Coming in to the 2011 Annual Meetings of the IMF and World Bank this past weekend, I had warned of the dangerous new phase for the global economy and had called for bold and collective action. Coming out of the Meetings, I feel strongly that the global community is beginning to respond. Why? Three reasons: a shared sense of urgency, a shared diagnosis of the problems, and a shared sense that the steps needed in the period ahead are now coming into focus. So, looking ahead, follow through—by all concerned—is now even more important. That means taking action not in the years ahead, but in the weeks ahead. And, in that, we are all in this together and we can only get out of it together.
We are back in the danger zone. Since our previous 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.
The global economy has entered a dangerous new phase. The recovery has weakened considerably, and downside risks have increased sharply. Strong policies are urgently needed to improve the outlook and to reduce the risks. Growth, which had been strong in 2010, decreased in 2011. What was going on was the stalling of the two rebalancing acts—internal and external—which, as we have argued in many previous reports, are needed to deliver “strong, balanced, and sustainable growth.” This has been compounded by a sharp increase in financial volatility since the middle of the summer. These developments have, not surprisingly, led us to revise our forecasts down. In light of the low baseline and the high risks, strong policy action is of the essence. It has to rely on three main legs.