imf - development in the global economy

7/28/2019 IMF - Development in the Global Economy

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iM annual rEPort 2011 |

AN UNBALANCED RECOVERY

Even as global growth strengthened, the recovery remainedunbalanced across the world. In the advanced economies, growthwas modest, with average growth o just 3 percent in 2010.Because growth has been slow considering the depth o therecession, output remains ar below potential, and unemploymentis still very high. Low growth in these countries can be traced toboth precrisis excesses and crisis allout. In many o themespe-cially the United Statesa depressed housing market continuesto weigh on investment. Te crisis itsel has also led to a dramaticincrease in public debt, raising worries about scal sustainability.In some o the advanced economies, not enough has been doneto strengthen banks capital positions and reduce leverage. Tishas contributed to sluggish credit growth.

Te problems o the European Union (EU) periphery have beenparticularly acute. Tese stem rom the combined interactions olow growth, scal diculties, and nancial pressures. Reestablish-ing scal and nancial sustainability in the ace o low or negativegrowth and high sovereign bond and bank credit deault swap

(CDS) spreads is a daunting challenge. Te problems o the EUperiphery point to a more general problem aced by many advancedeconomies: low potential growth and sizable economic slack. Tismakes the challenge o scal adjustment that much greater.

In the emerging and developing economies, economic perormancehas been much stronger. Overall, these economies enjoyed aver-age growth o over 7 percent in 2010. Growth in Asia and LatinAmerica was very buoyant, with most economies in the regionoperating at or above capacity. Developing economies, particularlyin sub-Saharan Arica, have also resumed ast and sustainable

growth. In the emerging economies in eastern Europe and theCommonwealth o Independent States that were hit much harderby the crisis, growth has only just begun to turn the corner.

Stronger initial iscal and inancial positions helped manyemerging and developing economies recover more quickly romthe crisis. Tese economies are also beneting rom a healthyrecovery in exports and strong domestic demand buoyed byaccommodative monetary and scal policies. Capital outowsduring the crisis have turned into capital inows in the recovery,owing to both better growth prospects and higher interest ratesthan in the advanced economies. At the same time, a number oemerging economies are experiencing a buildup in inationarypressures, rapidly expanding credit, and signs o overheating.

Despite the robust global recovery, growth has not been strongenough to make a major dent in aggregate unemployment. As oApril 2011, the International Labor Organization estimated thatsome 205 million people worldwide were still looking or jobsupby about 30 million since 2007. Te increase in unemploymenthas been especially severe in advanced economies. In many emerg-ing and developing economies, particularly in the Middle East and

North Arica, high youth unemployment is a special concern.

urning to nancial conditions, 2010 was a year o improve-mentalthough conditions remain unusually ragile. Globalnancial stability was bolstered by better macroeconomic peror-mance and continued accommodative macroeconomic policies.However, despite the transer o risks rom the private to thepublic sector during the crisis, condence in the banking systemso many advanced economies has not been restored. In somecountries, particularly in the euro area, this continues to interactadversely with sovereign risks.

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| iM annual rEPort 201114

Looking ahead, the global recovery is expected to continue at amoderate pace. Te April 2011 World Economic Outlookorecastglobal growth o about 4 percent in 2011 and 2012, a littleslower than in 2010. Te multispeed recovery is likely to continue,with growth averaging about 2 percent in advanced economiesand about 6 percent in emerging and developing economies.

Risks to the outlook remain on the downside. In advancedeconomies, weak sovereign and nancial sector balance sheetsand still-moribund real estate markets continue to present majorconcerns. Financial risks are also on the downside as a result othe high unding requirements o banks and sovereigns, especiallyin certain euro area economies.

New downside risks have also been building. Tese includecommodity pricesnotably or oiland related geopoliticaluncertainty. Overheating and booming asset markets in emerg-ing market economies are another source o downside risks.However, there is also the potential or upside surprises in regard

to growth in the short term, owing to strong corporate balancesheets in advanced economies and buoyant demand in emergingand developing economies.

A combination o strong demand growth and supply shocks hasdriven commodity prices up aster than anticipated, raising down-side risks to the recovery. However, in advanced economies, thealling share o oil in energy consumption, the disappearance owage indexation, and the anchoring o ination expectations suggestthat the efects on growth and core ination will be minor. Inemerging and developing economies, however, sharply higher oodand commodity prices pose a threat to poor households. Tey alsopresent a greater risk in regard to ination, given that spending on

ood and uel accounts or a much larger share o the consumerbasket in these countries. And because the credibility o monetarypolicy is less well established, it may be more dicult to keepination expectations in check. However, growth prospects are goodin most low-income countries despite these downside risks.

OLD AND NEW CHALLENGES

In the year ahead, policymakers will still be dealing with challengesstemming rom the crisis, even as new ones come to the ore. Inadvanced economies, the challenge is how best to sustain therecovery while pressing ahead with critical scal adjustment and

nancial sector repair and reorm. Monetary policy should remainaccommodative as long as output remains below potential andination expectations are well anchored. Countries also shouldadopt smart or growth-riendly scal consolidation: neithertoo ast, which could stop growth, nor too slow, which wouldundermine credibility. Te ocus should be on reorms to promotegrowth that place public debt on a sustainable track over themedium term. In the nancial sphere, the redesign o nancialregulation and supervision remains a pressing issue, as doesincreasing clarity on banks balance sheet exposures and prepar-

ing recapitalization plans, i needed. Finally, an increased ocuson reorms to boost potential growth is required in many advancedeconomies, but especially in Europe.

Action is also needed to bring down high unemployment, whichposes risks to social cohesion. Accelerating bank restructuring andrecapitalization to relaunch credit to small and medium-sized rms,which account or the bulk o employment, would help. empo-rary employment subsidies targeted at these rms might also beuseul to support job creation. Where unemployment has increasedor structural reasons or was high even beore the crisis, broaderlabor and product market reorms are essential to create more jobs.

For most emerging market economies, the challenge is how toavoid overheating in the ace o closing output gaps and highercapital ows. Macroeconomic policies are appropriate tools todeal with surging capital inowsnamely, allowing the currencyto appreciate, accumulating more reserves, and adjustingmonetary and scal policy to maintain output at potential.

Capital ow management measureswhich encompass a rangeo taxes, certain prudential measures, and capital controlsarealso part o the toolkit. But such measures should not be asubstitute or necessary macroeconomic policy adjustment.Countries are oten tempted to resist the exchange rate appre-ciation that is likely to come with higher interest rates and higherinows. But appreciation increases real income and is part o thedesirable adjustment in countries with large current accountsurpluses, and should not be resisted.

Securing robust and sustainable global growth will requirecontinued policy cooperation across the world. In the advancedeconomies, scal consolidation must be achieved. o do this and

to maintain growth, these economies need to rely more onexternal demand. Symmetrically, emerging market economiesmust rely less on external demand and more on domestic demand.Appreciation o emerging market economies currencies relativeto those o advanced economies is an important key to this globaladjustment, as is increasing the pace o structural reorms toboost the role o domestic consumption and investment. Teneed or careul design at the national level and coordination atthe global level may be as important today as at the peak o thecrisis two years ago.

Advancing the nancial sector reorm agenda remains crucial tosustaining the recovery. Countries in which banking systems are

still struggling will need to enhance transparency (includingthrough more consistent, rigorous, and realistic stress tests) andrecapitalize, restructure, and (i necessary) close weak institutions.Address ing risks posed by systemical ly important inancialinstitutions will remain an ongoing concern. And as countriestransition to a new and more-demanding regulatory regime,banks will need larger capital bufers and strengthened balancesheets. Without these longer-term nancial sector reorms,short-term unding diculties will continue to present seriousrisks o another systemic liquidity event.

imf - development in the global economy

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