for some countries once you are and and we're Seeing some of those effects play now - and we also saw them play out in the fourth quarter of last year - uncertainty hidden in the markets and uncertainty hitting the investment process around the world, then almost everybody ends up being affected negatively. That'S what we is seen for. The case of argentina, as i said i mean you, might have some positive effects coming through agricultural exports etcbut most of most of all, once you have uncertainty, affecting investment decisions and leading firms to postpone decisions until there's more clarity on the rules of the game and Also uncertainty here in markets under for postponing a financing decision cetera. Obviously this is negative for almost everybody around the globe and that's why the mdc says nobody wins with a trade war. Thank you, alejandro alfonso iii. Thank you, mexico, blaz, starting on monday. So i think it's pretty clear that the the effects and of tariffs on mexico are certainly larger as a share of gdp from mexico than they are for the united states, but i think both sides - both countries - have a negative effect andit's quite pronounced in certain sectors. Particulars that are very integrated across the border, so, for example, in sectors such as automobiles and transportation. I think and agriculture, where there's a lot of two-way flows across the border, they tend to have a large sectoral effect.

Even if the overall macro effects are not as large, the sectoral effects can be quite pronounced. We don't have any specific estimates of of the effects of these tires with something we're looking at. Thank you, nigel, yes, sir, so so what the way we approach our forecasting is we already built into our forecasts the policies of being put in place so, for example, the steel aluminum tariffs and the tariffs onchina? We actually have built into our forecast. The the policies have not yet in place such as those tariffs proposed for mexico. We do not build in until they're actually in place. So if you look at our forecasts that we just released, those tariffs are in or in place already embedded in that forecast. Of course, there's offsetting factors with you know things that are happening into inventories, things that happen to consumer demand, so the so you only seen the net effect. I think in general, what we've seen so far in terms of the tariff effects have been a modest headwind to the us economy, particularly the tariffs live being placed on china. They'Ve been moreof a headwind in particular sectors and in particular states they have for the economy. As a whole, we have not yet seen a large impact of the tariffs on consumer prices, although we do see their effects on import prices, so we presume that they are being somehow absorbed in the production chain, either through profit margins or some increasing efficiencies in production. But we're not yet seeing them passing through into consumer prices. That doesn't mean that they won't pass through because it takes some time and there's some lags involved, and certainly if the tariffs are increased, we would expect eventually those effects to turn up both in more pronounced inactivity and then also in consumer priceinflation.

Thank you nigel. I think there was a question from bloomberg in the front. Thank you very similar question, just piggybacking off of those, but could you talk about the increased potential increased risk of a recession in the us and the potential spillover effects, as madame lagarde mentioned in relation to the trade tariffs and slowing growth yeah? So i should say we don't see recession, as the likelihood in our base baseline in the us is certainly always a risk that we consider, but it's not in our baseline. We instead see a gradual slowing of the economy to a point where the economy slows down a little bit below the potential growth rate. Since right, nowthe economy is actually quite a bit above where potential growth is, i think, madame lagarde highlighted. What we see is the principal risk, which is actually a risk linked to financial conditions. But i think we've seen that the the trade tensions and financial conditions are actually quite intimately connected that as trade tensions and uncertainties increases our how alejandro said, that's reflected also a market pricing of equity prices, risk spreads and that then feeds into activity, and so the The idea that they would right now financial conditions are providing some support to growth, but, as we saw in the fourth quarter of last year, once those financial conditions tighten, they feed quite quickly into activity, andinto, a slowdown of activity and that's kind of the principal channel By which we see for the united states, at least that and and for other countries through spillover effects that this this will be, the sort of predominant channel by which activity be affected is the sort of uncertainty about trade and about policies, creates risk aversion, which then Leads to a tightening of financial conditions, which then feeds into a slowdown of activity, and that that's the sort of i think we highlighted that is that the risk that were most concerned about for the us economy. Thank you, lady in the front here. Thank you. So i was wondering whether you could tell us, if u. s. go through, actually implemented 300 billion dollars of products for chinese imports.

How would that impact your estimation, and also generally, if china, us trade tensions, continue to escalate? How do you see the future of the us economy? Thanks yeah, so on a general question, an escalation in trade tariffs is an unambiguous negative for the us economy and for its trading partners in terms of the quantification we actually did put out in the april. We, oh in chapter for the april. We were box where we looked at the impact of the 25 % tariff across-the-board in chinese goods, so i would refer you to that for the us over the long run and it reduces gdp byaround 0. 3 percent of the gdp over a longer term, a little bit Less in the shorter term, obviously those estimates are very uncertain and i think those estimates when we put them together. I had a relatively benign view of how much those tariffs would feed through into financial conditions. So if that channel is more pronounced, if risk aversion is much higher than you could expect to see larger macro effects in the us and abroad, thank you anything further in the room. Okay, we can take one more round. Let me start with ladies bloomberg. I want to ask you about the fiscal deficit, which was another issue, brought up potential risk because we're seeing a lotof 2020 candidates, democratic candidates, talking about expansive programs like a great new deal medicare for all what kind of impact would that have on sorry the deficit? What risks does that pose? If any? So, so i think we've said for a long time. The u. s. fiscal policy is unsustainable and the debt path in u.

s. is on stainless, largely dude to the fact that populations aging and so some of the entitlement programs will grow relatively rapidly over time, take lose the baby boom generation ages and well that will increase spending And and worse in the fiscal picture, so that's something we've been concerned about for quite some time. At the same time, we also see there'squite a lot of - let's say fiscal needs in the u. s. in order to address some of these issues that we've highlighted in the report, some of the inequalities and social issues that we've highlighted, so those things certainly cost resources to Some extent they're not a large drain on resources, but they would require some resources. However, we think that there is a path where both those investments in social and human capital can be made, and the deficit can be brought down over time. To do that, as we've highlighted in the report and management director had mentioned, there needs to be some effort to tackle entitlement, reform and medicare and social security trying to reduce the costinflation in health care provided by the federal government. We also think there's a need to raise revenues either through a carbon tax through an increase. The federal gas tax we've advocated for a federal v80 as well, so there's a number of tools at their disposal that can be used to achieve this fiscal adjustment, while providing resources for the other spending needs that we we see, are it necessary or it would be Useful and we've kind of trying to highlight that package within the report. Thank you, nigel. So we'll take the last question. Please switch on your mic.

Please i apologize, but i didn't have a chance to read the article for yet, but i didread the g20 surveillance note - and i took note of a paragraph in which you said many advanced economies can use structural reform to enhance growth. What would you recommend in that respect for the us economy, arthur structural reforms that the us could undertake that would increase growth? Thank you yep. So as i as we so try to highlight in this consultation on past consultation, we think things that would increase worker productivity, including investments in health and education, would be useful in the u. s. decreasing the increase access to both health and education, things that would improve retention Rates, for example, at college, improving science and technology education at k through 12. Those would be useful we'vealso in in this report and in the past highlighted immigration. Reform is something a skills-based. Immigration reform is something that can enhance both labor productivity and also increase the supply of labor in the us, which would help for for long-run growth, and, i think also putting the fiscal situation on a more sustainable trajectory in the end will reduce risk premium in the Us and will help support thanks hundred yes, another trend we've been flowing that relates to investment and innovation is the rise in corporate market power. This has been the case in many sectors in the u. s. from airlines to pharmaceuticals to high-tech companies, and we found in in some work we published in theapril wheel, but also earlier that this eventually, if it continues, can reduce investment and innovation. So really thinking hard about how to address the the the rise of market power and ensure that markets remain contestable.

That'S that's. Gon na be an important part of the of the of the menu for structural reform to raise long-term living standards in the us and on infrastructure. Absolutely, as as nigel said, this is something we've advocated a lot. You have to find resources to pay for it. We'Ve advocated for federal gasoline tax to help pay for the potholes, repairing the the bridges and the roads. This could really save people's improve people's lives by by making the commute the timelower, and you know this is something that we know the authorities are thinking about and it's an important part of the overall mix for raising living standards over the long haul. Thank you daniel. We will make madame lagarde remarks available to you now straight away, so we'll get those to you. You have the staff concluding statement and in a few weeks you will have the full report, the article for report, once our board has had a chance to to discuss and and review it in the usual way. So let me just thank you all for coming here. This morning we appreciate it and thanks to my colleagues up here on the podium and we lookforward to seeing you soon, thanks.


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