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A Bridge To Economic Recovery: Be Aware Of Financial Stability Risks

A Bridge To Economic Recovery: Be Aware Of Financial Stability Risks

By Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department

Despite a global economic crisis comparable only to the Great Depression, near-term financial stability risks have been contained with the help of unprecedented monetary policy easing and massive fiscal support across the globe. But many economies had pre-existing vulnerabilities – which are now intensifying, representing potential headwinds to the recovery.

Extraordinary policy measures have stabilized markets, boosted investors’ sentiment, and maintained the flow of credit to the global economy. Critically, these measures helped prevent a slowing economy and sliding financial markets from feeding on each other in a destructive vicious cycle.

The rebound in asset prices and the easing in global financial conditions have benefited not only advanced economies, but also emerging markets. In addition, unlike in previous crises, emerging markets this time were also able to respond by cutting policy rates, injecting liquidity and, for the first time, employing asset purchase programs.

Beware of the real-financial disconnect

The significant improvement in financial conditions has helped maintain the flow of credit to the economy, but the economic outlook remains highly uncertain. A disconnect persists, for example, between financial markets – where there have been rising stock market valuations (despite the recent repricing) – and the weak economic activity and uncertain outlook. This gap can gradually narrow if the economy recovers swiftly. But if the recovery is delayed, for example because it may take longer to get the virus under control, the investor optimism may wane.

As long as investors believe that markets will continue to benefit from policy support, asset valuations may stay elevated for some time. Nonetheless, and especially if the economic recovery is delayed, there is a risk of a sharp adjustment in asset prices or periodic bouts of volatility.

Corporate sector vulnerabilities

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Disorderly Brexit could damage UK’s economic recovery from Covid, says OECD

Disorderly Brexit could damage UK’s economic recovery from Covid, says OECD

Britain’s economy faces a double risk to recovery from a disorderly Brexit as the coronavirus pandemic drags down growth, the Organisation for Economic Co-operation and Development has warned.



a car parked on a sidewalk: The UK car industry and food and textiles producers could be hit hardest by a disorderly Brexit, suffering a fall in exports of more than 30%.


© The Guardian
The UK car industry and food and textiles producers could be hit hardest by a disorderly Brexit, suffering a fall in exports of more than 30%.

On the eve of a critical EU leaders’ summit in Brussels, the influential Paris-based thinktank said the Covid crisis would further complicate a disorderly Brexit as companies were less prepared for the end of the transition period, having diverted attention away from leaving the EU.

It warned that failure to secure a free trade agreement before the UK leaves the Brexit transition period at the end of December would leave the economy 6.5% lower in the next few years than would have been the case if existing arrangements with the EU had been maintained.

In a development with potential to cause severe disruption for cross-border trade, it said a disorderly Brexit would have the most significant impacts for manufacturing, with the UK car industry, food and textiles producers hardest hit, suffering a fall in exports of more than 30%.

Álvaro Pereira, the director of the country studies branch at the OECD, said: “We know Covid has been the largest economic shock and social shock in the last few decades all across the world. Brexit obviously compounds the issue.

“The most important thing in the next few days and months is to focus on a deal, so the closest possible relationship is established between the UK and EU. Both parties lose if there is no deal.”

Publishing its first major economic survey of the UK since 2017, the OECD said a disorderly Brexit had potential to compound the risks to the British economy from

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German economic recovery to lose steam as pandemic continues to dominate

German economic recovery to lose steam as pandemic continues to dominate

Germany’s leading economic institutes on Wednesday published their autumn report, which paints a more pessimistic forecast for the recovery of Europe’s largest economy than experts had predicted in their previous spring report.



a group of people sitting at a picnic table: 13 October 2020, Berlin: Unoccupied chairs of various open-air cafes and restaurants in Tauentzienstraße. Missing guests due to corona-related restrictions are causing the restaurateurs some trouble. Photo: Jens Kalaene/dpa-Zentralbild/ZB (Photo by Jens Kalaene/picture alliance via Getty Images)


13 October 2020, Berlin: Unoccupied chairs of various open-air cafes and restaurants in Tauentzienstraße. Missing guests due to corona-related restrictions are causing the restaurateurs some trouble. Photo: Jens Kalaene/dpa-Zentralbild/ZB (Photo by Jens Kalaene/picture alliance via Getty Images)

The research institutes have revised their GDP forecasts downwards by a percentage point for both 2020 and 2021.

They now expect gross domestic product (GDP) to decline by 5.4% this year from the -4.2% they had forecast in Spring. For 2021, they expect growth of 4.7%, revised down from 5.8%. In 2022, economic output should increase by 2.7 %, they said.

“A good part of the slump from the spring has already been made up, but the remaining catching-up process represents the more arduous journey back to normal,” said Stefan Kooths, economic director of IfW Kiel, in a statement.

READ MORE:German government defends curfews and travel bans amid outcry from businesses

Germany, like most other European countries, is suffering from a second wave of infections, with daily tallies rising to numbers not seen since April.

Chancellor Angela Merkel will meet with the leaders of Germany’s 16 states in Berlin on Wednesday in an attempt to reach some kind of clarity on the confusion over different curfews and domestic travel bans between states.

Video: ‘This is turning into the unemployment crisis we feared’ (Sky News)

‘This is turning into the unemployment crisis we feared’

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The report, which comes out twice a year, is developed jointly by the German Institute for Economic Research, the Ifo Institute in Munich, the Kiel Institute for the World Economy, the Halle

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Germany’s economic recovery loses momentum as daily cases spike above 5,000

Germany’s economic recovery loses momentum as daily cases spike above 5,000

  • Germany’s growth prospects for 2020 are looking increasingly bleak, with the country’s leading economic research institutes downgrading GDP forecasts for 2020 and beyond.
  • Publishing a joint economic forecast Wednesday, Germany’s leading economists warned that the coronavirus pandemic is leaving what they called “substantial marks” on the German economy.
  • The impact of the virus “is more persistent than assumed in spring.”



a person holding a sign: Advertising figures with a protective face masks in Munich, Germany.


© Provided by CNBC
Advertising figures with a protective face masks in Munich, Germany.

Germany’s economic prospects for 2020 are looking increasingly bleak, with the country’s leading research institutes downgrading GDP (gross domestic product) forecasts for this year and beyond.

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Publishing a joint economic forecast Wednesday, Germany’s prominent economists warned that the coronavirus pandemic is leaving what they called “substantial marks” on the German economy, adding that “its impact is more persistent than assumed in spring.”

They revised their economic outlook downward by roughly one percentage point for both 2020 and 2021. They now expect GDP to fall by 5.4% in 2020 (lower than a previous -4.2% forecast) and to grow by 4.7% (less than a previously forecast 5.8%) in 2021, and 2.7% in 2022.

The “Joint Economic Forecast” is published twice a year on behalf of the German Economy Ministry and is prepared by the German Institute for Economic Research (DIW Berlin) and the Ifo Institute in Munich, as well as several other organizations.

They said the downgrade follows a more pessimistic assessment of the recovery process. “Although a substantial part of the drop in output experienced in spring has already been recovered, the remaining catch-up process is the more difficult part of the return to normality,” Stefan Kooths, head of forecasting at the Kiel Institute, said on the outlook.

The downgrades are not surprising given a second wave of coronavirus cases that is ravaging Europe and

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German economic recovery loses momentum – institutes

German economic recovery loses momentum – institutes

BERLIN, Oct 14 (Reuters)Europe’s largest economy will recover more slowly from the coronavirus pandemic than originally predicted, Germany’s leading economic research institutes forecast on Wednesday.

As Reuters previously reported from sources, the institutes expect the economy will shrink by about 5.4% in 2020, a bigger decline than the 4.2% they forecast in April.

The institutes’ forecast, which forms the basis for the government’s own economic predictions, expects a rebound of 4.7% in 2021, also more pessimistic than their April forecast for 5.8% growth. They expect growth of 2.7% in 2022.

The institute said the recovery was being held back by sectors particularly hard hit by social distancing restrictions such as restaurants, tourism, events and air travel.

“Activity in this part of the German economy will … catch up with the rest of the economy only once measures to control the pandemic have largely been dropped, which we do not expect before next summer,” said Stefan Kooths, head of forecasting at the Kiel institute.

(Reporting by Emma Thomasson Editing by Riham Alkousaa)

((+49 30 2888 5081; Reuters Messaging: emma.thomasson.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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