Facing a Sluggish and Volatile Global Economy

Five years since the start of the global financial crisis, the world economy continues to face downside risks, while the outlook remains clouded by weak market sentiments. Governments in developed economies are engaging in fiscal consolidation, which is negatively affecting their economic growth, as well as that of developing economies. At the same time, households and the business and financial sectors continue to deleverage in an effort to rebuild their balance sheets, to the extent that the global economy is likely to experience a “new normal” of lower growth for years to come. In the past few years, the world economy has also been characterized by heightened economic uncertainty. Driven in large part by policy uncertainty in developed economies, such as divided negotiations on fiscal policy in the United States and the timing and magnitude of monetary injections in many advanced economies, near-term economic prospects have become more unpredictable, with sharp upward and downward revisions in growth projections. Moreover, businesses remain reluctant to expand operations as consumers further delay their spending due to increased job insecurity and as financial institutions continue to tighten lending standards due to heightening of perceived default risks. For emerging economies, massive inflows and the risk of sudden reversals of foreign capital, particularly in the form of short-term portfolio investments, add volatility to domestic financial markets.