Abstract
The global economy has slowed, financial volatility and investor risk aversion have sharply increased, and performance has continued to diverge across regions (Figure 2.1). In the United States, weak growth and the lack of a credible medium-term fiscal plan to reduce debt are draining confidence. Europe is gripped with financial strains from the sovereign debt crisis in the euro area periphery. How these advanced economies confront their fiscal challenges will profoundly affect their economic prospects. Emerging and developing economies as a group continue to expand, a few at rates well above their precrisis averages. However, growth will likely moderate as the slowdown in major advanced economies weighs on external demand. Finally, inflation remains elevated (Figure 2.2). Although this is explained mainly by resurgent commodity prices in the first half of the year, in some economies, demand pressures—stoked by accommodative policies, strong credit growth, and capital inflows—have contributed as well. Policy tightening, to eliminate inflation pressure and strengthen fiscal accounts, is essential to sustain balanced growth in these economies. Where overheating and fiscal risks are not imminent, further tightening can wait until risks to global stability subside.
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