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Dear MARIA, We just published a new blog—please find the full text below.  Enhancing Financial Stability for Resilience During Uncertain Times (Credit: Angela Weiss/Getty images) By Tobias Adrian Capital markets are essential for driving economic activity, providing mechanisms for raising funds and allocating resources efficiently. The stability of these markets and the financial institutions that intermediate them are therefore macro-critical, especially when market volatility and economic uncertainty are high, as they are now. In the latest Global Financial Stability Report, we assess that global financial stability risks have grown significantly, driven by tighter financial conditions and heightened trade and geopolitical uncertainty. Our assessment is supported by three salient and forward-looking vulnerabilities in the financial system:  Capital markets have become increasingly concentrated—for example, the United States makes up nearly 55 percent of the global equity market, up from 30 percent two decades ago—and valuations of some assets remain stretched despite the recent sell-offs. Further asset price corrections suggest the need for close attention given the highly uncertain economic backdrop. Nonbank financial institutions, or NBFIs, have become more active in channeling savings toward investments since 2008, and their nexus with banks has continued to grow. Further sell-offs could strain some financial institutions, and the ensuing deleveraging in the sector could exacerbate market turmoil. Sovereign debt levels continue to rise, seemingly outpacing growth in market infrastructure tasked with ensuring smooth market functioning. Core government bond markets may see elevated volatility, especially those in countries with high debt levels. Riskier emerging markets, which have seen their sovereign bond spreads rise during the recent market turmoil, may find it more challenging to refinance their debt or fund additional government spending. In all these areas, banks play a critical role. They lie at the heart of the financial system, not only because of their core lending function but also because of their key role in facilitating the growth of capital markets. Large international banks are important market-makers in securities and derivatives. They are also major providers of leverage to various NBFI segments, with the ability to lend directly against asset portfolios, through credit lines, or facilitate leverage indirectly through repos and derivatives. Globally systemically important banks, or G-SIBs, and other leverage providers, such as clearing houses for derivatives, use various tools to protect themselves against the risk of failure of a given NBFI entity, including collateral requirements and arrangements to reduce gross exposures. However, they can’t control how much a client borrows elsewhere. Consequently, the nexus between banks and NBFIs have risen in recent years—for example, in the United States, NBFI borrowings have reached 120 percent of banks’ common equity tier 1 capital.  Increasing nexus between banks and nonbanks Though expanded financial intermediation by nonbanks positively affects the economy, excessive growth predicated on borrowing from traditional banks may make both types of lenders more susceptible to potential contagion risks. Among other NBFI segments, this Global Financial Stability Report discusses how certain hedge funds, a key type of NBFI, may see their highly leveraged trading strategies backfire in volatile markets. This could lead to a deleveraging in which they sell assets into a falling market, in turn causing losses for banks that provided their leverage. Another segment of NBFIs that has seen substantial growth is the private credit segment, which typically lends to smaller corporate borrowers. As private credit continues to grow, banks have become willing partners through joint ventures or by providing loan facilities. With global growth forecast to slow (see World Economic Outlook), the repayment ability of borrowers could deteriorate, leading to losses to both private credit funds and partner banks. Debt is also increasing in a very different sector—government. Sovereign debt now accounts for 93 percent of global economic output, up from 78 percent a decade ago, and financing costs have increased in both nominal and real terms. Because government bonds are cornerstone instruments in capital markets, disruptions in this market could pose a threat to financial stability. Growth-enhancing fiscal consolidation is key to alleviating this risk, as the Fiscal Monitor indicates. Another critical aspect is ensuring that the market remains liquid and well-functioning. For advanced economies, such resilience depends on governments moderating the large amounts of bond issuances on the one hand, and ensuring bank and nonbank broker-dealers have the capacity to intermediate them on the other. In emerging markets, the credibility of debt management frameworks is essential. This means it will be key to strengthen the capacity of institutions, have clear targets and strategies for issuing and redeeming bonds, and carefully calibrate the currency composition of bonds. Policy recommendations Nonbanks boosting leverage doesn’t necessarily negate the benefits they provide to the economy if guardrails ensure they can weather adverse shocks. For a start, enhanced reporting requirements should help supervisors develop a systemwide view of their activities and discern between which provide helpful financial intermediation and which take excessive risk or are poorly governed. It is crucial to strengthen policies that mitigate leverage and interconnectedness vulnerabilities, building on the Financial Stability Board’s and other standard-setting bodies’ minimum standards or recommendations. Banks, as the foundation of the system, must be resilient to adverse shocks, including those stemming from their increasing interconnections with nonbanks. Full, timely, and consistent implementation of Basel III and other internationally agreed bank regulatory standards would ensure a level playing field across jurisdictions and guarantee ample and adequate capital and liquidity. Exposure of banks to NBFIs need to be managed prudently. With rising sovereign debt levels, resilience in bond market functioning can be built up by policies that promote the central clearing of bonds and the reduction of counterparty risks, at the same time further bolstering the resilience of central clearing. It’s also important to ensure that key intermediaries in government bond markets are sound and operationally resilient. For emerging markets, credible frameworks to meet government financing needs can strengthen bond markets. Other helpful tools include IMF-World Bank Medium-Term Debt Management Strategies for rolling over debt and assessing its currency composition and financing cost. Emerging economies may also consider ways to develop domestic markets for government bonds, as increased bond demand from long-term domestic investors has helped contain financing costs and external pressures in recent years.  —This blog is based on Chapter 1 of the April 2025 Global Financial Stability Report, “Enhancing Resilience amid Global Trade Uncertainty.” Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here.

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Dear MARIA, We just published a new blog—please find the full text below.  The Global Economy Enters a New Era (Credit: IMF Photo/Paige Taylor White) By Pierre-Olivier Gourinchas The global economic system under which most countries have operated for the last 80 years is being reset, ushering the world into a new era. Existing rules are challenged while new ones are yet to emerge. Since late January, a flurry of tariff announcements by the United States, which started with Canada, China, Mexico and critical sectors, culminated with near universal levies on April 2. The US effective tariff rate surged past levels reached during the Great Depression while counter-responses from major trading partners significantly pushed up the global rate. The resulting epistemic uncertainty and policy unpredictability is a major driver of the economic outlook. If sustained, this abrupt increase in tariffs and attendant uncertainty will significantly slow global growth. Reflecting the complexity and fluidity of the moment, our report presents a range of forecasts for the global economy. Our World Economic Outlook’s reference forecast includes tariff announcements between February 1 and April 4 by the US and countermeasures by other countries. This reduces our global growth forecast to 2.8 percent and 3 percent this year and next, a cumulative downgrade of about 0.8 percentage point relative to our January 2025 WEO update. We also present a global forecast excluding the April tariffs (pre-April 2 forecast). Under this alternative path, global growth would have seen only a modest cumulative downgrade of 0.2 percentage point, to 3.2 percent for 2025 and 2026. Finally, we include a model-based forecast incorporating announcements made after April 4. Over that period, the United States temporarily halted most tariffs while raising those on China to prohibitive levels. This pause, even if extended indefinitely, does not materially change the global outlook compared to the reference forecast. This is because the overall effective tariff rate of the United States and China remains elevated even if some initially highly tariffed countries will now benefit, while policy-induced uncertainty has not declined. Despite the slowdown, global growth remains well above recession levels. Global inflation is revised up by about 0.1 percentage point for each year, yet the disinflation momentum continues. Global trade was quite resilient until now, partly because businesses were able to re-route trade flows when needed. This may become more difficult this time around. We project that global trade growth will dip more than output, to 1.7 percent in 2025—a significant downward revision since our January 2025 WEO Update. However, the global estimate masks substantial variation across countries. Tariffs constitute a negative supply shock for the implementing jurisdiction, as resources are reallocated towards the production of less-competitive items with a resulting loss of aggregate productivity and higher production prices. In the medium term, we can expect tariffs to decrease competition and innovation and increase rent-seeking, further weighing on the outlook. In the United States, demand was already softening before the recent policy announcements, reflecting greater policy uncertainty. Under our April 2 reference forecast, we have lowered our US growth estimate for this year to 1.8 percent. That’s 0.9 percentage point lower than January, and tariffs account for 0.4 percentage point of that reduction. We also raised our US inflation forecast by about 1 percentage point, up from 2 percent. For trading partners, tariffs are mostly a negative demand shock, driving foreign customers away from their products, even if some countries can benefit from the trade diversion. Consistent with this deflationary impulse, we have lowered our China growth forecast for this year to 4 percent, a 0.6 percentage point reduction, and inflation is revised down by about 0.8 percentage point. Growth in the euro area, which is subject to relatively lower effective tariffs, is revised down by 0.2 percentage point, to 0.8 percent. Both in the euro area and China, stronger fiscal stimulus will provide some support this year and next. Many emerging market economies could face significant slowdowns depending on where tariffs settle. We have lowered our growth forecast for the group by 0.5 percentage point, to 3.7 percent. Dense global supply chains can magnify the effects of tariffs and uncertainty. Most traded goods are intermediate inputs that cross borders multiple times before being turned into final products. Disruptions can propagate up and down the global input-output network with potentially large multiplier effects, as we saw during the pandemic. Companies facing uncertain market access will likely pause in the near term, reduce investment and cut spending. Likewise, financial institutions will reassess borrowers’ exposure. The increased uncertainty and tightening of financial conditions could well dominate the short term, weighing on economic activity, as reflected in the sharp decline in oil prices. The effect of tariffs on exchange rates is complex. The United States, as the tariffing country, may see its currency appreciate as in previous episodes. However, greater policy uncertainty, dimmer US growth prospects, and an adjustment in the global demand for dollar assets—that has so far been orderly—can weigh down on the dollar, as we saw since the tariff announcements. In the medium term, the dollar may depreciate in real terms if the tariffs translate into lower productivity in the US tradable goods sector, relative to its trading partners. Risks to the global economy have increased, and worsening trade tensions could further depress growth. Financial conditions could tighten further as markets react negatively to the diminished growth prospects and increased uncertainty. While banks remain well capitalized overall, financial markets may face more severe tests. Growth prospects could, however, immediately improve if countries ease their current trade policy stance and forge new trade agreements. Addressing domestic imbalances can, over a period of years, offset economic risks and raise global output while contributing significantly to closing external imbalances.  For Europe, this means spending more on infrastructure to accelerate productivity growth. It also means boosting support for domestic demand in China, and stepping up fiscal consolidation in the United States. Our policy recommendations call for prudence and improved collaboration. The first priority should be to restore trade policy stability and forge mutually beneficial arrangements. The global economy needs a clear and predictable trading system addressing longstanding gaps in international trading rules, including the pervasive use of non-tariff barriers or other trade-distorting measures. This will require improved cooperation. Monetary policy will also need to remain agile. Some countries may confront steeper trade-offs between inflation and output. In others, inflation expectations may become less-well anchored, with a new inflation shock following closely after the prior one. Countries that encounter resurgent price pressures will require forceful monetary tightening. For others, the negative demand shock will warrant lower policy rates. Monetary policy credibility will be important in all cases, and central bank independence remains a cornerstone. The increased external volatility from tariff adjustments and a possibly prolonged risk-off environment, may be difficult to navigate for emerging markets. Our Integrated Policy Framework emphasizes that it is important to let currencies adjust when driven by fundamental forces, as is the case now, and spells out the specific conditions where it is advisable for countries to intervene. Fiscal authorities face starker trade-offs with high debt, low growth and rising financial costs. Most countries still have too little fiscal space and need to implement gradual and credible consolidation plans, while some of the poorest countries, also hit with reduced official aid, could experience debt distress. New spending needs are further weighing on fiscal fragilities. Calls for support will increase for those at risk of severe dislocation from the shocks. Such support should remain narrowly targeted and incorporate automatic sunset clauses. The experience of the last four years suggests that it is easier to open the tap of fiscal support than to close it. Some countries, especially in Europe, face new and permanent increases in defense-related spending. How should these be financed? For countries with sufficient fiscal space, only the temporary part of the additional spending—that is, temporary support to help adapt to the new environment or the initial bulge in spending to rebuild defense capabilities—should be financed by debt. For all other countries, new spending needs should be offset by spending cuts elsewhere or new revenues. We should not lose sight of the need for stronger growth. Governments should continue to engage in fiscal and structural reforms that help mobilize private resources and reduce resource misallocation. They should also invest in the digital infrastructure and training necessary to benefit from new technologies such as artificial intelligence. Finally, we should ask ourselves why our global system warrants remapping—and recognize that decades of deepening trade ties fostered rapid but uneven economic growth. In many advanced economies, there is an acute perception that globalization unfairly displaced many domestic manufacturing jobs. There is some merit to these grievances, even if the share of manufacturing employment in advanced economies has been in a secular decline in countries running trade surpluses, like Germany, or deficits, like the United States. The deeper force behind this decline is technological progress and automation, not globalization: in both countries the output share of manufacturing has remained stable. Both forces are ultimately beneficial but can be very disruptive to individuals and communities. It is a collective responsibility to ensure the right balance between the pace of progress or globalization and addressing the associated dislocations. This requires that policymakers think well beyond the reductive lens of compensating transfers between ”winners” and ”losers,” be it of technological revolutions or globalization. In this, unfortunately not enough has been done, pushing many to embrace a zero-sum worldview whereby the gains of some only come at the expense of others. Instead, it is important to better understand these root causes so that we can build an improved trading system that delivers more opportunities. This objective is enshrined in our Articles of Agreement, which ask us “to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income.” Global integration is not an objective in and of itself. It is a means to an end, important insofar as it supports improved living standards for all. —This blog is based on Chapter 1 of the April 2025 World Economic Outlook, “Policy Uncertainty Tests Global Resilience.” Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. This email was sent to politikimx@gmail.com using GovDelivery Communications Cloud on behalf of: International Monetary Fund · 1900 Pennsylvania Ave NW · Washington, DC · 20431