## Annex Table 1.1.1. ## Source details **Canonical URL:** [Annex Table 1.1.1.](https://www.imf.org/-/media/files/publications/weo/2022/october/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/weo/2022/october/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/weo/2022/october/english/text.pdf.json) --- ### Errata and Corrected Tables - Certain tables included incorrect projections for gross domestic product in US dollars for China and the world, and current account balance in percent of GDP for China. - Corrections applied to: - Annex Table 1.1.2. (page 43) - Statistical Appendix Table A1. (page 125) - Statistical Appendix Table A12. (page 144) - PDF now contains corrected data for the above tables. - Tables explicitly referenced as containing or related to corrections: - Annex Table 1.1.1. (page 42) - Annex Table 1.1.6. (page 47) - Statistical Appendix Table A2. (page 126) - Statistical Appendix Table A3. (page 128) - Statistical Appendix Table B1. (page 2) ### Assumptions and Key Numerical Working Hypotheses - Exchange rates and policy assumptions: - Real effective exchange rates assumed constant at their average levels during July 22, 2022, to August 19, 2022; currencies in ERM II assumed constant in nominal terms relative to the euro. - Established policies of national authorities assumed maintained (see Box A1 in the Statistical Appendix for specifics). - Commodity and interest rate assumptions: - Oil average price: $98.19 a barrel in 2022 and $85.52 a barrel in 2023. - Three-month government bond yields assumed to average: - United States: 1.8 percent in 2022 and 4.0 percent in 2023. - Euro area: –0.2 percent in 2022 and 0.8 percent in 2023. - Japan: –0.1 percent in 2022 and 0.0 percent in 2023. - Ten-year government bond yields assumed to average: - United States: 3.2 percent in 2022 and 4.4 percent in 2023. - Euro area: 0.9 percent in 2022 and 1.3 percent in 2023. - Japan: 0.2 percent in 2022 and 0.3 percent in 2023. - Other working-hypothesis figures appearing in text: “1.8 percent in 2022 and 4.0 percent in 2023” and “–0.2 percent in 2022 and 0.8 percent” for euro area in various contexts. ### Global Outlook, Projections, and Key Statistics - Global growth and inflation projections: - Global growth: 6.0 percent in 2021, 3.2 percent in 2022, and 2.7 percent in 2023. - Global headline CPI inflation: 4.7 percent in 2021, 8.8 percent in 2022, 6.5 percent in 2023, and 4.1 percent in 2024. - Global core inflation (ex food and energy): 6.6 percent on a fourth-quarter-over-fourth-quarter basis in 2022. - Selected country and group projections (annual percent change, as presented): - World Output: 6.0 (2021), 3.2 (2022), 2.7 (2023). - Advanced Economies: 5.2 (2021), 2.4 (2022), 1.1 (2023). - Emerging Market and Developing Economies: 6.6 (2021), 3.7 (2022), 3.7 (2023). - China: 8.1 (2021), 3.2 (2022), 4.4 (2023). - United States: 5.7 (2021), 1.6 (2022), 1.0 (2023). - Euro area growth (narrative figures): –0.2 percent in 2022 and 0.8 percent in 2023 (also multiple alternative series in text). - Japan growth (selected): –0.1 percent in 2022 and 0.0 percent in 2023 (narrative also reports other series). - Trade, prices, and volumes: - World Trade Volume (goods and services): 10.1 (2021), 4.3 (2022), 2.5 (2023). - Oil (Simple average of UK Brent, Dubai Fateh, and West Texas Intermediate): 2021 = $69.42; assumed = $98.19 in 2022 and $85.52 in 2023. - Risk quantification: - Estimated probability of one-year-ahead global growth falling below 2.0 percent: about 25 percent. - About 43 percent of economies with quarterly data forecasts (31 out of 72 economies) projected to experience a contraction in real GDP lasting at least two consecutive quarters during 2022–23, amounting to more than one-third of world GDP. ### Major Risk Factors and Drivers - Russia’s invasion of Ukraine: - European gas flows down to about 20 percent of their 2021 levels; pipeline gas flow to Europe down to about 20 percent of its level one year ago in another reference. - Severe energy crisis in Europe; gas prices in Europe increased more than four-fold since 2021 (specific indices and percent changes provided elsewhere in chapter). - Higher food prices on world markets despite some easing after the Black Sea grain deal. - Persistent and broadening inflation pressures: - Monetary tightening and powerful appreciation of the US dollar (documented nominal effective dollar appreciation in 2022: about 13 percent as of September compared with the 2021 average; elsewhere “about 15 percent against the euro, over 10 percent against the renminbi, 25 percent against the yen, and 20 percent against sterling”). - China: - Frequent lockdowns under zero COVID policy weighed on activity, especially Q2 2022. - Property sector represents about one-fifth of economic activity in China. - Emerging markets and developing economies: - Sharp appreciation of the US dollar adds to domestic price pressures and cost-of-living crises. - Capital flows have not recovered; many low-income and developing economies remain in debt distress. - Financial risks: - Increased risk of monetary, fiscal, or financial policy miscalibration; potential for financial turmoil with safe-haven flows into US Treasuries. ### Downside Scenario (Box 1.3) — Joint Shocks and Quantified Impacts - Scenario summary: - If downside scenario materializes, level of global activity would be 1.5 percentage points lower in 2023 and 1.6 percentage points lower in 2024 relative to the baseline. - Downside scenario implies global growth of 1.1 percent in 2023 (15th percentile of distribution). - Scenario layers and quantified contributions (2023 deviations from baseline): - Higher oil prices: oil prices pushed up 30 percent on average for 2023; reduces global GDP by about 0.5 percentage point in 2023; contributes 1.1–1.3 percentage points to headline inflation across regions in 2023. - China real estate sector: further decreases in real estate investment; reduces global output by 0.3 percentage point in 2023; total fixed investment level falls by as much as 9 percent by 2024 relative to baseline. - Lower potential output from labor market disruptions: reduces global output by 0.3 percentage point in 2023; is inflationary in advanced economies and emerging markets excluding China. - Tighter global financial conditions: reduces global activity by 0.5 percentage point in 2023; emerging market currencies depreciate 10 percent outside Asia and 5 percent in Asian emerging markets; emerging market sovereign premiums rise by more than 200 basis points in 2023; corporate premiums rise about 80 basis points for emerging markets and about 100 basis points for advanced economies. - Aggregate inflation effect from all layers: global inflation about 1.3 percentage points higher than baseline in 2023 and 1 percentage point lower in 2024. ### Policy Analysis and Recommendations - Monetary policy: - Central banks should keep a steady hand focused on taming inflation; risks of under- and over-tightening are both significant. - Front-loaded and aggressive tightening emphasized to restore price stability and prevent inflation expectations from de-anchoring. - Real policy rates remain below pre-pandemic levels in many cases despite nominal rate hikes. - Fiscal policy: - Where the pandemic is receding, rebuild fiscal buffers. - Fiscal policy should not work at cross-purposes with monetary efforts to quell inflation. - Protect the most vulnerable via targeted and temporary transfers; avoid broad price caps, untargeted subsidies, or export bans. - Embed unavoidable aggregate fiscal support in a credible medium-term fiscal framework. - Invest fiscal resources to expand productive capacity: human capital, digitalization, green energy, and supply chain diversification. - European fiscal authorities need multi-year planning and coordination for an energy shock (Winter 2022 challenging; Winter 2023 likely worse). - Exchange rate and reserve management: - Calibrate monetary policy to maintain price stability while letting exchange rates adjust and conserving foreign exchange reserves for severe stress. - Emerging market preparedness: - Eligible countries with sound policies should consider improving liquidity buffers by requesting access to precautionary instruments from the Fund. - Use preemptive macroprudential and capital flow measures where appropriate, in line with the Integrated Policy Framework. - Debt resolution: - Urgent progress on orderly debt restructurings through the Group of Twenty’s Common Framework for the most affected countries. - Climate policy: - Timely and credible climate policies necessary; near-term modest adverse implications for activity and inflation pale compared with catastrophic costs of inaction. - Delaying the green transition increases future costs and undermines macroeconomic stability. ### Inflation, Labor Markets, and Wage-Price Dynamics (Chapter 2 Highlights) - Inflation surprises and forecast errors: - Errors realized for 2021 and 2022 average 1.7 percentage points for Europe and 3.2 percentage points globally. - Root-mean-square error is 2.5 times larger for 2021 and 5 times larger for 2022 than for 2010–19. - An additional 1 percentage point inflation surprise for 2021 associated with an additional subsequent forecast error of 0.22 percentage point for 2022 (t-statistic = 2.68). - Wage-price spiral assessment: - Historical episodes similar to 2021 did not tend to lead to wage-price spirals on average. - Declining real wages observed in 2021 have acted as a drag, reducing price pressures and helping inhibit wage-price spirals. - Monetary responses need to be stronger and more front-loaded the more backward-looking expectations are. - Empirical pass-through estimates (United States): - Pass-through of a 1 percentage point change in current wage growth to services: about 10 percent after five quarters. - Pass-through to goods: no measurable pass-through detected. ### Near-Term Macroeconomic Impact of Decarbonization (Chapter 3 Highlights) - Global model findings (GMMET): - Global growth could be lower by 0.15 to 0.25 percentage point annually under modeled transition scenarios. - Global inflation could be 0.1 to 0.4 percentage point higher. - For China, Europe, and the United States: GDP growth costs expected to be lower, in a range between 0.05 and 0.20 percentage point annually. - Emissions target cited: emissions must decline by 25 percent by the end of the decade to be aligned with the Paris Agreement targets (chapter statement). - Policy design and revenue recycling: - Revenue recycling to cut labor income taxes reduces distortions and supports labor supply; subsidies to low-carbon investments lower required GHG taxes and inflationary impact. - Credible, gradual implementation preferred; delay amplifies costs and raises required GHG taxes. - Illustrative cross-model 2030 GDP deviations (model average): Lump-Sum Rebates −0.6; Labor Income Tax Cuts −0.3; Capital Income Tax Cuts 0.3 (percent deviations from baseline in 2030). - Credibility implications: - Partial credibility reduces cumulative emission reduction by 2030 by about 20 percent relative to full credibility in one comparison. - Partial credibility raises GDP losses by 2030 (example comparisons: United States GDP decline 1.0 percent under partial credibility vs. 0.6 percent under full credibility; euro area 1.0 percent vs. 0.5 percent; China 1.2 percent vs. 0.6 percent). ### Statistical Appendix, Conventions, and Data Notes - Data and projections based on information available through September 26, 2022. - Conventions include: - “. . .” indicates data not available or not applicable. - “–” between years or months indicates period covered (for example, 2021–22). - “/” between years or months indicates a fiscal or financial year (for example, 2021/22). - “Billion” means a thousand million; “trillion” means a thousand billion. - “Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points = ¼ of 1 percentage point). - Statistical Appendix notes and data coverage: - Real effective exchange rate and exchange-rate assumptions imply average US dollar–SDR conversion rates of 1.346 and 1.330 for 2022 and 2023, US dollar–euro conversion rates of 1.057 and 1.025 for 2022 and 2023, and yen–US dollar conversion rates of 128.4 and 129.3 for 2022 and 2023. - For 2022–23 projections, figures are shown with same precision as historical data for convenience but are projections and not exact outturns. - Country-specific changes noted as “What’s New”: Algeria, Ecuador, Tunisia, Türkiye nomenclature change, Sri Lanka and Venezuela publication adjustments. *International Monetary Fund | October 2022* ### Annex Table 1.1.1. (page 42) ### Annex Table 1.1.1. ### Errata and Corrected Tables - Additionally, certain tables in this report included incorrect projections for gross domestic product in US dollars for China and the world, and current account balance in percent of GDP for China. - These projections have been corrected in the following tables: - Annex Table 1.1.2. (page 43) - Statistical Appendix Table A1. (page 125) - Statistical Appendix Table A12. (page 144) - The PDF version of the report now contains the proper data in the above tables. - Tables explicitly referenced as containing or related to corrections: - Annex Table 1.1.1. (page 42) - Annex Table 1.1.6. (page 47) - Statistical Appendix Table A2. (page 126) - Statistical Appendix Table A3. (page 128) - Statistical Appendix Table B1. (page 2) ### Publication and Ordering Information - Publication orders may be placed online, by fax, or through the mail: - International Monetary Fund, Publication Services - P.O. Box 92780, Washington, DC 20090, USA - Tel.: (202) 623-7430 - Fax: (202) 623-7201 - E-mail: publications@imf.org - www.imfbookstore.org - www.elibrary.imf.org ### Selected Report Structure and Notable Numerical Assumptions - Report sections and tables referenced in the table of contents include chapters, boxes, figures, annex tables, and a Statistical Appendix (listing numerous tables and figures). - Assumptions excerpt (as presented): - Real effective exchange rates assumed constant at their average levels during July 22, 2022, to August 19, 2022, except for currencies participating in the European exchange rate mechanism II, which are assumed to have remained constant in nominal terms relative to the euro. - Established policies of national authorities will be maintained (see Box A1 in the Statistical Appendix for specific assumptions for selected economies). - The average price of oil will be $98.19 a barrel in 2022 and $85.52 a barrel in 2023. - The three-month government bond yield for the United States will average *International Monetary Fund | October 2022 — Annex Table 1.1.1. (page 42) ### 1.8 percent in 2022 and 4.0 percent in 2023, for the euro area will average –0.2 percent in 2022 and 0.8 percent ### text - 1.8 percent in 2022 and 4.0 percent in 2023, for the euro area will average –0.2 percent in 2022 and 0.8 percent ### Working hypotheses and key projections - Global growth projections: - Global growth to remain unchanged in 2022 at 3.2 percent. - Global growth to slow to 2.7 percent in 2023—0.2 percentage points lower than the July forecast—with a 25 percent probability that it could fall below 2 percent. - Regional / country projections and working hypotheses for interest rates and growth: - United States 10-year government bond yield will average 3.2 percent in 2022 and 4.4 percent in 2023. - Euro area 10-year government bond yield will average 0.9 percent in 2022 and 1.3 percent in 2023. - Japan 10-year government bond yield will average 0.2 percent in 2022 and 0.3 percent in 2023. - Euro area growth will average –0.2 percent in 2022 and 0.8 percent in 2023. - Japan growth will average –0.1 percent in 2022 and 0.0 percent in 2023. - Other mentions: “1.8 percent in 2022 and 4.0 percent in 2023” appears as part of working-hypothesis text. - Inflation and outlook: - Global inflation expected to peak in late 2022 but to remain elevated, decreasing to 4.1 percent by 2024. - More than a third of the global economy will contract this year or next. - For many people 2023 will feel like a recession. ### Major risk factors and drivers of the outlook - Russia’s invasion of Ukraine: - Severe energy crisis in Europe; gas prices in Europe have increased more than four-fold since 2021. - Russia cutting deliveries to less than 20 percent of their 2021 levels. - Higher food prices on world markets despite recent easing after the Black Sea grain deal. - Persistent and broadening inflation pressures: - Triggered a rapid and synchronized tightening of monetary conditions and a powerful appreciation of the US dollar. - Tightening global monetary and financial conditions will weigh on demand and help subjugate inflation, but price pressures are stubborn. - China: - Frequent lockdowns under zero COVID policy weighed on activity, especially in Q2 2022. - Property sector rapidly weakening; property represents about one-fifth of economic activity in China. - Weakness in China will weigh heavily on global trade and activity. - Emerging markets and developing economies: - Sharp appreciation of the US dollar adds to domestic price pressures and cost-of-living crises. - Capital flows have not recovered; many low-income and developing economies remain in debt distress. - Financial risks: - Risk of monetary, fiscal, or financial policy miscalibration has risen sharply. - Potential for financial turmoil with investors seeking safe havens (e.g., US Treasuries), pushing the dollar higher. ### Policy analysis and recommendations - Monetary policy: - Central banks should keep a steady hand focused on taming inflation; risks of under- and over-tightening are both significant. - Over-tightening risks pushing the global economy into an unnecessarily harsh recession; under-tightening risks entrenching inflation and de-anchoring expectations. - Fiscal policy: - For countries where the pandemic is receding, it is time to rebuild fiscal buffers. - Fiscal policy should not work at cross-purposes with monetary efforts to quell inflation. - Price signals are essential; price controls, untargeted subsidies, or export bans are fiscally costly and typically ineffective. - Protect the most vulnerable through targeted and temporary transfers. - If aggregate fiscal support is unavoidable, embed it in a credible medium-term fiscal framework. - Fiscal policy should invest in expanding productive capacity: human capital, digitalization, green energy, and supply chain diversification. - Fiscal authorities in Europe need to plan and coordinate for a multi-year energy shock (Winter 2022 challenging; Winter 2023 likely worse). - Exchange rate and reserve management: - Appropriate response for most countries: calibrate monetary policy to maintain price stability while letting exchange rates adjust and conserving foreign exchange reserves for severe stress. - Emerging market preparedness: - Eligible countries with sound policies should urgently consider improving liquidity buffers by requesting access to precautionary instruments from the Fund. - Use preemptive macroprudential and capital flow measures, where appropriate, in line with the Integrated Policy Framework. - Debt resolution: - Progress toward orderly debt restructurings through the Group of Twenty’s Common Framework is urgently needed for the most affected countries. - Climate policy: - Timely and credible climate policies are necessary; near-term modest adverse implications for activity and inflation pale compared with catastrophic costs of inaction. - Delaying the green transition increases future costs and undermines macroeconomic stability. ### Conventions, data, and publication notes - Estimates and projections are based on statistical information available through September 26, 2022. - These numerical paths are described as working hypotheses rather than forecasts and carry uncertainties that add to projection margins of error. - Conventions used throughout the WEO include: - “. . .” to indicate that data are not available or not applicable. - “–” between years or months (for example, 2021–22 or January–June) to indicate the period covered. - “/” between years or months (for example, 2021/22) to indicate a fiscal or financial year. - “Billion” means a thousand million; “trillion” means a thousand billion. - “Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point). - Data refer to calendar years except for a few countries that use fiscal years; Table F and Table G in the Statistical Appendix list special cases and latest actual outturns. - In tables and figures: - “IMF staff calculations” or “IMF staff estimates” draw on data from the WEO database. - When countries are not listed alphabetically, they are ordered by economic size. - Minor discrepancies between sums and totals reflect rounding. - Country group composites represent calculations based on 90 percent or more of weighted group data unless noted otherwise. - Boundaries and map features do not imply IMF judgments on legal status. - Recent changes in this WEO edition: - For Algeria, starting with the October 2022 WEO, total government expenditure and net lending/borrowing include net lending by the government reflecting support to the pension system and other public sector entities. - Ecuador’s fiscal sector projections are now included. - Tunisia’s forecast data are now included. - Turkey is now referred to as Türkiye. - For Sri Lanka, certain projections for 2023–27 are excluded from publication owing to ongoing discussions on sovereign debt restructuring following a staff-level agreement on an IMF-supported program. - For Venezuela, historical data have been revised from 2012 onward; nominal variables omitted in April 2022 WEO are now included. - Data and revisions: - The data and analysis are compiled by IMF staff at time of publication; when errors are discovered, corrections and revisions are incorporated into digital editions available from the IMF website and IMF eLibrary. - The WEO data and metadata are provided “as is” and “as available.” *International Monetary Fund | October 2022* ### FoReWoRd ### FoReWoRd ### Global outlook and growth projections - Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. - This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. - About a third of the world economy faces two consecutive quarters of negative growth. - The second quarter of 2022 saw global real GDP modestly contract (growth of –0.1 percentage point at a quarterly annualized rate). - In 2022, the world economy is predicted to be 3.2 percent larger than in 2021, with advanced economies growing 2.4 percent and emerging market and developing economies growing 3.7 percent. - In 2023, the world economy is forecast to expand at 2.7 percent, with advanced economies growing 1.1 percent and emerging market and developing economies 3.7 percent. ### Key drivers of the slowdown - Major contributors: inflation at multidecade highs, tightening financial conditions, Russia’s invasion of Ukraine, lingering COVID-19 pandemic (notably in China), and property sector stresses in China. - Significant slowdowns in largest economies: a US GDP contraction in the first half of 2022; a euro area contraction in the second half of 2022; prolonged COVID-19 outbreaks and lockdowns in China. - Additional supply-side disruptions and geopolitical fragmentation could further impede trade, capital flows, and climate policy cooperation. ### Inflation, monetary policy, and financial conditions - Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022, decline to 6.5 percent in 2023, and to 4.1 percent by 2024. - Upside inflation surprises have been most widespread among advanced economies; greater variability exists in emerging market and developing economies. - Monetary policy normalization (front-loaded and aggressive tightening) is emphasized as critical to avoid inflation de-anchoring. - Nominal policy rates are now above pre-pandemic levels in both advanced and emerging market and developing economies; real interest rates have generally not yet reverted to pre-pandemic levels. - Tightening financial conditions have produced a strong real appreciation of the US dollar and driven up yield spreads for debt-distressed lower- and middle-income economies. - In sub-Saharan Africa, yield spreads for more than two-thirds of sovereign bonds breached the 700 basis point level in August 2022. ### Inflation incidence and recent data points - US inflation: in August, prices were 8.3 percent higher than one year earlier. - Euro area inflation: reached 10 percent in September. - UK annual inflation: 9.9 percent. - Emerging market and developing economies: estimated inflation of 10.1 percent in the second quarter of 2022 and a peak inflation rate of 11.0 percent in the third quarter (the highest rate since 1999). - Underlying (core) inflation has also increased and is likely to remain elevated well into the second half of the year. - Food prices: futures prices have fallen and the Black Sea grain deal offers some hope of improved supply in coming months. - Commodity prices may ease as global demand slows, helping to moderate inflation. ### Risks (tilted to the downside) - Monetary policy could miscalculate the appropriate stance, risking persistent inflation or excessive tightening. - Policy divergence among largest economies could lead to further US dollar appreciation and cross-border tensions. - Additional energy and food price shocks could cause inflation to persist longer. - Global tightening in financing conditions could trigger widespread emerging market debt distress. - Halting gas supplies by Russia could depress output in Europe. - Resurgence of COVID-19 or new global health scares could further stunt growth. - Worsening of China’s property sector crisis could spill over to domestic banking and have negative cross-border effects. - Geopolitical fragmentation could impede trade and capital flows and hinder climate policy cooperation. - About a 25 percent chance that one-year-ahead global growth falls below 2.0 percent (in the 10th percentile of global growth outturns since 1970). ### Policy priorities and recommendations - Monetary policy: stay the course with front-loaded and aggressive tightening to restore price stability and prevent inflation expectations from de-anchoring. - Fiscal policy: prioritize protection of vulnerable groups through targeted near-term support to alleviate the cost-of-living burden, while keeping overall fiscal stance sufficiently tight to support monetary policy objectives. - Debt resolution: improve debt resolution frameworks to address growing government debt distress from lower growth and higher borrowing costs. - Macroprudential policy: remain vigilant against systemic risks amid tightening financial conditions. - Structural reforms: intensify reforms to improve productivity and economic capacity, easing supply constraints and supporting monetary policy efforts against inflation. - Green transition: fast-track policies for the green energy transition to yield long-term payoffs for energy security and climate costs; phasing in the right measures over the coming eight years will keep macroeconomic costs manageable. - Multilateral cooperation: successful cooperation is essential to prevent fragmentation that could reverse gains from 30 years of economic integration. *International Monetary Fund | October 2022* ### CHAPTER 1 gLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 gLObaL PROsPECTs aND POLICIEs ### Inflation dynamics and recent surprises - Global core inflation (excluding food and energy) is expected to be 6.6 percent on a fourth-quarter-over-fourth-quarter basis in 2022. - High inflation in 2021 and 2022 surprised many forecasters; upside inflation surprises were widespread among advanced economies. - Forecasters likely underestimated: - the impact of the strong economic recovery in 2021 supported by fiscal intervention in advanced economies, - coinciding strained supply chains, and - tight labor markets. - The correlation of output and inflation forecast errors was positive in both 2021 and 2022, stronger in 2021, suggesting excess demand dominated particularly in 2021. - In 2022, a declining cross-country correlation in forecast errors points to an increased role for supply shocks (clogged supply chains and the war in Ukraine). - Headline inflation forecast errors were larger for eastern European economies in 2022, consistent with the war in Ukraine driving up headline inflation. - Forecast errors for the noncore part of inflation (mainly food and energy) contributed more to unexpected increases in inflation in 2022 than in 2021. - Core inflation forecast errors in China and developing Asia have been negative and relatively small so far in 2022, consistent with slowing real activity. ### Role of markups and labor markets - Business markups (price-to-marginal-cost ratio) have risen steadily over several years, prompting debate. - Recent markup dynamics do not suggest markups are contributing in any sizable way to the current inflationary environment. - Elevated markups provide flexible buffers between general wage and general price increases, making persistent wage-price spirals less likely. - Despite historically tight labor markets in advanced economies, incipient wage-price spirals are not evident. - In the United States: - economists’ usual measure of labor market tightness (the unemployment rate) did not capture new dynamics because it remained near pre-pandemic levels, - other measures—ratio of vacancies to unemployed workers and intensity of on-the-job search—rose to historic highs and better explain the rise in inflation. ### Monetary policy responses and real rates - Central banks have rapidly lifted nominal policy rates to prevent inflation from becoming entrenched. - The Federal Reserve has increased the federal funds target rate by 3 percentage points since early 2022 and signaled further rises likely. - The Bank of England has raised its policy rate by 2 percentage points since the start of the year. - The European Central Bank has raised its policy rate by 1.25 percentage points in 2022. - Because inflation has outstripped these increases in most cases, real policy rates remain below pre-pandemic levels. - Differences in monetary policy paths partly reflect differences in core inflation timing and magnitude across economies (core inflation rose sooner and ran higher in the US than in the euro area), tighter labor markets in the US, and a higher estimated output gap in the US. ### War in Ukraine: human and economic impacts - The war has displaced millions, caused substantial loss of life, and damaged physical capital in Ukraine. - European Union measures in 2022 included embargoes on imports of coal (August 2022) and announced bans on seaborne oil imports starting end-2022 and a maritime insurance ban. - The flow of Russian pipeline gas to Europe is down to about 20 percent of its level one year ago. - Reduced Russian exports and gas flows contributed to steep increases in natural gas prices. - The war has severe repercussions in Europe: higher energy prices, weaker consumer confidence, slower manufacturing momentum due to persistent supply disruptions and rising input costs. - Adjoining economies (Baltic and eastern European states) experienced the largest impact: sharp growth slowdowns in Q2 and Q3 and soaring inflation rates. - Russia’s economy is estimated to have contracted by 21.8 percent (at a quarterly annualized rate) during the second quarter of 2022, although crude oil and nonenergy exports held up; domestic demand shows some stability due to policy support and a resilient labor market. - The war has global consequences for food prices; despite the agreement on Black Sea grain exports, global food prices remain elevated but are expected to soften somewhat. - Low-income countries are particularly affected; in sub-Saharan Africa: - food accounts for about 40 percent of the consumption basket on average, - the pass-through from global to domestic food prices is relatively high at 30 percent. ### COVID-19 effects and vulnerabilities - Pandemic-related forces continue to weigh on the macroeconomic outlook and have been particularly important in China, where Q2 2022 contraction contributed to slower global activity. - Temporary lockdowns in Shanghai and elsewhere weakened local demand, reflected in new-orders components of purchasing managers’ indices. - Manufacturing capacity utilization in China slowed to less than 76 percent in Q2 2022—its lowest level in five years except during the acute pandemic phase—delaying the unclogging of supply chains. - Resurgent variants threaten recovery elsewhere; limited vaccinations make sub-Saharan Africa more prone to illness and new variants: - African vaccination rates are about 26 percent compared with about 66 percent in other regions, - booster shots have been administered to 2 percent of people in African countries on average, - booster coverage on other continents ranges between a third and half of their populations. - Low vaccination and pandemic-induced scarring have contributed to sub-Saharan Africa’s real per capita GDP growth lagging behind advanced economies in 2022, and have slowed human capital buildup due to learning losses. ### Forecast, projections, and scenarios - Baseline forecasts assume: - no further sharp reductions in Russian natural gas flows to Europe in 2022 beyond the current 80 percent reduction compared with a year ago, - long-term inflation expectations remain stable, - disinflationary monetary policy tightening does not induce widespread recession or disorderly global financial adjustments. - Global growth projections: - World output: 6.0 percent in 2021, 3.2 percent in 2022, and 2.7 percent in 2023. - The 2023 forecast is lower by 0.2 percentage point compared with the July 2022 WEO Update and represents the weakest 2023 projection since the 2.5 percent growth rate in 2001, excluding the global financial and COVID-19 crises. - For most economies, the outlook is significantly weaker than projected six months earlier; forecasts are weaker than expected for 143 economies accounting for 92 percent of world GDP for 2023. - The world’s three largest economies—China, the euro area, and the US—will slow significantly in 2022 and 2023 with downgrades relative to April and July projections. - Factors behind downgrades include: - tightening global financial conditions tied to expected steeper interest rate hikes, - a sharper slowdown in China due to extended lockdowns and the property market crisis, - spillovers from the war in Ukraine tightening gas supplies to Europe. - A decline in global GDP or global GDP per capita is not in the baseline, but: - a contraction in real GDP lasting at least two consecutive quarters is seen at some point during 2022–23 in about 43 percent of economies with quarterly data forecasts (31 out of 72 economies), amounting to more than one-third of world GDP. - Table 1.1 highlights (selected): - World Output: 6.0 (2021), 3.2 (2022), 2.7 (2023). - Advanced Economies: 5.2 (2021), 2.4 (2022), 1.1 (2023). - Emerging Market and Developing Economies: 6.6 (2021), 3.7 (2022), 3.7 (2023). - China: 8.1 (2021), 3.2 (2022), 4.4 (2023). - United States: 5.7 (2021), 1.6 (2022), 1.0 (2023). - Russia: 4.7 (2021), –3.4 (2022), –2.3 (2023). - World Consumer Prices: 4.7 (2021), 8.8 (2022), 6.5 (2023). - World Trade Volume (goods and services): 10.1 (2021), 4.3 (2022), 2.5 (2023). - The report presents a baseline forecast, a fan chart for probability distribution around the baseline, and a downside scenario to recognize uncertainty. *Source: CHAPTER 1 gLObaL PROsPECTs aND POLICIEs, World Economic Outlook, October 2022.* ### 1.7 percent in 2022 and to 2.7 percent in 2023 ### text - 1.7 percent in 2022 and to 2.7 percent in 2023 ### Global growth outlook and divergence - World output growth: 4.5 percent in 2021, 1.7 percent in 2022, and 2.7 percent in 2023 (Q4 over Q4; Table 1.1). - Overall outlook: increasing growth divergence between advanced economies and emerging market and developing economies. - Negative revisions are more pronounced for advanced economies than for emerging market and developing economies. ### Aggregate projections (selected aggregates and comparisons) - Advanced Economies: 4.7 percent in 2021, 0.9 percent in 2022, 1.3 percent in 2023 (Table 1.1). - Emerging Market and Developing Economies: 4.3 percent in 2021, 2.5 percent in 2022, 3.9 percent in 2023 (Table 1.1). - World Growth Based on Market Exchange Rates: 4.5 percent in 2021, 1.5 percent in 2022, 2.1 percent in 2023 (Table 1.1 memorandum). ### Advanced economies — key country projections and revisions - United States: 5.5 percent in 2021, 0.0 percent in 2022, 1.0 percent in 2023; growth in 2022 revised down by 0.7 percentage point since July (Table 1.1; narrative: growth declines from 5.7 percent in 2021 to 1.6 percent in 2022 and 1.0 percent in 2023 on an alternative series). - Euro Area: 4.6 percent in 2021, 1.0 percent in 2022, 1.4 percent in 2023; euro area narrative projection: 3.1 percent in 2022 and 0.5 percent in 2023 with an upward revision of 0.5 percentage point for 2022 and a downward revision of 0.7 percentage point for 2023. - Germany: 1.2 percent in 2021, 0.6 percent in 2022, 0.5 percent in 2023 (Table 1.1); narrative highlights especially sharp slowdown with negative annual growth in 2023. - France: 5.0 percent in 2021, 0.4 percent in 2022, 0.9 percent in 2023 (Table 1.1); narrative projection: 2.5 percent in 2022. - Italy: 6.6 percent in 2021, 0.6 percent in 2022, 0.5 percent in 2023 (Table 1.1); narrative notes Italy experiencing negative annual growth in 2023 in one projection. - Spain: 5.5 percent in 2021, 1.3 percent in 2022, 2.0 percent in 2023 (Table 1.1); narrative projection: 4.3 percent in 2022. - Japan: 0.5 percent in 2021, 2.1 percent in 2022, 0.9 percent in 2023 (Table 1.1); narrative: growth expected to be 1.7 percent in both 2021 and 2022 and 1.6 percent in 2023 on an alternative series. - United Kingdom: 6.6 percent in 2021, 1.0 percent in 2022, 0.2 percent in 2023 (Table 1.1); narrative projection: 3.6 percent in 2022 and 0.3 percent in 2023, noting the forecast was prepared before the September 23 fiscal package announcement. - Canada: 3.2 percent in 2021, 2.2 percent in 2022, 1.3 percent in 2023 (Table 1.1). - Other Advanced Economies: 4.9 percent in 2021, 1.5 percent in 2022, 2.3 percent in 2023 (Table 1.1). ### Inflation outlook - Global headline CPI inflation: 4.7 percent in 2021, 8.8 percent in 2022, 6.5 percent in 2023, and 4.1 percent in 2024. - On a four-quarter basis, projected global headline inflation peaks at 9.5 percent in Q3 2022 and declines to 4.7 percent by Q4 2023. - Advanced economies inflation: 4.9 percent in 2021, 7.5 percent in 2022, 3.1 percent in 2023 (Table 1.1); narrative: expected to rise from 3.1 percent in 2021 to 7.2 percent in 2022 and decline to 4.4 percent in 2023, with upward revisions since July of 0.6 percentage point for 2022 and 1.1 percentage point for 2023. - United States inflation (narrative): upward revision to 8.1 percent in 2022 (0.4 percentage point upward revision). - Euro area inflation (narrative): 8.3 percent in 2022 (1.0 percentage point upward revision). - Emerging Market and Developing Economies inflation: 6.2 percent in 2021, 10.9 percent in 2022, 6.1 percent in 2023 (Table 1.1); narrative: inflation expected to rise from 5.9 percent in 2021 to 9.9 percent in 2022 and decline to 8.1 percent in 2023. - Noted regional revisions: Latin America and the Caribbean up by 2.2 percentage points for 2023; Emerging and Developing Europe up by 0.9 percentage point for 2023; Sub-Saharan Africa up by 2.0 percentage points for 2023. ### Medium-term scarring and output losses - Fall in global real GDP in 2022 compared with forecasts at the start of 2022: 1.3 percent. - Projected cumulative output loss by 2026 compared with early 2022 forecasts: 3.0 percent. - About half of the projected 2022 decline is attributed to lower growth in China, the euro area, Russia, and the US. - The shocks of 2022 nearly double the projected global output loss for 2024 to 4.6 percent when combined with pandemic scarring. - Pandemic medium-term impact at the start of 2022: global GDP projected at about –2.4 percent by 2024 relative to pre-pandemic forecasts; emerging market and developing economies projected average output losses of 4.3 percent for output and 2.6 percent for employment in 2024. ### Additional quantitative highlights (selected table entries and notes) - Oil (Simple average of UK Brent, Dubai Fateh, and West Texas Intermediate): average price in 2021 = $69.42; assumed price = $98.19 in 2022 and $85.52 in 2023 (Table 1.1 note). - World consumer prices (Table 1.1): 5.6 percent in 2021, 9.3 percent in 2022, 4.7 percent in 2023. - For world output, quarterly estimates and projections account for approximately 90 percent of annual world output at purchasing-power-parity weights (Table 1.1 note). - For Emerging Market and Developing Economies, quarterly estimates and projections account for approximately 85 percent of annual emerging market and developing economies’ output at purchasing-power-parity weights (Table 1.1 note). *Source: IMF staff estimates and World Economic Outlook projections as presented in the October 2022 World Economic Outlook chapter.* ### 10.1 percent in 2021 to a projected 4.3 percent in ### text - 10.1 percent in 2021 to a projected 4.3 percent in ### Global growth, trade, and supply constraints - Global growth: "10.1 percent in 2021 to a projected 4.3 percent in 2022 and 2.5 percent in 2023." - Comparison to past averages: "well below the historical average (4.6 percent for 2000–21 and 5.4 percent for 1970–2021)." - Slowdown magnitude: "The slowdown, which is 0.7 percentage point steeper than that projected for 2023 in the July WEO Update, mainly reflects the decline in global output growth." - Supply chains: "The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index has declined in recent months—largely because of a decrease in Chinese supply delivery times—but is still above its normal level, indicating continuing disruptions." - Dollar pass-through and trade impact: "The dollar’s appreciation in 2022—by about 13 percent in nominal effective terms as of September compared with the 2021 average––is likely to have further slowed world trade growth, considering the dollar’s dominant role in trade invoicing and the implied pass-through in consumer and producer prices outside the US (Gopinath and others 2020)." ### Global balances, valuation effects, and external positions - Global current account balances: "After shrinking during 2011–19, global current account balances—the sum of all economies’ current account surpluses and deficits in absolute terms—increased during the COVID-19 crisis and are projected to rise further in 2022." - Commodity price effects: "The widening of balances has reflected the pandemic’s impact. It has also, in 2022, mirrored the increase in commodity prices associated with the war in Ukraine, which has raised balances for oil net exporters and reduced them for net importers (2022 External Sector Report)." - Creditor/debtor stock positions: "Creditor and debtor stock positions are expected to remain elevated in 2022, although they have, on average, moderated slightly from their 2020 peaks, because valuation changes have more than offset the concurrent widening of current account balances." - Valuation and currency effects: "The 2022 decline in asset prices in the US—the economy with the world’s largest net liability position (external assets minus external liabilities)—could cause valuation losses for foreign holders of US assets. At the same time, however, US dollar appreciation could lead to valuation gains in emerging market and developing economies, which tend to have long positions in foreign currency, while increasing the burden of dollar-denominated public sector debts." ### Downside risks and their channels - Overall risk stance: "Risks to the outlook continue to be on the downside. Overall, risks are elevated as the world grapples with the impact of Russia’s invasion of Ukraine, a slowdown in economic activity as central banks ramp up efforts to quell inflation, and the lingering pandemic." - Firms’ risk perceptions: "While inflation is increasingly important, firms still see COVID-19 as the dominant risk (Figure 1.20)." - Policy mistakes: under- or overtightening - Elevated risk of policy mistakes given mixed readings in output and labor markets and uncertain neutral rate. - "Not tightening enough ... risks causing inflation to become entrenched, prompting a more hawkish future stance on interest rates at a significant cost to output and employment." - "Overtightening risks sinking many economies into prolonged recession." - Divergent policy paths and dollar strength - Policy divergence may sustain US dollar strength and "create cross-border tensions." - Documented 2022 currency moves: "the dollar has already appreciated by about 15 percent against the euro, over 10 percent against the renminbi, 25 percent against the yen, and 20 percent against sterling." - Consequences: competitiveness tensions, added inflation via dollar-priced trade, pressure to tighten policies to prevent excessive currency depreciation. - Inflation persistence risks - Disinflation expected faster in advanced economies than in emerging market and developing economies. - Factors that could delay moderation: further shocks to energy and food prices; "sustained high energy prices ... may also pass through to core inflation and so warrant a more hawkish monetary policy response." - Possible outcomes: deeper drag on growth from higher borrowing costs; risk of inflation de-anchoring or a wage-price spiral. - Widespread debt distress in vulnerable emerging markets - "The war in Ukraine has helped precipitate a surge in sovereign spreads for some emerging market and developing economies." - Elevated debt from the pandemic plus higher spreads and tighter advanced-economy policy could threaten debt sustainability, especially for countries hit by energy and food price shocks. - "Further US dollar strength can only compound the likelihood of debt distress." - Halting of gas supplies to Europe - Russian gas supply decline: "The amount of Russian gas supplied to Europe has fallen to about 20 percent of last year’s level, compared with 40 percent at the time of the July 2022 WEO Update." - Expectation incorporated in forecasts: volume expected "to decline further, to even lower levels, by mid-2024, in line with major European economies’ energy independence goals." - If Russia completely halts gas supplies to Europe in 2022: energy prices would likely increase further in the short term and "headline inflation in the euro area to remain elevated for longer," with differentiated effects across countries and risk of energy rationing in severe cases. - Global health scares and pandemic resurgence - Continued high contagion of recent coronavirus variants leads to workforce absenteeism, reduced productivity, and falling output. - Regions with low vaccination rates (notably Africa) face higher burdens in any resurgence. - New pandemics remain low probability but would sharply reduce contact-intensive services and could magnify supply chain bottlenecks. - China real estate and growth risks - "Growth in China has weakened significantly since the start of 2022" with downside risks concentrated in a slowing real estate sector. - Real estate dynamics: developer liquidity stress because "the decline in real estate sales prevents developers from accessing a much-needed source of liquidity to finish ongoing projects," prompting potential moratoria on mortgage payments and higher nonperforming loans for banks. - Real estate's weight: "the real estate sector makes up about one-fifth of GDP in China." - Fragmentation and cooperation risks - Geopolitical fragmentation risks disrupting trade and eroding multilateral cooperation, with medium-term consequences for trade, capital flows, food security, and climate policy cooperation. ### Quantified risk assessment and probabilities - Model-based confidence: "Confidence bands for the WEO forecast for annual global growth are obtained using the G20MOD module of the IMF’s Flexible System of Global Models." - Skew and downside probability: - "The estimated probability of one-year-ahead global growth below 2.0 percent ... now stands at about 25 percent: more than double the normal probability (Box 1.3)." - "The probability of negative per capita real GDP growth in 2023 is more than 10 percent." *WORLD ECONOMIC OUTLOOK: COUNTERINg ThE COsT-OF-LIvINg CRIsIs, International Monetary Fund | October 2022* ### Box 1.3 explains, a plausible combination of shocks ### Box 1.3 explains, a plausible combination of shocks ### Plausible combination of shocks described - The combination could include unexpected reductions in global oil supply, a further weakening in China’s real estate sector, persistent labor market disruption, and tighter global financial conditions. - These shocks would interact to raise inflation, weaken growth, and amplify financial vulnerabilities globally. ### Immediate policy priorities and trade-offs - Fighting inflation: - Priority: tackle inflation, normalize central bank balance sheets, and raise real policy rates above their neutral level fast enough and for long enough to keep inflation and inflation expectations under control. - Fiscal policy should support monetary policy by softening demand in economies with excess aggregate demand and overheating labor markets. - Taming inflation will raise unemployment and cause wages to decline as monetary policy tightens. - Central banks should act resolutely and communicate objectives and steps clearly (October 2022 Global Financial Stability Report). - Timing and costs of disinflation: - The costs of monetary contraction tend to come before the benefits. - Historical example: the last major US disinflation began in 1980 and brought an almost immediate recession; inflation took about three years to fall to manageable levels. - Evidence: monetary policy seems to have its peak impact on real variables after about one year, but on inflation after closer to three to four years (Coibion 2012; Cloyne and Hürtgen 2016). - If the natural rate of interest is higher than previously believed, the costs of disinflation will be correspondingly higher. - Central banks must stay the course; yielding to pressure to slow tightening undermines credibility and risks higher inflation expectations. - Supply-side support for disinflation: - Upgrade transportation infrastructure, pandemic preparedness, and create more reliable and resilient supply chains. - Long-lasting supply shocks may necessitate policy responses. ### International capital flows and exchange-rate-related guidance - Recent developments: - There has been a surge in the US dollar, which in real terms has risen to highs not seen since the early 2000s. - Policy responses depending on country circumstances: - Countries with deep foreign exchange markets and low foreign currency debt: rely on the policy rate and exchange rate flexibility. - Countries with shallow foreign exchange markets and portfolio-constrained investors: consider foreign exchange intervention or loosen inflow capital flow management measures (CFMs) instead of moving monetary and fiscal policy away from appropriate settings. - Countries with large foreign currency debts: consider preemptive capital flow management or macroprudential measures to reduce foreign exchange mismatches; in crisis or near-crisis circumstances, outflow CFMs may be considered. - Foreign exchange intervention and inflow CFMs may be appropriate where inflation expectations are at high risk of de-anchoring owing to sharp exchange rate depreciations. ### Monetary and fiscal policy coordination - After broad fiscal loosening during the pandemic, tightening is expected in 2022 and 2023. - Risks from fiscal loosening: - In some countries, fiscal policy is expected to loosen in ways that could boost aggregate demand and offset monetary policy’s disinflationary effect. - Deficits should be reduced to help tackle inflation and address debt vulnerabilities. - Fiscal consolidation can signal policymakers’ alignment in fighting inflation. - Targeted support: - Targeted redistributive policies may be appropriate to cushion vulnerable groups during disinflation, but deficits and unfunded spending increases risk pushing inflation up further. ### Protecting the vulnerable - Poor households spend relatively more on food, heating, and fuel—categories with steep price increases. - Recommended approaches: - In countries with well-developed social safety nets: use targeted cash transfers (for example, to children and older people) and existing automatic stabilizers (for example, unemployment insurance). - In countries lacking such nets: extend already active programs. - Avoid broad price caps or broad food and energy subsidies, which increase demand, diminish supply incentives, can lead to rationing and underground markets, are expensive, and often regressive. ### Pandemic risks and implications for China - COVID-19 continues to cause economic disruption through unpredictable absences and recurring outbreaks. - Equitable access to vaccines, tests, and treatments worldwide reduces uncertainty and supports recovery. - Vaccination focus: fully vaccinate the most clinically vulnerable populations. - For China: intermittent lockdowns and temporary disruptions to domestic logistics and supply chains have been a drag on private consumption and manufacturing; policy should pave the way for a safe exit from zero-COVID, including boosting vaccination among the undervaccinated elderly. ### Medium-term policies and financial stability - Improved frameworks for debt resolution: - More countries may enter debt distress owing to rising interest rates, a global slowdown, and pandemic-era debts. - Cooperative global policies and mechanisms (for example, an improved G20 common debt resolution framework) are essential for swift and fair resolution. - Recent progress on Zambia is noted as welcome, but coverage should be expanded and creditor committees should meet and formulate agreements swiftly and transparently. - Preparing for tighter international financial conditions: - Macroprudential policy should guard against failure of systemic institutions and address pockets of elevated vulnerability. - The housing market remains a potential source of macro-financial risk; authorities should assess systemic effects via rigorous stress tests. - In China, enable restructuring of troubled housebuilders and prepare to tackle broader housing-market impacts on the financial system. - Be ready to intervene in foreign exchange markets or introduce temporary capital flow measures when flexible exchange rates cannot absorb external shocks. - Governments with high debt should preemptively reduce reliance on foreign currency borrowing. - Prompt and reliable access to reserve currency liquidity—including through IMF precautionary and disbursing arrangements—gives countries breathing room to implement orderly adjustment policies. - For the euro area, a well-designed European Central Bank facility, such as the Transmission Protection Instrument, is necessary to support smooth monetary transmission; it should complement existing instruments without distorting market prices. ### Structural and longer-term policies - Structural reforms to expand supply can boost activity while easing inflation (with a lag). - Advanced economies: expand the workforce via childcare subsidies, earned income tax credits, reformed immigration systems, and better access to COVID-19 vaccinations and treatment. - Emerging market and developing economies: improve education, business climates, and digital infrastructure. - Climate policies: - Current global targets are not aligned with global temperature goals. - Meeting goals will require emission cuts of at least 25 percent by the end of the decade (Chapter 3). - Energy security benefits from transitioning to clean and reliable energy sources that steadily replace fossil fuels with renewables and low-carbon sources. - Governments should set a minimum price for carbon and promote clean alternatives, including subsidies for renewables and investment in enabling infrastructure such as smart grids. - Policies to offset transition costs (for example, feebates and targeted compensation) can ease the transition. *Source: IMF staff; World Economic Outlook: Countering the Cost-of-Living Crisis (October 2022).* ### Chapter 3 suggests that the cost of the transition to ### Chapter 3 suggests that the cost of the transition to ### Transition to clean electricity and national energy packages - The cost of the transition to clean electricity need not be inflationary and can be achieved with impacts on GDP that are smaller than the annual variation in normal times. - Delay will only cause those costs to rise. - The passage of the Inflation Reduction Act in the US, which includes $369 billion for energy security and climate change policies, is welcome. - The law aims to reduce US carbon emissions by about 40 percent by 2030, mostly through tax credits and incentives to increase investment in clean energy. - Omission points: the law omits broad-based carbon pricing and sectoral feebates, and does not eliminate subsidies for fossil fuel and carbon-intensive agriculture. - The UK government announced a sizable energy package aimed at assisting all families and businesses dealing with high energy prices. - The package has scope for better targeting the vulnerable, which would lower the cost of the package and better preserve incentives to save energy. ### Multilateral cooperation and trade policy - Strengthening multilateral cooperation and avoiding fragmentation is essential. - The recent spike in global inflation has prompted a wave of short-term protectionism, most notably regarding food. - Export bans deny countries income to buy other goods from abroad and often provoke retaliatory bans, leaving all parties worse off. - Medical products have been subject to trade restrictions at various times during the pandemic. - Policy recommendations: - Governments should unwind pre-pandemic trade restrictions. - Follow through on commitment to World Trade Organization reform, including: - Restoring a fully functioning dispute settlement system. - Enhancing rules in areas such as agricultural and industrial subsidies. - Multilateral cooperation is essential to: - Advance technologies to support climate change mitigation. - Boost green financing. - Provide support for low-income countries through concessional funding to catalyze growth-enhancing reform and help them meet climate targets. ### Inflation performance versus WEO forecasts (2021–22) - Inflation has repeatedly exceeded World Economic Outlook (WEO) forecasts during 2021–22 across geographic regions by an abnormally high amount. - Forecast errors were generally larger for 2022 than for 2021, but those for core inflation were less prominent for 2022. - Key statistics on forecast errors and persistence: - The errors realized for 2021 and 2022 average 1.7 percentage points for Europe and 3.2 percentage points globally, compared with a near-zero average for the decade that preceded the COVID-19 crisis. - The root-mean-square error is 2.5 times larger for 2021 and 5 times larger for 2022 than it was for 2010–19. - Only China and the US saw smaller errors for 2022 than for 2021. - An additional 1 percentage point inflation surprise for 2021 is associated with an additional subsequent forecast error of 0.22 percentage point for 2022 (t-statistic = 2.68). - Timing and composition: - Inflation surprised consistently on the upside since the second quarter of 2021, leading to successive upward revisions in WEO inflation forecasts for both headline and core inflation and for both advanced and emerging market and developing economies. - The October 2022 WEO forecast views inflation in advanced economies as peaking later than expected in the January WEO Update and April 2022 WEO. - Headline inflation in emerging market and developing economies is now expected to peak higher, yet not later, than previously thought. ### Drivers of forecast errors: core versus noncore, demand, supply, and fiscal policy - Core inflation contribution to forecast errors: - For 2021: core inflation forecast errors represented 53.6 percent for advanced economies and 71.9 percent for emerging market and developing economies. - For 2022: core inflation contribution is lower, at 46.5 percent for advanced economies and 47.9 percent for emerging markets. - Interpretation: - The large contribution of core inflation forecast errors for 2021 likely reflects wide demand-supply imbalances as the strong demand recovery from the COVID-19 shock hit persistent supply disruptions. - Inflation errors for 2022 are relatively more concentrated in noncore inflation, suggesting a stronger role for energy and food supply-side shocks, in large part due to the war in Ukraine. - Demand-recovery and Phillips curve evidence: - A positive association exists between output and core inflation surprises for 2021, with the line of best fit tracing out a Phillips curve relationship with a greater slope compared with the pre-pandemic Phillips curve estimate. - This suggests the global economy may have been at the steeper end of the aggregate supply curve in 2021 as rapid demand recovery met continually disrupted supply. - Fiscal policy and labor market effects: - Ambitious fiscal stimulus packages likely boosted demand recovery in 2021 and contributed to core inflation forecast errors. - A regression for advanced economies finds an additional 10 percent of GDP in fiscal support is associated with a 0.8 percentage point larger-than-expected core inflation rate (t-statistic = 3.38). - The ratio of vacancies to unemployment in 2021 relative to 2020 displays a positive relationship with inflation forecast errors; a regression accounts for more than 50 percent of the error variations. - Sectoral demand shifts: the ratio of core goods inflation to services inflation in 2021 was about 2.5 in the US, and this higher ratio correlates positively with core inflation forecast errors, indicating sectoral demand dislocations contributed to unanticipated inflation. ### Market power and inflation during COVID-19 - Question addressed: Is corporate market power behind the current wave of inflation? - Findings: - Profits rebounded in 2021 after taking a hit in 2020; decomposing GDP deflator growth shows private sector gross operating surplus has been an important driver of higher output prices in several advanced economies alongside rising unit labor costs. - In the US, the GDP deflator increased 7 percent between 2019 and 2021: - Roughly 40 percent of this increase can be attributed to rising gross operating surplus. - Rising employee compensation accounts for 65 percent. - While markups (price-to-marginal-cost ratio) increased steadily across advanced economies in past decades, during the pandemic markup growth slowed, halted, or turned slightly negative in some countries. - Despite high initial markup levels, evidence suggests firms with higher pre-pandemic markups absorbed increasing costs to a larger extent than low-markup firms during the pandemic, implying market power did not contribute substantially to inflation at the current conjuncture. - Data and methodology notes: - Markups estimated for nine advanced economies (Australia, Canada, France, Germany, Italy, Japan, Spain, UK, US) during 2000–21 based on Worldscope data on publicly traded nonfinancial firms, following De Loecker, Eeckhout, and Unger (2020) and Díez, Leigh, and Tambunlertchai (2018). - The financial sector is excluded from the markup estimation. *Italic: Source — WORLD ECONOMIC OUTLOOK: COUNTERING THE COST-OF-LIVING CRISIS, International Monetary Fund | October 2022* ### 1. United States2. Canada ### 1. United States2. Canada ### Markups and Production Costs Pass-Through to Prices (Box 1.2, continued) - The sales-weighted average markup is reported with a red segment representing the years of the COVID-19 pandemic; markups and net sales at the firm level are censored below the 5th percentile and above the 95th percentile for each country and year. - Pass-through coefficient definition: computed as 1 plus the regression coefficient from a firm-level regression of percent change in markups on percent change in COGS per employee, with COGS-per-employee interacted with quintiles of the pre–COVID-19 markup distribution (using the 2016–19 average). - Empirical findings for 2019–21: - Firms in the top 20 percent of the pre–COVID-19 markup distribution passed 60 percent of their cost increases through to prices and absorbed 40 percent through markup reductions. - Firms in the bottom 40 percent of the pre–COVID-19 distribution fully passed cost increases on to prices. - Overall interpretation: this finding supports the hypothesis that markups are not a major driver of inflationary pressures right now. ### Confidence Bands and Forecast Uncertainty (Box 1.3) - Methodology: - Uses the IMF’s G20 model (Andrle and others 2015) to quantify uncertainty around the WEO baseline projection via confidence bands and explicit judgment about recurrence of historical episodes. - Historical shocks to output, inflation for some countries, and oil prices are interpreted to estimate implied shocks to aggregate demand, supply, and oil supply; shocks are drawn jointly to capture synchronization (for example, 2020) or cross-country variation. - Historical shocks sampled uniformly unless expert judgment reweights episodes (example: shocks from 1982 considered 10 times more likely in one variant). - Shocks estimated using the entire WEO sample starting in 1960; shocks to demand for all G20 countries; supply shocks estimated only for the US (future work to expand). - Quantitative statements about probability: - The risk of global growth next year falling below 2 percent is currently estimated to be about 25 percent. - Illustration of distributions: - Figure 1.3.1: Each shade of blue represents a 5 percentage point interval; the entire band captures 90 percent of the distribution. Panel 1: shocks sampled uniformly. Panel 2: shocks from 1982 are 10 times more likely. - Without judgment, very low-growth outcomes are somewhat likely because the baseline global growth is unusually low; adding judgment skews the distribution further down, increasing probability of 2 percent or 1 percent outcomes. ### Downside Scenario (Box 1.3) - Overall impact if downside scenario materializes: - Level of global activity will be 1.5 percentage points lower in 2023 and 1.6 percentage points lower in 2024, relative to the current baseline. - The downside scenario implies global growth of 1.1 percent in 2023, which is in the 15th percentile of the distribution. - Scenario layers (joint shocks), with precise magnitudes and features: - Higher oil prices: - Oil prices are pushed up 30 percent, on average, for 2023 relative to the current baseline. - Reasons: (1) ongoing efforts to reduce Russia’s oil export revenues; (2) retaliation from Russia in the form of a 25 percent decrease in overall oil exports. - Oil prices start to decline in 2024 but stay 15 percent higher than baseline; shock fades in 2025 as supply and demand adjust. - China’s real estate sector: - Issues lead to further decreases in real estate investment over the next two years. - The level of total fixed investment falls by as much as 9 percent by 2024, relative to the baseline projection. - Lower potential output from persistent labor market disruptions: - Two labor developments: lower labor force participation and shifts in the Beveridge curve indicating worsened matching efficiency. - These lead to lower equilibrium employment and higher equilibrium unemployment; underlying potential output is lower, implying less slack and more inflation and requiring a larger monetary policy response. - The layer differentiates across countries: lower labor force participation more important for some advanced economies and emerging markets; Beveridge curve shifts more visible in advanced economies such as the US and some European countries. - Tighter global financial conditions: - Emerging market currencies: depreciation of 10 percent in emerging markets outside Asia and 5 percent in Asian emerging markets, including China, on average in 2023. - Emerging markets (excluding China): average increase in sovereign premiums of more than 200 basis points in 2023 and an additional increase in corporate premiums of about 80 basis points. - Advanced economies: increase in corporate premiums of about 100 basis points and negative effects from large depreciation of emerging market currencies. - Assumptions about policy responses: - Monetary policy responds endogenously to movements in inflation. - Fiscal policy responds through automatic stabilizers; no additional fiscal measures are assumed. - Quantified contributions to GDP and inflation (selected summary from Figure 1.3.2 and text): - GDP level effects (percent deviation from baseline, 2023): - Higher oil prices reduce global GDP by about 0.5 percentage point in 2023. - China’s real estate sector reduces global output by 0.3 percentage point in 2023. - Lower potential output reduces global output by 0.3 percentage point in 2023. - Tighter financial conditions reduce global activity by 0.5 percentage point in 2023. - Inflation effects (percentage point deviation from baseline, 2023): - Higher oil prices contribute 1.1–1.3 percentage points to headline inflation across regions in 2023, before turning disinflationary in 2024. - Lower potential output layer is inflationary, concentrated in advanced economies and emerging markets excluding China, and persistent. - Tighter financial conditions and the slowdown in China are disinflationary. - Aggregate effect from all layers: global inflation about 1.3 percentage points higher than baseline in 2023 and 1 percentage point lower in 2024. - Timing and persistence: - The impact from the last three layers continues to build over time, but there is no further deterioration in global activity in 2024 relative to baseline because declining oil prices provide some offset; level of activity remains well below baseline even if growth impact on 2024 is neutral. ### Commodity Market Developments and Food Inflation Drivers (Special Feature) - Aggregate commodity price movements: - Commodity prices rose 19.1 percent between February and August 2022. - Energy led the increase: natural gas up 129.2 percent. - Base metal prices declined by 19.3 percent. - Precious metal prices fell by 6.0 percent. - Agricultural commodity prices fell by 5.4 percent. - Energy and oil market details: - Crude oil prices up by 3.5 percent between February and August 2022; surged to $120 a barrel in early March following Russia’s invasion of Ukraine. - Strategic oil reserve releases and slower China demand caused oil prices to fall below $100 in April. - Announced bans on Russian oil imports and expectations of broader sanctions plus outages led prices to surge to $120 in early June. - International Energy Agency revised global 2022 oil demand growth down from 3.3 million barrels a day (mb/d) to 2.0 mb/d in September. - Futures markets suggest oil prices will rise by 41.4 percent in 2022, to average $98.2 a barrel, but will fall to $76.3 in 2025. - Short- and medium-term risks to oil futures are roughly balanced: upside risks from additional supply disruptions and higher demand owing to gas-to-oil switching offset downside risks from a slowing global economy, possible additional oil supplies from Iran, and higher-than-expected US oil production growth. - Sanctions and potential retaliation raise uncertainty and may lead to large revisions in oil price projections. - Natural gas and European supply: - Russia reduced pipeline gas exports to Europe by about 80 percent in September 2022 relative to the previous year. - Dutch Title Transfer Facility gas futures rose by 159 percent from February to August 2022, to record highs. - European countries increased reliance on global liquefied natural gas supplies and discussed a price cap on Russian gas. - Data sources and notes referenced: - Sources include National statistical offices; Worldscope; IMF staff calculations; Bloomberg Finance L.P.; IMF Primary Commodity Price System; Kpler; Refinitiv Datastream. - Notes: markups computed following Díez, Leigh, and Tambunlertchai (2018); EA4 = France, Germany, Italy, Spain; “N/A” WEO = World Economic Outlook. *Italic: International Monetary Fund | October 2022* ### 2023. Coal prices rose 61.4 percent over the reference ### 2023. Coal prices rose 61.4 percent over the reference ### Metal prices: retreat after rally - The base metal price index: net 19.3 percent decline from February to August. - Aluminum price: down by 25.0 percent. - Copper price: down by 19.6 percent. - Iron ore price: down by 21.9 percent. - IMF energy transition metal index (metals critical for electric vehicles and renewable energy): fell 21.0 percent. - IMF precious metals index: slipped 6.0 percent. - Outlook: - Base metal prices expected to fall 5.5 percent, on average, in 2022 (compared with a 9.9 percent increase projected in the April WEO). - Base metal prices expected to decrease by a further 12.0 percent in 2023. - Precious metal prices expected to decline 0.9 percent in 2022 and an additional 0.6 percent in 2023. - Risk drivers: potential supply reductions by European smelters amid higher energy costs versus weakening global demand. ### Agricultural and food commodity prices: correction from peak - Food commodity prices surged after Russia’s invasion of Ukraine but corrected to prewar levels in June and July, halting a two-year rally. - Drivers of the correction: - Improved supply conditions. - Gradual end to Russia’s blockade of Ukrainian grain exports. - Macroeconomic factors including rising interest rates and global recession concerns. - Upside risks to prices: - Renewed export restrictions (example cited: Indonesia’s April 2022 ban on palm oil exports). - Droughts in parts of China and the US. - Pass-through from higher fertilizer prices reflecting reduced availability of fertilizers produced in Belarus and Russia. ### Historical food price developments and drivers - Global food commodity prices increased by 54 percent from trough to peak in 2020–2022; prices of foods that make up large parts of diets increased by 107 percent. - Food and oil prices have been in the same phase about 66 percent of the time since 1970; concordance increases to 75 percent since 2004. - Mechanisms for food–energy comovement: 1. Oil used for farm equipment and transport; gas is a main input for nitrogen-based fertilizers and pesticides. 2. Global economic activity as a common demand factor. 3. Use of some agricultural products as biofuels. - After biofuel mandates in the mid-2000s, correlation between oil and cereal prices rose strongly, especially for corn and vegetable oil. - Table indicators (values preserved as reported): - Table 1.SF.1: Oil, Cereal, and Food Price Boom Phases (Duration, Amplitude, Sharpness) — Latest and Average values reported in source. - Table 1.SF.2: Oil-Cereal Price Correlation - 1970–2004 vs 2005–June 2022: - Cereal: –0.9% and 17.4% - Corn: –2.3% and 23.1% - Vegetable oil: –4.6% and 44.5% ### Econometric analysis: drivers of cereal prices - Four drivers studied: shocks to fertilizer prices, oil prices, cereal production (harvest shocks), and US interest rates. Controls include global GDP growth and the US dollar real effective exchange rate. - Key estimated effects: - A typical (negative) global harvest shock induces a 16 percent rise in cereal prices in the same quarter, peaking at 23 percent after one quarter. - A 10 percent oil price–raising supply shock leads cereal prices to rise by about 2 percent after three to four quarters. - A 10 percent rise in fertilizer prices (due to a natural gas supply shock) has no immediate effect but leads to a 7 percent rise in cereal prices after one quarter. - A 100-basis point US monetary policy shock (three-month Treasury bills) reduces cereal prices by about 13 percent with a one-quarter lag. - Figure references: cumulative impulse responses to (1) 10 percent fertilizer price shock, (2) 10 percent oil price shock, (3) 100 basis point shock to three-month Treasury bills, and (4) one-standard-deviation harvest shock. ### Transmission to domestic food price inflation (pass-through) - After an international food price shock, domestic food CPI: - Rises linearly and peaks after 10 months, then declines but persists at a higher level. - Increases about 0.3 percentage point in response to a 1 percentage point change in international food prices after about 10–12 months. - Average pass-through is about 30 percent for the average country (limited by cost share of food commodities in food consumer prices). - Heterogeneity in pass-through: - Larger for emerging market economies than for advanced economies (partly because food commodities have a higher cost share in emerging markets). - Larger for countries with higher trade openness; trade openness increases responsiveness for both net food importers and net food exporters. - For a one-standard-deviation rise in GDP per capita, pass-through declines by 6 percentage points. - For a one-standard-deviation rise in trade openness above the global mean, pass-through increases by 7 percentage points. - Regional example: recent domestic food inflation ranged from as low as 5.3 percent in south and east Asia to as high as 12.6 percent in central Asia and Europe. ### Conclusions, outlook, and policy implications - Contribution of international food prices to domestic food price inflation (reported estimates): - 2021: added 5 percentage points to food price inflation for the average country. - 2022: forecast to add an estimated 6 percentage points. - 2023: forecast to add an estimated 2 percentage points. - Current shocks and outlook drivers: - Supply-side factors: 2020–22 La Niña episode, food trade restrictions. - Demand factors: cereal-specific demand (China’s 2021 restocking). - Other contributors: low interest rates and the war in Ukraine plus Russian blockade of Ukrainian wheat exports. - Current estimates suggest a negative shock for global cereal production equivalent to about a 0.6 standard deviation in cereal growth for 2022—contributing to a 23 percent rise in cereal prices in 2022 and outweighing the effects of higher interest rates on food price inflation. - Policy recommendations and implications: - Emphasize the importance of well-functioning international food markets. - Appropriate domestic policies to address price swings: targeted food aid to vulnerable consumers and incentives for the buildup of global food stocks over the medium term. - Open food trade preferred: raises consumer variety, promotes deeper and more stable markets, and hedges against volatility of domestic production. - Caution against policies promoting self-sufficiency: weaken the world food trading system and raise environmental costs through land conversion or more intensive farming practices. - International trade remains indispensable especially for small countries, densely populated countries, and countries particularly vulnerable to climate change. *International Monetary Fund | October 2022* ### Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment ### Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment ### Regional aggregates and highlights - North America (Real GDP): 5.5 (2021), 1.8 (2022), 1.0 (2023). - Latin America and the Caribbean (Real GDP): 6.9 (2021), 3.5 (2022), 1.7 (2023). - Aggregates exclude Venezuela for consumer prices. ### Selected country-level real GDP projections (annual percent change) - United States: 5.7 (2021), 1.6 (2022), 1.0 (2023). - Mexico: 4.8 (2021), 2.1 (2022), 1.2 (2023). - Canada: 4.5 (2021), 3.3 (2022), 1.5 (2023). - Brazil: 4.6 (2021), 2.8 (2022), 1.0 (2023). - Argentina: 10.4 (2021), 4.0 (2022), 2.0 (2023). - Colombia: 10.7 (2021), 7.6 (2022), 2.2 (2023). - Chile: 11.7 (2021), 2.0 (2022), –1.0 (2023). - Peru: 13.6 (2021), 2.7 (2022), 2.6 (2023). - Ecuador: 4.2 (2021), 2.9 (2022), 2.7 (2023). - Venezuela: 0.5 (2021), 6.0 (2022), 6.5 (2023). - Bolivia: 6.1 (2021), 3.8 (2022), 3.2 (2023). - Paraguay: 4.2 (2021), 0.2 (2022), 4.3 (2023). - Uruguay: 4.4 (2021), 5.3 (2022), 3.6 (2023). - Puerto Rico (territory, separate statistics): 2.7 (2021), 4.8 (2022), 0.4 (2023). ### Selected consumer price movements (annual averages) - United States: 4.7 (2021), 8.1 (2022), 3.5 (2023). - Mexico: 5.7 (2021), 8.0 (2022), 6.3 (2023). - Canada: 3.4 (2021), 6.9 (2022), 4.2 (2023). - Brazil: 8.3 (2021), 9.4 (2022), 4.7 (2023). - Argentina: 48.4 (2021), 72.4 (2022), 76.1 (2023). - Colombia: 3.5 (2021), 9.7 (2022), 7.1 (2023). - Chile: 4.5 (2021), 11.6 (2022), 8.7 (2023). - Peru: 4.0 (2021), 7.5 (2022), 4.4 (2023). - Ecuador: 0.1 (2021), 3.2 (2022), 2.4 (2023). - Venezuela: 1,588.5 (2021), 210.0 (2022), 195.0 (2023). - Bolivia: 0.7 (2021), 3.2 (2022), 3.6 (2023). - Paraguay: 4.8 (2021), 9.5 (2022), 4.5 (2023). - Uruguay: 6.7 (2021), 9.1 (2022), 7.8 (2023). - Puerto Rico: 2.4 (2021), 4.4 (2022), 3.5 (2023). ### Selected current account balances (percent of GDP) - North America: –3.2 (2021), –3.5 (2022), –2.8 (2023). - United States: –3.7 (2021), –3.9 (2022), –3.1 (2023). - Mexico: –0.4 (2021), –1.2 (2022), –1.2 (2023). - Canada: 0.0 (2021), 0.5 (2022), –0.2 (2023). - Brazil: –1.7 (2021), –1.5 (2022), –1.6 (2023). - Argentina: 1.4 (2021), –0.3 (2022), 0.6 (2023). - Colombia: –5.7 (2021), –5.1 (2022), –4.4 (2023). - Chile: –6.7 (2021), –6.7 (2022), –4.4 (2023). - Peru: –2.5 (2021), –3.0 (2022), –2.1 (2023). - Ecuador: 2.9 (2021), 2.4 (2022), 2.1 (2023). - Venezuela: –2.1 (2021), 4.0 (2022), 6.0 (2023). - Bolivia: 2.0 (2021), –1.4 (2022), –2.1 (2023). - Paraguay: 0.8 (2021), –3.8 (2022), –0.1 (2023). - Uruguay: –1.8 (2021), –1.2 (2022), –1.9 (2023). ### Selected unemployment rates (percent) - United States: 5.4 (2021), 3.7 (2022), 4.6 (2023). - Mexico: 4.1 (2021), 3.4 (2022), 3.7 (2023). - Canada: 7.4 (2021), 5.3 (2022), 5.9 (2023). - Brazil: 13.2 (2021), 9.8 (2022), 9.5 (2023). - Argentina: 8.7 (2021), 6.9 (2022), 6.9 (2023). - Colombia: 13.8 (2021), 11.3 (2022), 11.1 (2023). - Chile: 8.9 (2021), 7.9 (2022), 8.3 (2023). - Peru: 10.9 (2021), 7.6 (2022), 7.5 (2023). - Ecuador: 4.2 (2021), 4.0 (2022), 3.8 (2023). - Bolivia: 7.0 (2021), 4.5 (2022), 4.0 (2023). - Paraguay: 7.7 (2021), 7.2 (2022), 6.4 (2023). - Uruguay: 9.4 (2021), 7.9 (2022), 7.9 (2023). - Puerto Rico: 7.9 (2021), 6.0 (2022), 7.9 (2023). ### Regional groupings and definitions (notes from table) - Central America refers to CAPDR and comprises Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Panama. - The Caribbean comprises Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. - Eastern Caribbean Currency Union comprises Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines as well as Anguilla and Montserrat, which are not IMF members. - Movements in consumer prices are shown as annual averages. Year-end to year-end changes can be found in Tables A6 and A7 in the Statistical Appendix. - Current account balances are reported as percent of GDP. - Unemployment rates are reported as percent; national definitions may differ. *Source: IMF staff estimates.* ### Introduction ### Introduction ### Context and observations - With the recovery picking up steam after the acute COVID-19 shock, inflation in 2021 started hitting levels that had not been seen in almost 40 years in many economies. - Factors underpinning sharp rises in prices include pandemic-related supply chain disruptions, commodity price shocks, expansive monetary policy and fiscal support, a surge in pent-up consumer demand, and changes in consumer preferences for goods versus services. - Labor demand resurged across many sectors while labor supply was slow to respond because of ongoing health concerns and difficulties finding child and family care, among other factors. - Average nominal wages (per worker) rose and the unemployment rate fell beginning in the second half of 2020 across economy groups, but nominal wage growth in 2021 did not fully keep up with price inflation, so real wages were fairly flat or falling. - These nominal and real wage patterns continued into the first quarter of 2022 for economies for which data are available. - At a sectoral level, nominal wages in both industry and services tended to converge to their common pre-pandemic trends across economy groups; sectoral employment shifts appear to explain little of overall wage changes through the end of 2021. ### Research questions addressed - How do wage, employment, and price dynamics in the recovery from the COVID-19 shock compare with pre-pandemic dynamics? Did historical episodes mirroring 2021 patterns in wages, employment, and prices in advanced economies subsequently evolve into wage-price spirals? - How well do inflation expectations and labor market conditions explain recent nominal wage growth in advanced and emerging market and developing economies? What were the deeper, underlying drivers of wages, prices, and employment during 2020–21? - Could wage and price pressures in the wake of COVID-19 lead to high and persistent wage and price inflation? Historically, has monetary tightening been effective in reducing wage and price pressures? How could changes in the formation of wage and price expectations affect prospects, and how should policymakers take them into account? ### Key findings (chapter summary) - Both wage and price inflation picked up in a broad-based manner through 2021, while real wages have tended to be flat or falling across economies on average. - On average, wage-price spirals did not follow historical episodes that were similar to the circumstances currently seen in advanced economies; similar historical episodes—in which real wages were flat or falling—did not tend to entail a wage-price spiral. In fact, inflation tended to fall in the aftermath while nominal wages gradually caught up. - Changes in inflation expectations and labor market slack explain wage dynamics in the second half of 2021 relatively well: by the end of 2021, wage growth was broadly in line with the increases in inflation expectations and labor market tightening observed across economy groups on average. - Analysis using a rich multi-sector, multi-economy structural model points to a complex mix of supply and demand shocks underlying 2020–21 behavior: wages have been driven predominantly by production capacity and labor supply shocks (from social distancing and lockdowns), while prices have been more affected by private saving and the release of pent-up demand. - When wage and price expectations are more backward-looking, monetary policy actions need to be more front-loaded to minimize the risks of inflation de-anchoring. The observed decline in real wages has acted as a drag so far, reducing price pressures and helping inhibit development of a wage-price spiral dynamic. However, the more backward-looking (adaptive) expectations are, the greater the chances that inflation could de-anchor to a higher-than-target level. The monetary policy response should depend on the nature of wage and price expectations: the more backward-looking they are, the quicker and stronger the tightening needed to avert inflation de-anchoring and prevent large declines in the real wage. ### Definition and scope of "wage-price spiral" - The chapter defines a wage-price spiral as an episode of several quarters characterized by accelerating wages and prices (that is, in which both wage and price inflation rates rise simultaneously). ### Historical evidence - A sample of advanced economies covering the past 40 years (and for a few the past 60 years) reveals 22 other episodes exhibiting similar conditions to the 2021 combination of rising inflation, positive nominal wage growth, declining real wages, and declining unemployment. - Selection criteria for the 22 episodes: at least three out of the previous four quarters had (1) rising inflation, (2) positive nominal wage growth, (3) declining real wages, and (4) declining or flat unemployment. The 22 episodes are identified within a sample of 30 advanced economies for which quarterly data are available. - Similar past episodes were not followed by a wage-price spiral on average: nominal wage growth tended to increase somewhat after these episodes, but inflation edged down on average, leading to an increase in real wages. The unemployment rate generally stabilized after the episodes. - Out of the 22 episodes illustrated, 13 were followed by monetary policy tightening. Monetary policy tightening in past episodes helped keep inflation contained. - Historical episodes of wage-price spirals did not typically last long: following such episodes, inflation and nominal wage growth on average tended to stabilize in subsequent quarters, leaving real wage growth broadly unchanged while the unemployment rate tended to edge down slightly. - Notable exceptions include the United States in 1979:Q2 (sharp post-episode inflation spike and aggressive monetary tightening during the Volcker disinflation), the US episode starting in 1973:Q3 (price inflation surged for five additional quarters after the 1973 oil embargo), Belgium in 1973 (both nominal wage growth and price inflation surged, partly owing to wide prevalence of wage indexation), and the United States in 1946–48 (post–World War II release of pent-up demand and removal of price controls led to large spikes in price inflation and nominal wage growth, both reaching about 20 percent year over year by 1947:Q1). ### Drivers of wages and prices during the COVID-19 shock and recovery - Empirical approach: study recent wage dynamics through the lens of the wage Phillips curve relating wage growth to inflation expectations, labor market slack, and productivity growth. - Model-based approach: use a rich structural multi-sector, multi-economy model to identify underlying supply and demand shocks driving wages and prices over 2020–21. - Findings from decomposition: over the two years since the pandemic’s onset, wages were driven predominantly by production capacity and labor supply shocks, while prices were more affected by private saving and the release of pent-up demand. How and when (or if) these deeper shocks unwind will matter for the future path of wage and price inflation. ### Policy implications and scenarios - The monetary policy response in the current inflationary environment should depend on the nature of wage and price expectations: the more backward-looking expectations are, the quicker and stronger the tightening needed to avert inflation de-anchoring and prevent large declines in the real wage. - Scenario analysis using a newly developed model of expectations and wage and price setting suggests the observed decline in real wages has so far reduced price pressures and helped inhibit a wage-price spiral, but risks of de-anchoring rise with more adaptive expectations. ### Caveats and limitations - The empirical analysis is constrained by the availability of data across economies and over time; exact sample coverage differs across exercises. - The empirical methods used are standard but should be interpreted as associational rather than causal. - Historical analyses may not be fully representative of current circumstances if COVID-19 induced a large structural break in expectations formation or wage-setting processes. The model-based analysis of expectations allows for a limited form of regime shifts via adaptive learning. *Source: Introduction, "Wage Dynamics Post–COVID-19 and Wage-Price Spiral Risks," IMF World Economic Outlook chapter (text - Introduction).* ### Annex 2.3 for additional information. ### Annex 2.3 for additional information ### Specification and sample - The specification is based on Chapter 2 of the October 2017 World Economic Outlook and is inspired by Galí’s (2011) work micro-founding the wage Phillips curve as the outcome of a wage-setting process. - The baseline specification uses the unemployment rate and its change as measures of labor market slack to permit wider coverage of advanced and emerging market economies. - Seventy-nine such episodes are identified within a sample of 30 advanced economies, the earliest going back to 1960. - The sample covering 2000:Q1–19:Q4 consists of 31 advanced and 15 emerging market economies. - One-year-ahead inflation expectations are the focus for the inflation expectations measure. ### Empirical findings on the Wage Phillips Curve - Inflation expectations and productivity growth are associated with increases in nominal wage growth; increases in labor market slack (captured by the unemployment rate and its change) are correlated with a slowdown in wage growth. - A 1 percentage point increase in inflation expectations is associated with: - a close to 1 percentage point increase in wage growth in advanced economies; - a 0.6 percentage point increase in wage growth in emerging market economies. - The positive relationship with inflation expectations survives controlling for lagged inflation. - The relationship between inflation expectations and wage growth weakened in the period after the global financial crisis when inflation was low and stable. - Emerging market wages can be more sensitive than those in advanced economies to changes in labor market and productivity conditions, though past experiences vary substantially. - Robustness: using unemployment gaps or unemployment-to-vacancy ratios yields broadly similar correlations; for the US the unemployment-to-vacancy ratio performed better in explaining recent wage growth in some checks. ### Role of structural characteristics - In economies with more stringent employment protection regulation, wage growth appears on average more sensitive to changes in unemployment and inflation expectations. - In economies with higher firm markups (a sales-weighted average of sectoral markups), wages appear slightly more responsive to unemployment changes. - Evidence from long cross-sectional time series for Europe indicates pass-through of inflation shocks to wages can increase when union density and the degree of centralized bargaining are high. - Regulatory, institutional, and structural features affect wages’ responsiveness to inflation expectations and slack. ### Pandemic-era deviations from the Wage Phillips Curve - During the acute COVID-19 phase, average wages did not move closely in line with the wage Phillips curve relationships, owing to the shock’s unprecedented and asymmetric sectoral effects. - Key observations from decomposition of average wage growth: - The acute shock and recovery exhibited abrupt swings deviating from those explained by inflation expectations and unemployment changes. - Only part of the deviations was due to movements in hours worked (intensive margin adjustments). - Deviations during COVID-19 were quantitatively and qualitatively different from those in the pre-pandemic period and during the global financial crisis, and varied across economies. - At the pandemic onset: - In advanced economies (particularly the US), the drop in wage growth was less prominent than predicted by inflation and unemployment movements. - In emerging markets, the drop in wage growth was more prominent than predicted. - By the end of 2021, wage growth in advanced economies did not seem abnormally above that predicted by falling unemployment and rising inflation expectations alone; the residual and other components’ contribution had shrunk. - The rise in inflation expectations accounted for more of the very latest movements in wage growth by end-2021. - Worker composition shifts (e.g., greater employment losses among low-wage workers in the US) partly explain some average-wage movements. ### Multi-economy, multisector general equilibrium model and shock decomposition - The model is a rich multi-economy, multisector general equilibrium model featuring nominal rigidities and credit constraints, based on Baqaee and Farhi (2020/2022a/2022b) and related work. - Seven types of shocks are considered. Supply-side shocks (three): - Production capacity (or labor supply) shocks arising from lockdowns and social distancing; calibrated to changes in hours worked by sector over time. - International trade cost shocks measured by shipping costs by product for US imports; freight and insurance costs showed marked increases starting in 2020. - Commodity price changes for energy and food: energy and food prices went up by 85 percent and 20 percent year over year, respectively, in 2021. Demand-side shocks (four): - Changes in private saving behavior: calibrated by adjusting households’ discount rate to track saving rates over time. - Consumption composition changes: consumer taste shocks derived using changes in expenditure shares as consumption reallocated from services toward goods. - Fiscal policy support: derived from changes in government consumption and changes in spending on unemployment insurance. - Monetary policy support: obtained by calibrating the domestic interest rate to observed central bank policy rates. - Historical decompositions for 2020 and 2021 are presented for the United States, euro area, and Mexico using the model; nominal and real wages are defined on a per hour basis for those results. ### Model-based insights on drivers of wages, prices, and employment - Two main contributors emerge from model results for 2020–2021: - Reductions in production capacity were the predominant contributors to nominal wage changes during 2020 and 2021. - Changes in households’ saving behavior were among the most important drivers of price changes over the same years. - Implication: future paths for wages and prices could depend heavily on whether and how these shocks unwind, and on whether new shocks arise. - Note: impacts of individual shocks do not necessarily add up to the total impact in combination because of interactions in general equilibrium; total model-based impacts are broadly aligned but not exactly equal to actual outturns. *Source: IMF staff calculations, Annex 2.3 (text).* ### CHAPTER 2 ### CHAPTER 2 WAgE DYNAMICs POsT–COvID-19 AND WAgE-PRICE sPIRAL RIsKs ### Drivers of wages, employment, and prices during 2020–2022 - 2020 primary driver across the three economies: drop in production capacity (lockdowns and rise in social distancing) — led to decreases in production capacity and labor supply, decline in employment, and increase in hourly wages (dark red bars). - 2020 secondary driver: rise in private saving (dark blue bars) — a contractionary force for aggregate demand, producing disinflationary impact on nominal wages and consumer prices, particularly in the United States. - 2020 policy responses: - Expansive fiscal and monetary policy in the United States and the euro area limited early employment damage and helped support nominal wages. - Fiscal policy support in Mexico shrank in 2020, pulling wages and prices down to some extent (yellow bars). - Monetary policy expansion in Mexico sustained employment and pushed nominal wages and prices up (light green bars). - Net 2020 outcome: sharp increase in nominal wages and muted price responses led to strong increases in real wages across the three economies. - 2021 primary driver: rebound in aggregate demand running ahead of production capacity — a supply-demand imbalance; private savings began to be drawn down, reversing the 2020 disinflationary effect. - 2021 production capacity: recovered somewhat, especially in the euro area and Mexico, but cumulative impact still negative so employment not fully restored. - 2021 policy and price effects: - Continued monetary accommodation in the United States pushed wages and prices up further. - Fiscal policy support decreased across economies in 2021 compared with 2020, relieving some earlier upward pressure on prices. - 2021 commodity price shock (dark green bars): steep rise in commodity prices was a drag on employment across the board and raised consumer prices more strongly in the euro area and Mexico than in the United States. - 2022 note: commodity prices have risen even further (particularly with the shock of the Russian invasion of Ukraine) and are pushing inflation up even more. ### Empirical analysis: inflationary shocks, supply chain pressures, and monetary tightening - Inflationary shocks proxied by the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index; index interacted with trade openness by economy to account for exposure differences. - Estimation sample excludes the United States and comprises 16 economies: Austria, Belgium, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, The Netherlands, Portugal, the Slovak Republic, Slovenia, and Spain. Estimation sample ends in the fourth quarter of 2019 (1999:Q4–2019:Q4). - For a one-standard-deviation increase in global supply chain pressures: - The inflation response outstrips nominal wage growth. - Both realized and short-term expected inflation increase persistently, taking three years (beyond the horizon shown) before reverting to their long-term means. - Nominal wage growth increases slightly in the very near term then deteriorates as depressive effects on activity take hold. - The dynamics produce a fall in real wage growth. - There are no signs that such inflationary shocks kick off a wage-price spiral. - Monetary tightening estimated using identified European Central Bank monetary shocks (Jarociński and Karadi (2020)): - A one-standard-deviation monetary tightening brings inflation down; its impact on realized and expected inflation is shorter lived than that of a supply chain shock. - Nominal and real wage growth decline, helping mitigate inflationary pressures. - In the background, the unemployment rate rises alongside increases in long-term government bond rates. - Interpretation: - Supply-chain-related inflationary shocks tend to have temporary effects on inflation and wage growth and do not give rise to a wage-price spiral. - Supply chain pressures have more prolonged effects on expected inflation than monetary tightening, suggesting monetary policymakers may need to respond aggressively to such shocks when inflation is high and rising. ### Expectations formation and scenario analysis - Three expectations formation processes considered: 1. Rational expectations: agents understand the economy’s complete structure and make forecasts that are correct on average in the absence of further shocks. 2. Fully adaptive expectations: agents project future variables to be exactly equal to their latest realization. 3. Adaptive learning: agents form expectations using small statistical models and update them as new data arrive, learning from mistakes. - Role of anchoring: - If inflation expectations are more anchored, they are less sensitive to an inflationary shock from higher global supply chain pressures. - The Global Supply Chain Pressure Index is interacted with a dummy equal to one if the lagged economy’s strength of inflation anchoring (proxied by Bems and others’ [2021] index) is above the cross-economy and cross-time median; more anchored expectations respond less to supply chain pressures. - United States scenario (model estimated for the United States; assumptions: no new shocks to inflation and interest rates exogenously set according to the Federal Reserve’s dot plot as of June 2022): - Under rational expectations: - A soft landing appears feasible. - The current inflationary shock is assumed to dissipate smoothly over the subsequent 12 quarters, allowing the output gap to converge to zero and core inflation to come down to the Federal Reserve’s target of 2 percent. - Under fully adaptive expectations: - Fast near-term acceleration in wage and price inflation because agents expect future values to equal the most recent high realizations. - As shocks dissipate and the real wage gap becomes even more negative, price inflation quickly declines after five quarters. - Price inflation remains 1.5 percentage points over target even 12 quarters later. - To bring inflation down more quickly under fully adaptive expectations, monetary policy would need to tighten much more sharply than currently anticipated. - Under adaptive learning: - Paths of inflation, wage growth, and output gap lie between rational and fully adaptive cases. - Greater inertia than rational expectations but far less than fully adaptive. - Output gap mostly closes; inflation is about half a percentage point above target after 12 quarters. - Emerging market example (Brazil): - Simulations show similar qualitative patterns across expectation types as for the United States but with greater sensitivity to inflationary shocks and higher risks of de-anchoring. - Greater sensitivity could entail a stronger central bank reaction to anchor expectations. - Mechanism limiting wage-price spirals in the model: - Real wages are critical because wages are modeled as the only determinant of marginal costs. - When inflationary cost-push shocks occur, the negative real wage gap under current circumstances helps anchor inflation: falling real labor costs help bring inflation down. - The larger the increase in inflation, the more negative the real wage gap becomes, enhancing the anchoring mechanism. - Policy implication: - More backward-looking or weakly anchored expectations require stronger monetary policy responses to reduce risks of de-anchoring. - The modeled scenarios indicate that the risks of a persistent wage-price spiral are low given the anchoring role of the current negative real wage gap and the dynamic responses estimated. *Source: CHAPTER 2 (text - CHAPTER 2), World Economic Outlook, October 2022.* ### Box 2.1 empirically examines the feedback from wages ### Box 2.1 empirically examines the feedback from wages ### Expectations, model setup, and scenario framing - The model is estimated over a period in which the monetary policy framework had high credibility, so the adaptive learning process begins centered on the inflation target, similar to the anchoring that occurs with rational expectations. - Greater economic inertia in the adaptive learning case is driven by greater inertia in expectations. - Scenarios are calibrated to the United States and assume that the inflationary shocks as of early 2022 dissipate as estimated based on previous experience. Inflation is core inflation. The horizontal axes in scenario figures show time in quarters since 2021:Q4. - The exercise underlying the scenarios uses a small dynamic stochastic general equilibrium model. Online Annex 2.7 contains further details on structure and estimation (as noted in the source). ### Scenario results and monetary policy implications - With cost-push shocks originating outside the labor market, real wage dynamics help to stabilize inflation even when wage and price expectations are backward-looking (adaptive). - If policy actions are not sufficiently responsive, inflation and inflation expectations can de-anchor from target the more adaptive the expectations are. - For the United States, with a positive output gap and persistent cost-push shocks, if expectations are formed through adaptive learning, a central bank minimizing a standard welfare function would: - initially tighten policy more, and - start easing earlier than the path implied by the Federal Reserve’s dot plot as of June 2022. - Monetary policy affects inflation dynamics through three channels: 1. Higher interest rates lower the output gap and real wages through the wage and price Phillips curves. 2. As expectations are partially adaptive, lower inflation realizations contribute to lower expected inflation. 3. Businesses and households learn over time (recognizing forecasting mistakes) and place less importance on past outcomes when forming expectations. - Under adaptive learning, front-loading monetary policy tightening is optimal to lessen the buildup of inflation expectations, helping to achieve target more quickly and smoothly. - The determination of the optimal monetary policy response in the exercise depends on these assumptions: 1. The central bank minimizes a welfare function that equally weighs output and inflation deviations (a quadratic loss function). 2. The central bank knows the expectations formation process and has full information on future cost-push shocks. ### Conclusions on wage-price spiral risks and recent dynamics - Since 2021 many economies experienced sharp rises in price inflation driven by adverse supply shocks and tight labor markets following the COVID-19 shock, raising concerns about a potential wage-price spiral. - Empirical and model-based analyses in the chapter indicate: - Although wage and price inflation picked up in 2021, real wages tended to be flat or falling across economies on average; falling real wages can be disinflationary by lowering firms’ real costs. - Historical episodes with features similar to today’s did not tend to be followed by a wage-price spiral; on average inflation fell gradually and nominal wages caught up over several quarters, though in some cases inflation remained elevated for a while. - Wage dynamics during 2020 and into early 2021 are poorly explained by inflation expectations and labor market slack, reflecting the unusual constellation of COVID-19 shocks. - Model-based analysis indicates wages in 2020–21 were driven predominantly by production capacity and labor supply shocks, while private saving was important for price changes. - In the second half of 2021, wage growth appears relatively well explained by inflation expectations and labor market slack on average, suggesting a potential gradual shift toward more normal dynamics—contingent on earlier shocks unwinding and no new persistent shocks arising. - Overall, the scenario analysis suggests that, with sufficiently aggressive monetary tightening and declines in real wages reducing price pressures, the risk of a persistent wage-price spiral in the current episode is contained on average—assuming no more persistent inflationary shocks or structural changes in wage- and price-setting processes (such as sharply higher pass-through from prices to wages or vice versa). ### Empirical estimates of pass-through from wages to consumer prices (United States) - Method and data: - The analysis studies pass-through to the PCE price index using disaggregated sectoral data and input-output matrices to construct cumulative labor input costs traced through the supply chain for 73 subcomponents of the PCE index. - The local projection method from Heise, Karahan, and Şahin (2020) is used, controlling for sectoral productivity growth and time and industry fixed effects. - Key quantitative findings (dynamic impulse responses to a 1 percentage point change in current wage growth, measured by the four-quarter change in wages): - Pass-through to services: about 10 percent after five quarters. - Pass-through to goods: no measurable pass-through detected. - The lack of pass-through in goods relative to services may reflect firms absorbing labor cost changes due to higher market power and import penetration. - The estimated pass-through appears materially unchanged from the mid-2000s up to the pandemic. - Heterogeneity and conditional effects: - Pre-2020 data suggest contemporaneous pass-through in services rises to 20 percent (statistically significant at the 99 percent confidence level) when wage growth is at or above the 75th percentile (that is, 3.9 percent). - Pass-through is about zero in periods with lower wage growth. - Cross-sectional sectoral data suggest the point estimate of pass-through from wages to service prices has been increasing since the first quarter of 2021, but this increase is not statistically significant. - Data sources: US Bureau of Economic Analysis; US Bureau of Labor Statistics; and IMF staff calculations. - Note on interpretation: Lines in the reported figure show the dynamic pass-through from a 1 percentage point change in current wage growth to inflation (four-quarter changes); shaded areas show the 90 percent confidence interval. *Source: IMF staff calculations.* ### Chapter 3). Forward-looking firms and households ### Chapter 3). Forward-looking firms and households ### Overview and purpose - Focus: near-term macroeconomic costs of decarbonization borne by agents with limited horizons; budget-neutral climate policies only. - Tool: IMF’s Global Macroeconomic Model for the Energy Transition (GMMET). - Time horizon emphasized: the next eight years; contrast between gradual credible implementation and delayed/rushed action. - Regions modeled: China, the euro area, the United States, and a block representing the rest of the world. ### Key questions addressed - Energy transition and macroeconomic costs: How fast can countries transition electricity generation toward renewables? What are household and firm costs? - Credibility and design of climate policies: Effects on employment, investment, consumption, output growth, inflation, and income distribution; implications of weak credibility. - Challenges for monetary policy: Output-inflation trade-offs from higher GHG taxes and the role of central bank credibility. - Macroeconomic cost of procrastination: Can delayed, faster action substitute for gradual action, and at what cost? ### Modeling approach (GMMET) - Model type: multicountry, microfounded, nonlinear dynamic general equilibrium with model-consistent expectations; includes nominal and real frictions. - Key sectors modeled explicitly: fossil fuel mining and trade, electricity generation with multiple technologies (including intermittence of renewables), transportation (electric and conventional cars, network externalities), energy use in production and residential heating, and non-fossil-fuel GHG activities (agriculture). - Calibration choices: two alternative calibrations for elasticity of substitution between renewables and fossil fuels in electricity generation to capture uncertainty about speed of decarbonization. ### Major quantitative findings and ranges - Global growth: could be lower by 0.15 to 0.25 percentage point annually under the modeled transition scenarios. - Global inflation: could be 0.1 to 0.4 percentage point higher. - For China, Europe, and the United States: GDP growth costs expected to be lower and in a range between 0.05 and 0.20 percentage point annually. - Benchmark pace of decarbonization: share of renewables in electricity generation increases by 20 percentage points by 2030. - Alternative (slower) calibration: pace roughly half as fast; to reach the same 25 percent emissions reduction by 2030 would require a sharper increase in GHG taxes (about twice as large as in the benchmark case). - Elasticities under alternative calibration: elasticities of substitution related to fossil fuel use reduced to one-fourth in electricity generation and halved in the manufacturing sector (see Annex Table 3.1.2). - Emissions target implication: limiting global warming to below 2°C requires emissions decline by 25 percent relative to current levels by 2030. - IPCC projection: under policies currently in place, emissions in 2030 will be more than 42 percent higher than those required to reach the Paris Agreement target. - Cost of delaying action: the resulting inflationary impulse from delayed action is about three times stronger than the gradual scenario; preventing it would require sacrificing roughly 1 percent of GDP over the course of four years. ### Policy design insights (budget-neutral packages) - Revenue recycling to cut labor income taxes: - Reduces distortions, increases labor supply, raises wages net of tax, and supports higher consumption, investment, and output. - Recycling revenues into subsidies for investment in low-carbon technologies (renewables, nuclear, hydroelectric, electric vehicles): - Facilitates transition, allows same decarbonization with lower GHG taxes, reduces inflationary impact and monetary-policy trade-offs. - Transfers to low-income households from GHG tax revenues: - Raise acceptance and credibility but come at a cost in terms of output growth. - Lump-sum rebates vs. targeted recycling: different distributional and macro effects; model contrasts cases including full lump-sum rebates to households. ### Credibility and institutional design - Credibility enhances effectiveness of climate policy; lack of credibility leads to weaker investment responses and incentives to renege. - Credibility is strengthened by: 1. A clearly defined rules-based commitment rather than pure discretion for achieving decarbonization targets. 2. Transparency of instruments and analysis used to reach targets. 3. Independent implementation insulated from political process (analogous to operational independence for central banks). - Pragmatic trade-offs: sacrificing some efficiency to provide redistribution (for equity and political support) can strengthen credibility and effectiveness. ### Implications for monetary policy - Overall: Climate policies (gradual and credible) have limited impact on output and inflation and do not present a significant challenge for central banks. - Gradual, credible implementation: - Gives agents time to adjust; induces mild inflationary pressures manageable with modest monetary adjustments while keeping GDP costs minimal. - May even permit some near-term easing to facilitate transition. - Low credibility or eroded monetary-policy credibility: - Requires sharper adjustments later, generates larger inflationary pressures, and imposes greater challenges and costs on monetary policy. ### Implications of timing: delay versus act now - Immediate action is preferable: delaying decarbonization amplifies costs. - Delaying until after current inflationary pressures are overcome would increase required GHG tax hikes and the speed of increases, producing much larger macroeconomic costs. - Rushed delayed action would produce a much stronger inflationary impulse (about three times stronger) and larger output sacrifices (roughly 1 percent of GDP over four years to prevent the impulse). *Italic: International Monetary Fund | October 2022 — Chapter 3. Forward-looking firms and households* ### CHAPTER 3 NEAR-TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIEs ### CHAPTER 3 NEAR-TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIEs ### Modeling approach and key calibration points - Simulations use a Global Macroeconomic Model for the Energy Transition and IMF staff estimates. - Two elasticity calibrations span a range of 0.15–0.25 percentage point of annual growth in costs. - Labor supply elasticity is 0.15. - A benchmark scenario assumes perfectly credible, gradually increasing GHG taxes from 2022/2023 onward; an alternative assumes partial credibility (future increments come as surprises). - For illustration: 1.5 percent of US GDP is about $320 billion and corresponds to the climate portion of that country’s recently passed Inflation Reduction Act; the costs would be spread over eight years, or $40 billion a year. ### Macroeconomic channels and general findings - A GHG tax raises energy prices, reduces future profitability, and leads forward-looking agents to cut investment and consumption. - In the short to medium term, when the tax is still low, lower aggregate demand dominates the increase in energy costs. - GHG tax revenues can be used to: - help accelerate the transition (incentives, subsidies, public investment); - cushion the taxes’ effect on firms’ output and household income; - compensate low-income households through targeted transfers. - Recycling tax revenues through lump-sum transfers is budget-neutral and nondistortionary, isolating climate-policy effects from fiscal-policy distortions. - An oil price shock differs conceptually from a GHG tax: oil shocks often shift supply suddenly; a GHG tax is more like a shift along the supply curve and is typically gradual. ### Revenue-recycling options and their differential macro effects - Three recycling strategies are contrasted: - Lump-sum transfers to households (Trans.); - Labor income tax cuts (Policy Package 1, P1: two-thirds labor tax cuts and one-third transfers to households); - Production or sectoral subsidies (feebates or firm-level rebates). - Common effect across strategies: similar impact on inflation (central bank credibility assumed). - Divergent effects: - Labor tax cuts: raise employment and output by reducing disincentives to work; boost consumption and have positive effects on labor market outcomes. - Lump-sum transfers: mitigate regressivity, support consumption, but do not raise labor supply. - Production subsidies: support investment (especially in renewables) but at the expense of consumption, since they reduce available transfers or tax cuts to households. - Lower elasticities require higher GHG prices to achieve the same emissions reduction by 2030 and magnify macroeconomic impacts. ### Feasible and balanced policy packages to align with Paris by 2030 - Three policy packages considered (described as implemented to achieve 25 percent decarbonization by 2030): - Policy Package 1 - Gradual GHG price increase from 2023 to 2030. - Two-thirds of revenue used to reduce labor taxes. - One-third of revenue transferred to households. - One-third of revenue used to subsidize low-emission sectors (listed in Package 2 in table but Package 1 in description uses labor tax cuts and transfers—see Table 3.1 for allocation). - Result: relatively higher GHG taxes required; investment declines more than in other packages; focuses on minimizing consumption penalty. - Policy Package 2 - Gradual GHG price increase from 2023 to 2026. - One-third of revenue used to reduce labor taxes. - One-third of revenue transferred to households. - One-third of revenue used to subsidize low-emission sectors: - Renewables investment - Nuclear and hydro power plants - Electric-vehicle purchase - Regulation of share of electric vehicles. - Result: subsidies stimulate private green investment, allow required emission reduction with lower GHG taxes and therefore lower inflation; supports investment more than Package 1. - Policy Package 3 - Gradual GHG price increase from 2023 to 2030. - GHG revenue rebated at the sectoral level (electricity generation, manufacturing, services). - GHG revenue from households’ activities (residential energy and individual transportation) transferred back to households. - Production subsidies and transportation regulation. - Result: production subsidies boost investment and GDP with little impact on inflation; households bear larger slowdown and consumption-to-investment ratio declines. ### Regional impacts and quantitative outcomes - Policy Package 1 reduces GDP by 1–2 percent in China, the euro area, and the US by 2030 under an alternative calibration (costs roughly twice as large as benchmark calibration). - Differences across regions mainly reflect: - starting values of energy use; - proportion of fossil fuels in consumption baskets; - GHG tax increases required to reach the 25 percent decarbonization goal. - China: household direct energy consumption is a lower share of the CPI, so GHG tax increases affect CPI less; demand-contraction effect can push down the core part of the price index. - Rest of the world (residual category dominated by fossil fuel exporters and oil-intensive economies): impact on growth is much larger, driven by rapid assumed energy transition and declines in fossil-fuel-related investment and demand. ### Credibility of climate policy and monetary policy - Climate-policy credibility - Partial credibility (agents do not believe future increments of the GHG price path) slows emissions reduction: cumulative emission reduction by 2030 is about 20 percent lower under partial credibility than under full credibility. - Partial credibility requires higher GHG taxes to reach the same decarbonization goal, leading to larger GDP losses by end of decade: - United States: GDP declines by 1.0 percent under partial credibility vs. 0.6 percent under full credibility. - Euro area: GDP declines by 1.0 percent under partial credibility vs. 0.5 percent under full credibility. - China: GDP declines by 1.2 percent under partial credibility vs. 0.6 percent under full credibility. - Key mechanism: with full credibility, anticipation of further GHG price increases accelerates shift away from emission-intensive capital (e.g., coal power) toward low-emission alternatives; partial credibility delays this reallocation. - Monetary-policy credibility - If central banks retain inflation-fighting credibility, output-inflation trade-offs from gradual climate policies are small. - If monetary credibility is lost, trade-offs are amplified; gradually implemented climate policy is easier to handle than sudden supply shocks. - Comparing monetary rules: targeting core inflation (excluding energy) versus a modified target that includes changes in GHG price (core plus GHG price) yields: - Targeting core inflation leads to slightly higher headline inflation because of tax’s direct impact on noncore CPI components. - Targeting core plus GHG price entails a larger output cost (lost output) necessary to bring down marginal costs and core inflation to offset the tax’s direct effect. *Source: CHAPTER 3 NEAR-TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIEs, text - CHAPTER 3 NEAR-TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIEs.* ### 1. Cumulative GHG Emissions ### 1. Cumulative GHG Emissions ### Impact of Mitigation Policy Credibility and Design - Less credible mitigation policies either miss GHG reduction targets when meeting GHG price paths (owing to insufficient shifts in the capital structure) or require higher GHG prices to meet GHG reduction targets at a higher macroeconomic cost. - Results presented are based on Policy Package 1 with benchmark elasticities. Decl. = declining energy sector (fossil fuel extractions and coal power plants); Exp. = expanding sectors (renewables, nuclear, hydro and fossil gas generation, electricity grid). - Including the impact of the GHG price on the consumer price index has limited macroeconomic implications as long as monetary policy credibility prevents any de-anchoring of inflation expectations. ### Macroeconomic Effects under Different Monetary Policy Targets - Under alternative (lower-elasticity) calibration and core plus GHG price targeting, by 2030 GDP would be about 1¼ percent lower than under the benchmark calibration. - Benchmark and lower elasticities are described in Annex Table 3.1.1; results draw on the Global Macroeconomic Model for the Energy Transition and IMF staff estimates. Key statistics and trajectories highlighted: - Real GDP could be between 0.9 and 2.0 percent below baseline by 2030. - Slowdown equivalent to a yearly growth reduction of 0.15 to 0.25 percentage point. - Inflation could increase to reach 0.1 to 0.4 percentage point above baseline. ### Risks from Loss of Monetary Credibility and Wage Indexation - If monetary policy loses credibility, wages could start indexing to past inflation, making inflation more inertial and amplifying output-inflation trade-offs. - Under wage indexation scenarios, stabilizing the modified version of core inflation (core plus GHG price) incurs a significantly higher output cost, while stabilizing output could trigger a wage-price spiral. - In countries where central banks might be less credible, policy packages with smaller pass-through to headline inflation (for example, Policy Package 2) could be preferred. ### Costs of Delaying Mitigation Policies - Comparing Policy Package 1 starting in 2023 with a delayed package starting in 2027 (designed to achieve the same cumulative emissions reduction in the long term) shows that delay requires faster phase-in and higher GHG taxes in some years to offset emissions accumulated from 2023 to 2026. - A delayed, faster transition significantly worsens the output-inflation trade-off: - Larger annual increments in the GHG tax directly generate larger increases in headline inflation. - Rapid fall in utilization of capital for fossil-fuel production imposes large costs to firms and profitability, plus declines in investment to shift away from emission-intensive capital. - If monetary policy targets output (to mimic gradual scenario), headline inflation increases much more; if it targets core plus GHG price, output drops much faster. - Conclusion: Delaying climate policy is not a reasonable option if the goal is to limit output-inflation trade-offs and preserve monetary credibility. Illustrative GHG-price and outcome points from model scenarios: - GHG prices in scenarios discussed include references to carbon tax levels analyzed elsewhere in the chapter (example comparisons: a $25 a ton starting tax reaching close to $38 a ton in 2030; a $75 a ton tax analyzed across advanced economies is noted for comparison). - Model averaging from referenced studies implies an economy-wide carbon tax starting at $25 a ton in 2020 (increasing by 5 percent annually until 2050) would reach close to $38 a ton in 2030 and, under lump-sum recycling, suggest a cost of 1.2 percent of GDP by 2030 in the United States. ### Policy Conclusions and Recommendations - Immediate implementation of required climate policies is essential: GHG emissions must decline by 25 percent, with respect to current levels, by 2030 to keep the Paris Agreement’s goal within reach. - Credibility of climate policy is crucial: - Credible, predictable GHG taxes incentivize investment and R&D in carbon-neutral technologies and accelerate shifts in consumption patterns. - Rebating tax revenues to low-income households helps bolster acceptance and strengthens policy credibility. - Monetary policy credibility complements climate policy credibility and is essential to keep output-inflation trade-offs low. - If global cooperation fragments, carbon border adjustment taxes could help prevent excess leakage and accelerate convergence to higher global standards. - International coordination priorities include bridging data gaps, improving reporting standards, and increasing access to climate finance in emerging market and developing economies. ### Empirical Evidence and Modeling Context - Most empirical studies find that modest carbon-pricing programs implemented so far have led to significant emission reductions at the sectoral level, with limited detected macroeconomic impact on GDP in cross-country studies. - Examples and findings: - EU ETS reduced EU-wide emissions by 3.8 percent between 2008 and 2016 (market covered about 50 percent of EU emissions and price remained below €20 a ton up to 2018). - ETS-regulated manufacturing plants reduced emissions by close to 15–20 percent in France and Germany in cited studies. - A northeastern US regional market contributed to more than half of power-sector emission reductions in the late 2000s and early 2010s despite a low price averaging $2–$3 a ton. - A UK energy tax led to energy use reductions of 23 percent in targeted manufacturing plants without cutting production, employment, or productivity. - Evidence also shows sectoral heterogeneity: carbon taxation in British Columbia led to a fall in employment in carbon-intensive and trade-intensive sectors. - Limitations: - Past carbon-pricing experiences were much smaller in scale and scope than what is required to meet Paris targets; thus inferential limits exist. - Modeling outcomes depend heavily on elasticities of substitution, capital adjustment costs, public subsidization of green technologies, and difficulty scaling up green energy supply. - Recycling carbon-tax revenues as lump-sum transfers supports consumption; using revenues to reduce distortionary taxes (including labor income taxes) enhances growth and investment. *Sources: Global Macroeconomic Model for the Energy Transition; IMF staff estimates; figures and notes as presented in the chapter excerpt.* ### 0.6 percent loss in GDP by 2030, while the GMMET ### 0.6 percent loss in GDP by 2030, while the GMMET ### Cross-Model Comparison of Changes in GDP (2030) - Table 3.1.1 reported percent deviations from baseline in 2030 under three revenue recycling options: Lump-Sum Rebates, Labor Income Tax Cuts, Capital Income Tax Cuts. - Model results (percent deviation from baseline in 2030): - E3: Lump-Sum Rebates −0.8; Labor Income Tax Cuts −0.7; Capital Income Tax Cuts −0.6 - DIEM: Lump-Sum Rebates −0.4; Labor Income Tax Cuts −0.2; Capital Income Tax Cuts 0.8 - IGEM: Lump-Sum Rebates −0.8; Labor Income Tax Cuts 0.2; Capital Income Tax Cuts 0.5 - NewERA: Lump-Sum Rebates −0.5; Labor Income Tax Cuts −0.4; Capital Income Tax Cuts 0.2 - RTI-ADAGE: Lump-Sum Rebates −0.8; Labor Income Tax Cuts −0.6; Capital Income Tax Cuts 0.9 - ReEDS-USREP: Lump-Sum Rebates −0.3; Labor Income Tax Cuts −0.1; Capital Income Tax Cuts 0.0 - Model average: Lump-Sum Rebates −0.6; Labor Income Tax Cuts −0.3; Capital Income Tax Cuts 0.3 - Note: With a linear approximation assumed, results in Table 3.1.1 could be multiplied by 2 to reflect the impact of a carbon tax that is twice as high as in the experiment conducted in the study. - Source attribution in the table: Goulder and Hafstead (2018). - Acronym note preserved: DIEM = Dynamic Integrated Evaluation Model; E3 = Goulder-Hafstead Environment-Energy-Economy; IGEM = Intertemporal General Equilibrium Model; NewERA = National Economic Research Associates economic consulting model; RTI-ADAGE = Applied Dynamic Analysis of the Global Economy; ReEDS-USREP = Region Energy Deployment System model−US Regional Energy Policy model. ### Policy Packages, Coordination, and Central Bank Response - Using comprehensive policy packages and coordinated approaches can reduce short-term output costs. - Complementary measures: - Complementing carbon taxes with green public investments can boost aggregate demand in the short term and reduce energy supply bottlenecks. - Internationally coordinated policy action (for example, an international carbon price floor arrangement with equitably differentiated emission reduction obligations by development level) would address carbon leakage and competitiveness concerns for energy-intensive and trade-exposed industries. - Central bank responses to climate-policy-related supply shocks can affect the magnitude of output and inflation effects. ### Political Economy of Carbon Pricing: Key Lessons - Credibility is essential: sudden departures from announced policies undermine credibility (example referenced: Australia’s carbon tax reversal in 2014). - Gradualism and distribution-friendly design increase political acceptability; abrupt or poorly designed measures can provoke opposition (example referenced: France’s Yellow Vests movement). - Transitional measures and clear, rules-based targets support long-term credibility. ### Country Experiences: Sweden, South Africa, Uruguay - Sweden: - Carbon tax introduced in 1991. - Carbon tax rate increased to $130 a ton (as of 2022), covering 40 percent of total emissions. - Early use of gradual implementation and exemptions (two-tier regime: some carbon-intensive and trade-exposed industries fully exempt; others faced rates as low as 25 percent of the general carbon tax rate). - Most exemptions removed in 2019. - Revenue recycling: reduction in labor income taxes implemented alongside the carbon tax. - Rules-based framework: 2018 Climate Act; transitional target example: 63 percent emission reduction by 2030 relative to 1990 levels; national review every four years by the Swedish Climate Policy Council; net-zero target by 2045. - South Africa: - Implemented a formal carbon-pricing regime in 2019. - Carbon tax rate started at $9.20 a ton of carbon dioxide, covering 80 percent of total emissions. - Transitional phase (2020–25): carbon-tax-free allowances range from 60 to 95 percent of firms’ emissions, with a further 10 percent for trade-exposed firms. - Transitional incentives include an electricity price neutrality commitment and integration within a carbon budget framework; enforcement of carbon budgets expected only after the transition period. - Concerns: - Extension of the transitional phase to 2025 risks weakening credibility. - Exemption of Eskom (state-owned power company and largest emitter) weakens effectiveness. - Full implementation conditional on external climate finance (COP26 commitments cited), creating uncertainty. - Institutional step: establishment of the Presidential Climate Commission in 2020; recommendation to further insulate it from political influence. - Uruguay: - Converted gasoline excise tax regime into a formal carbon tax in 2022. - 2022 tax rate set at $137 a ton of carbon dioxide. - Tax covers about half of carbon dioxide emissions; lower coverage in total greenhouse gas emissions. - No exemptions; portion of carbon tax revenues earmarked for incentives including subsidies for electric vehicles and investment in green public transport. - Challenges: - Lack of a rules-based mitigation path and sectoral emission intensity adjustment conditions could create uncertainty for private investment. - Climate mitigation agenda dependent on external climate finance. - Recommendation: delegate periodic evaluation of climate policy and progress to an independent body. - Note: Uruguay passed a carbon tax bill in November of last year; Uruguay’s new Sovereign Sustainability-Linked Bond Framework launched on September 20, 2022, noted as supportive. ### Decarbonizing the Power Sector and Managing Renewables’ Intermittence - Intermittent renewables (solar and wind) have grown, surpassing 20 percent in some countries; simulations suggest intermittent-renewables penetration needs to reach between 34 and 47 percent of power generation by 2030 to align with the 2°C goal. - Characteristics and challenges: - Renewables have near-zero marginal production cost, pushing them to be prioritized in dispatch and lowering electricity prices when they are marginal. - Intermittence causes price variability: prices can reach zero during high renewable output and spike when renewables are low and costlier marginal units (e.g., gas) are required. - Electricity systems must be balanced continuously; grid-scale storage remains very expensive. - Observed mitigants and recent shocks: - Enhanced grid interconnections and low-cost backup technologies (hydro, gas) have dampened price variability historically. - Between 2015 and 2019, electricity prices remained low and varied little day to day even with high renewables shares, aided by low-cost backup gas units. - Recent gas-supply disruptions (Russia’s invasion of Ukraine) and gas price spikes led to sharp wholesale electricity price increases, especially in countries relying on gas as backup (examples: Denmark, Ireland, Portugal, Spain). - Where renewables are backed by hydro (for example, Norway and Sweden), price volatility increased only partly in response to the gas price spike. - Price setting by marginal units means even small shares of gas can drive market prices when gas plants are marginal. - Policy and investment responses recommended: - System-wide approach needed as many sectors electrify and electricity prices become central to broader price setting. - Regulatory and investment measures: - Ensure adequate investment in backup capacity (for example, capacity markets). - Demand management (for example, time-of-day pricing). - Public investment in grid interconnections. - Support for research and development on storage (including from electric vehicles) and low-cost dispatchable backup technologies (for example, hydrogen, modular nuclear power plants). - Investment to limit price volatility in gas markets (for example, liquid natural gas terminals). - Use a diversified mix of decarbonized power sources (for example, renewables, hydropower, and nuclear) to enhance resilience. *International Monetary Fund | October 2022* ### Box 3.3 (continued) ### Box 3.3 (continued) ### References - Acemoglu, Daron, Philippe Aghion, Leonardo Bursztyn, and David Hémous. 2012. “The Environment and Directed Technical Change.” American Economic Review 102 (1): 131–66. - Agency for the Cooperation of Energy Regulators (ACER). 2022. 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Assumptions - Real effective exchange rates for the advanced economies are assumed to remain constant at their average levels measured during July 22, 2022–August 19, 2022. - For 2022 and 2023 these assumptions imply average US dollar–special drawing right conversion rates of 1.346 and 1.330, US dollar–euro conversion rates1 of 1.057 and 1.025, and yen–US dollar conversion rates of 128.4 and 129.3, respectively. - It is assumed that the price of oil will average $98.19 a barrel in 2022 and $85.52 a barrel in 2023. - National authorities’ established policies are assumed to be maintained. - With regard to interest rates, it is assumed that: - the three-month government bond yield for the United States will average 1.8 percent in 2022 and 4.0 percent in 2023; - the three-month government bond yield for the euro area will average –0.2 percent in 2022 and 0.8 percent in 2023; - the three-month government bond yield for Japan will average –0.1 percent in 2022 and 0.0 percent in 2023. - It is further assumed that the 10-year government bond yield will average: - for the United States: 3.2 percent in 2022 and 4.4 percent in 2023; - for the euro area: 0.9 percent in 2022 and 1.3 percent in 2023; - for Japan: 0.2 percent in 2022 and 0.3 percent in 2023. What’s New - For Algeria, starting with the October 2022 WEO, total government expenditure and net lending/borrowing include net lending by the government, which mostly reflects support to the pension system and other public sector entities. - Ecuador’s fiscal sector projections, which were previously omitted because of ongoing program review discussions, are now included. - Tunisia’s forecast data, which were previously omitted because of ongoing technical discussions pending potential program negotiations, are now included. *International Monetary Fund | October 2022 — Box 3.3 (continued) — text excerpt* ### Appendix of the October 2020 WEO. ### Appendix of the October 2020 WEO ### Data and Conventions - Data and projections for 196 economies form the statistical basis of the WEO database. - Data are maintained jointly by the IMF’s Research Department and regional departments; regional departments regularly update country projections based on consistent global assumptions. - Most countries’ macroeconomic data as presented in the WEO conform broadly to the 2008 version of the System of National Accounts (SNA 2008). - IMF sector statistical standards cited: - sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) - Monetary and Financial Statistics Manual and Compilation Guide - Government Finance Statistics Manual 2014 (GFSM 2014) - Conversion and adoption notes: - The process of adapting country data to new standards begins when manuals are released; full concordance depends on national statistical compilers providing revised country data. - WEO estimates are only partly adapted to these manuals; for many countries conversion will have only a small impact on major balances and aggregates. - Many countries have partly adopted the latest standards and will continue implementation over a number of years. - Fiscal gross and net debt data: - Drawn from official data sources and IMF staff estimates. - While attempts are made to align with GFSM 2014 definitions, data can sometimes deviate because of data limitations or specific country circumstances. - Changes in data sources or instrument coverage can give rise to revisions, sometimes substantial. - Composite data conventions: - Country group composites are either sums or weighted averages of individual country data. - Unless noted otherwise, multiyear averages of growth rates are expressed as compound annual rates of change. - Arithmetically weighted averages are used for all data for the emerging market and developing economies group—except data on inflation and money growth, for which geometric averages are used. - Conventions for weighting: - Exchange rates, interest rates, and growth rates of monetary aggregates: weighted by GDP converted to US dollars at market exchange rates (averaged over the preceding three years) as a share of group GDP. - Other domestic economy data (growth rates or ratios): weighted by GDP valued at purchasing power parity as a share of total world or group GDP. - For aggregation of world and advanced economies (and subgroups) inflation: annual rates are simple percentage changes from the previous years. - For aggregation of emerging market and developing economies (and subgroups) inflation: annual rates are based on logarithmic differences. - Composites for real GDP per capita in purchasing-power-parity terms: sums of individual country data after conversion to the international dollar in the years indicated. - Euro area composites: corrected for reporting discrepancies in intra-area transactions unless noted otherwise. - Unadjusted annual GDP data are used for the euro area and majority of individual countries, except Cyprus, Ireland, Portugal, and Spain, which report calendar-adjusted data. - For data prior to 1999, data aggregations apply 1995 European currency unit exchange rates. - Composites for fiscal data: sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated. - Composite unemployment rates and employment growth: weighted by labor force as a share of group labor force. - External sector composites: sums after conversion to US dollars at average market exchange rates (balance of payments) and at end-of-year market exchange rates for debt denominated in currencies other than US dollars. - Composites of changes in foreign trade volumes and prices: arithmetic averages of percent changes for individual countries weighted by the US dollar value of exports or imports as a share of total world or group exports or imports (in the preceding year). - Group composites are computed if 90 percent or more of the share of group weights is represented. - Data reference periods: - Data refer to calendar years, except for a few countries that use fiscal years; exceptional reporting periods are listed in Table F. - For some countries, figures for 2021 and earlier are based on estimates rather than actual outturns; latest actual outturns are listed in Table G. - Additional methodological and historical references: - Averages for real GDP, inflation, GDP per capita, and commodity prices are calculated based on the compound annual rate of change, except unemployment rate which uses simple arithmetic average. - See Box 1.1 of the October 2020 WEO for a summary of revised purchasing-power-parity-based weights and historical WEO references. ### Country Notes and Special Data Treatments - Naming and revisions: - Turkey is now referred to as Türkiye. - For Venezuela, following methodological upgrades, historical data have been revised from 2012 onward; nominal variables omitted from publication in the April 2022 WEO are now included. - Omitted or excluded projections owing to uncertainty: - Afghanistan: data and projections for 2021–27 are omitted because the IMF has paused engagement owing to lack of clarity on government recognition. - Lebanon: data and projections for 2021–27 are omitted owing to an unusually high degree of uncertainty. - Syria: data are excluded from 2011 onward because of the uncertain political situation. - Ukraine: all projections for 2022–27 except those for real GDP and consumer prices are omitted owing to an unusually high degree of uncertainty; real GDP and consumer prices are projected through 2022. - Sri Lanka: certain projections for 2023–27 are excluded from publication owing to ongoing discussions on sovereign debt restructuring, following the recently reached staff-level agreement on an IMF-supported program. - Country-specific notes and methodological points: - Albania: projections were prepared prior to the 2022 Article IV mission that ended on October 10th and do not reflect updates during the mission. - Algeria: starting with the October 2022 WEO, total government expenditure and net lending/borrowing include net lending by the government (mostly support to the pension system and other public sector entities). - Argentina: - The official national consumer price index (CPI) starts in December 2016. - For earlier periods CPI data reflect multiple series with limited comparability; WEO does not report average CPI inflation for 2014–16 and end-of-period inflation for 2015–16. - Argentina discontinued publication of labor market data starting in Q4 2015; new series available starting Q2 2016. - Bangladesh: data and forecasts are presented on a fiscal year basis; country group aggregates that include Bangladesh use calendar year estimates of real GDP and purchasing-power-parity GDP. - Costa Rica: central government definition expanded as of January 1, 2021, to include 51 public entities as per Law 9524; data back to 2019 are adjusted for comparability. - Dominican Republic: fiscal series coverage is mixed—public debt, debt service, and cyclically adjusted/structural balances are for the consolidated public sector; remaining fiscal series are for the central government. - Ecuador: authorities are undertaking revisions of historical fiscal data with technical support from the IMF. - Honduras: projections were prepared prior to the 2022 Article IV mission that ended on October 5th and do not reflect updates. - India: real GDP growth rates are calculated as per national accounts: for 1998–2001 with base year 2004/05 and, thereafter, with base year 2011/12. - Libya: reliability of data—especially national accounts and medium-term projections—is low owing to civil war and weak capacity. - Pakistan: 2022 projections are based on information available as of the end of August and do not include the impact of the recent floods. - Sierra Leone: redenominated its currency on July 1, 2022; local currency data in the October 2022 WEO are expressed in the old leone. - Turkmenistan: - Real GDP data are IMF staff estimates compiled in line with SNA, using official estimates and UN and World Bank databases. - Estimates and projections for the fiscal balance exclude receipts from domestic bond issuances and privatization operations, in line with GFSM 2014; the authorities’ official estimates include these proceeds as government revenues. - United Kingdom: projections are based on information as of September 12, 2022, and do not fully incorporate the fiscal announcement on September 23, 2022. - Uruguay: - In December 2020 authorities began reporting national accounts according to SNA 2008 with base year 2016; new series begin in 2016. - Data prior to 2016 reflect IMF staff’s best effort to preserve previously reported data and avoid structural breaks. - Since October 2018 Uruguay’s public pension system has been receiving transfers under a new law; these funds are recorded as revenues consistent with IMF methodology, affecting data and projections for 2018–22. ### Key Statistical and Methodological Points - Adoption timelines and legacy standards: - Many countries are implementing SNA 2008 or European System of National and Regional Accounts 2010; a few use versions older than 1993. - A similar adoption pattern is expected for BPM6 and GFSM 2014. - Table G lists the statistical standards to which each country adheres. - Aggregation and averaging specifics: - Averages for real GDP, inflation, GDP per capita, and commodity prices: compound annual rate of change. - Unemployment rate: simple arithmetic average. - Purchasing-power-parity-based weights revisions are summarized in Box 1.1 of the October 2020 WEO and in linked historical WEO materials. *Appendix of the October 2020 WEO (STATISTICAL APPENDIX), October 2022.* ### 1.2 percent of GDP in 2018, 1.1 percent of GDP in ### 1.2 percent of GDP in 2018, 1.1 percent of GDP in ### Fiscal data coverage and debt measurement (Uruguay) - Coverage of fiscal data for Uruguay changed from consolidated public sector to nonfinancial public sector with the October 2019 WEO. - Nonfinancial public sector coverage includes central government, local government, social security funds, nonfinancial public corporations, and Banco de Seguros del Estado. - Under the narrower fiscal perimeter (which excludes the central bank), assets and liabilities held by the nonfinancial public sector for which the counterpart is the central bank are not netted out in debt figures. - Capitalization bonds issued by the government to the central bank are now part of the nonfinancial public sector debt in this presentation. - Gross and net debt estimates for 2008–11 are preliminary. - Historical data were revised accordingly after the coverage change. ### Public pension disclaimer and sample figures - The disclaimer about the public pension system applies only to the revenues and net lending/borrowing series. - Example fiscal shares cited: "1.2 percent of GDP in 2018, 1.1 percent of GDP in 2019, 0.6 percent of GDP in 2020, and 0.3 percent of GDP in 2021 and are projected to be 0.1 percent of GDP in 2022 and 0 percent thereafter." ### Venezuela: data limitations and projection caveats - Projecting Venezuela’s economic outlook is difficult due to: - Lack of discussions with the authorities (the last Article IV consultation took place in 2004). - Incomplete metadata of limited reported statistics. - Difficulties reconciling reported indicators with economic developments. - Fiscal accounts (as used here) include: the budgetary central government; social security; FOGADE (insurance deposit institution); and a reduced set of public enterprises, including Petróleos de Venezuela, S.A. (PDVSA). - Following methodological upgrades to achieve a more robust nominal GDP, historical data and indicators expressed as percentage of GDP have been revised from 2012 onward. - For most indicators, data for 2018–22 are IMF staff estimates. - The effects of hyperinflation and the paucity of reported data mean IMF staff’s projected macroeconomic indicators for Venezuela need to be interpreted with caution; wide uncertainty surrounds these projections. - Venezuela’s consumer prices are excluded from all WEO group composites. ### Zimbabwe: currency redenomination and data revisions - In 2019 Zimbabwe authorities introduced the Real Time Gross Settlement dollar, later renamed the Zimbabwe dollar, and are in the process of redenominating their national accounts statistics. - Current data are subject to revision. - The Zimbabwe dollar previously ceased circulating in 2009; during 2009–19, Zimbabwe operated under a multicurrency regime with the US dollar as the unit of account. ### Country classification in the WEO - The WEO divides countries into two major groups: advanced economies and emerging market and developing economies. - The classification is not based on strict criteria; it has evolved and aims to facilitate analysis by organizing data meaningfully. - Some countries are outside the classification (examples given: Cuba and the Democratic People’s Republic of Korea), because the IMF does not monitor their economies as IMF members. ### Group composition and analytical classifications - Advanced economies: Table B lists 40 advanced economies; the Group of Seven major advanced economies are the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada. The euro area is distinguished as a subgroup. - Emerging market and developing economies: The group (156) includes all economies not classified as advanced. - Regional breakdowns: emerging and developing Asia; emerging and developing Europe; Latin America and the Caribbean; Middle East and Central Asia; sub-Saharan Africa. - Analytical criteria: - Source of export earnings distinguishes fuel and nonfuel, with further focus on nonfuel primary products (Standard International Trade Classifications 0, 1, 2, 4, and 68). Economies are categorized if their main source exceeded 50 percent of total exports on average between 2017 and 2021. - Financial and income criteria classify net creditor vs net debtor economies, heavily indebted poor countries (HIPCs), low-income developing countries (LIDCs), and emerging market and middle-income economies. Net debtor economies are those with latest net international investment position < zero or cumulative current account balance from 1972 (or earliest available data) to 2021 negative. - During 2017–21, 37 economies incurred external payments arrears or entered into official or commercial bank debt-rescheduling agreements (referred to as economies with arrears and/or rescheduling during 2017–21). ### Key composite shares and counts (Table A excerpt, 2021) - Advanced Economies: Number of economies = 40. - Advanced Economies’ share of world GDP (PPP): 42.0 percent (Advanced Economies 40 100.0 42.0 100.0 61.4 100.0 14.0 — presented in tabular format in source). - Emerging Market and Developing Economies: Number of economies = 156; share of world GDP (PPP) = 58.0 percent. ### Selected headline data and projections (Table A1 and medium-term highlights) - World: Real GDP annual percent changes (selected years): 2020 = –3.0, 2021 = 6.0, 2022 = 3.2, 2023 = 2.7, 2027 = 3.2. - Advanced Economies: 2020 = –4.4, 2021 = 5.2, 2022 = 2.4, 2023 = 1.1, 2027 = 1.7. - Emerging Market and Developing Economies: 2020 = –1.9, 2021 = 6.6, 2022 = 3.7, 2023 = 3.7, 2027 = 4.3. - Table A15 medium-term baseline scenario highlights: - World Real GDP: 2022 = 3.2, 2023 = 2.7, average 2024–27 = 3.3. - Advanced Economies consumer prices: 2022 = 7.2, 2023 = 4.4, average 2024–27 = 2.0. - Emerging Market and Developing Economies consumer prices: 2022 = 9.9, 2023 = 8.1, average 2024–27 = 4.6. - Average Oil Price (annual percent change) noted in trade tables and projections: historical volatility cited (e.g., Oil price percent changes across periods such as 2020 = –31.7, 2021 = 65.9, 2022 = 41.4, 2023 = –12.9 in Table A9 context). ### Fiscal and monetary policy assumptions (Box A1 synopsis) - Fiscal policy assumptions: - Short-term fiscal assumptions rely on officially announced budgets adjusted for IMF staff macroeconomic assumptions; when no official budget, projections incorporate likely policy measures. - Medium-term projections are judgments about the most likely policy path; when insufficient information, an unchanged structural primary balance is assumed. - Country-specific notes: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Denmark, France, Germany, Greece, Hong Kong SAR, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, Portugal, Puerto Rico, Russia (fiscal rule suspended and assumed discretionary spending increase), Saudi Arabia (baseline based on 2022 budget and WEO oil price assumptions and OPEC+ understanding), Singapore (detailed FY2022 fiscal measures assumed), South Africa, Spain, Sweden, Switzerland, Türkiye, United Kingdom, United States (based on July 2022 CBO baseline, adjusted for IMF staff assumptions and legislative acts such as the Bipartisan Infrastructure Law and Inflation Reduction Act). - Monetary policy assumptions: - Assumptions follow each country’s established policy framework; generally nonaccommodative over the business cycle. - Country-specific monetary assumptions include Argentina (crawling-peg regime), Brazil (convergence of inflation toward the middle of the target range by end-2024), Canada (policy tightening expected in 2022 and 2023), China (moderately accommodative in 2022), Denmark (maintain peg to the euro), euro area (in line with market expectations), India (consistency with RBI inflation target), Russia (tight monetary policy stance), Saudi Arabia (peg to US dollar), Singapore (broad money projected in line with nominal GDP), Switzerland (no policy rate change in 2022–23), United States (FOMC to continue adjusting federal funds target rate). - The World Real Long-Term Interest Rate (GDP-weighted average of 10-year or nearest-maturity government bond rates for Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) is highlighted in medium-term projections (Table A15): historical and projected values include a projected World Real Long-Term Interest Rate average of 0.8 for 2024–27. ### Statistical appendices and tables inventory (selected thematic highlights) - The Statistical Appendix contains extensive country-by-country documentation (Table G: Key Data Documentation), classifications (Tables A–F), and comprehensive tables on: - Output (Table A1, Table A2, Table A3, Table A4). - Inflation (Table A5, Table A6, Table A7). - Fiscal balances and debt for major advanced economies (Table A8). - Trade volumes and prices, including oil and nonfuel primary commodities (Table A9). - Current account balances in levels and percent of GDP (Tables A10–A12). - Financial account balances and components (Table A13). - Net lending/borrowing, savings, investment (Table A14). - Medium-term baseline scenario summary (Table A15). - The appendix explicitly notes country-specific data issues (for example, Argentina, Afghanistan, Albania, Honduras, India, Lebanon, Libya, Pakistan, Ukraine, Uruguay, Venezuela, Zimbabwe) and exceptions (Syria, Cuba, DPRK excluded from certain composites or classification). *International Monetary Fund | October 2022 — Statistical Appendix (excerpts and tabular data as presented in source).* ### Annex 1.SF.1 ### Annex 1.SF.1 ### Executive Board assessment of the global outlook (September 2022) - Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities. - Contributing factors to a weakening in global economic prospects: - High inflation and associated tightening financial conditions resulting from policy normalization. - Effects of Russia’s war in Ukraine, particularly on food and energy prices. - The lingering COVID-19 pandemic and related supply chain disruptions. - Directors recognized that risks to the outlook are unusually high and tilt the distribution of likely growth outcomes to the downside. - The current environment—high inflation, slowdown in growth, and heightened uncertainty—raises the likelihood of a policy mistake above usual levels. ### Principal downside risks identified - Policy divergence and cross-border tensions. - Further energy and food price shocks. - Entrenchment of inflation dynamics and a de-anchoring of inflation expectations. - Debt vulnerabilities in some emerging markets. ### Monetary policy guidance - Monetary authorities should act decisively and continue to normalize policy to prevent inflationary pressures from becoming entrenched and avoid an unmooring of inflation expectations. - Central banks in most advanced economies and EMDEs would need to continue tightening the monetary policy stance to bring inflation credibly back to target and to anchor inflation expectations. - Maintaining central bank independence and policy credibility is essential to secure price stability. - Importance of assessing the impact of simultaneous monetary tightening, particularly implications for EMDEs. - Preparedness for EMDEs if global financial conditions tighten in a disorderly manner: - Use all available tools, including foreign exchange interventions and capital flow management measures. - Actions should be guided when appropriate by the Integrated Policy Framework and in line with the Institutional View on the Liberalization and Management of Capital Flows. - Such measures should not substitute for exchange rate flexibility and warranted macroeconomic adjustments. - Clear communication of policy objectives is crucial to preserve credibility and avoid unwarranted market volatility. ### Fiscal policy guidance - Fiscal policy is operating in a highly uncertain environment of elevated inflation, slowdown in growth, high debt, and tightening borrowing conditions. - Where inflation is elevated, a tighter fiscal stance would send a powerful signal of policymaker alignment in the fight against inflation, reducing the size of required interest rate increases and helping keep borrowing costs lower. - Fiscal support to address the surge in cost of living from high food and energy prices should primarily focus on targeted support to the most vulnerable segments, to preserve price incentives for energy conservation. - Some Directors considered that additional but temporary energy policies may be needed in countries facing exceptionally high and volatile energy prices owing to Russia’s war in Ukraine. - Fiscal policy has a role in protecting people against loss in real incomes during large adverse shocks, but that requires healthy public finances. - Recommended fiscal priorities: - Invest in social safety nets and develop policy strategies and tools deployable under various scenarios. - Implement a sound and credible medium-term fiscal framework, including spending prioritization and efforts to raise revenues. - Rebuild fiscal buffers to cope with future crises. - Make progress in long-term development needs, such as investment in renewable energy and health care, to foster economic resilience. ### Financial stability concerns and macroprudential policy - Financial stability risks have risen along many dimensions despite no material systemic event so far. - Importance of containing further buildup of financial vulnerabilities. - Selected macroprudential tools may need adjustment to tackle pockets of elevated vulnerabilities, mindful of country-specific circumstances and near-term economic challenges. - Need to balance containing vulnerabilities with avoiding procyclicality and a disorderly tightening of financial conditions given heightened economic uncertainty and ongoing policy normalization. ### Multilateral cooperation and global priorities - Urgent call for global cooperation and dialogue to defuse geopolitical tensions, avoid further economic and trade fragmentation, and respond to interconnected challenges. - Critical multilateral actions identified: - Respond to humanitarian crises and end Russia’s war in Ukraine. - Safeguard global liquidity and manage debt distress. - Mitigate and adapt to climate change. - End the pandemic and address inequity in access to health care and vaccinations worldwide. - Multilateral institutions should be ready to provide emergency liquidity to safeguard essential spending and contain financing crises. - Call for greater debt transparency and better mechanisms to produce orderly debt restructurings—including a more effective Common Framework—where insolvency issues prevail. - Achieving energy security and addressing the climate agenda should go hand-in-hand, including addressing significant climate financing needs of EMDEs and investing in renewable energy and energy efficiency. - Directors called for decisive actions to reduce the threat of future pandemics. *Source: Remarks made by the Chair at the conclusion of the Executive Board’s discussion of the Fiscal Monitor, Global Financial Stability Report, and World Economic Outlook on September 29, 2022. (WORLD ECONOMIC OUTLOOK: COUNTERING THE COST-OF-LIVING CRISIS, October 2022)* --- _Source: https://www.imf.org/-/media/files/publications/weo/2022/october/english/text.pdf_