While economic data, financial market performance and improved economic forecasts pointed to improved economic prospects for 2010, the International Monetary Fund (IMF) first deputy MD John Lipsky has warned that there was still reason to be cautious.
In a note on the IMF's website, he said that financial conditions had improved and that more upbeat expectations would be reflected in this month's global economy forecast, but added that conditions remained far from normal in many ways.
"The combination of advanced economy output that is far below potential, the still-cautious attitudes of businesses and households, plus sluggish loan growth reflecting bankers' residual reticence, together add up to a notable absence of inflation pressures," he noted.
Lipsky added that the combination of large output gaps, low inflation and the prospect of only a moderate economic recovery for advanced economies, underscored the IMF's belief that it would be premature to start withdrawing the support for growth being supplied by accommodative budgetary and monetary policies.
He pointed out, however, that the growth outlook for many emerging nations, especially in Asia, remained upbeat.
"In most cases, this reflects improving export demand plus resilient domestic demand, the latter in many cases buoyed by significant policy support."
Lipsky also noted that capital flows to the best-performing emerging markets, had resumed, reversing the halt in capital flows seen at the end of 2008.
Meanwhile, Lipsky highlighted a number of potential challenges facing economies in the new decade.
"The first is to secure the recovery, by ensuring that policies among the key economies remain appropriately supportive of the expansion, as well as globally consistent," he noted.
Advanced economy fiscal stimulus planned for 2010 should go ahead, he suggested.
"Moving beyond the next several quarters, ensuring a robust global economy will require new growth patterns, including significant rebalancing of the sources of growth among and within most large economies," he added.
Secondly, the poorest and most vulnerable economies should be protected, with the challenge being to restore growth in low-income countries.
The third challenge would involve the reform of the financial sector to ensure that it is more effective and that the risk of future instability is reduced, he stated, adding that a rethink on how the potential costs of financial crises could be carried was also needed.
A further challenge would be the restructuring and reform of the governance and mandate of the key financial institutions, said Lipsky.
"The creation of the G-20 leaders process was a potentially pivotal step in this regard. The leaders, in turn, have endorsed some specific goals for the IMF's governance reform," he noted.