The economy is gradually coming out of a severe recession. The decline of output has ceased since the summer, though significant trouble spots remain. The risk of new large bankruptcies in the banking system has diminished, but equity capital will need to be replenished to offset financial losses. The household sector is also undergoing significant adjustment, with a sharp reduction of debt and rebuilding of assets. Sizeable macroeconomic stimulus and easing financial conditions will support growth, though it will be somewhat weaker than during past recoveries. Unemployment will decline slowly.
The Federal Reserve and the Administration must begin to withdraw the economic support as economic growth becomes self-sustaining. Gauging the appropriate timing will not be a simple task, but prolonged stimulus risks unanchoring inflation expectations and destabilising asset markets. While the need to be flexible in the face of changing economic conditions is desirable, exit strategies should nonetheless be communicated clearly.
©OECD Observer 2010
