Thursday, November 6, 2008

WEO Update

  • The U.S. economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions.
  • Growth in the euro area will be hard hit by tightening financial conditions and falling confidence.
  • In Japan, the support to growth from net exports is expected to decline.

  • Financial conditions continue to present serious downside risks
  • There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors. Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated. However, monetary policy may not be enough because monetary easing may be less effective in the face of difficult financial conditions and deleveraging. Also, is some cases room for further easing is limited as policy rates are already close to the zero bound. These are conditions where broad-based fiscal stimulus is likely to be warranted. Fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space.

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