The International Monetary Fund released a rather depressing economic outlook. The first line reads, “New Setbacks, Further Policy Action Needed“. The main points in their report:
- If policymakers (in the US) fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts, the U.S. structural fiscal deficit could decline by more than 4 percentage points of GDP in 2013. U.S. growth would then stall next year, with significant spillovers to the rest of the world.
- As the global recovery advances, a lack of progress (in fiscal consolidation) could trigger sharply higher sovereign borrowing costs in the United States and Japan as well as turbulence in the global bond and currency markets.
- The utmost priority is to resolve the crisis in the euro area. The recent agreements, if implemented in full, will help to break the adverse links between sovereigns and banks and create a banking union….But these measures must be complemented by more progress on banking and fiscal union. In addition, the periphery countries need to remain on track with their policy reform commitments, for which they need a supportive financial and growth environment that must be facilitated by the ECB and other euro-area-level facilities.
Does the IMF have even more to put on its wish list for Santa….of course:
These tasks require policy measures in several areas:
- A credible commitment toward a robust and complete monetary union.
- The viability of the monetary union must also be supported by wide-ranging structural reforms throughout the euro area to raise growth and resolve intra-area current account imbalances.
- Demand support and crisis management are essential in the short term to cushion the impact of the region’s adjustment efforts and maintain orderly market conditions
- There is room for monetary policy in the euro area to ease further. In addition, the ECB should ensure that its monetary support is transmitted effectively across the region and should continue to provide ample liquidity support to banks under sufficiently lenient conditions. This might require nonstandard measures, such as reactivation of the Securities Market Programme, additional LTROs with lower collateral requirements, or the introduction of QE-style asset purchases.
- Fiscal consolidation plans in the euro area must be implemented. In general, attention should be paid to meeting structural fiscal targets, rather than nominal targets that will likely be affected by economic conditions. Automatic stabilizers should thus be allowed to operate fully in economies not subject to market pressure. Considering the large downside risks, economies with limited fiscal vulnerability should stand ready to implement fiscal contingency measures if such risks materialize.
When I read through this report, I got a pretty clear message from the IMF: “The global economy is running off a cliff. If you do not have inflationary issues, then your central bank should implement as many ‘nonstandard’ measures as needed to divert away from a looming economic disaster.” QE 3, QE 4, QE 5…… Regardless, it’s quite the laundry list of needed actions that must be implemented by many different dysfunctional politicians. Good luck with that.
You can read the whole report at your leisure: IMF World Economic Update