## Building Defenses Against the Next Economic Downturn

_IMF Blog, January 17, 2019_

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## Bibliographic details
- Authors: David Lipton
- Published: January 17, 2019

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### Overview of risks and fragmentation
- The global economy faces complex challenges from technological change, globalization, and the lingering effects of the 2008-9 financial crisis.
- Declining trust in core institutions over the past 40 years risks fragmenting the international order that has governed the global economy.
- Symptoms of fragmentation include rising trade tensions, discord with and within some multilateral institutions, and diluted efforts to address cross-border challenges such as climate change, cyber-crime, and refugee flows.
- Recent signs of slowing global growth underline the imperative to prepare for unexpected developments; "History suggests such a downturn is somewhere over the horizon."

### Monetary policy constraints and considerations
- Past U.S. recessions have been met with "500 basis points or more" of Federal Reserve easing.
- During the global financial crisis, central banks used their balance sheets extensively.
- Current challenges:
  - Policy rates remain "so low in so many countries."
  - Balance sheet normalization is "still underway."
  - Conventional responses used in past crises "may not be available."
- Unconventional measures discussed include negative rates, forward guidance pledges to hold rates at lower levels longer than justified by inflation targets or policy rules, and other innovations.
- The effectiveness of these unconventional ideas is "at best uncertain," raising concern about the potency of monetary policy.

### Fiscal policy room and trade-offs
- Public debt has risen in many advanced economies; the U.S. increase followed tax cuts and spending increases.
- In many countries, deficits "remain too high to stabilize or reduce debt."
- If a slowdown creates unemployment and economic slack, fiscal multipliers should grow, which could restore some fiscal potency even at high debt levels.
- However, governments may lack the budgetary room to respond as they did ten years ago; with high sovereign debt levels, fiscal stimulus "may be a hard sell politically."
- Supporting households, small businesses, or homeowners in a future recession could further strain public finances, but failing to act could deepen political divides.

### Financial sector resilience and regulatory frameworks
- Post-crisis reforms shift recourse away from bailouts toward bail-ins of owners and lenders; these new systems remain "underfunded and untested."
- The global financial crisis showed that impairment of key U.S. capital markets was contained by unorthodox central bank actions supported by backstop funding from national treasuries.
- The capacity to repeat that level of coordinated support "is unlikely to be readily available."
- Conclusion: national policy options and public financial resources may be much more constrained than in the past, implying the need to sustain growth, limit vulnerabilities, and prepare proactively.

### Multilateral preparedness and the IMF's role
- Multilateral preparedness and action are essential; institutions like the IMF have played a crucial role in responding to crises and keeping the global economy on track.
- The IMF increased its lending capacity during the Global Financial Crisis to "about one trillion dollars."
- The G20, at the November meeting in Buenos Aires, restated commitment to support the global financial safety net with "a strong and adequately financed IMF at its center."
- IMF Managing Director Christine Lagarde has called for a "new multilateralism" aimed at improving lives broadly and sharing the benefits of globalization and technology more widely.
- Continued IMF reform across lending, analytical, and research activities is necessary to meet the core mission of supporting global growth and financial stability, especially if national tools prove insufficient.

### Policy implications and recommendations
- Countries should shore up defenses now by:
  - Building and preserving financial firepower.
  - Strengthening policies to fight crises and maintaining robust regulatory regimes established after the Global Financial Crisis.
  - Sustaining growth and limiting vulnerabilities to reduce reliance on constrained national policy options in a downturn.
- Multilateral action should be reinforced by:
  - Continuing IMF evolution and reform across lending, analysis, and research.
  - Ensuring the IMF remains strong and adequately financed to serve as the center of the global financial safety net.
- Address political economy considerations:
  - Anticipate calls to relieve debt burdens of small businesses and homeowners in a downturn and plan for the fiscal implications.
  - Recognize that political constraints may limit fiscal stimulus even when multipliers increase.

*Source: David Lipton, "Building Defenses Against the Next Economic Downturn", IMF, January 17, 2019 — https://www.imf.org/en/blogs/articles/2019/01/17/blog-building-defenses-against-the-next-economic-downturn*

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## References

- [عربي](https://www.imf.org/ar/News/Articles/2019/01/17/blog-building-defenses-against-the-next-economic-downturn)
- [Français,](https://www.imf.org/fr/News/Articles/2019/01/17/blog-building-defenses-against-the-next-economic-downturn)
- [Five Actions to Strengthen the Euro Area Banking Union](https://blogs.imf.org/2018/12/14/five-actions-to-strengthen-the-euro-area-banking-union/)
- [Top 5 Blogs on Climate Change](https://blogs.imf.org/2018/12/12/top-5-blogs-on-climate-change/)
- [G20: Step Up to Boost Inclusive Growth](https://blogs.imf.org/2018/11/28/g20-step-up-to-boost-inclusive-growth/)

_Source: https://www.imf.org/en/blogs/articles/2019/01/17/blog-building-defenses-against-the-next-economic-downturn_