Executive Summary
The global recovery is being threatened by intensified sovereign, financial, and real sector feedback loops. Activity will lose steam through 2012, but a collapse should be avoided. In G-20 advanced economies, the euro area will experience a mild recession through 2012. In the United States, growth is expected to moderate following the recent pick-up, which was supported in part by lower household saving. Other major advanced economies will suffer from weak and uneven growth. In G-20 emerging economies, the moderation in growth from high levels is expected to continue in 2012, reflecting past policy tightening and adverse spillovers from advanced economies.

Downside risks to global growth have escalated. The overarching risk remains an intensified "paradox of thrift" as households, firms, and governments globally reduce demand. The prospect of multiple equilibria—particularly with respect to market perceptions of sovereign debt sustainability in the euro area—has intensified this risk. Other key risks include hard landings in emerging economies and a sharply higher oil price, driven by geopolitical-related disruptions to the supply of crude oil.

Europe must pursue its move beyond its piecemeal approach and achieve a successful resolution of the crisis through four key steps. Fiscal consolidation structured and paced to avoid a collapse in demand, with the focus on the size of the cyclically-adjusted effort; countries with policy space should consider holding off adjustment in 2012. Stronger growth, by offsetting the adverse effect of fiscal consolidation on growth with other policies: easier monetary policy, including lower ECB policy rates; bank recapitalization; and structural reforms to address the root causes of the crisis and bolster market confidence. Enhanced crisis management, by providing sufficient funding through expanded use of the ECB’s balance sheet and adding real resources for the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Deeper fiscal and financial integration across Europe to underpin the sustainability of the common currency.

In other G-20 advanced economies, there remains an urgent priority to set out a credible path for fiscal consolidation over the medium term. In the near term, sufficient adjustment is planned in most advanced economies. If downside risks to growth materialize, countries with adequate space should allow automatic stabilizers to operate fully, and those that can afford it, may consider slowing the pace of near-term consolidation, while maintaining their commitment to credible medium-term consolidation. Monetary policy should remain highly accommodative, and policymakers should stand ready to continue or expand unconventional measures, if needed.

In G-20 emerging economies, the immediate policy priority is to ensure a soft landing as domestic growth and demand from advanced economies moderate. Monetary policies can be eased in economies with diminishing inflationary pressure (e.g., Latin America), but with sufficient safeguards to insure against overheating in some sectors (e.g., real estate). Social spending can be increased in economies where inflation is low, public debt is not high, and external surpluses are large (e.g., China). Policy space is more limited in those economies that suffer from both relatively high inflation and public debt, warranting a more cautious stance toward policy easing (e.g., India).

Collective action to address persistent global imbalances can better guarantee a return to strong, sustainable, and balanced global growth. This will require further deleveraging of households in advanced deficit economies and more inclusive growth and lower saving in emerging surplus economies. The latter can be achieved by alleviating distortions, notably financial sector reform as well as enhanced pension, healthcare, and education systems, complemented with less intervention in foreign exchange markets.

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