A year ago, the world economy fell into a deep recession. Now, happily, we see financial stabilisation and economic recovery. But we must not declare victory. The world could still make two mistakes: first, we might withdraw stimulus too soon; second, we might lose the opportunity for reform. We must avoid both dangers. That is the lesson I learnt at the annual meetings of the International Monetary Fund and World Bank in Istanbul. So where are we and where do we need to go? Think of this in terms of five ‘r’s: rescue; recovery; rebalancing; regulation; and reform.
The rescue was unprecedented in scale and scope. It had to be: the world economy went over a cliff. At the beginning of 2009, the annualised fall in a quarterly moving average of world industrial output reached 25 per cent (see chart). The fall in world trade was even more extreme.
In response, the authorities socialised most financial liabilities, launched unprecedented monetary easing and ran fiscal deficits never before seen in peacetime. In the high-income countries, support for the financial sector – via capital injections, guarantees, asset purchases and liquidity provision – was 29 per cent of 2008 gross domestic product (see chart). In its World Economic Outlook, the IMF forecasts the fiscal deficit of these countries at 9 per cent of GDP in 2009. The rise envisaged in public debt compares to that of a big war.
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