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The global recovery has been underway for some time now, although unemployment remains persistently high in many countries. Growth has been much stronger in emerging market economies, but remains weak and uneven in much of the OECD, and has faltered recently. As financial markets continue to normalise, and households and firms reduce their indebtedness, growth is projected to gradually strengthen in the OECD area in 2011-12. Against such background, the challenge will be to guide the transition from a policy-driven recovery to self-sustained growth. As stimulus is withdrawn, policy will have to provide a credible medium-term framework, including for the financial sector, to stabilise expectations and strengthen confidence. To this effect, international collaboration, notably within the G20 process, will be essential.
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The global economy is continuing to recover, but progress has become more hesitant. Output and trade growth have softened since the early part of the year, as temporary growth drivers, including the boost from fiscal support measures, have faded and not yet been fully replaced by selfsustaining growth dynamics. With monetary policies remaining accommodative even as fiscal consolidation becomes widespread, the present soft patch in output growth is not projected to persist for long. Even so, in the OECD economies at least, near-term growth appears unlikely to gain the momentum seen in earlier cyclical upturns.
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Most OECD countries face severe fiscal consolidation requirements. At a time when the recovery is still fragile and monetary policy already extended, difficult trade-offs arise between short-term growth and consolidation. Trade-offs also exist with other policy objectives, such as equity and long-term growth. Ultimately, difficult choices will have to be made and will depend on the economic and budget situations of individual countries. However, the choice of instruments used to improve public finances may help alleviate these trade-offs, with some measures potentially strengthening growth in the longer run, while also influencing the consequences of consolidation on equity and its political acceptance.
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