## The Managing Director’s Statement on the Global Economy and Financial Markets to the IMFC

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### The recovery: status and key statistics
- "The recovery remains fragile and uneven."
- "Global activity expanded at an annual rate of about 5¼ percent during the first half of 2010."
- "More than 210 million people across the globe may be unemployed, an increase of more than 30 million since 2007. Three-fourths of the increase has occurred in advanced economies."
- "According to the latest World Economic Outlook (WEO), global activity is forecast to expand by 4.8 in 2010 and 4.2 percent in 2011."
- "In advanced economies, growth is projected at 2.7 percent in 2010 and 2.2 percent in 2011."
- "Emerging and developing economies ... are projected to expand at rates of 7.1 percent and 6.4 percent for 2010 and 2011."
- "Inflation is projected to stay generally low, amid continued excess capacity and high unemployment, with a few exceptions among the emerging economies."

### Downside risks and transmission channels
- "Risks to the economic growth forecasts are to the downside."
- Key risk channels:
  - "Low growth undermines financial healing and amplifies fiscal deficits and sovereign debt levels."
  - "Rising risk aversion could exacerbate sovereign debt problems, undercutting the recovery."
  - "Insufficient real exchange rate adjustment in response to current account imbalances ... could hold back global growth even further and raise the specter of protectionism."
- "The probability of a sharp global slowdown, including stagnation or contraction in advanced economies, appears low."

### Need for coordinated and proactive policies
- Policy objectives:
  - Achieve two rebalancing acts: internal rebalancing (strengthening financial systems and private demand in advanced economies) and external rebalancing (increase net exports from deficit countries and decrease net exports from surplus countries).
  - Support a smooth transition from public- to private-sector-led growth in many advanced economies and from external to domestically driven growth in key emerging economies.
- Policy guidance:
  - "Accommodative macroeconomic policies are essential to support demand, keep financial markets functioning smoothly, and prevent more profound economic and social dislocation."
  - Do not rely solely on macroeconomic stimulus; repair and reform financial sectors and realign incentives.
  - Address structural failings: entitlement systems, tax systems that favor debt and have loopholes, labor market rigidities, closed product/services markets, barriers to R&D, and inadequate public services.

### Financial sector reform: priorities and recommendations
- "The financial sector remains the Achilles’ heel of the recovery."
- Required actions:
  - "Restructuring or resolving weak banks."
  - "Enhancing banks’ capital adequacy and liquidity buffers."
  - "Pursuing orderly and globally consistent regulatory reform."
  - "Strengthening supervision and oversight of the financial system."
- Ongoing vulnerabilities and near-term support:
  - "Many banks face a 'wall' of maturing debt at a time of large public sector financing needs."
  - Continue central bank and government support where needed, including liquidity facilities, government-guaranteed debt issuance programs, and dollar swap facilities.
  - "It may also be necessary to revive and possibly enlarge the use of unconventional monetary policies should downside risks begin to materialize."
- Medium-term reform priorities:
  - Further strengthen quantity and quality of bank capital; alter business models; ensure more secure and stable funding sources.
  - Supervisors should "encourage banks to increase the maturity of their liabilities whenever market opportunities arise and to shore up their funding sources."
  - Reduce risks from rising sovereign debt burdens and contingent liabilities; put in place credible plans for medium-term fiscal adjustment.
  - Move beyond micro-prudential regulation to a macro-prudential approach to limit systemic effects of too-important-to-fail institutions, including non-banks.
- On Basel Committee proposals:
  - "We welcome the recent proposals of the Basel Committee on Banking Supervision (BCBS), which represent a substantial improvement in the quality and quantity of capital in comparison with the pre-crisis situation."
  - "Common equity will represent a higher proportion of capital and thus allow for greater loss absorption."
  - "The amount of intangibles and qualified assets will be limited to 15 percent."
  - "Phase in arrangements have been developed to allow banks to move to these higher standards mainly through retention of earnings."
  - Consider phasing out intangibles completely and scaling back transition periods as the global financial system stabilizes.

### Fiscal consolidation and structural reform: timing and content
- Urgent needs for advanced economies:
  - "Put in place medium-term plans to help achieve sustainable fiscal positions."
  - Rebuild room for fiscal policy maneuver following turmoil in sovereign debt markets.
  - Plans must address "rapidly growing spending programs, notably entitlements; tax reforms to favor investment rather than consumption; and subsidies and tax exemptions that favor some consumers or producers over others."
- Timing and flexibility:
  - "Importantly, as part of these plans, fiscal consolidation should start in 2011."
  - If consolidation plans are "credible and growth-friendly, this would help mitigate any short-term dampening impact on private demand."
  - "The type and speed of adjustment should reflect different circumstances in different countries."
  - "If growth threatens to slow appreciably more than expected in the WEO, countries with fiscal room could postpone some of the planned consolidation."
- Labor market and product market reforms:
  - Eliminate two-tier labor markets by lowering protection for permanent contracts while raising protection for temporary contracts.
  - Facilitate job searching, skills matching, and labor mobility.
  - Improve access to training and education; consider well-designed employment subsidies for vulnerable groups (the long-term unemployed or the young).
  - Complementary product and services market reforms to boost labor demand and real wages through greater competition and lower markups.
- Emerging and developing economies:
  - Gradual macroeconomic policy normalization where private demand is established.
  - In economies with excessive external surpluses and low public debt, "fiscal tightening should take a backseat to monetary tightening and exchange rate flexibility."
  - In economies with high public debt or strong domestic recovery, fiscal tightening can start immediately.
  - Use capital inflows and exchange rate appreciation to reallocate demand; use macro-prudential measures to contain speculative excesses.
  - Further reforms: simplify regulation, raise human capital, build critical infrastructure, reform financial sector, strengthen corporate governance, and improve social safety nets to put capital inflows to productive use.

### International policy coordination and macroeconomic gains
- Coordination roles:
  - "Policy coordination will enable economies to achieve the twin goals of internal and external rebalancing with minimum disruption."
  - Past coordination helped alleviate liquidity strains and rebuild confidence in spring 2009 and averted more serious instability during the recent European sovereign debt turmoil.
- Potential gains:
  - "Internal and external rebalancing ... could significantly benefit the entire global economy."
  - "Global GDP could be elevated by 2½ percent over five years, which could potentially create 30 million jobs."
  - "Global policy coordination thus has a crucial role to play in creating more growth and more jobs."

*The Managing Director’s Statement on the Global Economy and Financial Markets to the IMFC.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_100110b.pdf_