Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy. A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged. For this purpose, new policy initiatives are needed to produce credible loan loss recognition; sort financial companies according to their medium-run viability; and provide public support to viable institutions by injecting capital and carving out bad assets. Monetary and fiscal policies need to become even more supportive of aggregate demand and sustain this stance over the foreseeable future, while developing strategies to ensure long-term fiscal sustainability. Moreover, international cooperation will be critical in designing and implementing these policies.

The world economy is facing a deep downturn.
Global growth in 2009 is expected to fall to ½ percent when measured in terms of purchasing power parity and to turn negative when measured in terms of market exchange rates (Table 1.1 and Figure 1, view: Data Figure 1). This represents a downward revision of about 1¾ percentage point from the November 2008 WEO Update. Helped by continued efforts to ease credit strains as well as expansionary fiscal and monetary policies, the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3 percent. However, the outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions.

Source: International Monetary Fund

More on this topic

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July 2010

Gradual increase in exchange rate flexibility, supported by fiscal consolidation, wage moderation, and a prudent monetary policy.

On July 12, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Honduras.

Background

Fiscal credibility and sovereign risk

January 2010

Fitch Ratings warned that although Central American sovereigns have resisted the global crisis pretty well so far, they now require fiscal consolidation in order to maintain their credit ratings.

Summary
Fitch‐rated Central American sovereigns have thus far withstood the destabilizing effects of the global economic and financial crisis, despite monetary and exchange rate policy challenges.

From Recession to Recovery: How Soon and How Strong?

April 2009

FMI: "Recessions associated with financial crises tend to be severe. Recoveries from such recessions are typically slow."

If such recessions are globally synchronized then they tend to last even longer and be followed by recoveries that are even weaker.

Countercyclical policies can be helpful in ending recessions and strengthening recoveries.

World Economic Outlook Update

January 2009

Global Economic Slump Challenges Policies. World growth is projected to fall to ½ percent in 2009, its lowest rate since World War II.

Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy. A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged.