Global Financial Stability Report

Getting the Policy Mix Right, April 2017

The April 2017 Global Financial Stability Report (GFSR) finds that financial stability has continued to improve since last October. Economic activity has gained momentum and longer-term interest rates have risen, helping to boost the earnings of banks and insurance companies. Despite these improvements, however, threats to financial stability are emerging from elevated political and policy uncertainty around the globe. If policy developments in advanced economies make the path for growth and debt less benign than expected, risk premiums and volatility could rise sharply. In addition, a shift toward protectionism in advanced economies could reduce global growth and trade, impede capital flows, and dampen market sentiment. Getting the policy mix right is crucial.

In the United States, policymakers should provide incentives for economic risk taking while guarding against excessive financial risk taking. Emerging market economies should address domestic imbalances to enhance their resilience to external shocks. In Europe, domestic banking systems continue to face significant structural challenges. Furthermore, there should be no rollback of the postcrisis reforms that have strengthened oversight of the financial system.

The April 2017 GFSR also includes a chapter that examines how a prolonged low-growth, low-interest rate environment can fundamentally change the nature of financial intermediation. In such an environment, yield curves would likely flatten. Combined with low credit demand, this would lower bank earnings, particularly for smaller, deposit-funded, and less diversified institutions, and presenting long-lasting challenges for life insurers and defined-benefit pension funds. Another chapter assesses the ability of country authorities to influence domestic financial conditions in a financially integrated world. It finds that, despite the significant impact on domestic financial conditions of global shocks, countries retain influence to achieve domestic objectives—specifically, through monetary policy. Full Report

World Economic Outlook

Gaining Momentum?, April 2017

Global economic activity is picking up with a long-awaited cyclical recovery in investment, manufacturing, and trade, according to Chapter 1 of this World Economic Outlook. World growth is expected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018. Stronger activity, expectations of more robust global demand, reduced deflationary pressures, and optimistic financial markets are all upside developments. But structural impediments to a stronger recovery and a balance of risks that remains tilted to the downside, especially over the medium term, remain important challenges. Full Report

Fiscal Monitor

Achieving More with Less, april 2017

Fiscal policy has recently gained prominence, both in public debate and in governments’ policy. A reassessment of fiscal policy is taking place, stressing its greater role in fostering sustainable and inclusive growth and smoothing the economic cycle. At the same time, the high uncertainty surrounding the outlook and high levels of public debt require a better understanding and managing of fiscal risks.

Therefore, fiscal policy has the difficult task of achieving more and better in a more constrained environment. This issue of the Fiscal Monitor shows how the evolution of the debate on fiscal policy can shed new light on fiscal developments and help frame policy recommendations to countries. Full Report

Asia and Pacific: Preparing for Choppy Seas, May 2017

The outlook for the Asia-Pacific region remains robust—the strongest in the world, in fact—and recent data point to a pickup in momentum. The near-term outlook, however, is clouded with significant uncertainty, and risks, on balance, remain slanted to the downside.

Medium-term growth faces secular headwinds, including from population aging and sluggish productivity. Macroeconomic policies should continue to support growth while boosting resilience, external rebalancing, and inclusiveness. The region needs structural reforms to address its demographic challenges and to boost productivity. Full Report

Middle East: Oil Exporters: Adjustment Needed, April 2017

The OPEC+ agreement has helped improve the outlook for oil prices in the near term, but prices remain volatile. Under the baseline projection for oil prices, fiscal and external positions in oil-exporting countries of the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region are expected to strengthen. That would support the projected firming of non-oil growth, even though overall growth will moderate in 2017 due to the cuts in oil production.

Over the medium term, oil prices are expected to remain low and highly uncertain, so further sustained fiscal adjustment remains critical. This fiscal consolidation means non-oil activity will remain modest in most countries. Moreover, countries need to maintain their focus on implementing their economic diversification plans—and the supporting structural reforms—to strengthen economic resilience.

In conflict countries, oil production has surprised on the upside, but long-term economic recovery is predicated on improved security conditions. Full Report

Latin America: Tale of Two Adjustment, May 2017

Economies of Latin America and the Caribbean are recovering from a recession at the regional level in 2016. In a tale of two adjustments, growth has been held back by weak domestic demand. This reflects both the ongoing external adjustment to earlier terms-of-trade shocks and, in some cases, fiscal adjustment, in addition to other country-specific domestic factors. Regional activity overall is expected to pick up gradually this year and next, but the outlook is weaker than projected last fall.

The projection for medium-term growth remains modest at about 2.6 percent. The outlook is shaped by key shifts in the global economic and policy landscape, including a modest rebound in commodity prices and in partner demand and higher policy uncertainty at the global level. Domestic fundamentals and developments, however, will continue to play a significant role in determining growth in many economies.

At the same time, risks to regional growth have widened in a setting of higher global policy uncertainty. In this challenging external context, countries should aim for completing fiscal and external adjustments to preserve or rebuild policy buffers. Charting a course toward higher, sustainable, and more equitable growth will also require strengthening structural reforms aimed at closing infrastructure gaps; improving the business environment, governance, and education outcomes; and encouraging female labor participation to boost medium-term growth and foster income convergence. Full Report

Research provided by the International Monetary Fund (IMF)

All photography by Jared Chambers