In addition, the indices of business activity and household confidence has clearly turned upward again, even if they remain at historically low levels. The combined effect of all these developments leads us to modify our risk assessment but does not substantially affect our scenario for the global economy. We still believe that positive growth could set in within the US in the second half of the year and in Europe at the beginning of next year. We continue to expect a modest global recovery, so that the considerable under-utilisation of production capacities will not be eliminated in the next few quarters. Consequently, unemployment is likely to increase further in the developed countries as a whole. BIS Review 77/2009  1  Swiss economic outlook As expected, the Swiss economic situation continued to deteriorate in the first months of the year. In the first quarter, GDP contracted by 3.2% in annualised terms. However, this figure obscures a much sharper drop in final demand. As in the preceding quarter, part of production was, in effect, absorbed by an increase in stocks. External demand again plummeted and the level of capacity utilisation fell substantially in the manufacturing sector. Final domestic demand by private entities stagnated, and is most likely to weaken in the months ahead, since companies will reduce their equipment investment and household expenditure will be checked by growing uncertainty in the labour market.
[7] Whose Problem Is It? In setting monetary policies, should advanced economies take into account the spillover eﬀects on EMEs through capital flows? It is neither feasible nor desirable for advanced economies’ monetary policies to be constrained by considerations of the cross-border spillovers they generate. Advanced economy central banks have their own domestic macro stability goals they need to meet and cannot be expected to sub-optimise their policy outcomes. Moreover, accommodative monetary policies in the advanced economies have generated positive spillovers to EMEs, through strengthening export demand and enabling conducive financing conditions. At the same time, it must be recognised that monetary policy latitude in EMEs is to some extent compromised by large capital flows. Empirical studies have found that EMEs’ monetary policy responds to movements in US interest rates and exchange rates, besides their own domestic macroeconomic conditions. [8]  EMEs should therefore have the flexibility to use the policy tools at their disposal to protect their domestic economies from risks arising from large capital flows. Some Questions for an Integrated Policy Framework What are some of the questions that an integrated policy framework should seek to address? The existence of diﬀerent policy objectives and multiple sources of disequilibria necessitates the use of a range of policy instruments. These can be grouped under three broad buckets: foreign exchange interventions (FXIs), macroprudential measures (MPMs) and capital flow management measures (CFMs).