IMF Aims to Restore Financial Market Confidence
In its global growth forecast released today, the International Monetary Fund (IMF) raised its expectations for growth from its April forecast of 4.2 percent to 4.6 percent, noting that this was a reflection of stronger activity in the first two quarters of 2010, and was in anticipation of fiscal measures being put into place by authorities, particularly in Europe. The IMF expressed confidence that, despite the European debt crisis that continues to cause turbulence and increase potential risk, the forecast of 4.6 percent global economic growth is a realistic one.
The forecast growth of 4.3 percent for 2011 remains unchanged at this time for the global economy. However the IMF forecast for some individual countries for 2011 was adjusted, with Japan dropping from 2 percent to 1.8 percent, China falling from 9.9 percent to 9.6 percent, and Britain declining from 2.5 percent to 2.1 percent. China and India are expected to lead the pack in economic growth in Asia, which is forecast at 9.2 percent. The United States was expected to grow at a rate of 3.3 percent.
The IMF noted that the global economy still faces the likelihood of an escalation of financial stress due to very real concerns regarding sovereign risk. The report noted that in the event of governments reneging on borrowing terms it could lead to “additional increases in funding costs and weaker bank balance sheets, and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in relative exchange rates.”
Some of the recommendations by the IMF to aid economic recovery in established economies included encouragement to resolve any ambiguity surrounding sovereign debt exposure of banks, ensuring lenders have sufficient capital to function efficiently, and that there is adequate market liquidity. Urgent implementation of financial sector reforms is being called for, such reforms including restructuring and consolidating banking industries, recapitalizing banks, and the overhauling of regulatory policy and powers. Emerging economies are also urged to implement financial sector reforms, with some countries (China immediately coming to mind) being called upon to employ greater exchange rate flexibility.
Putting it all in a nutshell the IMF report stated that “Against this uncertain backdrop, the overarching policy challenge is to restore financial market confidence without choking the recovery.”