International Monetary and Financial Committee

The global economy is at a critical juncture. The rapid recovery in numerous countries, particularly in developing regions, has been remarkable. Currently, the strongest recovery trends are apparent in developing countries, with emerging- market economies cing a strong rebound from the crisis. Nevertheless, we must not forget that the relatively high growth rates in 2010 are partly the result of their low levels in 2009. Moreover, the exit from recession is unlikely to be either strong or durable if it continues to be based on temporary factors, such as inventory cycles and exceptional fiscal stimulus programmes. The global industrial inventory cycle may give a misleading impression, leading to a belief in the briskness and sustainability of the turnaround. uld be a warning that businesses remain wary of the strength and durability of the rebound. Unless new sources of dynamism can be found, it is likely that growth rates will decline in most countries in 2011. Recovery in the United States has been driven by monetary and fiscal stimulus measures, but the stimulus is now likely to have run its course. Fiscal adjustment in 2011 may drag n. There are headwinds blowing from several directions: the property market, sion of balance wers and lenders, persistent weakness arket, and feeble credit growth. United States authorities are pinning their hopes for recovery on strong growth in exports. A weaker dollar would support this strategy, which would also be in line with the needed global rebalancing. But the scope for faster export growth in the United States is limited because the main market for United States exports is Europe, where the recovery appears to be the most fragile, and which has recently become a new hot spot of instability. In Europe domestic demand continues to stagnate, ompounded by continent-wide fiscal austerity starting in spring 2011. his may stall recovery in the region even before it has started, and there still remains the problem of financial instability. The subprime mortgage crisis in the United States acted as the trigger for a series of events that led to the European debt crisis of 2010. The root cause of this crisis can be traced to serious intraregional divergences and to the related build-up of regional imbalances that had long been ignored by market participants and policymakers alike. The crisis in Europe suggests that the euro area's current policy regime may well be unsustainable, and that member countries' uncoordinated national policies are on a collision course. Calls for an "early exit" from the demand-stimulating macroeconomic policy stance have been growing louder, especially in Europe, where austerity at balancing government budgets were announced in the first half of this year. At this juncture any withdrawal of a stimulus policy seems premature, since in many countries private demand remains fragile, with no sign of approaching even its pre-crisis levels. This raises the very real threat of a double-dip recession that could push the global economy into a vicious circle of debt deflation,download.