Transcript of European Economic Outlook October 2024 Press Briefing
October 24, 2024
Speakers:
Alfred Kammer, Director, European Department, IMF
Helge Berger, Deputy Director, European Department, IMF
Oya Celasun, Deputy Director, European Department, IMF
Moderator:
Camila Perez, Senior Communications Officer, IMF
MS. PEREZ: Hi everyone, thank you for joining today’s press conference regarding the release of the European Economic Outlook. I’m Camila Perez, a Communications Officer at the IMF. Joining me today are Alfred Kammer, the Director of the European Department, along with his deputies, Oya Celasun and Helge Berger. We’ll begin with opening remarks from Mr. Kammer before transitioning to your questions, both from the room and online. Alfred?
MR. KAMMER: Welcome to this press conference on the Economic Outlook for Europe.
Headline inflation has approached targets in advanced European economies, though progress remains inconsistent across Central, Eastern, and Southeastern European nations, collectively referred to as CESEE. A moderate recovery is observable, reflecting still-tight financial conditions, with the easing cycle anticipated to take time to yield results. Significantly, this rebound is accompanied by a high degree of uncertainty, leading consumers and investors to exercise caution.
Our primary message today is that Europe’s recovery is not realizing its full potential, with the medium-term outlook remaining similarly bleak. Europe continues to lag behind global competitors, a theme I will elaborate on later, but let’s first examine our near-term projections.
Our baseline forecasts signal a modest growth uptick for 2024 and 2025. Regarding inflation, we anticipate the European Central Bank (ECB) to achieve its target sustainably by mid-2025, while most CESEE countries may require another year, until 2026. For this to materialize effectively, Europe needs reliable leadership; central banks should pursue a gradual loosening strategy in advanced economies, while exercising caution in some CESEE nations to ensure that real wages do not surpass productivity growth. Additionally, we advocate for fiscal tightening across Europe, as public debt levels remain too high to stabilize deficits.
The positive development here is that the EU has agreed upon a new fiscal rules framework that balances sustainability concerns while allowing for investment in green transitions and infrastructure. The urgency for policy action, particularly concerning the medium-term outlook, is more pressing, which is the core focus of our report. Europe’s potential growth rate is uninspiring, and looking ahead, there appear to be no substantial changes to this trend.
In comparison to the United States, Europe’s income per capita remains an astonishing 30 percent lower, with this gap persisting unchanged for approximately two decades. Notably, this gap did not exist at the turn of the millennium, with factors such as low productivity rates and inadequate capital stock within CESEE regions being primary contributors.
Our report delineates three key factors inhibiting Europe’s progress. Firstly, fragmented markets hinder the scaling opportunities necessary for firms to grow. Secondly, despite an abundance of savings in Europe, its capital markets inadequately support the funding of new, productive firms. Lastly, a deficit exists in skilled labor where it is critically needed. Addressing these challenges requires a more integrated Single Market capable of facilitating the unhindered flow of goods, services, capital, and labor across national borders.
Current barriers in Europe’s Single Market equate to an approximate ad-valorem tariff of 44 percent for manufacturing goods; this stands in stark contrast to a mere 15 percent for goods between U.S. states, with service tariffs between EU countries reaching a staggering 110 percent. These figures vividly illustrate the substantial economic potential that Europe is leaving untapped.
While the significance of private investment cannot be understated, the need for public investment remains critical. Improvements in infrastructure and connectivity, alongside a deeper and broader Single Market, could foster a more resilient and rapidly growing Europe.
Countries that joined the EU in 2004 experienced GDP per capita growth exceeding 30 percent within 15 years post-accession, aided by robust reforms and enhanced market access. The expansion of the Single Market has similarly benefitted long-established member states. Europe holds the capacity to close the gap with the global economic frontier through the development of its most invaluable asset: the EU’s Single Market.
Immediate action steps highlighted in our report include opening energy, telecommunications, and financial services sectors to greater competition, which in turn would attract increased private sector investment and drive innovation. Advancing the capital markets union will facilitate the distribution of savings toward the most promising firms and emerging startups. Moreover, efforts must be made to alleviate administrative barriers hindering market entry for firms, particularly in the service sector, alongside improving infrastructure, institutional frameworks, and governance standards in CESEE countries.
In summary, Europe possesses the tools and mechanisms necessary to enhance growth to its optimal potential—a task entirely within Europe’s grasp that requires urgent attention and action. Thank you.
MS. PEREZ: Thank you, Alfred. We will now open the floor to questions. I see several colleagues participating online. We’ll address those questions shortly. To kick off, we’ll take the first question from the gentleman in the second row. Thank you.
Question: Thank you very much. In the recent World Economic Outlook, the IMF projected slightly improved growth for Europe this year but noted a downturn for emerging and developing economies in 2025. You’ve mentioned factors influencing this trend. I would like your perspective on the specific impact of Russia’s war in Ukraine on Europe’s economic dynamics. Additionally, the IMF has adjusted Ukraine’s projection downward, yet you mentioned its economy remains resilient despite the ongoing conflict. Could you please elaborate on the reasons for these revisions and suggest what more can be done to enhance Ukraine’s situation?
MR. KAMMER: Let’s begin with the general effect of Russia’s war in Ukraine on the European outlook. The growth trajectory for Europe has not shifted significantly over the past year. The primary reason for Europe’s economic struggles stems from the substantial energy price shock instigated by the Russia-Ukraine conflict. As we transition out of this crisis, we’re experiencing a moderate recovery, primarily propelled by consumer spending as real wages begin to recover. We anticipate a forthcoming shift in 2025 toward increased investment demand as policy interest rates gradually decline.
Germany is notably affected by the energy price crisis due to its energy-intensive manufacturing sector—this represents a direct consequence of the war. The ECB has had to pursue a more aggressive tightening cycle to tackle higher inflation, another fallout of the war.
The downward revision in growth forecasts for 2025 is characterized by a slowdown in the projected recovery, driven by uncertainty caused by the war. This uncertainty impacts consumer spending as individuals express concern over energy prices and future developments. Similarly, investor uncertainty complicates the medium-term outlook, suggesting that these adverse influences will persist for Europe temporarily.
Turning to Ukraine, the country’s growth figures this year have been severely impacted by the ongoing destruction of energy infrastructure due to the conflict, resulting in lower growth expectations. Furthermore, this prevailing uncertainty in Ukraine ultimately dampens overall demand within its economy. Our downgrades for Ukraine’s projections in 2025 reflect the assumption that the war will continue longer than initially anticipated, compounding the economic challenges faced by Ukraine.
The IMF team has diligently worked on maintaining macroeconomic stability in Ukraine, while also supporting efforts to bolster economic growth, sustain enterprise operations amidst the conflict, and protect vulnerable populations impacted by the war. Importantly, groundwork is being laid to ensure future reconstruction efforts and enable a path toward EU accession.
MS. PEREZ: Thank you, Alfred. We’ll now proceed to the lady in the third row, please.
MR. KAMMER: Spain exhibited notably strong growth performance, largely driven by a resurgence in tourism, a residual effect from the pandemic. The lower interest rates and growing confidence have spurred a resurgence in investment that further bolstered growth. On the supply side, significant employment increases have also been supported by immigration, which has served as another crucial growth driver. While we expect this growth to moderate somewhat in 2025, these effects are likely to continue. Additionally, the implementation of the Next Generation EU initiative is projected to yield positive effects not only in the short-term but also in enhancing medium-term growth projections for Spain.
Fundamentally, our policy recommendation for Spain revolves around transitioning from labor-intensive growth towards growth driven by productivity enhancement. The need to focus on productivity is a common theme across all European nations, and reforms targeting this area are essential for sustainable growth. These reforms should reflect domestic measures as well as broader structural modifications discussed in our Article IV assessments.
The overarching message remains that achieving productivity gains requires EU-wide cooperation, as it is not merely a national issue but an urgent collective objective that requires commitment at the national level to advance European-level reforms.
MS. PEREZ: Thank you. We’ll now take the next question from the middle of the room, please. The lady in the third row.
QUESTION: Thank you. Regarding the integration of Europe’s capital markets, how crucial is the establishment of larger banks? Would a potential merger between UniCredit and Commerzbank be welcomed? If capital markets are essential, should the German government reconsider its stance on this merger? Have you communicated any messages to the German government regarding this issue?
MR. KAMMER: The integration of capital markets and the strengthening of the banking sector are critically important for Europe. Analyzing the persistent productivity gap reveals that companies face limitations in scaling. The lack of business dynamism hinders startups in Europe; while we have ample emerging businesses, they struggle to secure funding akin to their U.S. counterparts. Particularly in the technology sector, startups require equity financing due to the intangible nature of their assets, which often cannot serve as collateral. Venture capital in Europe lags significantly behind the U.S.—approximately four times lower—putting European startups at a distinct disadvantage. Thus, establishing a banking union and capital markets union are fundamental for enabling these startups to grow, driving productivity and employment, and ultimately elevating GDP per capita.
To operate effectively and achieve scale, European economies should not only function as national entities across 27 member states, but become more unified as Pan-European players similar to U.S. firms. This requires larger Pan-European banks, paving the way for mergers and consolidations that would create greater scale in the banking sector. We encourage such mergers as part of the strategy to foster greater efficiency and competitiveness within Europe.
MS. PEREZ: Thank you.
MR. KAMMER: Turning to the UK?
MR. BERGER: Certainly, I would have been surprised if there were no inquiries regarding the UK—always a popular subject.
Our growth projections for the UK have seen an upward adjustment, with figures revised to an increase of 1.1 percent this year compared to the previous estimate of 0.7 percent, alongside an anticipated growth of 1.5 percent next year. This positive trajectory provides a backdrop for discussions surrounding fiscal policy.
To take a broader view of the fiscal framework concerning the debt target, we welcome the commitment from the government to work toward reducing debt levels relative to GDP over the next five years, or at a minimum, stabilizing them. This aligns with our longstanding recommendations from the UK team. Achieving this, however, will necessitate a substantial fiscal initiative, especially considering the existing high deficit levels. There are pressing funding needs in healthcare, social care, transport, housing, and climate initiatives that will require careful consideration moving forward.
Our team has consistently maintained that several strategies could address these fiscal challenges, including prioritizing spending, increasing fiscal revenues, or adopting a combination of both approaches. This is a deliberative process, and the government must determine what is most appropriate given the prevailing circumstances. We anticipate the forthcoming autumn budget to shed light on how these elements will coalesce.
In this context, operating within a well-structured fiscal framework is paramount. We have advised numerous countries, including the UK, on the benefits of implementing organized and transparent fiscal frameworks that can anchor budgetary policy over the medium term. This structure can help ensure that public debt moves in a desired direction. It is equally important to create fertile ground for growth as part of any effort to reduce public debt, and public investment should remain a priority even as fiscal frameworks are defined.
We await further details regarding the UK’s new fiscal approach, which we will evaluate once the budget is released.
MS. PEREZ: We have time for a few more questions. Let’s move to the online inquiries. Anton, please go ahead.
MS. PEREZ: I believe we have additional questions regarding Russia from online participants. Please proceed.
QUESTION: Good day, everyone. I would like to ask about the 2025 outlook for the Russian economy, which has been downgraded from a projected 1.8 to 1.3 percent GDP growth compared to the April outlook. Can you explain the factors influencing these projections, particularly concerning the Russian Central Bank’s approach to increasing key interest rates to 20-21 percent from the current 19 percent? What are the critical risks facing the Russian economy at this juncture?
MS. PEREZ: Thank you. We will now go to the gentleman in the first row, please.
QUESTION: Hello. Good afternoon. I have a query regarding the monetary policy being enforced by the Russian Central Bank. How might the tightening of monetary policy affect the Russian economy, particularly in combating inflation? Additionally, why has the IMF adjusted the projections for Russian debt levels for 2024 and 2025 downwards compared to estimates made in April?
MS. PEREZ: Thank you very much.
MR. KAMMER: Addressing your first query about 2024’s upgrade, this largely stems from data outcomes observed in the first half, which are reflected in our current forecasts. Currently, the Russian economy appears to be pushing against capacity constraints, suggesting a positive output gap or a situation of overheating. As we look ahead to the next year, we anticipate that this overextension cannot be sustained, resulting in adjustments back to more normalized growth figures. This will naturally be supported by the Central Bank of Russia’s restrictive monetary policy, which is exerting downward pressure on aggregate demand—effects that we foresee taking shape in 2025.
Regarding Russia’s long-term outlook, the medium-term prospects look dim, with potential growth rates being reduced due to diminished technology transfers and financing options, which ultimately stifle the productive capacity of the economy and hinder convergence toward Western Europe’s GDP levels—an objective Russia was well on its path to achieving a decade ago. This is a consequence of the sanctions regime that remains in place.
Concerning debt levels, the downward adjustments reflect the upward revisions in nominal GDP forecasts, subsequently affecting the debt-to-GDP ratios favorably.
MS. PEREZ: Thank you very much. We will now turn to the gentleman in the fourth row, gray shirt, please.
QUESTION: Thank you. Once again, we are discussing tariffs. Your report highlights the risks associated with EU tariffs on Chinese EV cars. Is it not more crucial for Europe to maintain free trade than to safeguard strategic industries within its economy?
MS. CELASUN: Thank you for that important question. Indeed, Europe has long been characterized by its openness to trade, reaping significant benefits over the years. As Europe navigates growing global tensions and fragmentation, it is vital to retain this cooperative approach. We encourage all nations, including Europe, to seek collaborative solutions, particularly regarding issues like subsidies, where transparency and collective action can foster stability.
Historically, tariffs have not effectively addressed trade dilemmas; they tend to hamper competitiveness, escalate costs, and provoke retaliatory measures—all concerning considerations for any country reliant on trade.
MS. PEREZ: Thank you very much. Let’s focus on this side of the room. The gentleman in the third row, white shirt, please.
QUESTION: Thank you. Good day. I have an inquiry regarding the outlook for the German economy, which still faces low growth prospects. Is the IMF worried that these subdued growth trends might contribute to political shifts, such as a rise in far-right sentiments leading up to the federal elections next year?
MS. CELASUN: We abstain from commenting on political events. Our role involves engaging with governments to impart policy advice aimed at enhancing growth and fostering resilience over time. Our recommendations, consistent over recent years, highlight Germany’s impending sharp decline in its working-age population over the next five years, combined with traditionally weak productivity trends. To counteract these issues, enhancing labor supply will be essential. Strategies should involve improving employment opportunities for women through better childcare and eldercare facilities, as well as reducing marginal tax rates for secondary earners. Other critical areas of focus include boosting public investment, which remains among the lowest of advanced economies, and streamlining regulations to reduce administrative burdens that can stifle productivity. Additionally, Germany should champion the single market, notably the capital markets union, to improve growth prospects for promising domestic firms.
MS. PEREZ: Let’s proceed to the lady in the middle of the room wearing a light jacket, please.
QUESTION: Thank you. I’m interested in discussing the Turkish economy. Türkiye has significantly tightened its policy stance over the past year. How would you assess the current state of its economy, and what is the IMF’s position regarding the appropriate timing for potentially easing these policies?
MR. KAMMER: We have been favorably impressed by Türkiye’s recent policy pivot. Two critical outcomes we’re observing are a substantially reduced vulnerability to a crisis and a downward trend in inflation—two significant achievements from the recent policy changes. However, the battle against inflation is not yet won; consequently, maintaining a tight monetary policy is imperative, and premature easing of restrictions would be unwise. We also recommend a continued focus on income policies; minimum wage agreements established on past inflation trends have had inflationary repercussions. A forward-looking approach is essential to mitigate the second-round effects.
Lastly, increased fiscal adjustment is necessary to enhance the situation. Such adjustments would work in tandem with efforts to combat inflation and contribute to bolstering the credibility of the overall adjustment strategy. Overall, we commend the team in Türkiye for their substantial progress but emphasize that the continuity of these policies is crucial. This period may be challenging for the populace and policymakers, yet these steps are vital in mitigating risk, ultimately fostering a healthier economic landscape.
MS. PEREZ: We are nearing the end of our time, but we will attempt to take a few more questions. Let’s go with the lady in the first row wearing a yellow jacket, please.
QUESTION: I’d like to address the concern highlighted by the IMF regarding Italy’s high debt. Is it accurate to conclude that you disagree with Fitch’s assertion that Italy’s fiscal credibility has improved, as indicated in the agency’s recent outlook promotion? Additionally, what recommendations do you have for Italy regarding debt reduction strategies?
MS. PEREZ: Let’s also see if there are other questions regarding Italy. The gentleman in the third row, please.
QUESTION: Thank you. The report references a recent proposal by Mario Draghi to reform the EU. What are the most urgent reforms you advocate for Europe to undertake based on this report?
MR. BERGER: On Italy, there’s indeed positive news. The debt ratio as a percentage of GDP has notably declined since peaking in 2020. However, it remains relatively elevated; estimates show it hovering around 130 percent by the end of last year. Our baseline predictions foresee a slight increase over the next five years, indicating that a fiscal task still lies ahead for the government, which appears ready to address these challenges. We recognize that despite improvements, deficits remain higher than desired.
In light of this, we support the adjustment plan agreed upon between the European Commission and the Italian government overall. Countries like Italy with elevated debt levels must pursue a more ambitious approach rather than just gradual deficit reduction to enhance creditworthiness and long-term growth. Structural reforms can play a key role in fostering overall growth and improving fiscal conditions.
MS. PEREZ: Thank you. We will now return to the conclusion.
MR. KAMMER: Regarding Draghi’s report, our focal points align closely with our REO on promoting productivity and fostering innovation. The recommended solutions emphasize the need to enhance the single market, advocating for the removal of existing barriers. Draghi identified an investment gap equivalent to 4.5 percent of GDP necessary to elevate Europe’s position, which is primarily tied to private investment opportunities. For such investment to flourish, efficient capital allocation, complemented by a robust capital market and banking union, must be established. Implementing these reforms will enable private investments to bridge this investment gap, combining both private and some public investment.
MS. PEREZ: Thank you. We’ll now address the lady in the second row in the middle.
QUESTION: Hi there, another inquiry focused on the UK. Is it fundamentally justifiable for the UK to borrow for investments, given the trajectory of its debt as you outline in the fiscal monitor? Furthermore, Era Dabla-Norris, who spoke yesterday, noted that building trust within populations regarding tax usage is vital. Our finance minister intends to focus tax increases on wealthy individuals and businesses. Is this a fair approach, and can any economy successfully tax its way towards prosperity?
MS. PEREZ: Let’s check if there are additional inquiries related to the UK. The gentleman in the back, please.
QUESTION: Thank you. Following up on UK debt rules, do you have any specific recommendations on appropriate targets for measuring a debt rule? Would a focus on public sector net financial liabilities make sense, or should government focus more on general government debt, as that has been central to IMF forecasts?
MR. BERGER: It is generally sound public finance principle to acknowledge that governments can sometimes benefit from borrowing for investment purposes. This principle is applicable across numerous countries. The critical questions involve identifying the nature of public investments being made and assessing their expected long-term growth returns. Any forward-looking government must derive reasonable expectations around the impact of investments on future growth trajectories. These considerations should be integrated into any fiscal framework, adapted appropriately to the circumstances at hand.
Taxation plays an equally vital role in financing ongoing government operations and supporting services for citizens, making the efficient allocation of tax revenues pivotal to enhancing overall welfare. The treatment of assets can vary by country; they may include tangible and intangible forms of capital. Carefully assessing the characteristics of such assets is essential in context. A conservative approach in evaluating the implications of assets plays an important role in managing fiscal policy. While the context may vary across nations, we look forward to future assessments as more details on the UK budget and fiscal rule become available.
MS. PEREZ: Unfortunately, we must conclude today’s session. Please forward any remaining questions to me and my colleagues in the media team, and we will ensure a response. The report is released and available for consultation at IMF.org. Thank you all for your participation. We regret we couldn’t address every inquiry but appreciate your engagement and to our online colleagues for joining as well.
MR. KAMMER: Thank you.
IMF Communications Department
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-looking borrowing strategy should be closely tied to the productivity impact of the investments made, ensuring that they effectively contribute to economic growth.
Regarding the taxation issue, targeting wealthy individuals and corporations for tax increases can be a fair approach, provided that it is implemented transparently and equitably. It’s essential for the government to effectively communicate how increased revenues will be utilized for public investment and social welfare programs to build trust among the populace. Communicating the direct benefits of such taxation—like improved public services or infrastructure—can enhance acceptance of higher taxes.
Ultimately, while taxation can play a vital role in financing public goods, it should be part of a broader strategy that includes fostering economic growth through investment in sectors that stimulate productivity and innovation. Balancing tax policy to ensure that it doesn’t impede growth while also addressing inequality is essential for long-term prosperity.
As for the measurement of debt rules, focusing on a combination of indicators could provide a more holistic picture. The consideration of public sector net financial liabilities may offer useful insights into the fiscal position and sustainability of the government’s finances. However, general government debt remains a crucial measure as it is widely understood and can guide investors and market perceptions of fiscal health. Adopting multi-faceted criteria that encompass both metrics can result in a more nuanced and effective fiscal policy framework.
MS. PEREZ: Thank you for the comprehensive answers. We have time for just one more question before we wrap up. Let’s turn to the gentleman in the fourth row, please.
The rationale behind such measures to build trust among citizens regarding how tax revenues will be utilized. Successful taxation ultimately hinges on the government’s ability to demonstrate that the funds will lead to tangible benefits for the population, thereby enhancing overall welfare and public investment.
The discussion around whether an economy can “tax its way to prosperity” is nuanced. While effective taxation can fund necessary public services and investments that spur growth, it must be balanced carefully. Too high a tax burden can stifle economic activity, reduce incentives for investment, and lead to capital flight. Therefore, in any economic strategy, it is crucial to focus on sustainable growth strategies through wise investments, sound fiscal management, and a tax structure that encourages productivity while ensuring fairness.
As for the specific recommendations on measuring debt rules, it would generally be prudent to consider both public sector net financial liabilities and general government debt. The choice depends on various factors, including economic conditions, fiscal sustainability trends, and the long-term implications for public investment and welfare. A thorough analysis will help in establishing appropriate fiscal targets relevant to the UK’s context.
MS. PEREZ: Thank you once again to everyone for your participation and insightful questions today. We appreciate your engagement, and we look forward to further discussions in the future. Please do not hesitate to reach out to our media team with any additional queries.