IMF Release Global Economic Report

July 9, 2010 International Tax CooperationTaxation in EU

International Monetary Fund [oct 25]New reports have been released, profiling worldwide economic growth and financial stability. According to the new publication, growth for 2010 is currently above previous projections, although financial stability has experienced a small setback in recent months.

On June 7th the International Monetary Fund (IMF) released two reports concerning the state of the world economy, World Economic Outlook Update (WEO) and the Global Financial Stability Report Market Update (GFSR). According to the WEO, cumulative worldwide economic growth in 2010 is expected to increase by 0.5 percent, reaching a level of 4.5 percent. The report advocated for advanced economies to continue focusing on medium-term growth through appropriate fiscal consolidation and reforms to tax systems. However, in the GFSR the IMF noted signs of decreasing financial stability throughout the global economy, warranting further fiscal-policy action to increase confidence in financial systems.

According to the GFSR, several financial indicators have shown decreased financial stability since May 2010. Adverse economic feedback loops could soon arise, whereby increased sovereign risk will effect bank’s lending behavior, which in turn strains the economy, leading back to sovereign risk. Further, the international nature of interbank lending is removing barriers to the spillover of national economic woes, with the instability of one nation adversely influencing others. The tightening of financing in emerging markets, one of the most significant economic recovery drivers, is adding to the decrease in global financial stability. The Euro area is currently showing the highest signs of financial instability and reciprocal risk loops.

The IMF has reported a small improvement in key financial indicators in June, but claimed it is too early to tell whether this is the beginning of a recovery. In response to the possible instabilities, the IMF has recommended Governments worldwide to instate policies addressing sovereign risk, along with improving transparency and resilience of struggling banks. Additionally, the report urged the use of the newly established European Financial Stability Facility, and liquidity support for financial markets.

Despite the suggested drop in financial stability, the WEO reported a better than projected level of global economic growth. The robust economic increase of Asia has been attributed to a significant portion of the recovery. The WEO stated that adequate stability, transparency and liquidity measures should ensure continued levels of growth. However, inappropriate policy implementation and fiscal stimulus package treatment could result in a approximate 1.75 percent from baseline drop in global growth in 2011, with a Euro area fall of 3.5 percent.

The IMF summarized the sentiment of both reports, saying “…ambitious and complementary policy efforts are needed to promote strong, sustainable, and balanced global growth over the medium term.”

Photo by JavierPsilocybin