Cspan. Org landmark cases. A look at the Global Economy with Financial Experts including Christine Legarde managing director of the international managing fund the Economic Forum in dove vose, switzerland, just over an hour. Im so im delight again to be moderating the Global Economic outlook. After what one has to agree was rather an unusual warmup act. I am very disappointed, however, that for some reason they forget to provide the band. [ applause ] which i think we would have enjoyed very much. The previous speakers said three things with which i think we can all agree. Growth is very important, jobs are very important and trade needs to be free, and perceived, i agree with this, to be fair. I think those three points, growth, jobs, and the nature of the trading system are pretty important for our discussions now. We are meeting at a point in which i think for pretty well the First Time Since january 2008, the web has a tendency to be a bit behind the times so it didnt fully aware at that time just how bad it was going to be, but since 10 years of extraordinarily Global Economic optimism and about a widely shared and synchronized recovery. So we will discuss the nature of that recovery, the risks in both directions to it, and some of the longer term opportunities and challenges it creates. To do so, if i may introduce the panel very very quickly, everybody here, i have Christine Legarde to my left, i think shes been a member of this panel for quite a long time. To her left. Was very young. Shes obviously the director of the International Monetary fund. To her left is mark carney, who is to me the governor, to others is really the governor of the bank of england, and the Central Banks have so many governors after all. To his left is carey lamb, the chief executive of hong kong. To her left is hadarico, governor of the bank of japan, who has actually been a friend of mine for 40 years. We met at oxford. To his left is mary edos, chief executive officer of jpmorgans asset and Wealth Management who ive met and shared panels with now on quite a few occasions. Im looking forward very much to this one. Lets start with a short Term Economic outlook. Youve just recently i will produce your update wonderfully cheerful in every respect forecasting 4. 9 for this year and the next. So what could go wrong . Lets celebrate what could go right for the moment. We are in a speed spot. 3. 9, 3. 92018 19 is not bad. What is interesting, about 120 countries have actually seen their growth increase last year and we only have 1 5 of developing emerging companies have seen the gdp basis decline. Its well spread out and shared between economies, emerging market economies and part of the world i would certainly worry most about is where we have a combination of factors that lead to that lower income per capita. I think we should celebrate, we dont do that so often, identify negative and Downside Risks in the most, we should celebrate the policies that have been implemented by policymakers and in particular by central bankers. I think one of the reasons we are in that sweet spot at the moment, its a cyclical upswing, but largely attributable to policies implemented. Monetary policies we had no idea about 10 years ago. Fiscal policies in many corners as well, which have been reasonably good, its debatable eight years ago, in the main, its the result of good policies. What could go wrong, ill mention three vulnerabilities as i see them. First, financial vulnerabilities, while the u. S. Tax reform will have positive effects in the short term for us and other countries around, it might also lead to serious risks. We can discuss that later if you want. That has an impact on the financial vulnerabilities particularly given the high asset prices we see around the world and easy financing still available. The second risk short and medium term needs to be addressed in the short term is excessive inequalities in many places are growing and creating those fractures clause has identified as one of the themes of the World Economy forum this year. I would say the third downside or risks i see this is lack of International Cooperation and the geopolitical risks that could be created as a result. Ill stop here but happy to comment on any of those three. These are huge points and we will certainly come back to them. Lets turn to one of the central bankers who has produced these outcomes. Central bankers are certainly controversial. They have been described by a wellknown authority as the only game in town. I think many of us feel thats true of japan than anyone else. There were three arrows and certainly more have gone to you, mr. Kuroda. Tell us about your market policy, its success and how youre going to get out of it. [ laughter ] thank you. Let me first explain the current status of the japanese economy. The economy is expanding moderately, supported by both domestic and external demand in a well balanced manner. The real gdp has continued to grow for seven consecutive quarters and the average growth rate during that period is close to 2 . Since japans potential growth rate at this moment is slightly less than 1 , 2 growth in the last seven quarters is really substantial improvement. An implement rate has declined to less than 3 , actually 2. 7 , which is evening the japanese context is for employment. Is even for the japanese context is for employment. They have lasted over 60 months. This is the second longest boom in the post war era. Going forward, japans economy is likely to continue its moderate expansion, cycle from income to spending is expected to be maintained in both the corporate as well as household sector on the back of the conditions. On the price front, the consumer pricing inclusion excluding fresh food has been approaching 1 . Slightly positive excluding the effect of energy prices. In japan, a contrast between strong economic recovery and activity, weak, prices stand out as much as or even more than in the u. S. And europe. However, we think that the output gap further improving and labor Market Conditions steadily tightening, expected to become gradually bullish and medium long term expectations are projected to rise. While consumer pricing inflation is likely to increase to the target of 2 , the deflation errey mindset entrenched among people in the prolonged differation has been more tenacious than expected. Therefore the bank of japan will continue to support japans economy and prices by pursuing monetary easing with persistence under the socalled monetary easing with control. There are various risks in the short medium term but from my perspective, they are mostly including some geopolitical risks. Can i follow up on one question because it is one more generally discussed and an issue you face in way that mark carney doesnt. Here, you have an economy growing significantly above trade for a length, quite an extended period. You have unemployment at 2. 7 , which is clearly very low, and falling. And you announced, when you became governor, not you, the government and the bank of japan together, you would hit an inflation target of 2 , most people would say, if the economy was like this, you would have got there. So why is there no inflation . What do you think is going on and how does that fit with what were seeing in many other areas like eurozone and the United States as well . I think there are two factors behind rather slow response of prices and wages to strong Economic Growth. One is universal common factor, like globalization, new technologies, even Amazon Effect and so on and so forth, all of them may make inclusion rather subdued. This is a universal factor. But, second, japan factor is, as i just said in my initial remark, that is to say after 15 year long differation from 1998 through 2013, differation and mindset, people expect prices and wages to not rise, and this kind of mindset is not as strong and its not so easy to eradicate this kind of mindset from japanese household as well as companies. There is some indication waistlines are actually rising and some prices have already started to rise and even medium to long term inflation expectations, which have been so weak in the last couple years, are now slightly picking up. There are many factors which made achieving 2 inflation target difficult and time consuming, but i think we are finally close to the target. Okay. We hope so. You promised the government you would deliver it. Mark carney, you dont have the problem leave inflation. You do have the problem of managing Monetary Policy in the face of some strange position the british people god bless them took in june 2016, one which probably those who ever read me realize i wasnt wildly enthusiastic about. You have started a tiny increase in interest rates, a step towards normalization. How do you perceive the Monetary Policy challenges for you and other Central Banks in similar situations ahead in this strange environment of strong growth but still generally contained inflation, and where, among the other things people are concerned about is that this normalization process might reveal more financial fragilitity than now evidence. What is the path forward . In the next 15 minutes should i answer that . You can do it in two minutes. To do it in two minutes, let me generalalize and pick up on the normalization. The nature of the recovery as just indicated, its stronger, getting up to around 4 , broader, 90 of the economy is growing faster than potential and slack being used up, although healthier. One example in acceleration of g7 growth in the last year, 80 plus of that has been investment picking up and net trade picking up. This is not a consumer boom led recovery acceleration. All of those have consequences for normalization, as you can anticipate. The first slack used up is the phillips curve coming back in the face of bigger secular and Global Technology as we just mentioned and all of us have been discussing over the course of this week and other times. The Crucial Point is as you get towards full employment, they call it a curve for a reason. You see the convex element, not to historic degrees, we should be cautious, if you look at wage behavioren the u. S. , maybe i shouldnt speak for other economy, you see that firming for wages, once you adjust for poor productivity growth and a low labor of churn in the market it starts to fit together directionally. Theres that aspect pushing up. The second element pushing towards normalization of policy, the second element is that healthier bit, more investment as part of the recovery, investment picking up, reinvela to savings and weve seen a big shift in fiscal policy think on averaged advanced economies, a 2, 2 1 2 drag from 2014 adding depending how you use multipliers, particularly for the u. S. , adding to growth maybe a half a percent or so on average, somewhere in that zone. Thats a big big swing. Investment up, savings down, pushing up on the ec librium rate of interest. The third element id highlight is the stance of policy as a whole if i could use the term, for these purposes, the g4, so members of the g7, practicing quantitative easing, if you look at the flow of net fiscal issuance, minus what the bond is being taken out. Of the doj or bank of england or fed, we shifted from collectively, 2013 to 2017, basically no net flow or even bonds being taken out on that to this year on the order of magnitude of about a trillion dollars of net issuance based on announce plans potentially going up to a trillion 5 or higher next year and one would expect that to push up on rates. So in the context of normalization, you have a real economy providing some support for it. You have technical factors which play into it. You have a very tough judgment to be made around where is the equilibrium rate of interest, which has been very very low and arguably should be raising a bit. You should make a judgment about election and certainly not decision about degree. That will require, one has a sense of direction, i would say, as a whole for the Central Banks, regime shift towards normalization, a requirement for each of us to be quite prudent and patient as appropriate in making those judgments. The last thing i will say and will not expand on it unless you want, the uk is in a relatively unique situation in over the course of the next year as the negotiations with the eu 27 progress, we will find a lot more about what the supply capacity of the economy is in the near term, what the right level of the Exchange Rate should be, whether or not there will be tariffs for other trade costs and how all of this affects demand. It is all of those factors together which determine the appropriate stance of Monetary Policy. Let me ask one followup question. I was trying to run out the clock. I will come back to that in a moment. You have had a central role through the Financial Stability board in strengthening the Global Financial system. I get and every time i write on this on the lines of, these crazy Central Banks have already and if they havent already will soon created the most unmanageable asset price bubble ever, the only bubble. It will burst when you raise rates, you collectively. The crash will lead to total meltdown event. Yes. This sort of thing. On a scale of 110, how likely is that . Which way . You can choose. 10, 10 risk essentially go ahead, all of you people, go away and not worry at all. And 10, run away and get a big umbrella because the house is going to fall down on you. Two points, its a composite problemability, whats the probability there will be adjustment in asset price, look at Corporate Bond spreads, high yield spreads at all time low, just before the Global Financial crisis in a rising rate environment if indeed that is the right stance of policy, one would expect some adjustment there, other asset prices accordingly. I think the big question is not the market will find the right level for assets, the question is whether the core of the Financial System is in a position to amplify those movements in an adverse way and be a feedback to the economy. In that comparison of the economy i would put that as quite low, not just the regulators, the Financial Institutions represented here and across the world that have really transformed the liquidity of capital institutions. Ill give you very quick numbers if i may. Precrisis, the coverage of short term liabilities for banks, major banks, particularly in the uk, plus their access to central Bank Facilities was 10 . Now, its 110 . Theyre fully covered both their own liquidity and access to our li liquidity. People can debate over it. The actual levels of capital have gone up about five times for major banks, apples for apples in comparison in terms of capital. Thats a huge shift and the type of shift in the judgment of the bank of england. Ill be around if this judgment is tested, that would allow that system to withstand a shock of a disorderly brexit, which is a big call but were confident in terms of the orders of magnitude because we tested it. The last point. Were not all the way there to ending too big to fail but we have made a huge amount of progress businesses reshaping business lines and separating street and retail of banking and adding on top of all of that capital big layers of debt. For the uk, ill stop on this, the major banks of 25 total loss absorbing capacity. Even if they go through that capital, theres another layer of securities held by institutional investor, some of whom represented in this room, who would find out they are no longer debt holders but equity holders. All of that provides real shock absorbing capacity for the core of the system. That is not say asset prices couldnt change but provide a layer of process even if they change the sharp changes wont impact. The conclusion i would draw, too, one, all those commentators and possibly one or two in the audience worried the world will fall apart in the next couple of years because of policy normalization and asset prices should calm down and feel completely and utterly relaxed and the second conclusion completely personal, if there are any politics in the world who are telling us that the continually rising stock market is an indication how successful they are they might find the Central Banks will get in the way. Let me turn to you, carey lam. Tell us about how the world looks from your perspective, both in hong kong, the core part of the asian economy financial center, and if you can, about the rather large place with which youre closely connected into your north. Yes. Well, as a small and externally oriented economy but at the same time, one of the freest and most competitive economies in the world, hong kong certainly benefits from the Global Economic recovery. We are doing very well last year and projecting a full year growth of 2017 at no less than 3. 7 in real terms, which is considerably higher than a 2 in the preceding year, that is 2016. Christine kept on reminding us while they fixed a roof, i am pleased to tell you i have not discovered a leaking roof in hong kong yet, similarly while the sun is out, always good to strengthen the foundation. Strengthening the foundation will enable hong kong to seize many opportunities available to us arising from chinas Economic Policy and also asia. Asias growth now accounts for 60 of gdp worldwide and china alone is 30 contribution. This session is about Global Economic situation. I would not be doing justice if i just talk about the small economy of hong kong. If one looks at the china Economic Policy, which will be very relevant for hong kon