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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

IMF: Global Economy Has 'Turned the Corner' But Troubles Remain

UPDATED at 2:30 p.m. with IMF quotes:

The global economy has "turned the corner" toward recovery, the International Monetary Fund said today in its semi-annual report on the economy, but substantial regulatory reform is needed to prevent a return to the abyss.

"The immediate outlook for the financial system has improved markedly since the April 2009 Global Financial Stability Report and extreme tail risks have abated," the IMF wrote today. "Financial markets have rebounded, emerging market risks have eased, banks have raised capital, and wholesale funding markets have reopened."

IMF director of monetary and capital markets department Jose Vinals said the situation has stabilized in both the mature and emerging economies.

"Overall, the situation has improved, and we have gone from the verge of the financial meltdown to a situation of stability at present," Vinals said in an interview on the IMF Web site.

Still, credit is tight and the economic recovery is likely to be slow, the report reads.

"The financial system is still not on safe grounds," Vinals said. "It still depends a lot on economic support -- public policy measures -- to function. So this means that we need to continue to address some basic problems, that still are important."

Chief among those problems is undercapitalized banks, which need to raise more money, either through private or public means, the IMF report says. The question is how.

"European banks are hoping that they can earn their way to stronger balance sheets but I think some will take advantage of the healthier capital markets to raise money," said Peter Boockvar, equity strategist at Miller Tabak. "Plenty of banks have raised money via stock offerings and the current rally has provided a nice window of opportunity for some to do more."

Also, the IMF said, businesses and households need to reduce their debt levels.

"While the deleveraging process is quite natural under the present circumstances, we must have an orderly deleveraging process and moreover we must do something so that when the economy starts picking up with a bit more force, the financial system can support the recovery by supplying the proper credit," Vinals said.

But Americans are already ahead of the IMF in terms of deleveraging: Consumer credit is shrinking at an annual rate of 6.5 percent, the Commerce Department said earlier this month.

And the personal savings rate rose to 5 percent in the second quarter of this year, the highest rate of this decade, according to the Commerce Department's Bureau of Economic Analysis.

On Thursday, the IMF is set to release its global economic outlook for 2010. Most forecasters expect the IMF to increase its global growth outlook for next year from 2.5 percent to 3 percent.

Jobs are a key element of any economic recovery and the IMF stability report out today painted dismal news for workers.

In the U.S., the official unemployment rate stands at 9.7 percent and is expected to climb to 9.8 percent on Friday when September's numbers come out. The White House and many economists predict U.S. unemployment will crest at 10 percent next year.

In Europe, unemployment is predicted to top off at 12 percent next year, the IMF report says, and the high rate will continue to produce adverse side effects: "European delinquencies and defaults are also rising, though from lower levels," the report reads, "and are likely to accelerate as unemployment allowances and other social safety nets that only offer temporary protection are exhausted," the report reads.

Today's IMF stability report hits at the central problem with managing the recovery from this recession, which began in December 2007: knowing when the government should back out and let the private sector start to work again.

"While the time is not ripe for a full-fledged disengagement from all the unconventional policies undertaken—indeed in some countries additional public resources may still be needed—it is time for policymakers to consider and articulate how and in what sequence policies may be unwound," the report reads.

On regulation, the IMF report describes a term economists call macroprudential regulation -- the act of trying to identify bubbles as they are forming and taking steps to prevent them from bursting. In the U.S., such a process would take the shape of a super-regulator, possibly a Federal Reserve imbued with greater powers, that would be on-guard for systemic problems among interconnected institutions. It would also be given the authority to wind down troubled financial institutions -- such as insurance giant AIG -- in a similar fashion to the way the FDIC takes over failed banks.

"The priority should be to reform the regulatory environment so that the probability of a recurrence of a systemic crisis is significantly reduced," the IMF wrote. "This includes not only defining the extent to which capital, provisions, and liquidity buffers are to rise, but also how market discipline is to be reestablished following extensive public sector support of systemic institutions in many countries. "

The fairly positive IMF report comes as the U.S. stock market suffered a pullback through most of today, though stocks have largely rebounded. With 90 minutes to go on the trading day, the Dow and the Nasdaq have turned positive, while the S&P 500 is barely underwater. Before lunch, all three indexes were down more than 1 percent.

Not only does this index paint a picture of manufacturing in the U.S. Midwest, it is considered a forecaster of the national manufacturing number, the Institute for Supply Management's index, which is set for Thursday release. Traders are worried the ISM number will mirror the Chicago number, painting a dim picture of the U.S. manufacturing recovery.

The IMF report noted that the toxic-asset problem has not been solved in the U.S. banking system and needs attention. The Post reported earlier this week that the White House is set to roll out a new plan to help banks cleanse toxic assets from their balance sheets, with a price tag that could run as high as $40 billion.

The IMF estimates that banks will be forced into $3.4 billion worth of write-downs, thanks to the crisis, but that figure is $600 billion less than it forecast during its April global financial stability report.

You can read the entire report by clicking here, or just the executive summary by clicking here.

-- Frank Ahrens
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By Frank Ahrens  |  September 30, 2009; 2:30 PM ET
Categories:  The Ticker  | Tags: IMF, International Monetary Fund, toxic assets  
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Comments

Thanks crisis for giving us opportunity to get to know each other better. There have always been troubles and always will be. It could be worse.

Posted by: Dermitt | September 30, 2009 12:43 PM | Report abuse

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