The International Monetary Fund has released its latest World Economic Outlook (WEO), October 2018, ‘Challenges to Steady Growth’, taking stock of the global economic recovery a decade after the 2008 financial crisis.

As report authors note, the analysis shows that in many countries output is still well below levels that would have prevailed had output followed its precrisis trend. Moreover, there are also signs that the crisis may have had lasting effects on potential growth through its impact on fertility rates and migration, as well as on income inequality. Despite these effects, the study shows that specific policies did have an effect on how individual countries fared after the crisis. The authors conclude that countries in better fiscal shape, with better regulated and supervised banks, and flexible exchange rates generally suffered less damage.

Room for fiscal policy

The analysis notes that output losses after the crisis appear to be persistent, irrespective of whether a country suffered a banking crisis in 2007-2008. However, policy choices before and after the crisis influenced post-crisis variations in output. In particular, countries with stronger fiscal positions before the crisis experienced smaller losses, while exceptional policy actions, like discretionary fiscal stimulus, helped mitigate output losses after the crisis.

G20 economies, on average, injected discretionary fiscal stimulus of just over 2 percent of GDP in 2009 and 2010, showing renewed recognition of discretionary fiscal policy as a countercyclical demand management tool, which can help limit persistent losses after a recession (Chapter 2).

The report highlights that a sound and sustainable fiscal policy is essential for the credibility of monetary policy, with fiscal institutions and credibility associated to inflation performance and anchoring of expectations. For emerging markets in particular, improving the long-term sustainability of fiscal frameworks –including the adoption of fiscal rules– and preserving and rebuilding fiscal buffers is fundamental (Chapter 3).

Looking forward, the World Economic Outlook summarises, fiscal policy should aim to rebuild buffers for the next downturn, and the composition of public spending and revenues should be designed to bolster potential output and inclusiveness.

(Source: IMF WEO | IMF Blog)

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