2010 Outlook: New Year, New Decade, New Challenges
IMF Blog, January 4, 2010
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- Authors: John Lipsky
- Published: January 4, 2010
Overview and near-term outlook
- The year 2010 "has opened amid generalized—–but tempered—optimism about the global economic and financial outlook."
- "The unprecedented scale and scope of the anti-crisis measures taken during the past year—and the unprecedented degree of multilateral policy coordination involved in their design and implementation—appear to have succeeded in averting a downturn of historic proportions."
- Improved prospects are evident in economic data, financial market performance, and upward revisions to economic forecasts; these improvements will be reflected in the IMF’s January update of the World Economic Outlook.
- Advanced-economy output remains "far below potential," contributing to a "notable absence of inflation pressures."
Reasons for caution
- U.S. firms reacted to the downturn with aggressive layoffs and unprecedented cutbacks in investment and inventories; U.S. business investments "didn’t even match depreciation during the past two years."
- High unemployment rates and anemic income growth are limiting consumption gains.
- Weakened household balance sheets increase uncertainty about spending prospects.
- Financial conditions have improved but "in many ways they remain far from normal." Credit losses continue to mount in some sectors, especially commercial real estate.
- Sluggish loan growth reflects bankers’ "residual reticence."
- The combination of large output gaps, low inflation, and a moderate advanced-economy recovery means "it is premature to begin withdrawing the important support for growth currently being supplied by accommodative budgetary and monetary policies."
- The growth outlook is "upbeat in many emerging market economies, especially in Asia," driven by improving export demand, resilient domestic demand buoyed by policy support, and renewed capital flows to the best-performing emerging markets reversing the sudden stop experienced in later 2008.
At least five key challenges
- Secure the recovery
- Ensure policies among the key economies "remain appropriately supportive of the expansion, as well as globally consistent."
- "Advanced economy fiscal stimulus planned for 2010 should be implemented fully," while countries "lay out credible medium-term frameworks for limiting spending and debt to sustainable levels."
- Transition to "new growth patterns, including significant rebalancing of the sources of growth among and within most large economies."
- The G-20 mutual assessment process agreed at the Pittsburgh Leaders Summit is intended to implement the G-20’s Framework for Strong, Sustained and Balanced Growth; the IMF will provide analytical support.
- Protect the poorest and restore growth in low-income countries
- Support through "the Fund’s new facilities for low-income countries and sharply increased resources for lending" aims to supplement growth in advanced economies and provide direct assistance.
- Note: "During 2003–06, sub-Saharan Africa achieved the fastest sustained expansion since the IMF was created, adding to per capita incomes."
- Reform the financial sector
- Triple goals: make the sector more effective, reduce risks of future instability, and rethink how the potential costs of financial crises might be borne.
- This topic is identified for further discussion in the author’s next blog.
- Restructure and reform governance and mandate of key international financial institutions
- The creation of the G-20 leaders process is "a potentially pivotal step."
- Leaders have endorsed specific goals for the IMF’s governance reform; this will be discussed in a subsequent piece.
- Reassess intellectual underpinnings of policy frameworks
- The crisis has called into question prevailing frameworks of rule-based policies and their intellectual foundations.
- The IMF will contribute to "the intellectual and empirical reassessment" through original research, conferences, and symposia to "distill the lessons of the crisis, and to help form a new policy consensus."
- One outcome could be "new lending instruments that—building on the 2009 innovation of the Flexible Credit Line—will allow the Fund to play a larger role as a provider of insurance to our members, and enhancing our ability to help prevent future crises."
Policy implications and recommended actions
- Implement fully the advanced-economy fiscal stimulus planned for 2010 while establishing credible medium-term fiscal frameworks to limit spending and debt.
- Maintain accommodative budgetary and monetary policies until recovery is secure, given large output gaps and low inflation.
- Support global consistency of policies through the G-20 mutual assessment process, with IMF analytical backing.
- Provide expanded direct support to low-income countries via new IMF facilities and increased lending resources.
- Advance comprehensive financial sector reform to improve effectiveness, reduce systemic risk, and clarify crisis-cost sharing.
- Pursue IMF governance reform as endorsed by G-20 leaders.
- Produce and disseminate original research and host events to reassess policy frameworks and develop a new policy consensus.
- Explore and design new IMF lending instruments informed by the 2009 Flexible Credit Line to enhance insurance-like roles for members.
John Lipsky, January 4, 2010 — 2010 Outlook: New Year, New Decade, New Challenges
