## ch1

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---

### PMI and Confidence Indicators
- Manufacturing Output PMI: Above 50 expanding; below 50 contracting.
- Services’ Business Activity PMI: Above 50 expanding; below 50 contracting.
- Consumer Confidence: September 2021 = 100 (panel shows series at Sep. 2021, Jan. 22, May 22, Sep. 22, Feb. 23).
- Sources for indicators: Haver Analytics; IHS Markit; and IMF staff calculations.
- Note: AE and EMDE country samples for PMI panels are specified using ISO country codes; contribution to AE manufacturing GVA and to AE services GVA are used as weights.

### Inflation, Labor Markets, and Wage Dynamics
- Headline inflation:
  - running at nearly 7 percent (year over year) in the euro area, with some member states seeing rates near 15 percent;
  - above 10 percent in the United Kingdom.
- Labor market tightness:
  - ratios of job openings to the number of people unemployed in the United States and the euro area at the end of 2022 were at their highest levels in decades.
- Wage pressures:
  - cost pressures from wages have so far remained contained;
  - real wage growth in advanced economies has been lower than it was at the end of 2021.
- Inflation expectations:
  - five-year-ahead projected inflation rates by professional forecasters have remained near pre-pandemic levels.

### Monetary Policy Tightening and Market Expectations
- Distributional evidence: policy rate changes illustrated for May 2004 to July 2007 (pre-GFC) and Jan. 2022 to Jan. 2023 (post-COVID).
- Market versus central bank paths (United States):
  - market-implied policy expectations shifted in early March (closing much of the gap with the Federal Reserve’s announced expected policy path), then moved back down following financial sector turbulence.
- Figure references: Figure 1.3; Figure 1.4; Figure 1.8.

### Indebtedness and Sovereign Spreads
- Private and public debt: reached levels not seen in decades in most economies, and remain high despite a fall in 2021–22.
- Sovereign spreads in EMDEs: average level and distribution increased markedly in summer 2022 before coming down in early 2023.
- Sovereign spread visualization note: Y-axis is cut off at 2,500 basis points; box-whisker plots for March 2023 computed with daily data until March 17, 2023.
- Fiscal vulnerability: the share of economies at high risk of debt distress remains high in historical context.

### Commodity Shocks and Europe’s Energy Response
- European fiscal support for energy shock: on the order of about 1.3 percent of GDP (net budgetary cost) in the case of the European Union.
- Energy market adjustments:
  - reorientation of gas flows with increased non-Russian pipeline and liquefied natural gas deliveries to Europe;
  - downward trends in oil and gas prices from mid-2022 peaks.
- Outlook dependency: sustaining lower food and energy prices in 2023 depends on the absence of further negative supply shocks.

### China’s Reopening and Spillovers
- COVID-19 dynamics:
  - lifting of restrictions led to multiple large outbreaks and declines in mobility and economic activity in Q4 2022; supplier delivery times rose temporarily.
- Policy responses in China:
  - additional monetary easing, tax relief for firms, new vaccination targets for the elderly, and measures to encourage completion and delivery of unfinished real estate projects.
- High-frequency indicators:
  - as COVID-19 waves subsided in January (of the year referenced), mobility normalized and retail sales and travel bookings started picking up.
- Trade exposure:
  - China absorbs about a quarter of exports from Asia and between 5 and 10 percent from other geographic regions;
  - reopening will generate positive spillovers, larger for countries with stronger trade links and reliance on Chinese tourism.

### Baseline Forecasts and Key Assumptions
- Baseline global output growth: 3.4 percent in 2022; 2.8 percent in 2023; 3.0 percent in 2024.
- Relative change versus prior projection:
  - 2023 forecast is 0.1 percentage point lower than predicted in the January 2023 WEO Update;
  - compared with the January 2022 WEO Update forecast, global growth in 2023 is 1.0 percentage point lower.
- Commodity price assumptions:
  - crude oil prices are projected to fall by about 24 percent in 2023 and a further 5.8 percent in 2024;
  - nonfuel commodity prices are expected to remain broadly unchanged.
- Monetary and fiscal policy assumptions:
  - global interest rates are assumed to stay elevated for longer than expected at the time of the October 2022 WEO;
  - governments are on average expected to gradually withdraw fiscal policy support, including scaling back packages shielding households and firms as commodity prices decline.
- Baseline caveat: assumes recent financial sector turmoil is contained and does not generate material disruptions to global economic activity with widespread recession.

### Risks and Alternative Scenarios
- Elevated downside risks: emphasis on a plausible alternative scenario illustrating the impact of downside risks materializing, given elevated uncertainties stemming from recent global financial market turmoil.
- Financial repricing risk:
  - divergence between market-implied policy paths and central bank communications raises risks for a significant market repricing, which could affect financial markets and global activity.

---

### Global projections (selected headline figures)
- World Output: 3.4 (2022), 2.8 (2023), 3.0 (2024).
- World Growth Based on Market Exchange Rates: 3.0 (2022), 2.4 (2023), 2.4 (2024).
- World Trade Volume (goods and services): 5.1 (2022), 2.4 (2023), 3.5 (2024).
- World Consumer Prices (headline CPI): 8.7 (2022), 7.0 (2023), 4.9 (2024).
- Oil (simple average of UK Brent, Dubai Fateh, and West Texas Intermediate):
  - average price in US dollars a barrel was $96.36 in 2022;
  - assumed price is $73.13 in 2023 and $68.90 in 2024.
- Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during February 15, 2023–March 15, 2023.

### Advanced economies (selected)
- Advanced Economies growth: 2.7 (2022), 1.3 (2023), 1.4 (2024).
  - About 90 percent of advanced economies are projected to see a decline in growth in 2023.
  - Projected unemployment: a rise of 0.5 percentage point on average from 2022 to 2024.
- United States: 2.1 (2022), 1.6 (2023), 1.1 (2024).
- Euro Area: 3.5 (2022), 0.8 (2023), 1.4 (2024).
- Japan: 1.1 (2022), 1.3 (2023), 1.0 (2024).

### Emerging Market and Developing Economies (aggregate and selected)
- EMDE aggregate: 4.0 (2022), 3.9 (2023), 4.2 (2024).
  - Low-Income Developing Countries: 5.0 (2022), 4.7 (2023), 5.4 (2024).
  - Projected per capita income growth in low-income developing countries: 2.8 percent on average during 2023–24.
- Emerging and Developing Asia: 4.4 (2022), 5.3 (2023), 5.1 (2024).
- China: 3.0 (2022), 5.2 (2023), 4.5 (2024).
- India (fiscal year basis): 6.8 (2022), 5.9 (2023), 6.3 (2024).

### Plausible alternative scenario: banking stress and tighter credit conditions
- Scenario assumptions:
  - Moderate additional tightening in credit conditions from further stress in individual banks vulnerable on two metrics: share of nonretail or uninsured depositors and unrealized losses.
  - Funding conditions for all banks tighten; stricter supervision increases cautious bank behavior.
  - Balance sheet policies and other interventions by central banks and regulators are implicitly assumed to help avert a larger crisis (not explicitly modeled).
- Quantified shocks:
  - Stock of real bank lending in the United States declines by 2 percent in 2023 relative to the baseline.
  - Equivalent to a 150 basis point increase in corporate spreads, on average, in 2023.
  - Similar decrease in credit and similar increase in spreads occur in the euro area and Japan.
- Economic impact (percent deviation from baseline):
  - World output falls by 0.3 percent in 2023 (implying real growth of about 2.5 percent instead of 2.8 percent in the baseline).
  - Real GDP is 0.2 percent lower than the baseline in 2024.
  - Effects larger in advanced economies than in emerging market economies; the United States, the euro area, and Japan each have growth about 0.4 percentage point lower in 2023 relative to the baseline.
  - Countries with greater trade exposure to the United States (such as Mexico and Canada) experience sharper impacts; countries with smaller exposures (such as China) are less affected.

### Inflation dynamics and targets
- Baseline global headline CPI inflation: 8.7 percent (2022) to 7.0 percent (2023).
- Global inflation excluding food and energy: declines much more gradually in 2023—by only 0.2 percentage point, to 6.2 percent in 2023.
- Distribution relative to official inflation targets (72 inflation-targeting economies):
  - 2023: annual average inflation expected to exceed targets in 97 percent of cases; median deviation from target is expected to be 3.3 percentage points.
  - 2024: inflation expected to exceed targets in 91 percent of cases; median deviation about 1 percentage point.
  - 2025: inflation expected to be close to targets with a median deviation of 0.2 percentage point.
- In the plausible alternative scenario:
  - Global headline inflation decreases by about 0.2 percentage point more in 2023 than in the baseline.
  - Oil prices decline by 3 percent more, on average, in 2023 than in the baseline.
  - Modest additional fall in inflation excluding food and energy.

### Medium-term outlook and output shortfall
- Five-year-ahead/global medium-term growth outlook:
  - Looking out to 2028, global growth is forecast at 3.0 percent—the lowest medium-term growth forecast published in all WEO reports since 1990.
- Output shortfall and cumulative gap:
  - Shortfall of global GDP in 2022 compared with January 2022 WEO Update forecasts is about 1 percent.
  - By 2026, the output loss (cumulative growth gap) is projected to widen to 2.7 percent.

---

### Downside risks, probabilities, and severe scenarios
- Dominant risk direction: Downside risks squarely dominate the outlook.
- Probabilities and scenario outcomes:
  - Estimated probability of global growth in 2023 falling below 2.0 percent is about 25 percent.
  - Estimated probability of a contraction in global per capita real GDP in 2023 is about 15 percent.
  - Probability of global headline inflation exceeding its 2022 level in 2023 is less than 10 percent.
  - Probability of core inflation in 2023 exceeding its 2022 level is 30 percent.
- Severe financial-sector-stress scenario (Box 1.3):
  - Global real GDP growth in 2023 could be 1.8 percentage points below the baseline even with monetary policy responding and fiscal automatic stabilizers operating.
  - This outcome would imply near-zero growth in global GDP per capita.
  - Global headline and core inflation would be lower by about 1 percentage point in 2023.

### Risk-layering in the severe downside scenario (quantified)
- Credit supply layer:
  - US bank lending decreases by 4 percent in 2023 relative to current baseline projections (equivalent to about one-fifth of the contraction in credit experienced during the global financial crisis, relative to the precrisis trend).
  - Corporate spreads increase by 250 basis points in 2023.
  - Euro area countries and Japan experience similar magnitude impacts; assumed impact on China’s domestic financial conditions is small.
- Equity prices:
  - Global equity prices fall by 10 percent on impact and by about 6 percent on average in 2023.
- Flight to safety and dollar appreciation:
  - In emerging markets excluding Asia, sovereign premiums increase considerably and the US dollar appreciates by close to 10 percent.
  - Shock for emerging market economies in Asia is about half as large; China is not directly affected.
- Confidence layer:
  - Greater precautionary saving at about 75 percent of the estimated increase in precautionary saving during the global financial crisis, leading to a decrease in consumption; US consumption and investment decrease by 0.3 and 1 percent, respectively, relative to the baseline.
- Combined effects:
  - Decrease in the level of global output of 1.8 percent in 2023 relative to the baseline.
  - Decrease in the level of global output of 1.4 percent in 2024 relative to the baseline.
  - Overall effect about one-fourth the size of the impact of the global financial crisis during 2008–09.
  - United States and other advanced economies see a broadly similar hit to activity (1.8 percent in 2023).
  - Emerging market economies excluding China see a larger effect (–1.9 percent).
  - China experiences a smaller impact overall (–1.2 percent).
- Oil prices and disinflationary impulse:
  - Oil prices fall by close to 15 percent in 2023 relative to the baseline, before gradually returning to the baseline over the projection horizon.
  - Global core inflation declines by 0.9 percentage point in 2023 relative to the baseline and by 1.1 percentage points in 2024 relative to the baseline.
- Policy rates (scenario):
  - US policy rates decline by 1.6 percentage points in 2023 relative to the baseline.
  - US policy rates decline by 1.8 percentage points in 2024 relative to the baseline.
  - The global average of policy rates declines by 2.1 and [text truncated in source].

---

### Financial sector resilience and market strain management
- Balance sheets, more intensive and high-frequency monitoring of risks in the banking sector, nonbank financial institutions, and the housing sector will be essential.
- Where market strains emerge, deploy tools that provide liquidity support promptly and forcefully, while mitigating moral hazard.
- Liquidity support should be targeted, properly collateralized, and preserve the transmission of monetary policy.
- Intervention and resolution procedures may need to be initiated promptly for weak and nonviable institutions.
- Strengthen oversight in the nonbank financial sector and address shortcomings in the supervisory oversight of banks, including exposures to interest rate risk.
- Make full use of the global financial safety net and proactively employ the IMF’s precautionary financial arrangements.
- Recent enhancement of dollar funding swap lines between the Federal Reserve and major advanced economy central banks should help limit financial strains.

### Currency swings and exchange-rate policy
- Observation: The US dollar has depreciated in real terms since October 2022—by 6 percent on a trade-weighted basis—but remains stronger than it has been since 2000.
- Guidance:
  - Emerging market economies should let their currencies adjust as much as possible in response to fundamentals.
  - Foreign exchange interventions may be appropriate on a temporary basis if currency movements and capital flows substantially raise financial stability risks.
  - Temporary capital flow management measures on outflows may be useful in a crisis but should not substitute for needed macroeconomic policy adjustment.

### Normalizing fiscal policy and protecting the vulnerable
- Fiscal normalization:
  - As deficits and debts remain above pre-pandemic levels, fiscal efforts will be warranted in 2023.
  - Fiscal policymakers should support monetary policy in getting inflation back to target.
  - Allow automatic stabilizers to operate fully in a severe downside scenario; use temporary support measures as needed with due consideration of available fiscal space.
- Supporting the vulnerable:
  - Fiscal support in many European economies was largely untargeted and is becoming increasingly costly; broad-based measures should be replaced by more targeted approaches.
  - Preserve market signals from higher energy prices as much as possible to encourage reduced energy consumption.

### Food security and trade restrictions
- Finding: Trade restrictions on food and fertilizers run the risk of pushing a large share of the global population into food insecurity.
- Evidence: Emerging market and developing economies’ net imports of wheat account for more than half of total wheat consumption; domestic storage in these economies tends to be low.
- Recommendation: Restrictions on exports of food and fertilizers—particularly those most recently imposed—should be lifted to safeguard global food supplies and distribution.

### Restoring debt sustainability and sovereign debt resolution
- With lower growth and higher borrowing costs, public debt ratios are becoming unsustainable in many countries; actions must be taken to put them on a credible downward path.
- For economies at high risk of debt distress: fiscal consolidation and structural reforms remain the fundamental solution; in some cases, debt restructuring may be necessary.
- Waiting to restructure until after a default occurs is associated with larger declines in output, investment, private sector credit, and capital inflows than preemptive restructuring.
- International cooperation and readiness of official and private creditors are necessary; the Global Sovereign Debt Roundtable (GSDR) aims to help identify impediments and design standards.

### Reinforcing supply and medium-term growth policies
- Policy actions to raise medium-term growth:
  - Structural reforms to reduce harmful market power and rent-seeking;
  - Stimulate investment in infrastructure and productive digitalization;
  - Enhance access to and quality of education;
  - Reduce labor market tightness by encouraging participation and reducing job search and matching frictions; bolster active labor market policies.
- Industrial policy guidance:
  - Pursue industrial policy only where frictions are well established and other policies are not available;
  - Avoid wasteful subsidy races and domestic production requirements; be consistent with WTO rules.

### Containing pandemic risks and multilateral cooperation
- Remain vigilant to risks of reemergence of COVID-19 and new pandemics; coordinate efforts to boost access to vaccines and medicines where immunity is low.
- Strengthen multilateral cooperation and the multilateral trading system; upgrade WTO rules in critical areas and restore the dispute settlement system.
- Speed up the green transition via coordinated carbon pricing or equivalent policies and investment incentives for clean energy, grid upgrades, and R&D.

---

### Commodity market developments (selected figures)
- Primary commodity prices declined 28.2 percent between August 2022 and February 2023.
- Energy commodities declined 46.4 percent over the same period.
- European natural gas prices declined by 76.1 percent, reaching $16.7 a million British thermal units (MMBtus) in February 2023.
- Base metal prices rebounded by 19.7 percent between August 2022 and February 2023.
- Precious metal prices rebounded by 3.3 percent between August 2022 and February 2023.
- Food prices increased by 1.9 percent between August 2022 and February 2023 and are:
  - 22.3 percent above the past-five-year average,
  - 39.1 percent above pre-pandemic levels.
- Crude oil prices retreated by 15.7 percent between August 2022 and February 2023 (from $96.4 in 2022).
- Futures markets suggest crude oil prices will:
  - slide by 24.1 percent, to average $73.1 a barrel in 2023 (from $96.4 in 2022),
  - continue to fall to $65.4 in 2026.
- Coal prices slid 50.9 percent over the reference period.
- The IMF’s energy transition metal index increased 14.3 percent.
- Gold prices rose by 5.1 percent; central banks’ net purchases broke a 55-year record.
- Base metal price index projected to:
  - increase 3.5 percent in 2023,
  - decrease 2.6 percent in 2024.

### Macroeconomic impact of declines in fossil fuel extraction (key findings)
- Reaching net zero emissions by 2050 will require an 80 percent reduction in global fossil fuel extraction compared with 2021 levels.
- Typical extraction-decline episode characteristics:
  - a 10 percent contraction in extraction activity in the episode’s first year,
  - cumulating to a 40 percent reduction over 10 years.
- Empirical results from 35 identified episodes:
  - A typical episode leads to a 1 percent initial decline from the baseline in real GDP,
  - Cumulating to a 5 percent decline after five years,
  - The real exchange rate depreciates slowly by 20 percent,
  - Exports decline by about 6 percent,
  - Manufacturing and services value added fall significantly by about 5 percent,
  - Negative impact on employment is small.
- Heterogeneity:
  - The GDP impact is significantly larger for middle- and low-income countries than for high-income countries;
  - Five years after the shock, the GDP difference between countries with high and low institutional quality is about 5 percentage points.
- Policy recommendations for affected countries:
  - Improve public finances and institutional quality;
  - Diversify the economy and establish sovereign wealth funds;
  - Modernize infrastructure and attract FDI in R&D;
  - Invest in human capital and facilitate factor reallocation.

### Data, methods, and coverage (extraction analysis)
- New dataset covers extraction of oil, coal, gas, and metals for countries worldwide from 1950 to 2020.
- Empirical specification includes country fixed effects ψn, time fixed effects φt, three lags of the dependent variable, a shock series to deal with autocorrelation, and Δqt,i capturing the percentage change in extraction output for episode i at year t.
- Results interpreted as cumulative percentage changes from the baseline over horizons up to 10 years.

---

### Housing markets: recent developments, risks, and vulnerabilities (Box 1.1)
- Real house price growth turned negative in both advanced and emerging market economies as central banks raised borrowing costs in 2022.
- In Q2 2022, quarterly real house prices fell with about two-thirds of economies experiencing negative growth.
- Mortgage rates:
  - climbed to an average of 6.8 percent in advanced economies in late 2022, up from 2.8 percent in January 2022.
- Risks and exposure:
  - Further mortgage rate rises likely weaken borrowing demand and house prices;
  - Economies with elevated house prices and high household debt issued at floating rates are particularly vulnerable.
- Comparison with 2007–08:
  - Banks are better capitalized: regulatory ratio of Tier 1 capital to risk-weighted assets at 17.5 percent on average across countries in 2021, compared with 13.4 percent in 2007.
  - Average household debt-to-income ratio across countries in 2022 was on par with that in 2007.
- Special case—China:
  - Real estate sector protracted contraction with early signs of stabilization in 2023;
  - Real estate and construction sectors account for about one-fifth of final demand absorption in China.

---

*Source: IMF staff estimates, World Economic Outlook: A Rocky Recovery (April 2023), Chapter 1.*

### 601. Manufacturing Output PMI

### ch1 - 601. Manufacturing Output PMI

### PMI and Confidence Indicators
- Manufacturing Output PMI: Above 50 expanding; below 50 contracting.
- Services’ Business Activity PMI: Above 50 expanding; below 50 contracting.
- Consumer Confidence: September 2021 = 100 (panel shows series at Sep. 2021, Jan. 22, May 22, Sep. 22, Feb. 23).
- Sources for indicators: Haver Analytics; IHS Markit; and IMF staff calculations.
- Note: AE and EMDE country samples for PMI panels are specified using ISO country codes; contribution to AE manufacturing GVA and to AE services GVA are used as weights.

### Inflation, Labor Markets, and Wage Dynamics
- Headline inflation: running at nearly 7 percent (year over year) in the euro area, with some member states seeing rates near 15 percent; above 10 percent in the United Kingdom.
- Labor market tightness: ratios of job openings to the number of people unemployed in the United States and the euro area at the end of 2022 were at their highest levels in decades (Figure 1.5).
- Wage pressures: cost pressures from wages have so far remained contained; real wage growth in advanced economies has been lower than it was at the end of 2021.
- Inflation expectations: five-year-ahead projected inflation rates by professional forecasters have remained near pre-pandemic levels.

### Monetary Policy Tightening and Market Expectations
- Distributional evidence: the figure shows policy rate changes for episodes May 2004 to July 2007 (pre-GFC) and Jan. 2022 to Jan. 2023 (post-COVID).
- Market versus central bank paths (United States): market-implied policy expectations shifted in early March (closing much of the gap with the Federal Reserve’s announced expected policy path), then moved back down following financial sector turbulence.
- Figure references: Figure 1.3 (headline and core CPI distribution across 35 economies accounting for about 81 percent of 2022 world output); Figure 1.4 (percentage point change a year by episode); Figure 1.8 (market-implied US policy rate expectations by vintage).

### Indebtedness and Sovereign Spreads
- Private and public debt: reached levels not seen in decades in most economies, and remain high despite a fall in 2021–22.
- Sovereign spreads in EMDEs: average level and distribution increased markedly in summer 2022 before coming down in early 2023 (Figure 1.9).
- Sovereign spread visualization note: Y-axis is cut off at 2,500 basis points; box-whisker plots for March 2023 computed with daily data until March 17, 2023.
- Fiscal vulnerability: the share of economies at high risk of debt distress remains high in historical context.

### Commodity Shocks and Europe’s Energy Response
- European fiscal support for energy shock: on the order of about 1.3 percent of GDP (net budgetary cost) in the case of the European Union.
- Energy market adjustments: reorientation of gas flows with increased non-Russian pipeline and liquefied natural gas deliveries to Europe; downward trends in oil and gas prices from mid-2022 peaks.
- Outlook dependency: sustaining lower food and energy prices in 2023 depends on the absence of further negative supply shocks.

### China’s Reopening and Spillovers
- COVID-19 dynamics: lifting of restrictions led to multiple large outbreaks and declines in mobility and economic activity in Q4 2022; supplier delivery times rose temporarily.
- Policy responses in China: additional monetary easing, tax relief for firms, new vaccination targets for the elderly, and measures to encourage completion and delivery of unfinished real estate projects.
- High-frequency indicators: as COVID-19 waves subsided in January (of the year referenced), mobility normalized and retail sales and travel bookings started picking up (Figure 1.10).
- Trade exposure: China absorbs about a quarter of exports from Asia and between 5 and 10 percent from other geographic regions; reopening will generate positive spillovers, larger for countries with stronger trade links and reliance on Chinese tourism (Figure 1.11).

### Baseline Forecasts and Key Assumptions
- Baseline global output growth: 3.4 percent in 2022; 2.8 percent in 2023; 3.0 percent in 2024.
- Relative change versus prior projection: 2023 forecast is 0.1 percentage point lower than predicted in the January 2023 WEO Update; compared with the January 2022 WEO Update forecast, global growth in 2023 is 1.0 percentage point lower.
- Commodity price assumptions: crude oil prices are projected to fall by about 24 percent in 2023 and a further 5.8 percent in 2024; nonfuel commodity prices are expected to remain broadly unchanged.
- Monetary and fiscal policy assumptions: global interest rates are assumed to stay elevated for longer than expected at the time of the October 2022 WEO; governments are on average expected to gradually withdraw fiscal policy support, including scaling back packages shielding households and firms as commodity prices decline (Figure 1.12).
- Baseline caveat: assumes recent financial sector turmoil is contained and does not generate material disruptions to global economic activity with widespread recession.

### Risks and Alternative Scenarios
- Elevated downside risks: the section places strong emphasis on a plausible alternative scenario illustrating the impact of downside risks materializing, given elevated uncertainties stemming from recent global financial market turmoil.
- Financial repricing risk: divergence between market-implied policy paths and central bank communications raises risks for a significant market repricing, which could affect financial markets and global activity.

*Sources: Haver Analytics; IHS Markit; IMF staff calculations; figures and notes as presented in the chapter.*

### 1. Policy Rates in Selected AEs

### ch1 - 1. Policy Rates in Selected AEs

### Global growth outlook and headline projections
- World Output: 3.4 (2022), 2.8 (2023), 3.0 (2024).
- World Growth Based on Market Exchange Rates: 3.0 (2022), 2.4 (2023), 2.4 (2024).
- World Trade Volume (goods and services): 5.1 (2022), 2.4 (2023), 3.5 (2024).
- World Consumer Prices (headline CPI): 8.7 (2022), 7.0 (2023), 4.9 (2024).
- Oil (simple average of UK Brent, Dubai Fateh, and West Texas Intermediate):
  - average price in US dollars a barrel was $96.36 in 2022;
  - assumed price is $73.13 in 2023 and $68.90 in 2024.
- Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during February 15, 2023–March 15, 2023.

### Advanced economies (AEs) versus emerging market and developing economies (EMDEs)
- Advanced Economies growth: 2.7 (2022), 1.3 (2023), 1.4 (2024).
  - About 90 percent of advanced economies are projected to see a decline in growth in 2023.
  - Projected unemployment: a rise of 0.5 percentage point on average from 2022 to 2024.
- United States: 2.1 (2022), 1.6 (2023), 1.1 (2024).
- Euro Area: 3.5 (2022), 0.8 (2023), 1.4 (2024).
- Japan: 1.1 (2022), 1.3 (2023), 1.0 (2024).
- Emerging Market and Developing Economies (aggregate): 4.0 (2022), 3.9 (2023), 4.2 (2024).
  - Low-Income Developing Countries: 5.0 (2022), 4.7 (2023), 5.4 (2024).
  - Projected per capita income growth in low-income developing countries: 2.8 percent on average during 2023–24.
- Regional highlights:
  - Emerging and Developing Asia: 4.4 (2022), 5.3 (2023), 5.1 (2024).
  - China: 3.0 (2022), 5.2 (2023), 4.5 (2024).
  - India (fiscal year basis): 6.8 (2022), 5.9 (2023), 6.3 (2024).

### Plausible alternative scenario: banking stress and tighter credit conditions
- Scenario assumptions:
  - Moderate additional tightening in credit conditions stemming from further stress in individual banks vulnerable on two metrics: share of nonretail or uninsured depositors and unrealized losses.
  - Funding conditions for all banks tighten; stricter supervision increases cautious bank behavior.
  - Balance sheet policies and other interventions by central banks and regulators are implicitly assumed to help avert a larger crisis (not explicitly modeled).
- Quantified shocks:
  - Stock of real bank lending in the United States declines by 2 percent in 2023 relative to the baseline.
  - Equivalent to a 150 basis point increase in corporate spreads, on average, in 2023.
  - Similar decrease in credit and similar increase in spreads occur in the euro area and Japan.
- Economic impact (percent deviation from baseline):
  - World output falls by 0.3 percent in 2023 (implying real growth of about 2.5 percent instead of 2.8 percent in the baseline).
  - Real GDP is 0.2 percent lower than the baseline in 2024.
  - Effects are generally larger in advanced economies than in emerging market economies; the United States, the euro area, and Japan each have growth about 0.4 percentage point lower in 2023 relative to the baseline.
  - Countries with greater trade exposure to the United States (such as Mexico and Canada) experience sharper impacts; countries with smaller exposures (such as China) are less affected.

### Inflation dynamics, targets, and disinflation path
- Baseline forecast for global headline CPI inflation: 8.7 percent (2022) to 7.0 percent (2023).
- Global inflation excluding food and energy: declines much more gradually in 2023—by only 0.2 percentage point, to 6.2 percent in 2023.
- Distribution relative to official inflation targets (72 inflation-targeting economies):
  - 2023: annual average inflation expected to exceed targets in 97 percent of cases; median deviation from target is expected to be 3.3 percentage points.
  - 2024: inflation expected to exceed targets in 91 percent of cases; median deviation about 1 percentage point.
  - 2025: inflation expected to be close to targets with a median deviation of 0.2 percentage point.
- In the plausible alternative scenario:
  - Global headline inflation decreases by about 0.2 percentage point more in 2023 than in the baseline.
  - Oil prices decline by 3 percent more, on average, in 2023 than in the baseline.
  - Modest additional fall in inflation excluding food and energy.

### Medium-term outlook and structural considerations
- Five-year-ahead/global medium-term growth outlook:
  - Looking out to 2028, global growth is forecast at 3.0 percent—the lowest medium-term growth forecast published in all WEO reports since 1990.
  - The decline in medium-term global growth prospects reflects:
    - progress in raising living standards in economies such as China and Korea (associated decline in growth rates);
    - slower global labor force growth (United Nations medium-term population growth projections have declined since 2010 by about one-quarter of a percentage point);
    - geoeconomic fragmentation and slower pace of supply-enhancing reforms.
- Output level shortfall and cumulative gap:
  - Shortfall of global GDP in 2022 compared with January 2022 WEO Update forecasts is about 1 percent.
  - By 2026, the output loss (cumulative growth gap) is projected to widen to 2.7 percent.

### Global trade and imports/exports
- Growth in the volume of world trade: 5.1 percent (2022) to 2.4 percent (2023).
- Imports (Advanced Economies): 6.6 (2022), 1.8 (2023), 2.7 (2024).
- Exports (Advanced Economies): 5.2 (2022), 3.0 (2023), 3.1 (2024).
- Imports (EMDEs): 3.5 (2022), 3.3 (2023), 5.1 (2024).
- Exports (EMDEs): 4.1 (2022), 1.6 (2023), 4.3 (2024).

*Source: IMF staff estimates, World Economic Outlook: A Rocky Recovery (April 2023), Chapter 1.*

### 1. Economy Contributions to Five-Year-Ahead World Growth

### 1. Economy Contributions to Five-Year-Ahead World Growth

### Global trade and current account dynamics
- Trade growth outlook:
  - Weaker trade growth is expected in 2023 than during the two pre-pandemic decades (2000–19), when it averaged 4.9 percent.
  - Contributing factors: post-pandemic shift in spending from traded goods back toward domestic services, rising trade barriers, and lagged effects of US dollar appreciation in 2022 that made traded products more costly given the dollar’s dominant role in invoicing.
- Global current account balances:
  - Global current account balances––the sums of absolute surpluses and deficits––are expected to narrow in 2023 following their significant increase in 2022.
  - The 2022 rise largely reflected commodity price increases triggered by the war in Ukraine, causing a widening in oil and other commodity trade balances.
  - Over the medium term, global balances are expected to narrow gradually as commodity prices decline.
- International investment positions:
  - Creditor and debtor stock positions remained historically elevated in 2022, reflecting offsetting effects of widening current account balances and the dollar’s strength (valuation gains for holders of foreign currency positions).
  - Elevated positions are expected to moderate only slightly over the medium term as current account balances narrow.

### Downside risks and scenario quantifications
- Dominant risk direction: Downside risks squarely dominate the outlook, with significant uncertainty from the shocks of 2020–22 and recent financial sector turmoil.
- Key downside channels and risks:
  - Severe tightening in global financial conditions from banking system turbulence, amplifying declines in business and consumer confidence.
  - Sharper contractionary effects from synchronous central bank rate hikes amid historically high private and public debt.
  - Stickier inflation prompting further monetary tightening.
  - Faltering China recovery, escalation of the war in Ukraine, and geoeconomic fragmentation hindering multilateral responses.
- Probabilities and scenario outcomes:
  - Estimated probability of global growth in 2023 falling below 2.0 percent is about 25 percent (an outcome that has occurred on only five occasions since 1970: 1973, 1981, 1982, 2009, and 2020).
  - Estimated probability of a contraction in global per capita real GDP in 2023 is about 15 percent.
  - Probability of global headline inflation exceeding its 2022 level in 2023 is less than 10 percent.
  - Probability of core inflation in 2023 exceeding its 2022 level is 30 percent.
- Severe financial-sector-stress scenario (quantified in Box 1.3):
  - Global real GDP growth in 2023 could be 1.8 percentage points below the baseline even with monetary policy responding and fiscal automatic stabilizers operating.
  - This outcome would imply near-zero growth in global GDP per capita.
  - Global headline and core inflation would be lower by about 1 percentage point in 2023.
- Sharper monetary policy impact amid high debt:
  - Rising real interest rates interacting with historically elevated corporate and household debt can lead to debt overhang, lower investment and consumption, higher unemployment, and widespread bankruptcies—especially where house prices are elevated and household debt is issued at floating rates.

### Sovereign and external debt vulnerabilities
- General assessment:
  - External debt as a share of gross national income is on average one-third lower today than in the 1980s and 1990s.
  - However, vulnerabilities have shifted: a higher share of external debt is now issued at variable interest rates and in US dollars, increasing exposure to monetary tightening in advanced economies.
- Distress risk shares:
  - About 56 percent of low-income developing countries are estimated to be either already in debt distress or at high risk of it.
  - About 25 percent of emerging market economies are estimated to be at high risk of debt distress.
- Creditor composition changes (comparisons cited):
  - Share of external debt owed to Paris Club official bilateral creditors fell from 39 percent in 1996 to 12 percent in 2020.
  - Share owed to non–Paris Club official bilateral creditors rose from 8 percent to 22 percent.
  - Share owed to private creditors doubled from 8 percent to 16 percent.
- Policy implication:
  - A new wave of debt-restructuring requests could occur, but the more complex creditor landscape may make restructuring more difficult.

### Geoeconomic fragmentation and spillovers
- Risks from faltering China:
  - A weaker-than-expected recovery in China would have significant cross-border effects, especially for commodity exporters and tourism-dependent economies, with risks from the Chinese real estate market posing potential financial stability threats.
- Escalation of the war in Ukraine:
  - An escalation could trigger a renewed energy crisis in Europe and exacerbate food insecurity in low-income countries.
  - A failed extension of the Black Sea Grain Initiative could raise food prices, weighing on importers lacking fiscal space.
- Geoeconomic fragmentation:
  - The retreat from cross-border economic integration—reinforced by the war in Ukraine—risks splitting the world economy into geopolitical blocs, increasing barriers to trade and reducing international cooperation on global public goods (climate change mitigation, pandemic resilience).
  - Harmful trade restrictions and measures (e.g., export bans, semiconductor trade restrictions, local-content requirements) have been increasing, with adverse implications for short-term economic well-being.

### Policy priorities and recommended actions
- Overarching challenge:
  - Policymakers face a narrow path to restore price stability while avoiding recession and maintaining financial stability; agility and data dependence are essential.
- Policies with immediate impact: Ensuring a durable fall in inflation
  - Steady but ready monetary policy:
    - Under the baseline, real (inflation-adjusted) policy rates in major economies are expected to increase gradually even as nominal rate rises slow with declining inflation.
    - Where core inflation pressures persist, raising real policy rates and holding them above neutral levels would help anchor inflation expectations.
    - Central banks should stand ready to address liquidity and financial sector risks amid elevated financial volatility.
    - In a severe downside scenario with financial stability at stake, substantial readjustment of monetary policy paths might be needed to respond to a disinflationary shock and contain contagion.
  - Clear communication:
    - Given heightened uncertainty and reemerging disconnects between central banks’ communications and market expectations, clear communication about objectives and likely responses is crucial.
    - Estimates of the natural rate of interest (r*) and the natural rate of unemployment (u*) are highly uncertain; for example, recent estimates of u* for the United States range from 4 percent to 7 percent.
    - Policymakers should reinforce communication about the likely need for a restrictive monetary stance until tangible evidence shows inflation returning toward target, while reassuring markets they can change course and use the full set of instruments if market turmoil deepens.
  - Applying lessons from past premature easing:
    - Premature easing when price pressures have not receded can increase the ultimate costs of disinflation (example: United States experience in the early 1980s), potentially requiring a second wave of sharp policy tightening with larger adverse effects on growth and employment.
- Safeguarding financial stability:
  - Monitoring risks:
    - In a period of high uncertainty and market volatility, monitoring the buildup of risks across industries and promptly addressing vulnerabilities is crucial to restore confidence and safeguard financial stability.
    - As central banks raise rates and gradually unwind balance-sheet policies, attention to bank and nonbank financial institution vulnerabilities is essential (see related analysis in the Global Financial Stability Report).
  - Managing market strains and strengthening oversight:
    - Authorities should be prepared to manage liquidity and market functioning stresses and to strengthen oversight where fragilities emerge.

*Source: IMF staff calculations.*

### CHAPTER 1 GLObAL PROsPECTs AND POLICIEs

### CHAPTER 1 GLObAL PROsPECTs AND POLICIEs

### Financial sector resilience and market strain management
- Findings and imperatives:
  - Balance sheets, more intensive and high-frequency monitoring of risks in the banking sector, nonbank financial institutions, and the housing sector will be essential.
  - Where market strains emerge, deploying tools that provide liquidity support promptly and forcefully, while mitigating the risk of moral hazard, will be necessary to ease pressures and limit contagion.
  - Liquidity support should be targeted as well as properly collateralized and preserve the transmission of monetary policy.
  - Intervention and resolution procedures may need to be initiated promptly for weak and nonviable institutions.
- Strengthening oversight:
  - Financial sector regulations introduced after the global financial crisis contributed to the resilience of banks throughout the pandemic.
  - More efforts are needed to address shortcomings in the supervisory oversight of banks, including in the prudential framework for exposures to interest rate risk.
  - Ensure that stringent prudential requirements align with the Basel framework on capital and liquidity regulations.
  - The intensity of supervision must be commensurate with banks’ risks and systemic importance.
  - It is essential to address supervisory gaps in the nonbank financial sector (see also Chapter 1 of the April 2023 Global Financial Stability Report).
- Use of global financial safety net:
  - Make full use of the global financial safety net afforded by international financial institutions.
  - Proactively employ the IMF’s precautionary financial arrangements.
  - Focus aid from the international community on low-income countries facing shocks, including through rechanneling of special drawing rights and support from the Poverty Reduction and Growth Trust and the Resilience and Sustainability Trust.
  - The recent enhancement of dollar funding swap lines between the Federal Reserve and major advanced economy central banks should help limit financial strains.
  - Ensure that other central banks are also able to access liquidity to guard against potential external funding shocks.

### Currency swings and exchange-rate policy
- Key observation:
  - The US dollar has depreciated in real terms since October 2022—by 6 percent on a trade-weighted basis—but remains stronger than it has been since 2000.
- Guidance:
  - Emerging market economies should let their currencies adjust as much as possible in response to such fundamentals.
  - As guided by the IMF’s Integrated Policy Framework, foreign exchange interventions may be appropriate on a temporary basis if currency movements and capital flows substantially raise financial stability risks (for example, in shallow foreign exchange markets or with high foreign currency debt), or jeopardize the central bank’s ability to maintain price stability.
  - Temporary capital flow management measures on outflows may also be useful in a crisis or when one is imminent but should not substitute for needed macroeconomic policy adjustment.
- Example:
  - In response to developments in 2022, some economies resorted to capital flow management measures (for example, China and Malawi, among others).

### Normalizing fiscal policy and protecting the vulnerable
- Fiscal normalization:
  - As deficits and debts remain above pre-pandemic levels, fiscal efforts will be warranted in 2023.
  - Fiscal policymakers should support monetary policy in getting inflation back to target.
  - Where inflation remains high, a steady tightening of the fiscal stance would moderate the need for monetary tightening.
  - In a severe downside scenario, automatic stabilizers should be allowed to operate fully, and temporary support measures should be used as needed (including to buttress the financial system), with due consideration of available fiscal space (see Chapter 1 of the April 2023 Fiscal Monitor).
- Supporting the vulnerable:
  - The surge in global energy and food prices in 2022 triggered a cost-of-living crisis in many countries, especially low-income countries, many of which are still suffering from food insecurity.
  - Governments acted swiftly to extend support to households and firms, which helped cushion the effects on growth.
  - The fiscal support extended to households and firms in many European economies was largely untargeted.
  - Broad-based measures are becoming increasingly costly and should be replaced by more targeted approaches.
  - In the event of a renewed commodity price spike, measures taken should preserve the market signal from higher energy prices as much as possible, because high prices encourage a reduction in energy consumption, limiting the risks of shortages.

### Food security and trade restrictions
- Finding:
  - Trade restrictions on food and fertilizers run the risk of pushing a large share of the global population into food insecurity.
- Evidence:
  - Emerging market and developing economies’ net imports of wheat account for more than half of total wheat consumption, but domestic storage in these economies tends to be low, making them more vulnerable to trade shocks.
- Recommendation:
  - Restrictions on exports of food and fertilizers—particularly those most recently imposed—should be lifted to safeguard food supplies and their distribution globally.

### Restoring debt sustainability and sovereign debt resolution
- Findings:
  - With lower growth and higher borrowing costs, public debt ratios are becoming unsustainable in many countries.
  - Actions must be taken to put them on a credible downward path.
- Policy guidance:
  - For economies at high risk of debt distress, fiscal consolidation and structural reforms to create sound policy frameworks and revitalize growth remain the fundamental solution to sustainable debt (Box 3.1).
  - In some cases, debt restructuring may be necessary to help reduce fiscal vulnerabilities.
  - Waiting to restructure debt until after a default occurs is associated with larger declines in a country’s output, investment, private sector credit, and capital inflows than when debt restructuring is preemptive.
- International cooperation:
  - The world is at a critical juncture, and international cooperation is needed to reduce the likelihood of a snowballing global debt crisis.
  - Progress has been made regarding countries that requested debt treatment under the G20 Common Framework (for example, Chad).
  - Official and private creditors need to stand ready to respond swiftly to requests from a broad set of countries, including the poorest nations that were part of the Debt Service Suspension Initiative, as well as middle-income economies under stress (for example, Sri Lanka).
  - It is necessary to agree on mechanisms to address debt-restructuring needs for a broader set of economies, including middle-income economies that are not eligible under the current Common Framework.
  - Large creditors, including non–Paris Club and private creditors, have a crucial role to play in ensuring effective, predictable, and timely debt resolution processes.
  - The newly created Global Sovereign Debt Roundtable (GSDR) will help multilateral agencies and private and public creditors identify key impediments to restructurings and design standards and processes that can address them.

### Reinforcing supply and medium-term growth policies
- Policy actions to raise medium-term growth and recoup output losses:
  - Structural reforms to reduce harmful market power and rent-seeking behavior and to address overly rigid regulation and planning processes.
  - Stimulate investment in infrastructure improvements and productive digitalization initiatives.
  - Enhance access to and quality of education.
  - Reduce labor market tightness by encouraging participation and reducing job search and matching frictions, including bolstering active labor market policies such as short-term training programs for professions experiencing shortages.
  - Pass labor laws and regulations that increase work flexibility through telework and leave policies, and allow for the resumption of regular immigration flows.
- Industrial policy guidance:
  - Industrial policy could be pursued if frictions (for instance, market failures) are well established and if other policies are not available.
  - Industrial policy should not introduce distortions and should be consistent with international agreements and World Trade Organization (WTO) rules.
  - Where industrial policies are rolled out, wasteful subsidy races or the imposition of domestic production requirements should be avoided.

### Containing pandemic risks
- Recommendation:
  - Authorities should remain vigilant to the risks of a reemergence of the COVID-19 virus and new pandemics and their potential impacts on the global economy.
  - Coordinated efforts to boost access to vaccines and medicines where immunity is low and greater public support for vaccine development and systematic responses to future epidemics are needed.

### Policies for a better long term: multilateral cooperation and the green transition
- Strengthening multilateral cooperation:
  - Complex global challenges necessitate a coordinated and common response to bolster resilience and achieve the best outcomes.
  - Strengthening the multilateral trading system would help reduce the risks to growth and resilience from geopolitical fragmentation by providing fair and predictable rules for exchange.
  - To achieve such strengthening, WTO rules in critical areas such as agricultural and industrial subsidies must be upgraded, new WTO-based agreements implemented, and the WTO dispute settlement system fully restored.
- Speeding up the green transition:
  - Progress in emission reductions needed to contain global warming at 2°C or less remains inadequate.
  - Implementing credible policies now will limit the overall costs of mitigation.
  - International coordination on carbon pricing or equivalent policies would facilitate a faster decarbonization in a cost-efficient way.
  - With declining investment in fossil fuels, a concerted push on alternative clean energy investment could help ensure sufficient energy supplies and achieve the needed decarbonization.
  - Measures could include investment incentives for green materials and electricity grid upgrades, easing of permitting processes for renewables, and support for research and development.
  - Meetings at the 27th United Nations Climate Change Conference of the Parties resulted in encouraging signs of international cooperation on adaptation to climate change, but more needs to be done, including channeling aid to vulnerable countries.

### Housing markets: recent developments, risks, and vulnerabilities (Box 1.1)
- Recent developments:
  - As central banks raised borrowing costs to fight inflation in 2022, real house price growth turned negative in both advanced and emerging market economies.
  - In the second quarter of 2022, quarterly real house prices fell, with about two-thirds of economies experiencing negative growth and the remainder positive but slower growth.
  - Among advanced economies, the deterioration in the housing market was more pronounced in those that showed signs of overvaluation before and during the pandemic.
- Mortgage rates:
  - Mortgage rates climbed to an average of 6.8 percent in advanced economies in late 2022, up from 2.8 percent in January 2022.
- Risks and exposure:
  - If mortgage rates continue to rise, demand for borrowing and house prices are likely to weaken further.
  - Economies with elevated house prices and high levels of household debt issued at floating rates are particularly vulnerable to any ensuing financial sector stress.
  - Economies in which house prices increased rapidly and affordability declined, but household debt levels remained moderate up to the recent onset of monetary tightening, a more gradual price decline is expected, which could improve affordability.
- Comparison with 2007–08:
  - In most cases, it is unlikely that an ongoing fall in house prices will lead to a financial crisis, but a sharp drop in house prices could adversely affect the economic outlook.
  - Data from 2021 show that banks are better capitalized than before the global financial crisis, with the regulatory ratio of Tier 1 capital to risk-weighted assets standing at 17.5 percent on average across countries, compared with 13.4 percent in 2007.
  - The average household debt-to-income ratio across countries in 2022 was on par with that in 2007, driven mainly by households in economies that managed to escape the brunt of the global financial crisis and have since run up substantial borrowing.
- Special case—China:
  - In China, the real estate sector has experienced a protracted contraction, with early signs of stabilization in 2023.
  - Share prices of property developers rebounded partially following the wave of support measures announced in November 2022, but a correction in house prices could intensify financial stress for property developers.
  - The real estate and construction sectors account for about one-fifth of final demand absorption in China and constitute a significant fraction of lending.
  - The share of property developers in need of restructuring remains large, and the loosening of lending standards could exacerbate financial stability risks.

*Source: CHAPTER 1 GLObAL PROsPECTs AND POLICIEs (ch1 - CHAPTER 1 GLObAL PROsPECTs AND POLICIEs), World Economic Outlook: A Rocky Recovery, April 2023.*

### Box 1.1 (continued)

### Box 1.1 (continued)

### Understanding how long monetary policy takes to affect output and inflation
- Central bank credibility and mortgage rate flexibility increase transmission speed.
- Financial development and offsetting (uncoordinated) fiscal policies reduce transmission speed.
- With ongoing synchronous tightening, a faster and stronger response of economic output and prices could occur.

### Transmission Speed
- Estimates for timing of transmission to output in the United States and the euro area vary between near-immediate effects and a lag of about three quarters; output usually reverts to its initial level within two to three years, although more persistent effects may occur.
- Estimates of the lag in transmission to prices vary; at the upper end, delays are about 1.5 to 2.5 years.
- Studies accounting for the information component find that prices decline immediately following monetary shocks; the immediate response is driven by exchange rate appreciation and changes in inflation expectations.
- Macroeconomic variables react faster to forward guidance, which may signal a more persistent change in financial market conditions.

### Country Heterogeneity
- A meta-analysis of 67 published studies covering 30 economies (Havranek and Rusnak 2013) finds the effect of a tightening on prices takes an average of about three years to reach its trough, with a wide range.
- Prices in advanced economies take about twice the time needed in emerging market and developing economies.
- Financial development:
  - Developed financial systems provide more opportunities to hedge against monetary surprises in advanced economies, delaying impact (Havranek and Rusnak 2013).
  - More competitive financial sectors exhibit faster and more complete interest rate pass-through (Georgiadis 2014).
- Financial frictions:
  - Investment sensitivity to monetary policy is higher for low-liquidity firms (Jeenas 2019); younger non-dividend-paying firms (Cloyne and others, forthcoming); low-risk firms (Ottonello and Winberry 2020); and firms with a high marginal product of capital (González and others 2022; Albrizio, González, and Khametshin 2023).
  - Following monetary tightening, investment declines more where financial frictions are higher, capital misallocation increases, and productivity declines.
- Central bank credibility and communication:
  - When inflation expectations are well anchored and central bank independence is high, monetary policy restores price stability with a lower output cost (Chapter 3 of the October 2018 WEO; Bems and others 2020).
  - If expectations are more backward looking, as in many emerging market and developing economies, a stronger monetary policy reaction is warranted (Chapter 2 of the October 2022 WEO; Alvarez and Dizioli 2023).
  - Exchange rate pass-through to consumer prices will be stronger (Carrière-Swallow and others 2021).
- Household wealth and income distribution:
  - Households with a mortgage reduce spending on durables most in response to tightening (Cloyne, Ferreira, and Surico 2020).
  - Liquidity of asset holdings matters: bottom of liquid asset distribution decrease consumption; midpoint reduce saving or increase borrowing; top increase consumption substantially due to higher interest income (Holm, Paul, and Tischbirek 2021).
  - High-income consumers cut spending more than low-income consumers (Grigoli and Sandri 2022).
- Nominal rigidities:
  - Greater wage rigidities amplify the output effect (Olivei and Tenreyro 2010).
  - Mortgage rate rigidities dampen the output effect by reducing responsiveness of residential investment and sensitivity of defaults, house prices, car purchases, and employment (Calza, Monacelli, and Stracca 2013; Di Maggio and others 2017).
  - A large share of adjustable-rate mortgages amplifies the contractionary output effect; adjustable-rate mortgages are more common in emerging market and developing economies (Cerutti and others 2016).

### Asymmetric Effects
- Evidence of asymmetry: policy easing has large effects on prices but small effects on real activity; policy tightening has large output effects, especially during booms, but small effects on prices (Barnichon and Matthes 2018; Angrist, Jordà, and Kuersteiner 2018; Forni and others 2020; Tenreyro and Thwaites 2016).
- Potential drivers:
  - Downward nominal rigidities (Forni and others 2020).
  - Interaction with fiscal policy, which can dampen monetary policy in recessions but reinforce it in expansions (Tenreyro and Thwaites 2016).
  - Changes in firms’ price-setting when inflation increases (Alvarez, Lippi, and Paciello 2011; Nakamura and Steinsson 2008; Albagli, Grigoli, and Luttini 2023).
- Cross-country synchronized tightening can counteract global shocks; synchronization among energy importers lowers energy world demand and reduces inflation faster (Auclert and others 2022).
- Given today’s synchronous global tightening, withdrawal of fiscal support, sharply increasing residential mortgage rates, and financial conditions sensitive to policy news, a shorter transmission lag than in the past could occur in several countries.
- Clear and effective communication by major central banks to anchor inflation expectations is expected to accelerate policy transmission.

### Confidence Bands (methodology and headline results)
- Methodology: Uses IMF’s G20 Model and the approach of Andrle and Hunt (2020) to recover implied shocks to aggregate demand and supply, sample shocks nonparametrically, and generate predictive distributions around WEO projections. Distributions for global variables are obtained by aggregating country-level estimates.
- Judgment: As in October 2022 WEO, two versions of the forecast distribution were presented; the distribution shown samples the year 1982 more heavily (with judgment) to stress downside risk from contractionary monetary policy. Judgment is applied to the first two years in the projection horizon (2023 and 2024).
- Graphical representation: Each shade represents a 5 percentage point interval; the entire band covers 90 percent of the distribution.
- Global growth:
  - Added judgment skews distribution to the downside.
  - There is a 70 percent probability that 2023 global growth could be between 1.0 percent and 3.8 percent.
  - There is a 70 percent probability that growth will be between 1.4 percent and 4.3 percent in 2024.
- Global inflation:
  - There is a 70 percent chance that 2023 headline inflation could be about 1.2 percentage points higher or lower than currently projected.
  - The 70 percent range for core inflation is 0.7 percentage point higher or lower than the baseline.
  - Distributions are skewed to the upside in the near term; about 30 percent probability that 2023 core inflation will exceed the 2022 level.

### Risk Scenarios: Severe downside scenario from banking-sector fragility and tightened credit supply
- Scenario focus: Shocks to credit supply stemming from banking sector fragility amplified by risk-off behavior and a decline in confidence could reduce global growth to about 1 percent.
- Layers and assumed impacts:
  - Credit supply layer:
    - US bank lending decreases by 4 percent in 2023 relative to current baseline projections (equivalent to about one-fifth of the contraction in credit experienced during the global financial crisis, relative to the precrisis trend).
    - Corporate spreads increase by 250 basis points in 2023.
    - Euro area countries and Japan experience similar magnitude impacts; other countries’ shocks vary with correlation to US financial conditions; assumed impact on China’s domestic financial conditions is small.
    - Tightening in financial conditions is persistent into 2024 and (to a lesser extent) beyond.
  - Equity prices:
    - Global equity prices fall by 10 percent on impact and by about 6 percent on average in 2023.
  - Flight to safety and dollar appreciation:
    - In emerging markets excluding Asia, sovereign premiums increase considerably and the US dollar appreciates by close to 10 percent.
    - Shock for emerging market economies in Asia is about half as large; China is not directly affected.
    - Sovereign spreads in some euro area countries increase by a modest amount.
  - Fall in confidence:
    - Assumes greater precautionary saving at about 75 percent of the estimated increase in precautionary saving during the global financial crisis, leading to a decrease in consumption; a decline in business sentiment leads to lower investment.
    - In this layer, US consumption and investment decrease by 0.3 and 1 percent, respectively, relative to the baseline.

### Policy response assumptions
- Monetary policy responds endogenously to decreased activity and inflationary pressures.
- Fiscal policy: automatic stabilizers operate in advanced economies but not in emerging markets.
- Balance sheet policies and central bank/regulator interventions are not explicitly modeled but should be thought to help avert a crisis, with larger effects on activity than presented; potential fiscal costs and impacts on fiscal stance are not considered.
- If fiscal policy tightens in countries with limited fiscal space, the macroeconomic impact would be larger.

### Impact on world output and inflation (scenario quantitative outcomes)
- Credit conditions layer subtracts 0.5 percent from global output in 2023; larger impact in the United States and other advanced economies than in emerging markets; impact on China is small.
- Appreciation of the US dollar and tightening sovereign premiums subtract another 0.2 percent globally in 2023; effect larger in emerging markets (–0.4 percent in 2023).
- Decline in equity prices subtracts another 0.5 percent from global output in 2023.
- Confidence layer subtracts 0.5 percent from global activity in 2023.
- Combined effect from all layers implies:
  - Decrease in the level of global output of 1.8 percent in 2023 relative to the baseline.
  - Decrease in the level of global output of 1.4 percent in 2024 relative to the baseline.
  - Overall effect on global output is about one-fourth the size of the impact of the global financial crisis during 2008–09.
  - United States and other advanced economies see a broadly similar hit to activity (1.8 percent in 2023).
  - Emerging market economies excluding China see a larger effect (–1.9 percent), mainly due to the dollar appreciation layer.
  - China experiences a smaller impact overall (–1.2 percent).
- Oil prices fall by close to 15 percent in 2023 relative to the baseline, before gradually returning to the baseline over the projection horizon.
- Disinflationary impulse:
  - Global core inflation declines by 0.9 percentage point in 2023 relative to the baseline.
  - Global core inflation declines by 1.1 percentage points in 2024 relative to the baseline.
  - Disinflation is more pronounced in emerging markets excluding China due to assumed steeper Phillips curves, but decline is sizable in advanced economies as well.
- Policy rates (not shown):
  - US policy rates decline by 1.6 percentage points in 2023 relative to the baseline.
  - US policy rates decline by 1.8 percentage points in 2024 relative to the baseline.
  - The global average of policy rates declines by 2.1 and [text truncated in source].

*Prepared by Silvia Albrizio and Francesco Grigoli; Yang Liu provided research support. Prepared by Michal Andrle, Jared Bebee, Allan Dizioli, Rafael Portillo, and Aneta Radzikowski.*

### 2.3 percentage points over the same period.

### Impact of Downside Scenario on GDP and Core Inflation

### Commodity Market Developments
- Primary commodity prices declined 28.2 percent between August 2022 and February 2023.
- Energy commodities declined 46.4 percent over the same period.
- European natural gas prices declined by 76.1 percent, reaching $16.7 a million British thermal units (MMBtus) in February 2023.
- Base metal prices rebounded by 19.7 percent between August 2022 and February 2023.
- Precious metal prices rebounded by 3.3 percent between August 2022 and February 2023.
- Food prices increased by 1.9 percent between August 2022 and February 2023 and are:
  - 22.3 percent above the past-five-year average,
  - 39.1 percent above pre-pandemic levels.
- Crude oil prices retreated by 15.7 percent between August 2022 and February 2023 (from $96.4 in 2022).
- Futures markets suggest crude oil prices will:
  - slide by 24.1 percent, to average $73.1 a barrel in 2023 (from $96.4 in 2022),
  - continue to fall to $65.4 in 2026.
- European natural gas futures and storage developments:
  - Prices reached nearly $100 a MMBtu in late August 2022;
  - A price decline to historical averages is expected by 2028.
- Coal prices slid 50.9 percent over the reference period.
- The IMF’s energy transition metal index increased 14.3 percent.
- Gold prices rose by 5.1 percent; central banks’ net purchases broke a 55-year record.
- Base metal price index projected to:
  - increase 3.5 percent in 2023,
  - decrease 2.6 percent in 2024.
- Drawdowns of staple food stocks have stopped; food and beverage prices peaked in May 2022 and are up 1.3 percent from last August.
- Prices of raw agricultural materials declined by 9.1 percent from last August.

### The Macroeconomic Impact of Declines in Fossil Fuel Extraction
- Reaching net zero emissions by 2050 will require an 80 percent reduction in global fossil fuel extraction compared with 2021 levels (International Energy Agency (2022) cited).
- Typical identified extraction-decline episode characteristics:
  - The typical episode is a 10 percent contraction in extraction activity in the episode’s first year,
  - cumulating to a 40 percent reduction over 10 years.
- Empirical identification:
  - 35 episodes involving persistent declines in extractive activity identified out of 154 observed episodes,
  - Episodes are verified to be driven by factors exogenous to economic conditions (for example, depletion or sector-specific policy changes).
- Estimated macroeconomic effects (local projections following Jordà (2005)):
  - A typical episode leads to a 1 percent initial decline from the baseline in real GDP,
  - Cumulating to a 5 percent decline after five years,
  - The real exchange rate depreciates slowly by 20 percent,
  - Exports decline by about 6 percent,
  - The trade balance worsens,
  - Imports and investment also decline (estimates are less precise),
  - Aggregate consumption responds only with a lag of more than five years.
- Sectoral spillovers:
  - Manufacturing and services value added fall significantly by about 5 percent,
  - Negative impact on employment is small (attributed to the high capital intensity of the extraction sector).
- Heterogeneity by income and institutions:
  - The estimated GDP impact is significantly larger for middle- and low-income countries than for high-income countries,
  - Five years after the shock, the GDP difference between countries with high and low institutional quality is about 5 percentage points,
  - A decline in extraction activity does not restore the quality of institutions even a decade after the shock, suggesting hysteresis and an asymmetric institutional response.
- Anticipation and robustness:
  - Anticipation could bias estimated impacts downward if earlier adjustment is not captured;
  - Article IV report projections compared with actual production for 26 decline episodes (Article IV coverage) were reviewed to explore anticipation.

### Data, Methods, and Coverage
- New dataset covers extraction of oil, coal, gas, and metals for countries worldwide from 1950 to 2020.
- Empirical specification includes:
  - country fixed effects ψn,
  - time fixed effects φt,
  - three lags of the dependent variable,
  - a shock series to deal with autocorrelation following Montiel Olea and Plagborg-Møller (2021),
  - the term Δqt,i captures the percentage change in extraction output for episode i at year t.
- Results are interpreted as cumulative percentage changes from the baseline to a shock in year t over horizons up to 10 years.

### Quantitative Illustrations and Projections (Selected)
- Primary commodity prices: −28.2 percent (Aug 2022 to Feb 2023).
- Energy commodities: −46.4 percent (Aug 2022 to Feb 2023).
- European natural gas: −76.1 percent (Aug 2022 to Feb 2023); $16.7 per MMBtu in Feb 2023.
- Crude oil futures projection: $73.1 a barrel in 2023; $65.4 in 2026.
- Base metal index: +19.7 percent (Aug 2022–Feb 2023); projected +3.5 percent in 2023, −2.6 percent in 2024.
- Coal prices: −50.9 percent over the reference period.
- Food and beverage prices: +1.3 percent from last August; 22.3 percent above past-five-year average; 39.1 percent above pre-pandemic levels.
- Typical extraction-decline episode: −10 percent first year, −40 percent over 10 years.
- Macroeconomic impacts from a typical episode:
  - Real GDP: −1 percent initially; −5 percent after five years.
  - Real exchange rate: −20 percent (depreciation).
  - Exports: −6 percent.
  - Manufacturing and services value added: −5 percent.

*Source: IMF staff calculations; figures and analysis as presented in the Special Feature "Commodity Special Feature: Market Developments and the Macroeconomic Impact of Declines in Fossil Fuel Extraction."*

### 1. Real GDP2. Role of Institutions

### 1. Real GDP2. Role of Institutions

### Responses of Macroeconomic Variables to an Extraction Decline Shock
- Figures show impulse-response-style outcomes with x-axis unit "years after the shock" and shaded areas representing 90 percent confidence intervals.
- Variables analyzed include: Real GDP, Role of Institutions (interaction), Trade, Exchange Rate, Consumption, Investment.
- Comparative cases displayed: "Small manufacturing sector" and "Large manufacturing sector".
- Sources: Bems and others (forthcoming); and IMF staff calculations.

### Empirical Patterns and Interpretation
- In many episodes of extraction declines, only 4 cases were anticipated; in the other 22 cases, extraction was expected either to increase or to remain stable (or in a few cases, it was not mentioned).
- The lack of anticipation suggests uncertainty about the size and persistence of the contraction, which may have delayed economic adjustment.
- Both private and public consumption initially increase, declining only with a delay to a 4 percent lower level.
- The exchange rate moves in only a modest and statistically nonsignificant way in typical episodes, consistent with incomplete anticipation or buffering policies.

### Policy Challenges and Recommendations for a More Challenging Energy Transition
- Countries at risk of declining fossil fuel output need to address the possibility of a challenging structural adjustment.
- Policy areas to improve:
  - Public finances and the quality of institutions (for example, by enhancing the management of public sector institutions and the regulatory business environment).
  - Economic diversification (reference to Cherif and others 2022).
  - Establishment of sovereign wealth funds.
  - Facilitation of the reallocation of production factors.
- Possible policy actions:
  - Ameliorate the business environment to attract investment in new, productive, higher-value-added sectors.
  - Modernize infrastructure and attract foreign direct investment in research and development.
  - Improve the human capital stock of the labor force by investing in education.
- Uncertainty note:
  - The pace and direction of the clean energy transition and the price outlook depend on the policy mix.
  - If fossil fuel prices decline because of a climate policy mix that works mostly through the demand side, high-cost producers will need to shut down production.
  - If prices instead rise based on a climate policy mix that relies on supply cuts, local production declines will depend on domestic policy decisions.
  - Climate policy certainty, at the country and global levels, could make adjustments more predictable and less costly.
- Cross-reference: Special Feature in the April 2022 World Economic Outlook.

### Selected Regional and Country Projections and Key Statistics (Annex Tables)
- Europe aggregate: Real GDP 2.7 (2022); Projections 0.8 (2023) and 1.7 (2024).
- Advanced Europe aggregate: Real GDP 3.6 (2022); Projections 0.6 (2023) and 1.4 (2024).
- Euro Area: Real GDP 3.5 (2022); Projections 0.8 (2023) and 1.4 (2024). Current account balance 0.5 (2022), 3.0 (2023), 1.6 (2024). Unemployment projections 6.8 (2023), 6.8 (2024).
- United Kingdom: Real GDP 4.0 (2022); Projections -0.3 (2023) and 1.1 (2024). Consumer prices 9.1 (2022); Projections 6.8 (2023) and 3.0 (2024). Current account balance -5.6 (2022), -5.2 (2023), -4.4 (2024). Unemployment projections 3.7 (2023), 4.2 (2024), 4.7 (2024).
- United States: Real GDP 2.1 (2022); Projections 1.6 (2023) and 1.1 (2024). Consumer prices 8.0 (2022); Projections 4.5 (2023) and 2.3 (2024). Current account balance -3.6 (2022), -2.7 (2023), -2.5 (2024). Unemployment projections 3.6 (2022), 3.8 (2023), 4.9 (2024).
- China: Real GDP 3.0 (2022); Projections 5.2 (2023) and 4.5 (2024). Consumer prices 2.1 (2022); Projections 1.9 (2023) and 2.0 (2024). Current account balance 1.3 (2022), 1.4 (2023), 1.1 (2024). Unemployment projections 4.2 (2022), 4.1 (2023), 3.9 (2024).
- India: Real GDP 6.8 (2022); Projections 5.9 (2023) and 6.3 (2024). Consumer prices 6.7 (2022); Projections 4.9 (2023) and 4.4 (2024). Current account balance -2.6 (2022), -2.2 (2023), -2.2 (2024).
- Russia: Real GDP -2.1 (2022); Projections 0.7 (2023) and 1.3 (2024). Consumer prices 13.8 (2022); Projections 7.0 (2023) and 4.6 (2024).
- Sub-Saharan Africa aggregate: Real GDP 3.9 (2022); Projections 3.6 (2023) and 4.2 (2024). Consumer prices 14.5 (2022); Projections 14.0 (2023) and 10.5 (2024). Current account balance -2.0 (2022), -2.6 (2023), -2.7 (2024).
- World real per capita output (annual percent change, constant 2017 international dollars at PPP): 2.3 (average 2005–14); 2.1 (2015); 1.9 (2016); 2.4 (2017); 2.4 (2018); 1.6 (2019); -4.0 (2020); 5.7 (2021); 2.4 (2022); 1.8 (2023); 2.0 (2024).
- Advanced Economies world per capita: 0.9 (average 2005–14); 1.7 (2015); 1.3 (2016); 2.1 (2017); 1.9 (2018); 1.3 (2019); -4.7 (2020); 5.3 (2021); 2.3 (2022); 0.9 (2023); 1.0 (2024).
- Emerging Market and Developing Economies world per capita: 4.4 (average 2005–14); 2.8 (2015); 2.9 (2016); 3.3 (2017); 3.3 (2018); 2.3 (2019); -3.1 (2020); 6.1 (2021); 2.8 (2022); 2.8 (2023); 3.0 (2024).
- China world per capita: 9.4 (average 2005–14); 6.5 (2015); 6.2 (2016); 6.4 (2017); 6.3 (2018); 5.6 (2019); 2.1 (2020); 8.4 (2021); 3.0 (2022); 5.3 (2023); 4.6 (2024).
- India world per capita: 6.2 (average 2005–14); 6.7 (2015); 7.0 (2016); 5.6 (2017); 5.3 (2018); 2.8 (2019); -6.7 (2020); 8.0 (2021); 5.8 (2022); 4.9 (2023); 5.4 (2024).

*Source: IMF staff estimates. Note: Figures, tables, and notes as provided in the source content.*

### References

### References

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*CHAPTER 1 GLObAL PROsPECTs AND POLICIEs — International Monetary Fund | April 2023*

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_Source: https://www.imf.org/-/media/files/publications/weo/2023/april/english/ch1.pdf_