Exit strategies for recovery from the global recession

Following the deepest global recession in recent history, the global recovery is off to a stronger start than we had earlier anticipated.

The International Monetary Fund expects global output to rise by 4 per cent in 2010.

But the recovery is proceeding at different speeds across the various regions and is still heavily dependent on extraordinary policy support.

In most advanced economies, growth is likely to be sluggish.

The recovery is being led by key emerging Asian economies, notably China, India, Indonesia, and Korea thanks to buoyant domestic demand and stimulus measures.

Policymakers now face a critical policy challenge.

Given the still-fragile nature of the recovery, withdrawing policy support too early may undermine growth momentum, while leaving policy support for too long could lead to overheating and asset bubbles.

The key challenge remains to exit at the right time, pace and sequencing.

Macroeconomic policy stimulus should be maintained in major advanced countries, but may need to be unwound sooner in key emerging markets.

In advanced economies where the recovery is expected to be weak, central banks should maintain low interest rates in 2010 given that underlying inflation is expected to remain subdued and unemployment is expected to remain high.

On the fiscal front, due to the still-fragile nature of the recovery, policies need to remain supportive of economic activity in the near term and the stimulus planned for 2010 should be implemented.

Growing concerns

However, countries facing growing concerns about fiscal sustainability need credible medium-term consolidation plans.

Financial markets have recovered strongly since the peak of the crisis, thanks to improving economic fundamentals and policy support.

Risk appetite has returned, equity markets have improved, corporate bond issuance has reached record levels, and capital markets have re-opened.