Group of Twenty

IMF Notes for the Meeting of G-20 Ministers and Deputies

London — September 03-04, 2009

Executive Summary of the Global Economy Beyond the Crisis—Challenges Over the Medium Term

The global economy is beginning to pull out of its deepest recession since the Great Depression, but the recovery is uneven and remains dependent on policy support.
Following a sharp decline in the first quarter of 2009, output in the second quarter has begun to expand in some advanced and many emerging economies—led by Asia—but in much of the world activity remains depressed.

Financial conditions in mature and emerging markets have continued to improve. The unprecedented response of both financial and macroeconomic policies and increasing signs of a turnaround in global activity have reduced the risk of systemic collapse and helped restore market confidence. Nonetheless, the global financial system is far from returning to normal, and many markets remain highly dependent on public support. In emerging economies, financial pressures have receded but some countries remain vulnerable to deleveraging in advanced economies and potential shocks to growth.

Going forward, the pace of recovery will be sluggish. Policy support and the turn in the inventory cycle—which are driving the recovery at the moment—will gradually lose impetus. Private demand is likely to be held back for some time by limited credit availability, household desire to rebuild balance sheets, and still-rising unemployment.

Downside risks to the recovery are receding gradually but remain a key concern. The overarching risk is that the recovery stalls. Premature exit from accommodative monetary and fiscal policies could undermine the nascent recovery. Moreover, financial strains could persist or even intensify further, particularly if efforts to restore health to bank balance sheets are not followed through forcefully.

G-20 countries have implemented bold and wide-reaching measures to address the financial crisis and global recession, yielding tangible benefits.

• While financial sector policies have been instrumental in stabilizing market conditions, additional measures are needed to restore the financial system to health, including further recapitalization and dealing with problems assets.
• Forceful monetary easing, alongside enhanced credit and liquidity support, have helped to ease financial stress and support activity. In emerging economies, rising asset prices and a vigorous turnaround in economic activity suggest that policy tightening may soon be needed in some countries.
• Fiscal stimulus is well underway in G-20 countries, and will continue to support activity through 2010. In general, revenue measures and social transfers have been implemented more quickly than infrastructure projects.

Strengthening multilateral coordination to mitigate cross-border strains and distortions remains a priority. Notwithstanding announcements about the importance of coordination and cooperation in the design and development of crisis strategies, in practice countries have adopted policies that appear to be driven largely by national interests. Markets would likely respond favorably to a sense that there is an agreed upon set of principles and practices related to supervisory actions that all countries have agreed to follow. Moreover, the crisis has demonstrated the need for closer cooperation between home and host supervisors and for timely information on rollover needs in emerging economies.

Looking ahead, policymakers will need to bridge from near-term support to mediumterm policy requirements through credible and coherent exit strategies. The key challenge is to map a course between unwinding public interventions too early—which would jeopardize progress in securing financial stability and economic recovery—and withdrawing them too late, which would distort private incentives and create new risks.

• The pace of exit from financial sector policies will need to be gradual, with the most distortionary programs phased out first. Incentives should be put in place to encourage healthy banks to progressively reduce their dependence on public support. To the extent possible, priority should be given to exiting from programs that have the greatest distortionary impact on financial market decisions and/or involve considerable contingent liabilities to the government.
• G-20 central banks will need eventually to unwind their degree of conventional and unconventional monetary accommodation. Interest rates will need to be raised as output gaps are reduced. It may take time to reduce the size of central bank balance sheets, and policymakers will need to find ways to withdraw excess bank reserves to ensure transmission of tighter monetary conditions to the real economy.
• The scale of fiscal adjustment required to ensure fiscal solvency will be large, particularly for advanced economies where debt is rising rapidly. Sizable improvements in primary balances will be needed in most advanced and several emerging market economies to bring debt-to-GDP ratios back to sustainable paths. Medium-term adjustment strategies have yet to be fully articulated.

• IMF and the Group of Twenty
• IMF Note on Global Economic Prospects and Policy Challenges — September 24, 2009, Pittsburgh
• Updated Stocktaking of the G-20 Responses to the Global Crisis: A Review of Publicly Announced Programs for the Banking System — September 3-4, 2009, London
• Global Economy Beyond the Crisis — Challenges Over the Medium Term — September 3-4, 2009, London
• World Economic Outlook — October 2009
• Global Financial Stability Report — October 2009
• List of IMF G-20 Surveillance Notes