## Key Issues Note by the IMF Managing Director to the IMFC on the Global Economy and Financial Market—Outlook and Policy Responses September 30, 2009

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### Sustaining the recovery
- Global economy appears to be expanding again and financial conditions have improved markedly.
- Triggers for rebound: strong public policies that allayed concerns about systemic financial collapse, supported demand, and all but eliminated fears of a global depression.
- Recovery risks and constraints:
  - Recent recovery is not yet self-sustaining.
  - Forces driving rebound are temporary, including restocking and major fiscal stimulus, and will diminish in the course of 2010.
  - Limits on credit availability will be a key constraint on pace of recovery.
  - Consumption and investment gaining strength only slowly due to large increases in unemployment, need for balance sheet repair, high excess capacity, and financing constraints.
- WEO projections: activity contracting by about 1 percent in 2009 and expanding by about 3 percent in 2010, well below rates achieved before the crisis.
- Key policy question posed to Ministers and Governors: Do Ministers and Governors agree that the current rebound remains very dependent on supportive macroeconomic and financial policies? How do they see the pressures for premature exit from these policies? How should exit policies be coordinated?

### Reconciling short and long-run fiscal challenges
- Immediate policy stance:
  - Global fiscal stimulus needs to be sustained until recovery is on a firm footing.
  - Stimulus may need amplification or extension beyond current plans if downside risks materialize.
- Medium-term fiscal credibility:
  - Governments need to step up efforts to constrain future spending by advancing reforms to entitlements.
  - Governments must commit to large reductions in deficits once recovery is on a solid footing to maintain fiscal credibility and policy effectiveness in the face of large and rising public debt stocks.
- Key policy questions posed to Ministers and Governors: How do Ministers and Governors see fiscal policy challenges? Do Ministers see political constraints on further stimulus implementation? What initiatives would help support the credibility of fiscal sustainability and provide room for short-term fiscal stimulus if needed?

### How to exit from easy monetary conditions
- Central issues for monetary policymakers: timing of tightening and how to unwind large central bank balance sheets.
- Advanced economies:
  - Central banks can (with few exceptions) afford to maintain accommodative conditions for an extended period since inflation is likely to remain subdued while output gaps remain wide.
  - Monetary policy will need to anticipate the impact of gradual withdrawal of fiscal support.
  - Instruments exist to start tightening monetary conditions even while central bank balance sheets remain much larger than usual, allowing unwinding to be tailored to credit market conditions.
- Emerging economies:
  - Situation is varied; the moment for starting to remove monetary accommodation is likely to materialize sooner in a number of these economies than in advanced economies.
  - Warding off risks for new asset price bubbles may call for greater exchange rate flexibility (aside from strong prudential policies) to allow monetary policy tightening relative to easy stances in advanced economies.
- Key policy questions posed to Ministers and Governors: Do Ministers and Governors agree that inflationary pressures are likely to remain low over the foreseeable future or do they see appreciably upside risks? Do they foresee difficulties in raising policy rates even while central bank balance sheets remain larger than usual? Looking beyond the crisis, how should monetary policy frameworks be enhanced to help preserve economic and financial stability?

### Repairing and reforming financial sectors
- Two main challenges:
  1. Ensure markets and banks can support economic recovery:
     - Renewed efforts to increase bank capital and repair bank balance sheets are required.
     - Official stress tests are important instruments to help achieve this.
     - Exit strategies from public support need clear articulation; programs should be phased out very gradually using market-based incentives to reduce reliance on public support.
  2. Put in place reforms to forestall a similar crisis in the future:
     - Major overhaul of micro- and macro-prudential policies required.
     - Specific issues highlighted:
       - Broaden and make more flexible the perimeter of regulation to cover all systemically important institutions, alongside measures addressing institutions considered “too big or too connected to fail.”
       - Macroprudential frameworks must induce banks to build more capital in good times to support continued lending in bad times and combat other forms of procyclicality.
       - Improve international collaboration and coordination.
- Key policy question posed to Ministers and Governors: How do Ministers and Governors see the progress with respect to restoring the stability of the banking system? With political and market resistance to critical financial sector reforms on the rise, how can reform momentum best be sustained to ensure that the financial system is overhauled and the likelihood of future crises reduced?

### Rebalancing global demand
- Objective: Achieve sustained healthy growth for all countries over the medium run through rebalancing the pattern of global demand.
- Required adjustments:
  - Many current account surplus economies that followed export-led growth strategies need to rely more on domestic demand growth to offset likely subdued domestic demand in deficit economies that have undergone asset price/housing busts.
  - Many external deficit countries will have to shift from domestic to externally-led growth.
  - Policy measures needed include changes in fiscal policies and significant structural reforms:
    - Repair financial systems.
    - Improve corporate governance and financial intermediation.
    - Support public investment.
    - Improve labor and product markets as well as social safety nets.
- Key policy question posed to Ministers and Governors: How do Ministers and Governors see prospects for rebalancing global demand? What part can the IMF play to ensure adequate progress is made?

*Key Issues Note by the IMF Managing Director to the IMFC on the Global Economy and Financial Market—Outlook and Policy Responses, September 30, 2009*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_093009.pdf_