Press Release: IMF Says European Economic Recovery to be Fragile and Calls for Policy Action to Secure a Solid Rebound
IMF News, October 3, 2009
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- Published: October 3, 2009
Main findings on the European outlook
- The European economic recession is showing signs of bottoming out, with the contraction appearing to have ended at mid-2009 and expected to give way to a moderate recovery in 2010 and more solid growth returning only afterwards.
- In advanced economies the IMF projects an average decline of -4.0 percent in 2009 and growth of 0.5 percent in 2010.
- In emerging Europe activity is expected to contract by -6.6 percent in 2009, with growth returning in 2010 and GDP increasing by an average 1.7 percent.
- Recovery drivers are weak: the pickup in demand from Asia can hardly substitute for the pre-crisis appetite for imports of U.S. consumers; exports alone cannot be relied on to drive the recovery.
- Key constraints include scarce credit, rising unemployment, and a reduced growth potential caused by the crisis.
Near-term financial sector actions urged
- Adopt a more resolute approach to assessing balance sheet risks faced by banks.
- Take action to recapitalize or restructure viable institutions and resolve others.
- The IMF warns: “The economic recovery might be weaker than hoped for unless the financial sector problems are dealt with promptly and effectively.”
Macroeconomic policy guidance
- Fiscal policy:
- Continue with planned stimuli in the near term and let automatic stabilizers work.
- Once the recovery has firmed up, undertake a strong consolidation effort to address sustainability concerns.
- Monetary policy:
- Remain supportive while financial conditions are fragile.
- Once financial conditions normalize and the recovery is firm, prepare to exit unprecedented market interventions.
- Clear communication of the exit strategy will be essential.
- The IMF emphasizes careful timing and pace for exits: “Getting its timing and the pace right will require careful judgment.”
Structural and long-term priorities
- Repair the damage to potential growth is identified as the ultimate priority: “Only lifting the long-run growth potential of Europe will put the crisis behind us for good.”
- Advanced countries: pursue opportunities to reform labor and product markets.
- Emerging economies: develop a new business model that rebalances the sources of growth and financing.
Brief summary of analytic chapters in the 2009 October REO
- Chapter 2, “The Crisis and Potential Output”:
- Financial sector difficulties, weak investment, and long spells of unemployment are likely to hold back potential growth over the next few years; magnitude is uncertain.
- Over the long term, potential growth should return to historic trends in most advanced economies, except where unsustainable financial sector profits might have exaggerated prior growth.
- Emerging Europe: resuming convergence depends on restoring sustainable capital inflows by ensuring a business-friendly environment, strengthening policy frameworks to reduce uncertainty, and implementing sound macroeconomic policies.
- Chapter 3, “Implications of the Fall in Potential Output for Macroeconomic Policies”:
- The decline in potential output and uncertainty complicates fiscal and monetary policy decisions and can lead to policy mistakes.
- Monetary policymakers need to clearly communicate their views on potential output underpinning policy rate decisions and emphasize willingness to adjust as new information arrives.
- Given large fiscal costs of the crisis, fiscal policy should err on the side of caution and consolidate as soon as the recovery takes momentum.
- Chapter 4, “Policies in Emerging Economies to Cope with Heightened Risk during Recovery”:
- Emerging Europe is likely to face higher risk premiums and a more volatile environment; investors will pay increased attention to domestic policies.
- Policies that lower uncertainty about the state of the financial system and reduce fiscal discretion will address concerns and yield a “double dividend” for long-term growth prospects.
Key statistics (selected from Table 1: Real GDP Growth and CPI Inflation, 2006–10)
- Europe (1/ 2/):
- Real GDP Growth: 2006: 4.2, 2007: 3.9, 2008: 1.7, 2009: -4.7, 2010: 0.8
- CPI Inflation: 2006: 3.6, 2007: 5.7, 2008: 3.0, 2009: 2.7
- Advanced European economies (1/):
- Real GDP Growth: 2006: 3.2, 2007: 2.8, 2008: -4.0, 2009: 0.5
- CPI Inflation: 2006: 2.2, 2007: 2.1, 2008: 3.4, 2009: 0.7, 2010: 1.0
- Emerging European economies (1/ 2/):
- Real GDP Growth: 2006: 7.2, 2007: 6.8, 2008: -6.6, 2009: 7.8, 2010: 12.0
- CPI Inflation: 2006: 9.0, 2007: 7.8, 2008: 12.0, 2009: 9.0
- European Union (1/):
- Real GDP Growth: 2006: 3.1, 2007: -4.2, 2008: 2.3, 2009: 2.4, 2010: 3.7
- CPI Inflation: 2006: 0.9, 2007: 1.1
- Selected country figures (Real GDP Growth and/or CPI Inflation where specified):
- Ireland: 2006: 5.4, 2007: 6.0, 2008: -3.0, 2009: -7.5, 2010: -2.5 (and additional entries: -1.6, -0.3)
- Luxembourg: 2006: 6.4, 2007: 5.2, 2008: -4.8, 2009: -0.2
- Slovak Republic: 2006: 8.5, 2007: 10.4, 2008: 4.6, 2009: 1.5
- Slovenia: 2006: 5.9, 2007: 0.6
- Estonia: 2006: 10.0, 2007: -3.6, 2008: -14.0, 2009: -2.6
- Latvia: 2006: 12.2, 2007: -4.6, 2008: -18.0, 2009: 10.1, 2010: 15.3, additional: -3.5
- Lithuania: 2006: 8.9, 2007: -18.5, 2008: 5.8, 2009: 11.1, additional: -2.9
- Romania: 2006: 7.1, 2007: -8.5, 2008: 4.8, 2009: 5.5
- Russia: 2006: 8.1, 2007: 9.7, 2008: 14.1, 2009: 12.3, 2010: 9.9
- Ukraine: 2006: 9.1, 2007: 12.8, 2008: 25.2, 2009: 16.3, 2010: 10.3
- Source noted in table: IMF, World Economic Outlook.
- Footnotes in table:
- 1/ Average weighted by PPP GDP.
- 2/ Montenegro is excluded from the aggregate calculations.
Press Release No.09/332, October 3, 2009 — International Monetary Fund