Global Financial Stability Report

is growth at risk? October 2017

The October 2017 Global Financial Stability Report (GFSR) finds that the global financial system continues to strengthen in response to extraordinary policy support, regulatory enhancements, and the cyclical upturn in growth. Global bank balance sheets are stronger because of improved capital and liquidity buffers, amid tighter regulation and heightened market scrutiny. However, some banks are still grappling with legacy issues and business model challenges, where progress has been uneven.

The environment of continuing monetary accommodation—necessary to support activity and boost inflation—may lead to a continued search for yield where there is too much money chasing too few yielding assets, pushing investors beyond their traditional habitats. As the search for yield intensifies, vulnerabilities are shifting to the nonbank sector and market risks are rising. This may lead to a further compression of risk compensation in markets and higher leverage in the nonfinancial sector. These challenges must be managed carefully to avoid putting growth at risk. Policymakers at both the national and global level will have to strengthen the financial and macroeconomic policy mix.

The October 2017 GFSR also includes a chapter that examines the short- and medium-term implications for economic growth and financial stability of the past decades’ rise in household debt. It documents large differences in household debt-to-GDP ratios across countries but a common increasing trajectory that was moderated but not reversed by the global financial crisis. Another chapter develops a new macroeconomic measure of financial stability by linking financial conditions to the probability distribution of future GDP growth and applies it to a set of 21 major advanced and emerging market economies. The chapter shows that changes in financial conditions shift the whole distribution of future GDP growth. Full Report

World Economic Outlook

seeking sustainable growth: short-term recovery, long-term challenges, October 2017

The global upswing in economic activity is strengthening, with global growth projected to rise to 3.6 percent in 2017 and 3.7 percent in 2018. Broad-based upward revisions in the euro area, Japan, emerging Asia, emerging Europe, and Russia more than offset downward revisions for the United States and the United Kingdom. 

But the recovery is not complete: while the baseline outlook is strengthening, growth remains weak in many countries, and inflation is below target in most advanced economies. Commodity exporters, especially of fuel, are particularly hard hit as their adjustment to a sharp stepdown in foreign earnings continues. And while short-term risks are broadly balanced, medium-term risks are still tilted to the downside. 

For policymakers, the welcome cyclical pickup in global activity provides an ideal window of opportunity to tackle key challenges—namely to boost potential output while ensuring its benefits are broadly shared, and to build resilience against downside risks. Full Report

Fiscal Monitor

tackling inequality, october 2017

Rising inequality and slow economic growth in many countries have focused attention on policies to support inclusive growth. While some inequality is inevitable in a market-based economic system, excessive inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth.

This Fiscal Monitor discusses how fiscal policies can help achieve redistributive objectives. It focuses on three salient policy debates: tax rates at the top of the income distribution, the introduction of a universal basic income, and the role of public spending on education and health. Full Report

Europe: hitting its stride, november 2017

The European recovery is strengthening and broadening appreciably. Real GDP growth is projected at 2.4 percent in 2017, up from 1.7 percent in 2016, before easing to 2.1 percent in 2018. These are large upward revisions-0.5 and 0.2 percentage points for 2017 and 2018, respectively—relative to the April World Economic Outlook.

The European recovery is spilling over to the rest of the world, contributing significantly to global growth. In a few advanced and many emerging economies, unemployment rates have returned to pre-crisis levels. Most emerging European economies are now seeing robust wage growth. In many parts of Europe, however, wage growth is sluggish despite falling unemploymentFull Report

China: financial system stability assessment, December 2017

 China: Growth of Bank Assets, 2013-2016 (In trillions of renminbi)

China: Growth of Bank Assets, 2013-2016 (In trillions of renminbi)

Since the 2011 Financial Sector Assessment Program (FSAP), China’s impressive economic growth has continued, and it is now undertaking a necessary but prolonged economic transformation. China is transitioning from an economic model based on exports and investment to a more sustainable one based on services and consumption.

The financial system has facilitated this high growth rate and the consequent sharp decline in poverty rates. The sector now reaches most of the population, as evidenced in financial inclusion measures, and permeates virtually all aspects of economic activity.

The economic transformation requires a fundamental change in the role of the financial system. Historically its role was to channel China’s high savings at low cost to strategic sectors.

Looking ahead, the policy objective for the financial sector should be to facilitate China’s economic transformation to a more demand-driven system, in which markets play an increasingly dominant role in resource allocation and where consequences of risk-taking are well-understood and accepted. Full Text

Middle East: oil exporters need to push ahead with fiscal consolidation and diversification, october 2017

 Projected Financing Needs in the GCC (Gulf Cooperation Council: Bahrain, Oman, Qatar, United Arab Emirates, Saudi Arabia, Kuwait), 2017 (Percent in GDP)

Projected Financing Needs in the GCC (Gulf Cooperation Council: Bahrain, Oman, Qatar, United Arab Emirates, Saudi Arabia, Kuwait), 2017 (Percent in GDP)

Economic prospects for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and Caucasus and Central Asia (CCA) regions are diverging. Despite the strengthening global recovery, the outlook for MENAP countries remains relatively subdued due to the continued adjustment to low oil prices and regional conflicts.

In contrast, the outlook for the CCA region is improving, supported by the more favorable global environment. In both regions, efforts to promote growth-friendly fiscal consolidation, stronger monetary policy frameworks, economic diversification and private sector development should continue.

The window of opportunity arising from various integration initiatives and the favorable external environment call for increasing trade openness, while the adoption of financial technologies could increase financial inclusion and facilitate greater access to credit. Together, these actions will help MENAP and CCA countries to secure higher and more inclusive growth.

Debt Issuance Remains the Main Source of Deficit Financing

MENAP oil-exporting countries continue to issue debt to meet their budget financing needs. Countries with market access have tapped significant amounts from international markets — in the first half of 2017, GCC countries issued some $30 billion, as conditions in international financial markets remain favorable (Figure above). Full Report

Research provided by the International Monetary Fund (IMF)

All photography by Jared Chambers