Global economic outlook and short-term policy response to the financial and economic crisis
| |
Main issues addressed:
Quick Links:
|
What started as a financial crisis has turned into a deep recession with a dramatic impact on the real economy. Virtually all markets and economies have been affected. As a result, it has become almost impossible to achieve the Millennium Development Goals.
Global GDP is expected to fall by more than 2.5 per cent in 2009. Economic contraction will be about 4 per cent in developed countries and more than 6 per cent in transition economies. Developing countries will suffer a strong deceleration of growth to only 1.3 per cent. (Table 1.1)
| The main cause of the global financial and economic crisis is found in financial markets deregulation. This allowed uncontrolled innovation in financial instruments, which obscured creditor-debtor relations and led to excessive risk taking. The result was that finance came to predominate over the real economy. |
Large parts of the financial sector have become detached from the productive sector of the economy. The predominance of speculative forces over fundamentals in determining market outcomes is reflected in the uniform behaviour of many different markets, including financial, commodity and currency markets. (Chart 1.5)
The financial and economic crisis spread from developed countries to developing and transition economies through different channels:
- A sharp contraction in international trade volume, which mirrored the fall in manufacturing production; (Chart 1.7)
- A sharp correction of previously rallying primary commodity prices as a result of lower demand for raw materials and the unwinding of speculative positions; (Chart 1.1)
- Lower capital inflows;
- Declining migrantsī remittances flows; (Chart 1.8)
- Worsening of external debt indicators.
Developing countries have been hit by the crisis differently according to their diverse pre-crisis situations. Some of them, particularly in Asia and Latin America, had strong macroeconomic positions before the crisis and thus have been less vulnerable than in previous crises. Other emerging market economies, notably in Eastern Europe, suffered from financial marketsī general loss of confidence in their ability to cope with their external financial exposure.
The short-term policy response to the immediate effects of the crisis has included:
- Monetary policy easing; (Table 1.7)
- Support for ailing financial institutions;
- Unprecedented fiscal stimulus packages. (Table 1.8)
Monetary easing and large bailout operations have succeeded in preventing a meltdown of the financial system, but were insufficient to revive aggregate demand and halt rising unemployment.
Additional policy measures needed include:
- Strengthened countercyclical policy measures that have a direct effect on aggregate demand;
- Increased financial support from the IMF to developing and transition economies, which should avoid procyclical conditionality;
- For low income countries, an internationally coordinated effort to increase official development assistance and a temporary moratorium on their debt owed to official creditors. This would help to mitigate the impact of the crisis on poverty and also provide an additional stimulus to global demand.
| In order to halt the contraction of GDP and prevent the risk of deflation, the expansionary stance of monetary and fiscal policies should be maintained or even strengthened. |
|
