A Spanner in the Works: An Update to the World Economic Outlook

21970901656_57e69fe1e3_zBy Maurice Obstfeld

Versions in عربي (Arabic), 中文 (Chinese), Français (French), and Español (Spanish)

The United Kingdom’s June 23 vote to leave the European Union adds downward pressure to the world economy at a time when growth has been slow amid an array of remaining downside risks. The first half of 2016 revealed some promising signs—for example, stronger than expected growth in the euro area and Japan, as well as a partial recovery in commodity prices that helped several emerging and developing economies. As of June 22, we were therefore prepared to upgrade our 2016-17 global growth projections slightly. But Brexit has thrown a spanner in the works.

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The Broader View: The Positive Effects of Negative Nominal Interest Rates

By Jose ViñalsSimon Gray, and Kelly Eckhold

Versions in: عربي (Arabic), Deutsch (German), 日本語 (Japanese), and Español (Spanish)

We support the introduction of negative policy rates by some central banks given the significant risks we see to the outlook for growth and inflation. Such bold policy action is unprecedented, and its effects over time will vary among countries. There have been negative real rates in a number of countries over time; it is negative nominal rates that are new. Our analysis takes a broad view of recent events to examine what is new, country experiences so far, the effectiveness of negative nominal rates as well as their limits and their unintended consequences. Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability. Still, there are limits on how far and for how long negative policy rates can go. Continue reading

What a Drag: The Burden of Nonperforming Loans on Credit in the Euro Area

By Will Kerry, Jean Portier, Luigi Ruggerone and Constant Verkoren 

High and rising levels of nonperforming loans in the euro area have burdened bank balance sheets and acted as a drag on bank profits. Banks, striving to maintain provisions to cover bad loans, have had fewer earnings to build-up their capital buffers. This combination of weak profits and a decline in the quality of bank assets, resulting in tighter lending standards, has created challenging conditions when it comes to new lending.

We took a closer look at this relationship and the policies to help fix the problem in our latest Global Financial Stability Report because credit is the grease that helps the economy function.

The stock of nonperforming loans has doubled since the start of 2009 and now stands at more than €800 billion for the euro area as whole (see chart). Around 60 percent of these nonperforming loans stem from the corporate loan book.

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The Danger Zone: Financial Stability Risks Soar

By José Viñals

(Versions in عربيFrançais日本語, and Русский)

We are back in the danger zone. Since the IMF’s previous Global Financial Stability Report, financial stability risks have increased substantially—reversing some of the progress that had been made over the previous three years.

 Several shocks have recently buffeted the global financial system: unequivocal signs of a broader global economic slowdown; fresh market turbulence in the euro area; and the credit downgrade of the United States.

This has thrown us into a crisis of confidence driven by three main factors: weak growth, weak balance sheets, and weak politics. Continue reading

No End in Sight: Early Lessons on Crisis Management

By Stijn Claessens and Ceyla Pazarbasioglu

(Version in Español)

Crises are like stories; they have a beginning, middle, and an end, and on occasion, we learn something along the way.

In times of crisis, choices must be made. In the most recent global economic crisis policymakers moved quickly to stabilize the system, providing massive financial support, which is the right response in the beginning of any crisis. But that only treated the symptoms of the global financial meltdown, and now a rare opportunity is being thrown away to tackle the underlying causes.

Without restructuring financial institutions’ balance sheets and their operations, as well as their assets ‒ loans to over-indebted households and enterprises ‒ the economic recovery will suffer, and the seeds will be sown for the next crisis. Continue reading

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