The health of the global financial system has improved since the October 2009 Global Financial Stability Report (GFSR), as illustrated in our global financial stability map . However, risks remain elevated due to the still-fragile nature of the recovery and the ongoing repair of balance sheets. Concerns about sovereign risks could also undermine stability gains and take the credit crisis into a new phase, as nations begin to reach the limits of public sector support for the financial system and the real economy. Macroeconomic risks have eased as the economic recovery takes hold, aided by policy stimulus, the turn in the inventory cycle, and improvements in investor confidence. The baseline forecast in the World Economic Outlook (WEO) for global growth in 2010 has been raised significantly since October, following a sharp rebound in production, trade, and a range of leading indicators. The recovery is expected to be multi-speed and fragile, with many advanced economies that are coping with structural challenges.

The overall credit recovery will likely be slow, shallow, and uneven. The pace of tightening in bank lending standards has slowed, but credit supply is likely to remain constrained as banks continue to deliver. Private credit demand is likely to rebound only weakly as households restore their balance sheets. Ballooning sovereign financing needs may bump up against limited lending capacity, potentially helping to push up interest rates (see Section D) and increasing funding pressures on banks. Policy measures to address supply constraints may therefore still be needed in some economies. Emerging market risks have continued to ease. Capital is flowing to Asia (excluding Japan) and Latin America, attracted by strong growth prospects, appreciating currencies, and rising asset prices, and pushed by low interest rates in major advanced economies, as risk appetite continues to recover. Rapid improvements in emerging market assets have started to give rise to concerns that capital inflows could lead to inflationary pressure or asset price bubbles. So far there is only limited evidence of stretched valuations—with the exception of some local property markets. However, if current conditions of high external and domestic liquidity and rising credit growth persist, they are conducive to over-stretched valuations arising in the medium term.