Even with more forceful policy actions, the downturn in Europe is likely to last until early 2010 and the subsequent recovery is expected to be gradual, the International Monetary Fund (IMF) says.
In its Regional Economic Outlook for May, the IMF says that restoring confidence, adjusting to a lower level of wealth and reducing leverage in the financial sector will take time.
“Following the jarring global re-pricing of risk and the diminishing of risk appetite, the cost of capital will remain high for some time, and several emerging economies are facing a sudden retrenchment of capital inflows.”
The report says deflationary pressures have increased but inflation
expectations so far remain anchored in positive territory.
Further policy action, especially in the financial sector, is required to restore market trust and confidence in all countries, the IMF says. In addition to continued liquidity provision, credible loss recognition must be undertaken.
The IMF says that while the downturn is likely to be protracted, macroeconomic policies will need to continue to support demand.
“Further room to reduce interest rates should be exploited swiftly and additional unconventional easing will have to be considered with appropriate safeguards to limit market distortions, ensure reversibility, and preserve the integrity of central banks.”