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Group of Twenty -- Meetings of G-20 Finance Ministers and Central Bank Governors

IMF Note on Global Prospects and Policy Changes

November 4–5, 2012, Mexico City

About the Executive Summary

The Following executive summary is from a note by the Staff of the IMF prepared for the November 4–5, 2012 meeting of the Group of Twenty Finance Ministers and Central Bank Governors in Mexico City.
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Executive Summary

Recent policy actions have led to some easing in financial stress and economic conditions may be stabilizing. Following actions by major central banks and EU governments, financial markets have experienced welcome respite recently and there are signs that the pace of activity has picked up relative to the second quarter. Nonetheless, the global economy remains vulnerable to new setbacks. In the euro area, activity remains weak, implementation challenges are large, financial conditions remain fragile, and high funding costs in the periphery hinder their growth and adjustment. Political impasse on dealing with large fiscal imbalances in the United States and Japan also contributes to lack of clarity and weighs on business confidence. Meanwhile, activity in major emerging economies—a main driver of global growth—has decelerated on the back of spillovers from advanced economies and the unwinding of credit booms in some countries, but the extent is not fully known.

The outlook for growth remains weak with appreciable downside risks. Prospects are for a modest reacceleration of global activity, provided policies are implemented decisively in the euro area and fiscal mistakes are avoided in the United States. But downside risks remain considerable. Despite strong ECB actions, a re-escalation of the euro area crisis remains a threat. Major risks also originate in the United States from the "fiscal cliff," a looming debate on raising the debt ceiling, and the absence of an agreed-upon fiscal roadmap. Potential growth may disappoint going forward in both advanced and emerging economies, reflecting the legacy of the financial crisis in the former and the unwinding of credit booms in the latter. But growth could also be stronger if policymakers acted promptly to further strengthen policies.

While progress has been made, resolving the euro area crisis will require timely and resolute policy implementation. Access to funding at reasonable costs is essential to allow economies to adjust successfully. Countries under pressure should implement adjustment plans and, if needed, request appropriate support from the EFSF/ESM. This would allow the ECB to intervene by using the newly-established OMT framework. Where financial conditions permit, automatic stabilizers should be allowed to operate. Anti-crisis measures should also be paired with a clearer roadmap toward banking union and greater fiscal integration to strengthen EMU. Such a union should rest on a single supervisory mechanism; a pan euro area resolution mechanism with common backstops; and a pan euro area deposit guarantee scheme. Finally, continued implementation of structural, fiscal and financial reforms, that will still take many years to complete, is essential.

Fiscal consolidation in advanced economies should proceed in a sustained and gradual manner, while central banks should stand ready to do more if needed. Fiscal policy should adhere to cyclically-adjusted targets unless activity falls significantly short of projections, in which case adjustment should be smoothed in countries that can afford it. In the United States, the imperatives are to agree to and implement a credible medium-term fiscal adjustment roadmap. In Japan, the plan should be strengthened considerably, notwithstanding the recent approval of a timetable for consumption tax increase. Central banks should continue managing downside risks to growth while addressing factors that hinder the effectiveness of monetary transmission.

Appropriate policy responses in emerging economies vary widely reflecting differing conditions. For those with low public debt or pursuing policies to move further from externally- to domestically-driven growth, placing consolidation on hold is appropriate in light of the weaker outlook. Others should rebuild fiscal room for maneuver over time. Where inflation is tame, monetary policy can remain on hold or be eased. However, monetary policy needs to be more cautious where inflationary pressures remain elevated and should be supported by macro-prudential measures where credit growth and real estate prices are high.