Russian
World
Economic Outlook Update
Restoring Confidence without Harming Recovery
July 7,
2010
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World growth is projected at about 4½ percent in 2010
and 4¼ percent in 2011. Relative to the
April 2010
World Economic Outlook (WEO), this
represents an upward revision of about ½ percentage point in 2010,
reflecting stronger activity during the first half of the year. The forecast
for 2011 is unchanged (Table
1; Figure 1:
CSV|PDF).
At the same time, downside risks have risen sharply amid renewed financial
turbulence. In this context, the new forecasts hinge on implementation of
policies to rebuild confidence and stability, particularly in the euro area.
More generally, policy efforts in advanced economies should focus on
credible fiscal consolidation, notably measures that enhance medium-run
growth prospects, such as reforms to entitlement and tax systems. Supported
by accommodative monetary conditions, fiscal actions should be complemented
by financial sector reform and structural reforms to enhance growth and
competitiveness. Policies in emerging economies should also help rebalance
global demand, including through structural reforms and, in some cases,
greater exchange rate flexibility.
A strengthening global economy is battered by financial
shocks
The world economy expanded at an annualized rate of over 5
percent during the first quarter of 2010. This was better than expected in
the April 2010 WEO, mostly due to robust growth in Asia. More broadly, there
were encouraging signs of growth in private demand. Global indicators of
real economic activity were strong through April and stabilized at a high
level in May. Industrial production and trade posted double-digit growth,
consumer confidence continued to improve, and employment growth resumed in
advanced economies (Figure
2:
CSV|PDF).
Overall, macroeconomic developments during much of the spring confirmed
expectations of a modest but steady recovery in most advanced economies and
strong growth in many emerging and developing economies.
Nevertheless, recent turbulence in financial
markets—reflecting a drop in confidence about fiscal sustainability, policy
responses, and future growth prospects—has cast a cloud over the outlook.
Crucially, fiscal sustainability issues in advanced economies came to the
fore during May, fuelled by initial concerns over fiscal positions and
competitiveness in Greece and other vulnerable euro area economies.
Table 1. Overview of the World
Economic Outlook Projections
(Percent change, unless otherwise
noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year |
|
Q4 over Q4 |
|
|
|
Projections |
|
Difference from
April 2010 WEO Projections |
|
Estimates |
Projections |
|
2008 |
2009 |
2010 |
2011 |
|
2010 |
2011 |
|
2009 |
2010 |
2011 |
|
World
Output1 |
3.0 |
–0.6 |
4.6 |
4.3 |
|
0.4 |
0.0 |
|
2.0 |
4.2 |
4.3 |
Advanced Economies |
0.5 |
–3.2 |
2.6 |
2.4 |
|
0.3 |
0.0 |
|
–0.5 |
2.3 |
2.6 |
United States |
0.4 |
–2.4 |
3.3 |
2.9 |
|
0.2 |
0.3 |
|
0.1 |
3.2 |
2.6 |
Euro Area |
0.6 |
–4.1 |
1.0 |
1.3 |
|
0.0 |
–0.2 |
|
–2.1 |
1.1 |
1.6 |
Germany |
1.2 |
–4.9 |
1.4 |
1.6 |
|
0.2 |
–0.1 |
|
–2.2 |
1.3 |
1.7 |
France |
0.1 |
–2.5 |
1.4 |
1.6 |
|
–0.1 |
–0.2 |
|
–0.4 |
1.5 |
1.7 |
Italy |
–1.3 |
–5.0 |
0.9 |
1.1 |
|
0.1 |
–0.1 |
|
–2.8 |
1.1 |
1.3 |
Spain |
0.9 |
–3.6 |
–0.4 |
0.6 |
|
0.0 |
–0.3 |
|
–3.1 |
–0.1 |
1.2 |
Japan |
–1.2 |
–5.2 |
2.4 |
1.8 |
|
0.5 |
–0.2 |
|
–1.4 |
1.1 |
3.0 |
United Kingdom |
0.5 |
–4.9 |
1.2 |
2.1 |
|
–0.1 |
–0.4 |
|
–3.1 |
2.1 |
1.9 |
Canada |
0.5 |
–2.5 |
3.6 |
2.8 |
|
0.5 |
–0.4 |
|
–1.1 |
4.0 |
2.6 |
Other Advanced
Economies |
1.7 |
–1.2 |
4.6 |
3.7 |
|
0.9 |
–0.2 |
|
3.1 |
3.4 |
4.6 |
Newly
Industrialized Asian Economies |
1.8 |
–0.9 |
6.7 |
4.7 |
|
1.5 |
–0.2 |
|
6.1 |
4.3 |
6.3 |
Emerging and Developing Economies2 |
6.1 |
2.5 |
6.8 |
6.4 |
|
0.5 |
–0.1 |
|
5.7 |
6.9 |
6.8 |
Central and
Eastern Europe |
3.1 |
–3.6 |
3.2 |
3.4 |
|
0.4 |
0.0 |
|
2.0 |
2.3 |
3.5 |
Commonwealth of
Independent States |
5.5 |
–6.6 |
4.3 |
4.3 |
|
0.3 |
0.7 |
|
... |
... |
... |
Russia |
5.6 |
–7.9 |
4.3 |
4.1 |
|
0.3 |
0.8 |
|
–3.8 |
3.7 |
3.9 |
Excluding
Russia |
5.3 |
–3.4 |
4.4 |
4.7 |
|
0.5 |
0.2 |
|
... |
... |
... |
Developing Asia |
7.7 |
6.9 |
9.2 |
8.5 |
|
0.5 |
–0.2 |
|
9.8 |
9.0 |
8.7 |
China |
9.6 |
9.1 |
10.5 |
9.6 |
|
0.5 |
–0.3 |
|
12.1 |
9.8 |
9.6 |
India |
6.4 |
5.7 |
9.4 |
8.4 |
|
0.6 |
0.0 |
|
7.3 |
10.3 |
8.0 |
ASEAN-53 |
4.7 |
1.7 |
6.4 |
5.5 |
|
1.0 |
–0.1 |
|
5.1 |
4.9 |
6.8 |
Middle East and
North Africa |
5.3 |
2.4 |
4.5 |
4.9 |
|
0.0 |
0.1 |
|
... |
... |
... |
Sub-Saharan
Africa |
5.6 |
2.2 |
5.0 |
5.9 |
|
0.3 |
0.0 |
|
... |
... |
... |
Western
Hemisphere |
4.2 |
–1.8 |
4.8 |
4.0 |
|
0.8 |
0.0 |
|
... |
... |
... |
Brazil |
5.1 |
–0.2 |
7.1 |
4.2 |
|
1.6 |
0.1 |
|
4.4 |
5.3 |
4.3 |
Mexico |
1.5 |
–6.5 |
4.5 |
4.4 |
|
0.3 |
–0.1 |
|
–2.4 |
3.5 |
4.3 |
Memorandum |
|
|
|
|
|
|
|
|
|
|
|
European Union |
0.9 |
–4.1 |
1.0 |
1.6 |
|
0.0 |
–0.2 |
|
–2.2 |
1.3 |
1.7 |
World Growth
Based on Market Exchange Rates |
1.8 |
–2.0 |
3.6 |
3.4 |
|
0.4 |
0.0 |
|
... |
... |
... |
|
|
|
|
|
|
|
|
|
|
|
|
World
Trade Volume (goods and services) |
2.8 |
–11.3 |
9.0 |
6.3 |
|
2.0 |
0.2 |
|
... |
... |
... |
Imports |
|
|
|
|
|
|
|
|
|
|
|
Advanced
Economies |
0.5 |
–12.9 |
7.2 |
4.6 |
|
1.8 |
0.0 |
|
... |
... |
... |
Emerging and
Developing Economies |
8.6 |
–8.3 |
12.5 |
9.3 |
|
2.8 |
1.1 |
|
... |
... |
... |
Exports |
|
|
|
|
|
|
|
|
|
|
|
Advanced
Economies |
1.8 |
–12.6 |
8.2 |
5.0 |
|
1.6 |
0.0 |
|
... |
... |
... |
Emerging and
Developing Economies |
4.5 |
–8.5 |
10.5 |
9.0 |
|
2.2 |
0.6 |
|
... |
... |
... |
Commodity Prices (U.S. dollars) |
|
|
|
|
|
|
|
|
|
|
|
Oil4 |
36.4 |
–36.3 |
21.8 |
3.0 |
|
–7.7 |
–0.8 |
|
... |
... |
... |
Nonfuel
(average based on world commodity export weights) |
7.5 |
–18.7 |
15.5 |
–1.4 |
|
1.6 |
–0.9 |
|
... |
... |
... |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Prices |
|
|
|
|
|
|
|
|
|
|
|
Advanced
Economies |
3.4 |
0.1 |
1.4 |
1.3 |
|
–0.1 |
–0.1 |
|
0.8 |
1.1 |
1.5 |
Emerging and
Developing Economies2 |
9.3 |
5.2 |
6.3 |
5.0 |
|
0.1 |
0.3 |
|
4.9 |
6.1 |
4.1 |
London
Interbank Offered Rate (percent)5 |
|
|
|
|
|
|
|
|
|
|
|
On U.S. Dollar
Deposits |
3.0 |
1.1 |
0.6 |
0.9 |
|
0.1 |
–0.8 |
|
... |
... |
... |
On Euro
Deposits |
4.6 |
1.2 |
0.8 |
1.2 |
|
–0.1 |
–0.4 |
|
... |
... |
... |
On Japanese Yen
Deposits |
1.0 |
0.7 |
0.5 |
0.6 |
|
–0.1 |
–0.1 |
|
... |
... |
... |
|
Note: Real effective exchange rates
are assumed to remain constant at the levels
prevailing during April 29–May 27, 2010. Country
weights used to construct aggregate growth rates for
groups of economies were revised. When economies are
not listed alphabetically, they are ordered on the
basis of economic size. The aggregated quarterly
data are seasonally adjusted. |
1The
quarterly estimates and projections account for 90
percent of the world purchasing-power-parity
weights. |
2The
quarterly estimates and projections account for
approximately 79 percent of the emerging and
developing economies. |
3Indonesia,
Malaysia, Philippines, Thailand, and Vietnam. |
4Simple
average of prices of U.K. Brent, Dubai, and West
Texas Intermediate crude oil. The average price of
oil in U.S. dollars a barrel was $61.78 in 2009; the
assumed price based on future markets is $75.27 in
2010 and $77.50 in 2011. |
5Six-month
rate for the United States and Japan. Three-month
rate for the Euro Area. |
|
Concern over sovereign risk spilled over to banking
sectors in Europe. Funding pressure reemerged and spread through interbank
markets, fed also by uncertainty about policy responses. At the same time,
questions about sustainability of the strength of the global recovery
surfaced.
As risk appetite waned and markets scaled back
expectations for future growth, assets in other regions, including emerging
markets, also experienced substantial sell-offs. This spilled over into
sharp movements in currency, equity, and commodity markets (Figure
3:
CSV|PDF).
In principle, the renewed financial turbulence could spill
over to the real economy through several channels, involving changes in
domestic and external demand and in relative exchange rates. The supply of
bank credit could be curtailed by heightened uncertainty about financial
sector exposure to sovereign risk as well as increased funding costs,
notably in Europe. Moreover, lower consumer and business confidence could
suppress private consumption and investment. Fiscal consolidation could also
dampen domestic demand. To the extent that higher risk premiums were
accompanied by depreciation of the euro, the latter would boost net exports
and mitigate the overall negative effect on growth in Europe. However, the
negative growth spillovers to other countries and regions could be
substantial because of financial and trade linkages. Lower risk appetite
could initially reduce capital flows to emerging and developing economies.
But relatively more robust growth prospects and low public debt could
eventually result in higher capital flows, as some emerging market economies
become a more attractive investment destination than some advanced
economies.
Global recovery will continue, despite more financial
turbulence
At this juncture, the potential dampening effect on growth
of recent financial stress is highly uncertain. So far, there is little
evidence of negative spillovers to real activity at a global level. Hence,
the projections below incorporate a modest negative effect on growth in the
euro area. The euro area projections also hinge on the use, as needed, of
the new European Stabilization Mechanism (aimed at preserving financial
stability) and, more important, on successful implementation of
well-coordinated policies to rebuild confidence in the banking system. As a
result, financial market conditions in the euro area are assumed to
stabilize and improve gradually. The additional fiscal consolidation
triggered by the financial turmoil (of about ½ percent of GDP) is projected
to detract from euro area growth in 2011 (about ¼ percentage point relative
to the April 2010 WEO), whereas the negative impact of tighter financing
conditions will be countered by the positive effects of euro depreciation.
Contagion to other regions is assumed to be limited and
the disruption in capital flows to emerging and developing economies to be
temporary. But there is a downside scenario: further deterioration in
financial conditions could have a much greater adverse effect on global
growth as a result of cross-country spillovers through financial and trade
channels.
Overall, output in advanced economies is now expected to
expand by 2½ percent in 2010, a small upward revision of ¼ percentage point,
due mostly to stronger-than-expected growth during the first quarter,
especially in advanced economies in Asia. Indeed, on a Q4-over-Q4 basis, the
forecast is broadly unchanged at 2¼ percent, implying lower growth during
the second half of 2010 on account of the financial turbulence.
For 2011, growth in advanced economies remains broadly
unchanged from the April 2010 WEO, at 2½ percent. Somewhat stronger
projected growth in the United States (owing to gathering momentum in
private demand) is offset by slightly weaker projected growth in the euro
area (due to the turbulence). Overall, the WEO forecast continues to be
consistent with a modest recovery in advanced economies, albeit with
substantial differentiation among them. Challenging the recovery in these
economies are high levels of public debt, unemployment, and in some cases,
constrained bank lending.
For 2011, output growth in emerging and developing
economies is expected to edge down to 6½ percent on an annual basis. This
forecast is broadly unchanged from the April 2010 WEO. However, growth is
now projected at 6¾ percent on a Q4-over-Q4 basis, which represents a
downward revision of ½ percentage point. The projections are consistent with
still-robust growth overall in emerging and developing economies, but with
considerable diversity among them. Key emerging economies in Asia (Box
1:
PDF) and in Latin America continue to lead the recovery. Given the
relatively modest effects to date of the financial turbulence on euro area
growth and on commodity prices, growth prospects remain favorable for many
developing countries in sub-Saharan Africa as well as for commodity
producers in all regions. Nimble policy responses and stronger economic
frameworks are helping many emerging economies rev up internal demand and
attract capital flows. The ongoing rebound in global trade is also
supporting the recovery in many emerging and developing economies.
Box 1. Economic Outlook for Asia and Pacific
Region
Asia’s strong recovery from the global financial crisis
continued in the first half of 2010, despite renewed tension in global
financial markets. First-quarter GDP outturns were generally stronger than
anticipated at the time of the April 2010 WEO, and high-frequency indicators
suggest that economic activity remained brisk during the second quarter.
Economic activity in the region has been sustained by
continued buoyancy in exports and strong private domestic demand. As
envisaged in the April 2010 WEO, exports are being boosted by the global and
domestic inventory cycles and by the recovery of final demand in advanced
economies. Private domestic demand maintained its 2009 momentum across the
region, despite less stimulative policy conditions and increased volatility
in capital inflows and equity valuations after the euro area financial
turbulence. In particular, private fixed investment has strengthened on the
back of higher capacity utilization and the still relatively low cost of
capital.
Against this background, GDP growth forecasts for Asia
have been revised upward for 2010, from about 7 percent in the April WEO to
about 7½ percent. For 2011, when the inventory cycle will have run its full
course and the stimulus is withdrawn in several countries, Asia’s GDP growth
is expected to settle to a more moderate but also more sustainable rate
(about 6¾ percent.)
The pace and drivers of growth will
continue to differ substantially across the region. In China, given the
strong rebound in exports and resilient domestic demand so far this year,
the economy is now forecast to grow by 10½ percent in 2010, before slowing
to about 9½ percent in 2011, when further measures are taken to slow credit
growth and maintain financial stability. In India, growth is expected to
accelerate to about 9½ percent in 2010, as robust corporate profits and
favorable financing conditions fuel investment, and then to settle to
8½ percent in 2011. Both Newly Industrialized Asian Economies (NIEs) and
ASEAN economies are expected to grow by about 6½ percent in 2010, as a
result of surging exports and private domestic demand, before moderating to
4¾ percent and 5½ percent, respectively, in 2011. In Japan, growth is now
expected to reach about 2½ percent in 2010, due mainly to
stronger-than-expected exports during the first half of 2010, before easing
to about 1¾ percent in 2011 as the fiscal stimulus gradually tapers off. In
Australia and New Zealand, growth is expected to be about 3 percent in 2010,
before accelerating to 3½ and 3¼, respectively, in 2011, with still-robust
commodity prices boosting private domestic demand.
Although baseline growth forecasts for
2010 have been revised upward, downside risks have intensified for the
second half of the year and for 2011 following the financial turbulence in
the euro area. Asia has only limited direct financial linkages to the most
vulnerable euro area economies, but a stall in the European recovery that
spilled over to global growth would affect Asia through both trade and
financial channels. Many Asian economies (especially NIEs and the ASEAN
economies) are highly dependent on external demand, and their export
exposure to Europe is at least as large as their export exposure to the
United States. However, in the event of external demand shocks, the large
domestic demand bases in some of the Asian economies that contribute
substantially to the region’s growth (China, India, Indonesia) could provide
a cushion to growth. Significant contagion effects from a Europe-wide credit
event could materialize through bank funding and corporate financing,
especially in those regional economies that are more dependent on foreign
currency financing. Further spikes in global risk aversion also could
precipitate capital outflows from the region and could weaken equity
valuations, undermining the positive feedback loop between favorable
financial conditions and domestic demand.
It is worth noting, however, that in the
event of such contagion, Asian central banks could swiftly redeploy tested
instruments to overcome market seizures, as shown by the reestablishment of
the U.S. dollar liquidity swap facility announced by the Bank of Japan in
May 2010. Many regional economies also have room for further policy maneuver
and could delay the planned withdrawal of monetary and fiscal stimulus in
order to mitigate adverse spillovers to the real economy.
Inflation to remain mostly subdued
Prices of many commodities fell during the financial
market shocks in May and early June, reflecting in part expectations for
weakened global demand. Prices recovered some ground more recently, as
concern about the real spillovers of the financial turbulence has eased. At
the same time, waning appetite for risk prompted gold prices to settle
higher. In line with futures market developments, the IMF’s baseline
petroleum price projection has been revised down to $75.3 a barrel for 2010
and $77.5 a barrel for 2011 (from $80 and $83, respectively, in the April
2010 WEO). Projections for the nonfuel commodity price index have remained
broadly unchanged, partly reflecting stronger-than-expected market
conditions through April.
Inflation pressures are expected to remain subdued in
advanced economies (Figure
4:
CSV|PDF).
The still-low levels of capacity utilization and well-anchored inflation
expectations should contain inflation pressures in advanced economies, where
headline inflation is expected to remain around 1¼-1½ percent in 2010 and
2011. In a number of advanced economies, the risks of deflation remain
pertinent in light of the relatively weak outlook for growth and the
persistence of considerable economic slack.
In contrast, in emerging and developing economies,
inflation is expected to edge up to 6¼ percent in 2010 before subsiding to 5
percent in 2011.
Downside risks to global growth are much greater
Downside risks have risen sharply. In the near term, the
main risk is an escalation of financial stress and contagion, prompted by
rising concern over sovereign risk. This could lead to additional increases
in funding costs and weaker bank balance sheets and hence to tighter lending
conditions, declining business and consumer confidence, and abrupt changes
in relative exchange rates. Given trade and financial linkages, the ultimate
effect could be substantially lower global demand. To illustrate the likely
growth effects,
Figure 5 (CSV|PDF)
presents an alternative scenario using the IMF’s Global Projection Model (GPM).
The scenario assumes that the magnitude of shocks to financial conditions
and domestic demand in the euro area are as large as those experienced in
2008. The model simulation also incorporates significant contagion to
financial markets, particularly in the United States, where reductions in
equity prices dampen private consumption. Given negative financial and trade
spillovers, growth is suppressed in other regions as well. In this downside
scenario, world growth in 2011 is reduced by about 1½ percentage points
relative to the baseline.
In addition, growth prospects in advanced economies could
suffer if an overly severe or poorly planned fiscal consolidation stifles
still-weak domestic demand. There are also risks stemming from uncertainty
about regulatory reforms and their potential impact on bank lending and
economy-wide activity. Yet another downside risk is the possibility of
renewed weakness in the U.S. property market. These downside risks to growth
in advanced economies also complicate macroeconomic management in some of
the larger, fast-growing economies in emerging Asia and Latin America, which
face some risk of overheating.
Daunting policy challenges lie ahead
Against this uncertain backdrop, the overarching policy
challenge is to restore financial market confidence without choking the
recovery.
In the euro area, well-coordinated policies to rebuild
confidence are particularly important. As discussed in the
July 2010 Global Financial Stability Report (GFSR) Update,
immediate priorities in the financial sphere include: making the new
European Stabilization Mechanism fully operational, resolving uncertainty
about bank exposures (including to sovereign debt), ensuring that European
banks have adequate capital buffers, and continuing liquidity support.
At a global level, policies should focus on implementing
credible plans to lower fiscal deficits over the medium term while
maintaining supportive monetary conditions, accelerating financial sector
reform, and rebalancing global demand.
“Growth-friendly” medium-term fiscal consolidation plans
are urgently needed
Of utmost importance are firm commitments to ambitious and
credible strategies to lower fiscal deficits over the medium and long term.
Such plans could include legislation creating binding multiyear targets and
should emphasize policy measures that reform pension entitlements and public
health care systems, make permanent reductions in non-entitlement spending,
improve tax structures, and strengthen fiscal institutions. Such steps
should mitigate the type of adverse short-term effects on domestic demand
that fiscal consolidation has commonly caused in the past by reducing the
fiscal burden for the future and boosting the economy’s supply potential.
In the near term, the extent and type of fiscal adjustment
should depend on country circumstances, particularly the pace of recovery
and the risk of a loss of fiscal credibility, which can be mitigated by the
adoption of credible medium-term consolidation plans.
Most advanced economies do not need to tighten before
2011, because tightening sooner could undermine the fledgling recovery, but
they should not add further stimulus. Current fiscal consolidation plans for
2011, which envisage a fiscal retrenchment corresponding to an average
change in the structural balance of 1¼ percentage points of GDP, are broadly
appropriate (Figure 6:
CSV|PDF).
Economies facing sovereign funding pressures have already
had to embark on immediate fiscal consolidation; in these economies, strong
signals of commitment through politically-difficult, upfront measures are
necessary. More generally, countries that are unable to credibly commit to
medium-term consolidation may find themselves compelled by adverse market
reactions to undertake more frontloaded adjustments.
Meanwhile, fast-growing advanced and emerging economies
can start to tighten now. For some, it may be preferable to use fiscal
policy rather than monetary policy to contain demand pressures if tighter
monetary conditions could exacerbate pressure from capital inflows. In
contrast, in economies with excessive external surpluses and relatively low
public debt, fiscal tightening should take a backseat to monetary tightening
and exchange rate adjustment, in order to facilitate the necessary
rebalancing toward domestic demand.
Monetary and exchange rate policies should support global
demand rebalancing
Monetary policy remains an important policy lever. Given
subdued inflation pressures, monetary conditions can remain highly
accommodative for the foreseeable future in most advanced economies. This
will help mitigate the adverse effects on growth of earlier and larger
fiscal consolidations as well as of financial market jitters. Moreover, if
downside risks to growth materialize, monetary policy should be the first
line of defense in many advanced economies. In such a scenario, with policy
interest rates already near zero in several major economies, central banks
may need to again rely more strongly on using their balance sheets to
further ease monetary conditions.
Monetary policy requirements are more diverse for emerging
and developing economies. Some of the larger, fast-growing emerging
economies, faced with rising inflation or asset price pressures, have
appropriately tightened monetary conditions, and markets are pricing in
further moves. But monetary policy actions must remain responsive in both
directions. In particular, should downside risks to global growth
materialize, there may need to be a swift policy reversal.
In emerging economies with excessive external surpluses,
monetary tightening should be supported with nominal effective exchange rate
appreciation as excess demand pressures build, including in response to
continued fiscal support to facilitate demand rebalancing or renewed capital
flows. In this context, any concerns about exchange rate overshooting could
be addressed by fiscal tightening to ease pressure on interest rates, by
some buildup of reserves, by macroprudential measures, and possibly by
stricter controls on capital inflows—mindful of the potential to create new
distortions—or looser controls on outflows.
Financial system reform needs to be accelerated
Recently renewed financial strains underscore the urgent
need to reform financial systems and restore the health of banking systems.
In many advanced economies, more progress is needed on bank
recapitalization; bank consolidation, resolution, and restructuring; and
regulatory reform. In some cases, larger capital buffers are required to
absorb the ongoing and potential future deterioration in credit quality and
to meet expected higher capital standards. In the absence of complete
banking sector recapitalization and restructuring, the flow of credit to the
economy will continue to be impaired. As discussed in the
July 2010 GFSR Update, bank funding remains a concern, given
upcoming debt rollovers.
Greater transparency is also a priority. Resolving
uncertainty about bank exposures, including to sovereign debt, could
alleviate pressure in the European interbank markets and help improve market
sentiment. As discussed in the
July 2010 GFSR Update, publishing the results of the ongoing
stress tests in Europe is a step in the right direction. But this should be
complemented by credible plans to strengthen capital levels as needed and by
further efforts to increase the transparency of the activities of European
financial institutions that are not publicly traded and do not publish
quarterly accounts.
There is also a pressing need to reduce ongoing
uncertainty about the regulatory environment and to implement long-awaited
reforms. Otherwise, policy opacity could hinder banks’ willingness to supply
credit and support the recovery. Hence, credible and consistent plans and
timetables for implementing regulatory reform need to be developed and to
reduce uncertainty. Unilateral measures should be avoided as they could have
unintended consequences, especially if market confidence suffers.
Global demand rebalancing and key structural reforms are
essential to support future growth
Last but not least, the ongoing rebalancing of global
demand must be supported by bold policy action. To some extent, financial
markets and capital flows are already facilitating global demand rebalancing
through currency pressures, although many economies have been resisting them
by building up reserves (Figure
7:
CSV|PDF).
In economies with excessive external surpluses, the
transition toward domestic sources of demand should continue, helped by
structural policies to reform social safety nets and to improve productivity
in the service sector as well as, in a variety of cases, more flexible
exchange rates. In economies with excessive external deficits, fiscal
consolidation and financial sector reform should help rebalance demand.
However, successful fiscal adjustment is difficult without
strong growth. Structural reform, particularly in product and labor markets,
is needed to raise potential growth and improve competitiveness,
particularly in many economies facing large fiscal adjustment. Also,
tax-reform efforts should give preference to measures that encourage
investment, because such policies are less likely to dampen domestic demand
in the near term.
In sum, ambitious and complementary policy efforts are
needed to promote strong, sustainable, and balanced global growth over the
medium term.
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