## Statement by the Managing Director to the International Monetary and Financial Committee on the Global Economy and Financial Markets (April 13, 2011)

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### Recovery Outlook and Key Growth Projections
- World growth moderated to about 3¾ percent in the second half of 2010 as the global inventory cycle came to a close.
- World real GDP growth is forecast at about 4½ percent in 2011 and 2012, down modestly from 5 percent in 2010.
- Real GDP in advanced economies is projected to expand by around 2½ percent as investment recovers, supported by low interest rates, easing financing conditions, and generally healthy corporate balance sheets and profitability.
- Real GDP in emerging and developing economies is projected to expand by 6½ percent, buoyed by accommodative macroeconomic policies, easy financial conditions, and capital inflows.
- Signs indicate the recovery is becoming more self-sustaining: the hand-off from public to private demand is advancing in many advanced countries, and financial conditions have continued to improve (though remain unusually fragile). Emerging and developing economies show robust growth supported by well-entrenched private demand.

### Downside and Upside Risks
- Downside risks continue to outweigh upside risks.
- Downside risks highlighted:
  - Weak sovereign balance sheets in certain euro area economies.
  - Still-vulnerable real estate markets in advanced economies.
  - High funding requirements of banks and sovereigns (financial downside).
  - Commodity price shocks, notably oil supply disruptions.
  - Overheating and booming asset markets in some emerging market economies.
- Upside possibilities:
  - Strong corporate balance sheets in advanced economies.
  - More buoyant-than-expected demand in emerging and developing economies.

### Advanced Economies: Fiscal and Financial Repair
- Main challenges:
  - Urgent need to place fiscal positions on sustainable medium-term paths to avoid risks to global bond and currency markets and to preserve policy space.
  - Implementation of adjustment plans, further fiscal consolidation and entitlement reforms, and stronger fiscal rules and institutions are required.
- Country-specific notes:
  - United States: Recent agreement to trim discretionary spending needs to be complemented with timely fundamental entitlement and tax reforms, with plans adopted this year.
  - Japan: Immediate fiscal priority is humanitarian and reconstruction response to the recent earthquake; reconstruction spending should be linked to a clear fiscal strategy for bringing down the public debt ratio over the medium-term once damage size is better understood.
- Financial sector priorities:
  - Restore confidence in banking systems to support lending to small and medium-sized enterprises.
  - In the euro area, rigorous, comprehensive, and transparent stress tests, and measures to strengthen, restructure, or close banks, to reduce excessive reliance on central bank funding.
  - Ensure multilateral backstops are sufficiently flexible and endowed to facilitate orderly deleveraging without triggering further fiscal or bank funding strains.
  - United States: address legacy mortgage problems, repair and reform housing finance.
  - Build larger bank capital buffers and strengthened balance sheets to transition to a more demanding supervisory and regulatory regime that addresses shadow banking and “too-important-to-fail” institutions, including cross-border finance.
- Labor market:
  - Strong macroeconomic policies and financial sector repair are key to restarting robust employment growth.
  - Specific labor-market measures may be desirable to alleviate high unemployment (notably among the young) and induce a more job-intensive recovery.

### Emerging and Developing Economies: Guarding Against Overheating
- Main challenge: Prevent buoyant conditions from evolving into overheating or financial vulnerabilities.
- Inflation and capacity constraints:
  - Inflation pressure likely to build as production meets capacity constraints and large food and energy price increases stoke wage demands.
  - Real interest rates remain low and fiscal policies are appreciably more accommodative than before the crisis in many economies.
- Policy guidance differentiated by external position:
  - For external surplus countries (many of which manage their currencies and do not face fiscal problems):
    - Removal of monetary accommodation and appreciation of the exchange rate are necessary to maintain internal balance, rein in inflation pressure and excessive credit growth.
    - Exchange rate appreciation will assist in global demand rebalancing.
  - For many external deficit countries:
    - Need to tighten fiscal and monetary policies, possibly tolerating some overshooting of the exchange rate, consistent with their cyclical position.
  - Across emerging and developing economies:
    - Ensure gains from trade and financial integration are widely shared.
    - Stand ready to deploy targeted support for the poor given the high level and volatility of food prices and low food inventories.
- Capital flows:
  - Capital flows to emerging market economies resumed quickly after the crisis but have slowed lately.
  - As policy rates in advanced economies rise, volatile flows may again exit emerging market economies.
  - Measures to curb capital inflows can help dampen the impact of excessive volatility on the real economy, depending on country circumstances and assuming appropriate macroeconomic and prudential policies; such measures are not a substitute for needed macroeconomic adjustments.

### Global Policy Imperatives for Strong and Balanced Growth
- Broad agreement exists on required policy responses, but the sense of urgency and willingness to cooperate is waning as the crisis peak recedes.
- Policy priorities:
  - Advanced economies should not postpone fiscal adjustment due to domestic political difficulties.
  - Emerging surplus economies should not delay exchange rate adjustment in the face of rising inflationary pressure.
  - Many emerging market economies cannot afford to delay policy tightening until advanced economies undertake tightening.
  - Insufficient progress on one front (fiscal consolidation or removal of surplus-side distortions) should not be an excuse for inaction on the other.
  - Acting together would facilitate more ambitious policy adjustment and help deliver stronger, more balanced, and inclusive growth.

*Statement by the Managing Director to the International Monetary and Financial Committee on the Global Economy and Financial Markets, April 13, 2011.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_041311a.pdf_