IMF Urges Concerted Policy Action to Reduce Risks to Global Growth

Global imbalances and some tail risks have been reduced

But policy settings in major countries remain source of global risks

Additional policy action needed, with optimal results if countries act in sync

The 2013 Spillover Report finds that five years after the global financial crisis, the tensions and risks rooted in the “Systemic 5” economies—China, the euro area, Japan, United Kingdom, and the United States—have lessened, but these economies are not contributing to global activity as much as they might.

The report focuses on the Systemic 5’s “spillover effects”—that is, the impact of their policies on one another and on the rest of the world because of the large volume of trade and financial linkages in today’s economy. The challenge for these economies, the IMF says, has been to find policies that will help them reach their potential output without complicating, through spillovers, economic management in other countries.

The IMF is also releasing its 2013 Pilot External Sector Report, which examines the evolution of the external sector position—current accounts, exchange rates, capital accounts, reserves, and external assets and liabilities—of the world’s 28 largest economies plus the euro area. The two reports focus on links between developments at the country and global levels.

Lower global imbalances

The IMF reports say that while global growth has continued to disappoint, much else has gone in the right direction. Global imbalances have continued to narrow—for structural reasons, not just cyclical; exchange rates have moved closer to where fundamentals suggest they should be; and policies of the Systemic 5 have enabled them to avert far worse outcomes.

Indeed, concerted policy actions to avert some of the most significant tail risks facing the global economy are estimated to have saved 2-5 percent of global output. Global imbalances—defined as the gap between actual current account balances and those estimated by staff to be consistent with fundamentals and desirable policies—narrowed in 2012 to about ¾ percent of global GDP.

“External sector developments have been shaped by two key interrelated issues—the implications of policy measures, particularly in the advanced economies, to support growth and shifting risk sentiment,” noted David Robinson, Deputy Director of the IMF’s African Department and one of the lead authors of the 2013 Pilot External Sector Report.

Both emerging markets and safe haven economies, including a number...