Pierre-Olivier Gourinchas spoke to AFP ahead of Tuesday's release of the International Monetary Fund's World Economic Outlook in Marrakesh, Morocco.
This interview has been edited for length and clarity.
- Why is the United States performing better than Europe? -
There are a number of things. The most important one by far is ... the Russian invasion of Ukraine, the disruption in energy markets. Europe is importing energy, so when it has to pay a higher energy bill, it's basically sending a check somewhere else and so the region becomes poorer. The US is not an energy importer, so when the price of energy goes up, if anything, they become richer. So there's a big difference right there.
The second difference, I would say, is probably coming from the fact that we've seen US consumers being very resilient and, well, how do they do that? Well, they've been dipping into the savings. In many advanced economies, there was a buildup of what we call excess savings during the pandemic. In Europe, by and large, households have not started dipping into that.
Factor number three, I would say, there might be some difference in the transmission of monetary policy. So both in the euro area and the US, we've seen his massive tightening of monetary policy (by central banks). In the US you have a lot of long-term, fixed-rate mortgages in the housing market. People borrow 30 years and they lock in the rate at the time at which they bought, so (if) you borrowed three years ago at a rate of two percent, let's say rates can be now seven percent, it doesn't affect you.
Finally, there is a question of how much fiscal policy might be doing. What we're seeing in the euro area is (that) a lot of support was put in place during the pandemic and during the energy crisis. The energy prices have been coming down, the pandemic is behind us, so a lot of that support is being withdrawn. In the US, the deficits are still very large.
- The IMF forecasts a 0.5 percent contraction in Germany this year. Is there a long-term concern? -
In the case of Germany there is a combination of two very powerful forces right now. One we've already mentioned when we talked about the difference between the euro area and the US, which is the energy shock, and in the context of an economy that was very dependent on the manufacturing industries -- very energy intensive and dependent on energy supplies from Russia. So that has been a big shock for the German economy.
But then you have the tightening of monetary policy and on top of that in an inflation context, the loss of purchasing power, the cost-of-living crisis. So all of these things together, explain, we have relatively weak manufacturing, we have relatively weak consumption, we have relatively weak investment.
I think this is an economy that has a lot of resources. It has fiscal space. It has the ability to adapt. It has tremendous industries and technology, it has skilled labour, so this is this is not necessarily something that is a concern.
- You have lowered China's growth outlook due to a real estate crisis. Does the government need to do more to prevent a worsening situation? -
It's obviously an important factor behind our revised estimate for 2023. This has the potential, if it's not addressed, to weigh on Chinese economic activity even more. It's a very substantial component of aggregate activity in China. You could have then worries about the financial health for the banks that are making loans to the developers who are right now sitting on a number of properties that they cannot sell, or cannot complete and deliver the units that they have already pre-sold because they're facing liquidity problems. So that could then spread more broadly into the Chinese economy. You could have problems for local authorities because they generate quite a bit of their revenues from land sales.
This is already a real estate crisis, but it could become something even bigger. So that requires, in our view, very forceful, and very sizable action by the government to really bring back confidence in the sector, to guarantee financial stability to resolve and take care of the developers facing financial difficulties. And until that is done, then, you know, at that point, maybe the sector would be able to rebound, but that will require quite a bit of adjustment.
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