## FOREWORD

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### Global outlook
- Global growth will bottom out at 2.8 percent this year before rising modestly to 3.0 percent in 2024.
- Global inflation will decrease from 8.7 percent in 2022 to 7.0 percent this year and 4.9 percent in 2024.
- Emerging market and developing economies: growth (fourth quarter over fourth quarter) jumps from 2.8 percent in 2022 to 4.5 percent this year.
- Advanced economies slowdown concentrated in:
  - Euro area: growth (fourth quarter over fourth quarter) expected to fall to 0.7 percent this year before rebounding to 1.8 percent in 2024.
  - United Kingdom: growth (fourth quarter over fourth quarter) expected to fall to –0.4 percent this year before rebounding to 2.0 percent in 2024.

### Inflation, labor markets, and demand
- Core inflation (excluding energy and food) is expected to decline to 5.1 percent this year (fourth quarter over fourth quarter), a sizable upward revision of 0.6 percentage point from the January update, and remains well above target.
- Nominal wage inflation continues to lag far behind price inflation, implying a steep and unprecedented decline in real wages; real wages are expected to recover given labor market tightness.
- Corporate margins have surged and should be able to absorb rising labor costs on average.
- Activity shows resilience as labor markets remain historically tight in most advanced economies; output and inflation estimates have been revised upward for the past two quarters, suggesting stronger-than-expected demand that may require monetary policy to tighten further or to stay tighter for longer.

### Financial stability risks and recent developments
- The sharp policy tightening of the past 12 months has triggered sizable losses on long-term fixed-income assets after a prolonged period of muted inflation and extremely low interest rates.
- Recent episodes of stress:
  - Gilt market instability in the United Kingdom in the fall.
  - Banking turbulence in the United States with the collapse of a few regional banks.
- Authorities took quick and strong action and have been able to contain the spread of the crises so far (April 2023 Global Financial Stability Report), but the financial system may be tested again.
- Potential vulnerabilities include financial institutions with excess leverage, credit risk or interest rate exposure, too much dependence on short-term funding, or those located in jurisdictions with limited fiscal space.
- A sharp tightening of global financial conditions—a “‘risk-off” shock—could lead to:
  - Large capital outflows from emerging market and developing economies.
  - A sudden increase in risk premia.
  - A dollar appreciation in a rush toward safety.
  - Major declines in global activity amid lower confidence, household spending, and investment.
- In such a severe downside scenario, global GDP per capita could come close to falling — an outcome whose probability is estimated at about 15 percent.

### Policy guidance and recommended actions
- Monetary policy:
  - As long as the financial system remains reasonably stable, monetary policy should stay firmly focused on bringing inflation down.
  - Banking turmoil will help slow aggregate activity as banks curtail lending, partially mitigating the need for further monetary policy tightening.
  - Any expectation that central banks will abandon the fight against inflation would lower yields, support activity beyond what is warranted, and complicate central banks’ tasks.
- Fiscal policy:
  - Tighter fiscal policy can support monetary policy by cooling economic activity and allowing real interest rates to return faster to their low natural level (April 2023 WEO Chapter 2).
  - Appropriately designed fiscal consolidations will help rebuild fiscal buffers and strengthen financial stability (April 2023 WEO Chapter 3; April 2023 Fiscal Monitor).
- Financial authorities and safety nets:
  - Regulators and supervisors should act now to manage market strains and strengthen oversight to prevent market stress from morphing into a full-blown financial crisis.
  - Emerging market and developing economies should ensure proper access to the global financial safety net, including the IMF’s precautionary arrangements, and access to the Federal Reserve repurchase facility for Foreign and International Monetary Authorities or to central bank swap lines, where relevant.
  - Exchange rates should adjust as much as possible unless doing so raises financial stability risks or threatens price stability, in line with the Integrated Policy Framework.
- Crisis contingency:
  - Should a systemic financial crisis loom, a careful and timely recalibration of policy will be needed to safeguard both the financial system and economic activity.

### Medium-term prospects and risks of fragmentation
- Five-year-ahead growth forecasts declined steadily from 4.6 percent in 2011 to 3.0 percent in 2023.
- Factors behind the decline:
  - Convergence dynamics as previously fast-growing economies such as China and Korea slow.
  - Possible scarring from the pandemic.
  - A slower pace of structural reforms.
  - The rising threat of geoeconomic fragmentation leading to more trade tensions, less direct investment, and a slower pace of innovation and technology adoption across fragmented ‘blocs’ (April 2023 WEO Chapter 4).
- A fragmented world is unlikely to achieve progress for all or to allow effective global responses to challenges such as climate change or pandemic preparedness; avoiding geoeconomic fragmentation is imperative.

*Pierre-Olivier Gourinchas, Economic Counsellor*

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