IMF outlook warns against “paralysis” in economic reform

Policymakers must avoid paralysis and force through economic growth and rebalancing, according to the first two chapters of the International Monetary Fund’s (IMF) World Economic Outlook (WEO).

“The challenge ahead is for policymakers to put in place, in a coordinated manner, policies that support the fundamental adjustments needed for a return to healthy medium-term growth,” says the report, which was published today.

Despite conclusions from G20 summits, much reform remains uncoordinated, included the abolition of too-big-to-fail financial institutions, the separation of retail and investment banking and the monitoring of systemically important non-bank financial institutions.

On the macroeconomic side, the IMF adds, many advanced economies need to find a way for a smooth transition from public to private sector-led growth. Many emerging economies, on the other hand, must find a way to move from externally to domestically driven growth. (article continues below)

But although much of the developed is devaluing its currencies in an attempt to rebalance towards export growth, Dominique Strauss-Kahn, the managing director of the IMF, recently criticised such strategies, which encourage fierce economic competition rather than coordination.

Despite progress made so far, the WEO warns that rebalancing economies will require a further response. In the past, the IMF says, policymakers have failed to grasp the depth and breadth of ways in which financial shocks could be amplified across institutions and economies. This, together with other problems in the financial sector, has created an environment where the financial crisis could take root.

Restructuring or resolving weak banks and enhancing their liquidity buffers are of paramount importance, says the IMF, as are pursuing orderly and globally consistent regulatory reform, as well as strengthening supervision and oversight of the financial system.

The IMF forecasts that global productivity will expand by 4.8% this year and 4.2% next year. In advanced economies, economic growth is expected to reach 2.7% this year and 2.2% next year. Emerging and developing economies, on the other hand, are expected to grow by 7.1% and 6.4% respectively.

Inflation is likely to stay generally low, the IMF says, while many countries still struggle with excess capacity and high unemployment.

Although the economic activity has started to pick up, the WEO highlights that the recovery remains fragile and unemployment a major challenge.