This edition of the World Economic Outlook explores the prospects for growth in the aftermath of the financial crisis. The fragile nature of the recovery will present many challenges. These include the need for continued strong monetary, fiscal, and financial policies, ongoing efforts to restore the financial sector to health, improvements in private demand, and preparation of exit strategies on the fiscal, monetary, and financial fronts. The first of two analytical chapters included in this edition, "Monetary Policy and Asset Prices: What Do We Learn from Booms and Busts?" explores whether there is a role for monetary policy in preventing asset price busts. The second, "Medium-Run Output Evolutions after Crises: A Historical Perspective," explores the effect of large economic shocks on output and its composition, including variations related to initial conditions, the type of shock, and economic policies.
After a deep global recession, economic growth has turned positive, as wide-ranging public intervention has supported demand and lowered uncertainty and systemic risk in financial markets. Nonetheless, the recovery is expected to be slow, as financial systems remain impaired, support from public policies will gradually have to be withdrawn, and households in economies that suffered asset price busts will continue to rebuild savings. Risks to the outlook remain on the downside. Premature exit from accommodative monetary and fiscal policies is a particular concern because the policy-induced rebound might be mistaken for the beginning of a strong recovery. The key requirement remains to restore financial sector health while maintaining supportive macroeconomic policies until the recovery is on a firm footing. At the same time, policymakers need to begin preparing for an orderly unwinding of extraordinary levels of public intervention. Policies also need to facilitate a rebalancing of global demand, because economies that experienced asset price busts will need to raise saving rates, and there is a need to bolster potential growth in advanced economies, which has suffered as a result of the major financial shocks. Rising unemployment and setbacks to progress in poverty reduction pose social challenges that also must be addressed.
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