The ongoing but necessary deleveraging of household and bank balance sheets will continue to weigh on economic activity over the medium term. A pick-up in activity is predicated on a bottoming out of the housing market and a reduction in uncertainty. Policies should be geared towards supporting growth while minimizing downside risks and allowing for an orderly adjustment of private sector balance sheets. Given this balance sheet recession, fiscal policy should maintain its focus on medium-term structural targets while allowing automatic stabilizers to operate. The banking system should shore up its capital buffers through private sources and retained earnings to reduce its vulnerability to funding and housing market uncertainty, and to prepare for Basel III capital requirements. Structural reforms to support long term growth and reduce volatility are required, although some of these will need to be sequenced appropriately.
Bron: IMF