Advanced Economies Strengthening, Emerging Market Economies Weakening


WEOBy Olivier Blanchard

(Versions in عربي, 中文Français日本語, Русский, and Español)

The issue probably foremost on everyone’s mind, is the fiscal situation in the United States, and its potential implications.

While the focus is on the shutdown and the debt ceiling,  we should not forget the sequester, which is leading to a fiscal consolidation this year which is both too large and too arbitrary. The shutdown is yet another bad outcome, although one which, if it does not last very long, has limited economic consequences.  

Failure to lift the debt ceiling would, however, be a game changer.  Prolonged failure would lead to an extreme fiscal consolidation, and surely derail the U.S. recovery. But the effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets, both in the U.S. and abroad.   We see this as a tail risk, with low probability, but, were it to happen, it would have major consequences.

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Time Not On Our Side: Tough Decisions Needed to Strengthen Financial Stability


By José Viñals

(Versions in  عربي中文EspañolFrançaisРусский日本語)

Recent policy actions in Europe, the United States, in emerging markets, and here in Japan, where I’m attending the IMF-World Bank annual meetings, have improved investor sentiment and helped markets rebound in recent months.

Yet our latest assessment is that confidence is still very fragile and risks have increased, when compared to the IMF’s last report in April. Policymakers need to do more to gain lasting stability.

The principal risk remains the euro area. The forces of financial and economic fragmentation have widened the divide between countries at the core and the “periphery” of the euro zone. Faltering confidence and policy uncertainty have led to a pullback of cross-border private capital flows from the periphery—quite an extraordinary phenomenon within a currency union.

This has driven up funding costs to governments and banks, as well as for companies and households, and, in turn, threatening a vicious downward economic spiral.

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U.S. Fiscal Policy: Avoiding Self-Inflicted Wounds


by Gian Maria Milesi-Ferretti

(Version in Español)

The United States and much of the world economy are still recovering from the devastating global recession that began in 2008. Sometimes crises happen that we cannot foresee or avoid.

But for the U.S. economy, serious risks could come at the end of this year from two potential self-inflicted wounds: the so-called “fiscal cliff” and the debt ceiling.

Let’s start with the fiscal cliff. In simple terms: if U.S. policymakers do nothing, a number of temporary tax cuts will expire and significant across-the-board spending reductions will kick in on January 1, 2013. The combined effect of these measures could result in a huge fiscal contraction, which would derail the economic recovery.

Why is this happening?

The payroll tax break, the Bush tax cuts (enacted in 2001 and 2003, and extended for two years at the end of 2010), as well as exemptions on the Alternative Minimum Tax are set to expire on January 1, 2013.

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Christine Lagarde on Sovereign Debt, Growth and Social Instability


by iMFdirect

The IMF chief gave a speech in New York City today that sets out how the IMF can help countries tackle this troika of challenges to the global economy.

 Watch the speech

 

Between a Rock and a Hard Place: U.S. Fiscal Policy


By Rodrigo Valdés

(Versions in عربي,  中文日本語EspañolFrançaisРусский)

The United States faces two pressing challenges to fiscal policy: raise the debt ceiling, and begin the arduous process of reducing deficits and debt.

And, right now, this leaves U.S. fiscal policy between a rock and a hard place. How much savings should be found and in what form are crucial questions. So is when to put those savings in effect. Continue reading

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