Group of Twenty IMF Note — Finance Ministers and Central Bank Governors' Meetings

IMF Note on Global Prospects and Policy Challenges

February 26-27, 2016

The Following executive summary is from a note by the Staff of the IMF prepared for the February 26-27, 2016 G-20 Finance Ministers and Central Bank Governors' Meetings in Shanghai, China.
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Executive Summary

The global recovery has weakened further amid increasing financial turbulence and falling asset prices. Activity softened towards the end of 2015 and the valuation of risky assets has dropped sharply, especially in advanced economies, increasing the likelihood of a further weakening of the outlook. Growth in advanced economies is modest already under the baseline, as low demand in some countries and a broad-based weakening of potential growth continue to hold back the recovery. Adding to these headwinds are concerns about the global impact of China’s transition to more balanced growth, along with signs of distress in other large emerging markets, including from falling commodity prices. Heightened risk aversion has triggered global equity market declines and brought a further tightening of external financial conditions for emerging economies. Strong policy responses both at national and multilateral levels are needed to contain risks and propel the global economy to a more prosperous path.

These developments point to higher risks of a derailed recovery, at a moment when the global economy is highly vulnerable to adverse shocks. Financial market turbulence and asset price declines have tightened financial conditions in advanced economies and, if persistent, could further weaken growth. Emerging market stress could rise more, also reflecting domestic vulnerabilities. At the same time, there is a risk that the decline in oil prices will further destabilize the outlook of oil exporters while the impact on importers generates less demand support than expected, lowering global growth and exacerbating the current low-inflation environment. Finally, shocks of a non-economic origin—related to geopolitical conflicts, terrorism, refugees, and global epidemics—loom over some countries and regions, and, if left unchecked, could have significant spillover impacts on global economic activity.

The fragile conjuncture increases the urgency of a broad-based policy response that strengthens growth and manages vulnerabilities.

  • Strengthening growth. In advanced economies, securing higher and sustainable growth requires a mix of mutually-reinforcing demand and supply policies. On the demand side, accommodative monetary policy remains essential where inflation is still well below central banks’ targets. However, a comprehensive approach is needed to reduce over-reliance on monetary policy. In particular, near-term fiscal policy should be more supportive where appropriate and provided there is fiscal space, especially through investment that boosts both the demand and the supply potential of the economy. In a number of countries, efforts to accelerate the repair of private sector balance sheets would help improve the transmission of monetary policy and support domestic demand. On the supply side, across advanced and emerging economies, credible and well-designed structural reforms remain critical to lift potential output, and can provide some near-term demand support directly and through increased confidence and expectations of higher future income.

  • Securing resilience. In emerging economies, policymakers should reduce macroeconomic and financial vulnerabilities and rebuild resilience. In commodity exporters, fiscal buffers can help smooth the adjustment to lower commodity prices, but it will be important to plan for fiscal adjustment and new, more diverse growth models. Exchange rate flexibility, where feasible, should also be used to cushion the impact of adverse external shocks, with a temporary role for foreign exchange interventions to prevent disorderly market conditions. Rebuilding resilience also requires strengthening supervision and macro-prudential frameworks, as well as addressing corporate and banking sector vulnerabilities.

At the same time, bold multilateral actions are needed to boost growth and contain risks.

  • Coordinating the international policy response. To support global activity and contain risks, the G20 must act now to implement forcefully the existing G-20 growth strategies and plan for coordinated demand support using available fiscal space to boost public investment and complement structural reforms.

  • Enhancing the global financial safety net and oversight. To address the potentially protracted risks faced by commodity exporters and emerging markets with strong fundamentals but high vulnerability, there may be a need to consider reforms to the global financial safety net, including new financing mechanisms.

  • Ring-fencing spillovers from non-economic shocks. Countries at the center of the current refugee crises and epidemics are shouldering a burden for others and could be backed up by a coordinated global initiative —with those at risk from spillovers contributing financial support, and multilateral agencies, including the Fund, reassessing how they can best help channel those resources to areas of most need.

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