## 2022 January Update — The Forces Shaping the Outlook (excerpt)

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### Global outlook and forecasts
- Global growth is estimated at 5.9 percent in 2021 and is expected to moderate to 4.4 percent in 2022.
- The forecast for 2023 is revised up mechanically as 2022 drags dissipate, but cumulative global growth over 2022 and 2023 is projected to be 0.3 percentage point lower than previously forecast.
- Country and regional revisions for 2022 (difference from October 2021 WEO where noted):
  - United States: downgrade of 1.2 percentage points for 2022.
  - Canada: downgrade of 0.8 percentage point for 2022.
  - Euro area: downgrade of 0.4 percentage point for 2022; Germany marked down by 0.8 percentage point.
  - United Kingdom: growth revised down by 0.3 percentage point to 4.7 percent.
  - China: growth forecast for 2022 revised down by 0.8 percentage point to 4.8 percent.
  - India: prospects for 2023 marked up (revisions discussed; India data also presented on fiscal year basis).
  - Brazil, Mexico, Russia, South Africa: forecasts adjusted downward for 2022 for reasons including monetary tightening, weak harvests, and softer investment.
- World trade volume (goods and services) and regional projections are presented in the overview table (projections based on data up to 18 January 2022).

### Inflation, commodity prices, and labor markets
- Inflation expectations and projections:
  - Inflation is expected to remain elevated in the near term, averaging 3.9 percent in advanced economies in 2022.
  - Inflation in emerging market and developing economies is expected to average 5.9 percent in 2022.
  - Food prices are expected to increase at about 4½ percent in 2022 and decline in 2023.
  - Futures markets indicate oil prices will rise about 12 percent and natural gas prices about 58 percent in 2022 (both lower than 2021 increases) before retreating in 2023 as imbalances recede further.
- Oil price assumptions (based on futures markets as of January 10, 2022):
  - The average price of oil in US dollars a barrel was $69.07 in 2021.
  - The assumed price is $77.31 in 2022 and $71.29 in 2023.
- Labor market dynamics:
  - Employment and participation are returning almost to pre-pandemic levels in many countries, with nominal wage growth generally contained.
  - In the United States, however, a sharp decline in unemployment has been accompanied by buoyant nominal wage growth, indicating tightening not evident elsewhere.
  - If US labor force participation remains below pre-pandemic levels, tighter labor markets may feed through to higher prices.
- Monetary policy signals:
  - The Federal Reserve communicated in December 2021 that it will taper asset purchases at a faster pace and signaled the federal funds rate will likely be raised to 0.75–1.00 percent by the end of 2022, some 50 basis points higher than previous guidance.
  - The European Central Bank announced it will end net asset purchases under the Pandemic Emergency Purchase Programme in March 2022, temporarily increase net purchases under the Asset Purchase Programme, and maintain key interest rates at current levels until adequate progress toward stabilizing inflation is made.

### Key downside risks and drivers of uncertainty
- The balance of risks is tilted to the downside, with five key questions determining the global outlook:
  - Path of the pandemic: Baseline conditioned on adverse health outcomes coming down to low levels in most countries by end-2022, assuming vaccination rates improve and therapies become more effective. Over 55 percent of people have received at least one dose (as of the period covered).
  - Emergence of new COVID-19 variants (notably Omicron): Omicron appeared more transmissible than Delta as of mid-January 2022; net effects on hospitalizations and deaths remain uncertain. The baseline assumes most countries achieve vaccination rates consistent with the IMF’s pandemic proposal by end-2022, with some EMDEs falling short and achieving broad coverage only in 2023.
  - Persistent supply chain disruptions and energy price volatility: These continue to weigh on activity and push inflation higher and more broad-based.
  - Monetary policy normalization in advanced economies: As policy rates lift, risks to financial stability and EMDE capital flows, currencies, and fiscal positions may emerge—especially given significantly increased debt levels over the past two years.
  - Geopolitical tensions and the ongoing climate emergency: Elevated probability of major natural disasters and other global risks crystallizing.
- Recent adverse developments that weakened the start of 2022:
  - Omicron-related mobility restrictions and financial market volatility in late 2021.
  - Continued supply disruptions hindering global manufacturing, particularly in Europe and the United States.
  - China-specific drags: COVID outbreaks, power outages interrupting industrial production, a retrenchment in the real estate sector, and faster-than-expected withdrawal of public investment.
- Broadening price pressures in late 2021:
  - Fossil fuel prices nearly doubled over the prior year, raising energy costs and inflation—most prominently in Europe.
  - Rising food prices contributed to higher inflation in regions such as sub-Saharan Africa.
  - Ongoing supply chain constraints, clogged ports, and high goods demand contributed to broadening inflation, especially in the United States.
  - Higher imported goods prices contributed to inflation in Latin America and the Caribbean.

### Policy recommendations and priorities
- Global health strategy:
  - Emphasize worldwide access to vaccines, tests, and treatments to reduce the risk of dangerous COVID-19 variants.
  - Increase production of supplies, improve in-country delivery systems, and ensure fairer international distribution.
- Monetary policy:
  - Monetary policy in many countries will need to continue on a tightening path to curb inflation pressures.
- Fiscal policy:
  - Fiscal policy will have more limited space than earlier in the pandemic and should prioritize health and social spending while focusing support on the worst affected.
  - International cooperation is essential to preserve access to liquidity and expedite orderly debt restructurings where needed.
- Climate policy:
  - Investing in climate policies remains imperative to reduce the risk of catastrophic climate change.

### Risks to the global growth outlook (additional detail)
- Baseline assumes adverse health outcomes—severe illness, hospitalizations, deaths—are brought to low levels in most countries by the end of 2022.
- Key downside risks that could push global growth below the baseline:
  - Continued emergence of new variants if low vaccination rates persist.
  - Miscommunication or stronger-than-expected tightening of US monetary policy prompting market reactions and tighter global financial conditions.
  - Persistent supply-demand imbalances and prolonged supply chain disruptions.
  - Intensification of China’s real estate slowdown with spillovers to commodity exporters and emerging markets.
  - Escalating climate-related disasters and geopolitical tensions.
- IMF conditioning on US monetary policy: an end to asset purchases in March 2022 and three rate increases in both 2022 and 2023—“consistent with what will be needed to bring inflation back down to the 2 percent medium-term goal.”

### Supply chain disruptions and inflation
- IMF staff analysis suggests supply disruptions in 2021:
  - shaved 0.5–1  .0 percentage point off global GDP growth in 2021
  - added 1.0 percentage point to core inflation in 2021
- Causes and dynamics:
  - Shift toward goods consumption (especially in advanced economies) overloaded global supply chains.
  - Pandemic-related impediments to transportation and staffing, plus fragile just-in-time logistics and lean inventories.
  - Bottlenecks often on land (trucking and services) even where shipping fleets have limited spare capacity.
  - Baseline assumes supply-demand imbalances will wane over the course of 2022, but persistence risks feeding into higher inflation expectations.
  - The Omicron variant may limit port efficiency, exacerbate shipping problems, and delay rebalancing of demand from goods to services.

### Labor markets, wages, and inflation persistence
- Baseline expects inflation to subside in the coming year and expectations to remain well anchored.
- Risks:
  - Tight labor markets and persistently elevated living costs could push workers to demand higher wages and firms to grant them, creating a wage-price spiral.
  - These risks are particularly salient in the United States: labor market slack seems to have dissipated, labor costs have risen, inflation is more broad-based (including shelter), and US supply disruptions may last longer than in Europe or Asia.
  - Worker reluctance to return to in-person service professions (e.g., leisure and hospitality) could cause labor shortages and upward wage pressure in those sectors.
- Key indicators to monitor: inflation expectations, wage growth and unit labor costs, and firms’ profit margins.

### US monetary tightening and global spillovers
- US policy normalization could trigger capital flow reversals and tighter financial conditions internationally:
  - Markets’ reactions to Federal Reserve policy changes will determine spillovers, particularly to emerging markets and frontier economies.
  - Miscommunication may provoke a flight to safety, raising spreads for riskier borrowers and pressuring emerging market currencies, firms, and fiscal positions.
- Policy assumptions: end asset purchases in March 2022 and three rate increases in both 2022 and 2023.
- Policy recommendation: central banks should telegraph an orderly, data-dependent withdrawal and clearly signal possible recalibration if the pandemic worsens.

### Emerging market vulnerabilities and external financing
- Less accommodative advanced-economy policy will:
  - Incentivize capital outflows from emerging market and developing economies.
  - Put downward pressure on their currencies and raise inflation.
  - Increase burdens on foreign-currency borrowers and raise debt service costs.
- Relative resilience noted: emerging markets generally have higher reserves and better current account balances than during the 2013 taper tantrum, but public and private debt levels are higher.
- Policy guidance:
  - Extend debt maturities where feasible and contain currency mismatches.
  - Use exchange rate flexibility to absorb shocks.
  - In cases of market distortions or balance sheet vulnerabilities, consider foreign exchange intervention to smooth disorderly market conditions and temporary capital flow management measures (not as substitutes for macroeconomic adjustment).
  - Strengthen resolution regimes to facilitate orderly deleveraging and restructuring.
  - IMF lending arrangements can act as a backstop; for countries with large financing needs and unsustainable debt, timely operationalization of the G20 Common Framework for debt treatment is essential (progress has been too slow and needs urgent improvement).

### Fiscal pressures and policy sequencing
- Global public debt reached record levels due to pandemic spending amid collapsing tax receipts.
- Higher interest rates will raise borrowing costs, especially for foreign-currency and short-maturity borrowers.
- Fiscal guidance:
  - Fiscal deficits will need to shrink in most countries in coming years, contingent on the pace of recovery.
  - If the pandemic worsens, consolidation can be slowed where fiscal space permits; governments should reintroduce targeted support (lifelines) for worst-affected households and firms and increase support for the most vulnerable.
  - Better targeting of support and credible, sustainable medium-term fiscal plans are essential.
  - Decisive international support for low-income countries with elevated debt levels is necessary so they can provide fiscal support.
  - In countries with upside growth surprises (example countries listed in source), scope exists to retire extraordinary crisis expenditures and enhance revenue mobilization.
- Longer-term: higher growth and stronger tax revenues are required for many countries to avoid debt distress; structural reforms and improved fiscal frameworks are critical.

### Structural reforms and supply-side policies
- To boost long-term growth and offset pandemic scarring:
  - Remedy education interruptions and learning losses, especially acute in low-income countries lacking alternatives like online instruction.
  - Retool and reskill workers for a more digital economy.
  - Use the pandemic as an opportunity to accelerate digitalization and technology adoption.
  - Reduce tariffs and trade barriers to ease supply disruptions and inflation pressures and improve resource allocation.
  - Strengthen global cooperation on supply chains to reduce hoarding incentives and smooth future adjustments.

### Climate risks and policy imperatives
- Climate emergency poses ongoing severe risks: more frequent natural disasters (floods, droughts, wildfires) that hit vulnerable low-income, low-vaccination countries hardest and strain global supply chains.
- Current commitments fall far short of limiting global temperature increases to 2 degrees Celsius above preindustrial levels.
- Policy recommendations:
  - Implement much larger coordinated global policies, including carbon price floors.
  - Reallocate resources from carbon pricing and fossil-fuel subsidy reductions to:
    - green infrastructure investment,
    - research subsidies for renewables and storage technologies,
    - compensatory transfers to those adversely affected by the energy transition.
  - Reinforce national measures with adequately resourced multilateral climate finance initiatives to enable mitigation and adaptation investments by all countries.

### Health policy priorities and global equity
- Vaccination and health tool disparities:
  - Fully vaccinated share of population: about 70 percent for high-income countries, but below 4 percent for low-income countries.
  - 86 countries—accounting for 27 percent of the world’s population—fell short of the end-2021 40 percent vaccination target (excluding boosters) set out in the IMF pandemic proposal.
  - Aggregate shortfall of administered doses in these 86 countries: 974 million below the amount needed to meet the end-2021 vaccination target.
  - Testing inequity: testing rates are about 80 times higher in high-income countries than in low-income countries.
- Immediate actions called for:
  - Close the financing gap of the ACT Accelerator of about $23 billion to finance vaccines, tests, treatments, PPE, and in-country delivery for developing economies.
  - Ensure equitable and predictable vaccine supply through COVAX and the African Vaccine Acquisition Trust.
  - Scale up absorptive capacity: support in-country vaccine delivery costs, address vaccine hesitancy, and improve health infrastructure.
  - Balance global goals of helping all countries meet vaccine targets with booster rollouts in highly vaccinated countries.
  - Improve testing to enable effective use of oral antivirals, which depend on timely case identification.
  - Consider incentivizing global technology transfers and licensing to diversify production of vaccines and other medical tools.
- Policy guidance for high-immunization countries: tread carefully to balance higher case numbers against economic harm of restrictions; avoid penalizing countries reporting new variants to not disincentivize timely disclosure.

### BOX 1. GLOBAL FINANCIAL STABILITY UPDATE — key takeaways
- Monetary conditions and inflation risks:
  - Global financial conditions have remained broadly accommodative since the October Global Financial Stability Report, despite some recent tightening driven by rising interest rates and spread of the Omicron variant.
  - Front-end interest-rate-implied volatility has risen significantly as the market-implied expected path of policy has moved higher.
  - Driven by higher real rates, global long-term rates have increased sharply since the beginning of 2022 to pandemic-era highs.
  - Market-based measures of inflation expectations have declined in the last few weeks, partially reversing increases during 2021.
- Emerging markets: flows, spreads, and policy response:
  - Emerging market assets have remained under pressure due to concerns about inflation, the policy outlook, and expected Fed policy tightening.
  - Spreads on hard currency bonds have widened, especially for frontier economies.
  - Emerging market capital flows have come under pressure, with a moderation in hard currency bond issuance and continued weakness in local currency bond flows, excluding China.
  - Many emerging market central banks have continued to raise policy rates, above pre-pandemic levels in several countries.
- Risk assets, valuations, and corporate earnings:
  - Risk assets face higher volatility amid stretched valuations.
  - Earnings are expected to surpass pre-pandemic levels in 2022 in most sectors, though sectors linked to international travel remain vulnerable to the development of the virus.
  - In credit markets, bond spreads are still below average 2019 levels despite some modest widening in early 2022.
  - Crypto-asset prices have been declining significantly since early November ahead of the 2022 “crypto sprint” focus on these assets by US regulators.
- Key figures and indicators (as described): Financial Conditions Indices (standard deviations), Implied Volatility Indices (Percent), Market Expectations for Two-Year-ahead Policy Rates (Percent), Market-Based Inflation Expectations (Percent), Portfolio Flows to Emerging Markets (Billions of US dollars), Real Yields (Basis points).
- This box was prepared by Sergei Antoshin, Rohit Goel, and Sheheryar Malik and provides an update on market developments since the October 2021 Global Financial Stability Report (data cutoff around September 30, 2021).

*International Monetary Fund | January 2022*

### 2023. Although this is 0.2 percentage point higher than in the previous forecast, the upgrade largely reflects a

### The Forces Shaping the Outlook

### Global outlook and forecasts
- Global growth is estimated at 5.9 percent in 2021 and is expected to moderate to 4.4 percent in 2022.
- The forecast for 2023 is revised up mechanically as 2022 drags dissipate, but cumulative global growth over 2022 and 2023 is projected to be 0.3 percentage point lower than previously forecast.
- Country and regional revisions for 2022 (difference from October 2021 WEO where noted):
  - United States: downgrade of 1.2 percentage points for 2022.
  - Canada: downgrade of 0.8 percentage point for 2022.
  - Euro area: downgrade of 0.4 percentage point for 2022; Germany marked down by 0.8 percentage point.
  - United Kingdom: growth revised down by 0.3 percentage point to 4.7 percent.
  - China: growth forecast for 2022 revised down by 0.8 percentage point to 4.8 percent.
  - India: prospects for 2023 marked up (revisions discussed; India data also presented on fiscal year basis).
  - Brazil, Mexico, Russia, South Africa: forecasts adjusted downward for 2022 for reasons including monetary tightening, weak harvests, and softer investment.
- World trade volume (goods and services) and regional projections are presented in the overview table (projections based on data up to 18 January 2022).

### Inflation, commodity prices, and labor markets
- Inflation expectations and projections:
  - Inflation is expected to remain elevated in the near term, averaging 3.9 percent in advanced economies in 2022.
  - Inflation in emerging market and developing economies is expected to average 5.9 percent in 2022.
  - Food prices are expected to increase at about 4½ percent in 2022 and decline in 2023.
  - Futures markets indicate oil prices will rise about 12 percent and natural gas prices about 58 percent in 2022 (both lower than 2021 increases) before retreating in 2023 as imbalances recede further.
- Oil price assumptions (based on futures markets as of January 10, 2022):
  - The average price of oil in US dollars a barrel was $69.07 in 2021.
  - The assumed price is $77.31 in 2022 and $71.29 in 2023.
- Labor market dynamics:
  - Employment and participation are returning almost to pre-pandemic levels in many countries, with nominal wage growth generally contained.
  - In the United States, however, a sharp decline in unemployment has been accompanied by buoyant nominal wage growth, indicating tightening not evident elsewhere.
  - If US labor force participation remains below pre-pandemic levels, tighter labor markets may feed through to higher prices.
- Monetary policy signals:
  - The Federal Reserve communicated in December 2021 that it will taper asset purchases at a faster pace and signaled the federal funds rate will likely be raised to 0.75–1.00 percent by the end of 2022, some 50 basis points higher than previous guidance.
  - The European Central Bank announced it will end net asset purchases under the Pandemic Emergency Purchase Programme in March 2022, temporarily increase net purchases under the Asset Purchase Programme, and maintain key interest rates at current levels until adequate progress toward stabilizing inflation is made.

### Key downside risks and drivers of uncertainty
- The balance of risks is tilted to the downside, with five key questions determining the global outlook (summarized):
  - Path of the pandemic: Baseline conditioned on adverse health outcomes coming down to low levels in most countries by end-2022, assuming vaccination rates improve and therapies become more effective. Over 55 percent of people have received at least one dose (as of the period covered).
  - Emergence of new COVID-19 variants (notably Omicron): Omicron appeared more transmissible than Delta as of mid-January 2022; net effects on hospitalizations and deaths remain uncertain. The baseline assumes most countries achieve vaccination rates consistent with the IMF’s pandemic proposal by end-2022, with some EMDEs falling short and achieving broad coverage only in 2023.
  - Persistent supply chain disruptions and energy price volatility: These continue to weigh on activity and push inflation higher and more broad-based.
  - Monetary policy normalization in advanced economies: As policy rates lift, risks to financial stability and EMDE capital flows, currencies, and fiscal positions may emerge—especially given significantly increased debt levels over the past two years.
  - Geopolitical tensions and the ongoing climate emergency: Elevated probability of major natural disasters and other global risks crystallizing.
- Recent adverse developments that weakened the start of 2022:
  - Omicron-related mobility restrictions and financial market volatility in late 2021.
  - Continued supply disruptions hindering global manufacturing, particularly in Europe and the United States.
  - China-specific drags: COVID outbreaks, power outages interrupting industrial production, a retrenchment in the real estate sector, and faster-than-expected withdrawal of public investment.
- Broadening price pressures in late 2021:
  - Fossil fuel prices nearly doubled over the prior year, raising energy costs and inflation—most prominently in Europe.
  - Rising food prices contributed to higher inflation in regions such as sub-Saharan Africa.
  - Ongoing supply chain constraints, clogged ports, and high goods demand contributed to broadening inflation, especially in the United States.
  - Higher imported goods prices contributed to inflation in Latin America and the Caribbean.

### Policy recommendations and priorities
- Global health strategy:
  - Emphasize worldwide access to vaccines, tests, and treatments to reduce the risk of dangerous COVID-19 variants.
  - Increase production of supplies, improve in-country delivery systems, and ensure fairer international distribution.
- Monetary policy:
  - Monetary policy in many countries will need to continue on a tightening path to curb inflation pressures.
- Fiscal policy:
  - Fiscal policy will have more limited space than earlier in the pandemic and should prioritize health and social spending while focusing support on the worst affected.
  - International cooperation is essential to preserve access to liquidity and expedite orderly debt restructurings where needed.
- Climate policy:
  - Investing in climate policies remains imperative to reduce the risk of catastrophic climate change.

*International Monetary Fund | January 2022*

### Part i al l y or f ul l y vacci nat ed peopl e per 100

### Part i al l y or f ul l y vacci nat ed peopl e per 100

### Risks to the global growth outlook
- Baseline assumes adverse health outcomes—severe illness, hospitalizations, deaths—are brought to low levels in most countries by the end of 2022.
- Key downside risks that could push global growth below the baseline:
  - Continued emergence of new variants if low vaccination rates persist.
  - Miscommunication or stronger-than-expected tightening of US monetary policy prompting market reactions and tighter global financial conditions.
  - Persistent supply-demand imbalances and prolonged supply chain disruptions.
  - Intensification of China’s real estate slowdown with spillovers to commodity exporters and emerging markets.
  - Escalating climate-related disasters and geopolitical tensions.
- IMF conditioning on US monetary policy: an end to asset purchases in March 2022 and three rate increases in both 2022 and 2023—“consistent with what will be needed to bring inflation back down to the 2 percent medium-term goal.”

### Supply chain disruptions and inflation
- IMF staff analysis suggests supply disruptions in 2021:
  - shaved 0.5–1  .0 percentage point off global GDP growth in 2021
  - added 1.0 percentage point to core inflation in 2021
- Causes and dynamics:
  - Shift toward goods consumption (especially in advanced economies) overloaded global supply chains.
  - Pandemic-related impediments to transportation and staffing, plus fragile just-in-time logistics and lean inventories.
  - Bottlenecks often on land (trucking and services) even where shipping fleets have limited spare capacity.
  - Baseline assumes supply-demand imbalances will wane over the course of 2022, but persistence risks feeding into higher inflation expectations.
  - The Omicron variant may limit port efficiency, exacerbate shipping problems, and delay rebalancing of demand from goods to services.

### Labor markets, wages, and inflation persistence
- Baseline expects inflation to subside in the coming year and expectations to remain well anchored.
- Risks:
  - Tight labor markets and persistently elevated living costs could push workers to demand higher wages and firms to grant them, creating a wage-price spiral.
  - These risks are particularly salient in the United States: labor market slack seems to have dissipated, labor costs have risen, inflation is more broad-based (including shelter), and US supply disruptions may last longer than in Europe or Asia.
  - Worker reluctance to return to in-person service professions (e.g., leisure and hospitality) could cause labor shortages and upward wage pressure in those sectors.
- Key indicators to monitor: inflation expectations, wage growth and unit labor costs, and firms’ profit margins.

### US monetary tightening and global spillovers
- US policy normalization could trigger capital flow reversals and tighter financial conditions internationally:
  - Markets’ reactions to Federal Reserve policy changes will determine spillovers, particularly to emerging markets and frontier economies.
  - Miscommunication may provoke a flight to safety, raising spreads for riskier borrowers and pressuring emerging market currencies, firms, and fiscal positions.
- Policy assumptions: end asset purchases in March 2022 and three rate increases in both 2022 and 2023.
- Policy recommendation: central banks should telegraph an orderly, data-dependent withdrawal and clearly signal possible recalibration if the pandemic worsens.

### Emerging market vulnerabilities and external financing
- Less accommodative advanced-economy policy will:
  - Incentivize capital outflows from emerging market and developing economies.
  - Put downward pressure on their currencies and raise inflation.
  - Increase burdens on foreign-currency borrowers and raise debt service costs.
- Relative resilience noted: emerging markets generally have higher reserves and better current account balances than during the 2013 taper tantrum, but public and private debt levels are higher.
- Policy guidance:
  - Extend debt maturities where feasible and contain currency mismatches.
  - Use exchange rate flexibility to absorb shocks.
  - In cases of market distortions or balance sheet vulnerabilities, consider foreign exchange intervention to smooth disorderly market conditions and temporary capital flow management measures (not as substitutes for macroeconomic adjustment).
  - Strengthen resolution regimes to facilitate orderly deleveraging and restructuring.
  - IMF lending arrangements can act as a backstop; for countries with large financing needs and unsustainable debt, timely operationalization of the G20 Common Framework for debt treatment is essential (progress has been too slow and needs urgent improvement).

### Fiscal pressures and policy sequencing
- Global public debt reached record levels due to pandemic spending amid collapsing tax receipts.
- Higher interest rates will raise borrowing costs, especially for foreign-currency and short-maturity borrowers.
- Fiscal guidance:
  - Fiscal deficits will need to shrink in most countries in coming years, contingent on the pace of recovery.
  - If the pandemic worsens, consolidation can be slowed where fiscal space permits; governments should reintroduce targeted support (lifelines) for worst-affected households and firms and increase support for the most vulnerable.
  - Better targeting of support and credible, sustainable medium-term fiscal plans are essential.
  - Decisive international support for low-income countries with elevated debt levels is necessary so they can provide fiscal support.
  - In countries with upside growth surprises (example countries listed in source), scope exists to retire extraordinary crisis expenditures and enhance revenue mobilization.
- Longer-term: higher growth and stronger tax revenues are required for many countries to avoid debt distress; structural reforms and improved fiscal frameworks are critical.

### Structural reforms and supply-side policies
- To boost long-term growth and offset pandemic scarring:
  - Remedy education interruptions and learning losses, especially acute in low-income countries lacking alternatives like online instruction.
  - Retool and reskill workers for a more digital economy.
  - Use the pandemic as an opportunity to accelerate digitalization and technology adoption.
  - Reduce tariffs and trade barriers to ease supply disruptions and inflation pressures and improve resource allocation.
  - Strengthen global cooperation on supply chains to reduce hoarding incentives and smooth future adjustments.

### Climate risks and policy imperatives
- Climate emergency poses ongoing severe risks: more frequent natural disasters (floods, droughts, wildfires) that hit vulnerable low-income, low-vaccination countries hardest and strain global supply chains.
- Current commitments fall far short of limiting global temperature increases to 2 degrees Celsius above preindustrial levels.
- Policy recommendations:
  - Implement much larger coordinated global policies, including carbon price floors.
  - Reallocate resources from carbon pricing and fossil-fuel subsidy reductions to:
    - green infrastructure investment,
    - research subsidies for renewables and storage technologies,
    - compensatory transfers to those adversely affected by the energy transition.
  - Reinforce national measures with adequately resourced multilateral climate finance initiatives to enable mitigation and adaptation investments by all countries.

### Health policy priorities and global equity
- Vaccination and health tool disparities:
  - Fully vaccinated share of population: about 70 percent for high-income countries, but below 4 percent for low-income countries.
  - 86 countries—accounting for 27 percent of the world’s population—fell short of the end-2021 40 percent vaccination target (excluding boosters) set out in the IMF pandemic proposal.
  - Aggregate shortfall of administered doses in these 86 countries: 974 million below the amount needed to meet the end-2021 vaccination target.
  - Testing inequity: testing rates are about 80 times higher in high-income countries than in low-income countries.
- Immediate actions called for:
  - Close the financing gap of the ACT Accelerator of about $23 billion to finance vaccines, tests, treatments, PPE, and in-country delivery for developing economies.
  - Ensure equitable and predictable vaccine supply through COVAX and the African Vaccine Acquisition Trust.
  - Scale up absorptive capacity: support in-country vaccine delivery costs, address vaccine hesitancy, and improve health infrastructure.
  - Balance global goals of helping all countries meet vaccine targets with booster rollouts in highly vaccinated countries.
  - Improve testing to enable effective use of oral antivirals, which depend on timely case identification.
  - Consider incentivizing global technology transfers and licensing to diversify production of vaccines and other medical tools.
- Policy guidance for high-immunization countries: tread carefully to balance higher case numbers against economic harm of restrictions; avoid penalizing countries reporting new variants to not disincentivize timely disclosure.

*Source: International Monetary Fund | January 2022*

### BOX 1. GLOBAL FINANCIAL STABILITY UPDATE

### BOX 1. GLOBAL FINANCIAL STABILITY UPDATE

### Monetary conditions and inflation risks
- Global financial conditions have remained broadly accommodative since the October Global Financial Stability Report, despite some recent tightening driven by rising interest rates and spread of the Omicron variant.
- The ensuing surge in new infections has increased global financial market volatility, delayed business re-openings, and clouded the inflation outlook.
- Amid price pressure persisting more than anticipated:
  - Central banks in advanced economies have taken steps toward policy normalization.
  - Policymakers in several emerging markets have continued to tighten monetary policy.
- Front-end interest-rate-implied volatility has risen significantly as the market-implied expected path of policy has moved higher.
- Driven by higher real rates, global long-term rates have increased sharply since the beginning of 2022 to pandemic-era highs, reflecting in part the perception that the Federal Reserve will accelerate its normalization process.
- Market-based measures of inflation expectations have declined in the last few weeks, partially reversing increases during 2021.
- Higher real rates have weighed on risk asset prices, with equity markets losing some ground.

### Emerging markets: flows, spreads, and policy response
- Emerging market assets have remained under pressure due to concerns about inflation, the policy outlook, and expected Fed policy tightening.
- Spreads on hard currency bonds have widened, especially for frontier economies.
- Emerging market capital flows have come under pressure, with:
  - A moderation in hard currency bond issuance.
  - Continued weakness in local currency bond flows, excluding China.
- Market indicators point to expectations of inflation pressure, with considerable regional differentiation.
- Many emerging market central banks have continued to raise policy rates, above pre-pandemic levels in several countries.
- Market participants expect the tightening cycle in emerging markets to continue over the next few quarters, particularly in Latin America and emerging Europe.
- Spillover effects to emerging markets from the policy normalization process in advanced economies could result in a marked rise in real rates.
- Such further tightening of domestic financial conditions at a time of high fiscal deficits and external financing needs could generate significant strains, putting the nascent growth recovery at risk.

### Risk assets, valuations, and corporate earnings
- Risk assets face higher volatility amid stretched valuations.
- In early January, global risk markets—especially in North America and the technology sector—have come under pressure from rising real rates.
- Still negative real rates and strong corporate earnings have continued to support equity markets.
- In the third quarter, companies in most large countries beat analyst expectations and recorded very high profits despite supply chain problems, inflation pressure, and rising labor costs.
- Firms have in many cases been able to pass through higher costs to consumers, who currently have healthy balance sheets; some firms have accelerated the shift towards digitalization and automation.
- Earnings are expected to surpass pre-pandemic levels in 2022 in most sectors, though sectors linked to international travel remain vulnerable to the development of the virus.
- Valuation models (for example, forward price-to-earnings ratios) point to elevated equity valuations.
- In credit markets, bond spreads are still below average 2019 levels despite some modest widening in early 2022.
- Crypto-asset prices have been declining significantly since early November ahead of the 2022 “crypto sprint” focus on these assets by US regulators and as part of a broad risk-off selloff.
  - On November 23, 2021, the Board of Governors of the Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency issued a joint statement on Crypto-Asset Policy Sprint Initiative. The so-called “crypto sprint” aims to provide a common regulatory framework for crypto-assets-related activities focusing on legal permissibility, safety and soundness, consumer protection, and compliance with existing legal and regulatory obligations.

### Key figures and indicators (as described)
- Financial Conditions Indices: shown as standard deviations from mean (Figure 1.1).
- Implied Volatility Indices (Percent): averages of one-year one-year swaption volatility indices for the US dollar, euro, and pound; averages of implied volatility indices for S&P 500, Euro Stoxx 50, and Nikkei 225 (Figure 1.2).
- Market Expectations for Two-Year-ahead Policy Rates (Percent, from swaps): regional series for EMEA, United States, Latin America, Euro area, Asia (Figure 1.3).
- Market-Based Inflation Expectations (Percent): series including US 5 year, EA 5 year, US 5 yr-5yr, EA 5 yr-5yr (Figure 1.4).
- Portfolio Flows to Emerging Markets (Billions of US dollars): components include Equity fund flows - EMs ex China, Equity fund flows - China, Hard currency bond flows, Local currency bond flows, Total EM fund flows (ex China equities) (Figure 1.5).
- Real Yields (Basis points, from swaps): includes 5 year, 5 year-5 year, 30 year; vertical bars show 10-year historical ranges (Figure 1.6).

This box was prepared by Sergei Antoshin, Rohit Goel, and Sheheryar Malik. It provides an update on market developments since the October 2021 Global Financial Stability Report, whose data cutoff was around September 30, 2021.

*Prepared by IMF staff (January 2022).*

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_Source: https://www.imf.org/-/media/files/publications/weo/2022/update/january/english/text.pdf_