## World Economic Outlook: NAVIGATING GLOBAL DIVERGENCES — Preface and Chapters 1–3 (selected excerpts) ## Source details **Canonical URL:** [World Economic Outlook: NAVIGATING GLOBAL DIVERGENCES — Preface and Chapters 1–3 (selected excerpts)](https://www.imf.org/-/media/files/publications/weo/2023/october/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/weo/2023/october/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/weo/2023/october/english/text.pdf.json) --- ### Global projections, baseline assumptions, and key metrics - Global growth: - Global growth will slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024. - Medium-term (2028) projection: 3.1 percent. - Inflation: - Headline inflation: 9.2 percent in 2022, 5.9 percent in 2023 (alternative overview also cites 6.9 percent in 2023), and 4.8 percent in 2024 (chapter-level projections cite 5.8 percent in 2024 and a fourth-quarter 2024 rate of 4.8 percent). - Core inflation (excluding food and energy): projected to decline to 4.5 percent in 2024 (overview) and globally to 5.3 percent in 2024 (chapter figure). - Policy-rate and bond-yield assumptions: - Short-term (three-month) government bond yields assumed: - United States: 5.3 percent in 2023 and 5.4 percent in 2024. - Euro area: 3.0 percent in 2023 and 3.2 percent in 2024. - Japan: –0.2 percent in 2023 and –0.1 percent in 2024. - Long-term (10-year) government bond yields assumed: - United States: 3.8 percent in 2023 and 4.0 percent in 2024. - Euro area: 2.4 percent in 2023 and 2.6 percent in 2024. - Japan: 0.5 percent in 2023 and 0.6 percent in 2024. - Oil price assumptions: - Average price of oil: $80.49 a barrel in 2023 and $79.92 a barrel in 2024. - Exchange-rate and data-timing assumptions: - Real effective exchange rates assumed constant at average levels during July 25, 2023–August 22, 2023. - Projections based on statistical information available through September 25, 2023. ### Outlook by country groups and regions (selected numeric highlights) - Advanced economies: - Aggregate growth: 2.6 percent in 2022; 1.5 percent in 2023; 1.4 percent in 2024. - United States: growth projected at 2.1 percent in 2023 and 1.5 percent in 2024; unemployment forecast rise from 3.6 percent to a peak of 4.0 percent by the last quarter of 2024. - Euro area: growth projected to fall from 3.3 percent in 2022 to 0.7 percent in 2023, then rise to 1.2 percent in 2024. - Japan: growth projected to rise from 1.0 percent in 2022 to 2.0 percent in 2023. - Emerging market and developing economies: - Aggregate projection: 4.1 percent in 2022; 4.0 percent in 2023; 4.0 percent in 2024 (0.1 percentage point downward revision for 2024). - Emerging and developing Asia: 4.5 percent in 2022; 5.2 percent in 2023; 4.8 percent in 2024. - China: revised to 5.0 percent in 2023 and 4.2 percent in 2024 (downward revisions of 0.2 and 0.3 percentage points). - India: projected at 6.3 percent in both 2023 and 2024. - Regional and country-specific notes: - Sub-Saharan Africa: growth projected to decline to 3.3 percent in 2023 then pick up to 4.0 percent in 2024. - Saudi Arabia: region-level growth for its region revised to 0.8 percent in 2023, with a negative revision to the latter of 1.1 percentage point; Sudan growth cut to about –18.3 percent (downward revision of nearly 20 percentage points). - Latin America and the Caribbean: growth decline from 4.1 percent in 2022 to 2.3 percent in both 2023 and 2024. ### Major risks and quantified scenario outcomes - Risk environment: - Balance of risks remains tilted to the downside despite some receding of acute near-term risks; probability global growth in 2023 falls below 2.0 percent assessed at about 5 percent (down from 25 percent in April 2023); for 2024 probability below 2.0 percent about 15 percent. - Probability that core inflation in 2024 will be higher than in 2023 assessed at about 15 percent. - Box 1.2 scenario quantifications (selected impacts): - Disinflationary scenario: global core inflation troughs at –0.4 percentage point in 2024 relative to baseline and generates a 0.5 per cent increase in global GDP in 2024 persisting into 2025; advanced-economy policy rates decrease by 0.3 percentage point relative to baseline. - Stronger investment recovery (advanced economies): global output increase up to 0.3 per cent by 2025; advanced-economy GDP impact peaks at 0.6 percent in 2025; adds 0.3 percentage point to core inflation and requires about 0.75 percentage point higher policy rates relative to baseline. - China downside: China’s GDP lowers by as much as –1.6 percent in 2025 relative to baseline; China core inflation down by about 1 percentage point; global output reduced by –0.6 per cent by 2025. - Longer monetary lags: global output down about –0.4 percent by 2024; advanced economies output –0.6 percent and core inflation –0.2 percentage point in 2024. - Tighter financial conditions in emerging markets: global output lower by –0.5 percent by 2024; sovereign premiums about 200 basis points and corporate premiums about 150 basis points increase in emerging markets (excluding China); emerging market currencies depreciate 10 percent relative to the US dollar in H1 2024. ### Inflation, expectations, and monetary policy findings (Chapter 2) - Empirical facts: - Near-term (next-12-months) inflation expectations rose sharply in 2022 across agents; long-term (five-year-ahead) expectations have remained broadly stable on average. - Global core inflation fell from a peak of 8.5 percent (Q1 2022, quarterly annualized) to 4.9 percent in Q2 2023 (chapter-level measure). - For the average advanced economy, a 1 percentage point rise in near-term expectations is associated with a 1.1 percentage point rise in current inflation (baseline hybrid Phillips curve estimate). - Causal estimates and heterogeneity: - Instrumental variables estimates imply causal effects of near-term expectations about 30 percent lower than associational estimates: for the average advanced economy, inflation would rise by about 0.8 percentage point for a 1 percentage point rise in near-term expectations; for the average emerging market economy, pass-through about 0.4 percentage point. - Lagged inflation has little explanatory power in advanced economies; in emerging markets the carryover from previous quarter’s inflation about 0.2 percentage point. - Pass-through from expectations to inflation increases when inflation is elevated (for advanced economies coefficient rises from 0.6 when inflation low to 0.9 when inflation high). - Model insights and trade-offs: - A heterogeneous-agents DSGE with forward- and backward-looking learners implies output costs of disinflation rise with the share of backward-looking learners and with prevailing inflation. - Representative timing trade-offs: focusing solely on rapid disinflation could shorten convergence to target by two years but at the cost of a sharper economic slowdown; when accommodating output gap and rate smoothing, likely take about three to four years to return inflation and expectations to target. - Estimated share of backward-looking learners: about 20 percent for representative advanced economy and about 30 percent for representative emerging market economy. - Policy implications: - Central banks should generally maintain a tight stance while monitoring near-term expectations; avoid premature easing. - Improvements in monetary policy frameworks and communication to raise the share of forward-looking learners can reduce disinflation output costs. - Invest in better measurement of expectations, including novel text-based firm measures; firms more attentive to policy reduce their inflation expectations more following tightening. ### Fragmentation and commodity markets: vulnerabilities, scenarios, and impacts (Chapter 3) - Structural vulnerabilities: - Production concentration: the three largest producers account on average for about 65 percent of global agricultural output, about 50 percent of energy, and about 70 percent of mineral commodities. - Trade reliance: about 30 percent of agricultural and energy output and about 45 percent of minerals output is traded on average; roughly half of countries rely on three or fewer exporters for mineral imports; a quarter rely on only one. - Low elasticities: short-term supply and demand elasticities are low; e.g., copper mine development averages 16 years from exploration to opening. - Evidence of rising fragmentation: - 2022 saw more than six times more new restrictions affecting commodity trade than the 2016–19 average; overall trade-restricting measures increased 3.5 times relative to 2016–19 average. - Price dispersion widened in 2022 for selected commodities (example: Russian coal traded at almost three times lower price than Australian coal in September 2022). - Two-bloc illustrative scenario and key simulation findings: - Two hypothetical blocs based on the 2022 UN vote: “US-Europe+ bloc” and “China-Russia+ bloc”; scenario assumes no cross-bloc trade in a given commodity. - Minerals critical for the green transition (copper, nickel, cobalt, lithium) face large price increases in the China-Russia+ bloc because mining concentrated in US-Europe+ bloc while use concentrated in China-Russia+ bloc; refined minerals show opposite vulnerabilities. - Energy and most agricultural commodities show more subdued price changes under the baseline bloc split, but agricultural outliers (palm oil, soybeans) are highly exposed. - Volatility amplification: - Fragmentation increases price sensitivity to supply shocks through smaller market sizes and potential bloc-switching of suppliers. - Example: a three-standard-deviation US wheat harvest shock doubles the price impact in a fragmented world versus integrated market using elasticity assumptions (supply elasticity 0.2; demand elasticity –0.85). - A major exporter switching blocs (example: South Africa for manganese) can raise bloc prices by very large amounts (figure capped at 800 percent). - Macro and distributional impacts: - Partial-equilibrium results: copper fragmentation could reduce surplus by as much as 2.5 to 5 percent of gross national expenditure in Chile and Peru. - General-equilibrium trade model: low-income countries average long-term GDP losses of 1.2 percent; some low-income countries lose more than 2 percent of GDP. - Dynamic macro model (seven commodities): global GDP loss from fragmenting these commodities about 0.3 percent; modeled commodities account for about 70 percent of value of global commodity trade; fragmentation between blocs causes global GDP losses roughly 15 percent of loss from restricting all trade. - Europe could face inflation increases as much as 100 basis points or more in some fragmentation scenarios. - Clean energy transition implications: - IEA net-zero-emissions path to 2030 projects mineral demand changes: copper ×1.5; nickel and cobalt ×2; lithium ×6. - Integrated-world baseline: average world prices of the four minerals rise about 90 percent to 2030; fragmented world: China-Russia+ bloc faces additional average price increase of 300 percent for these minerals. - Fragmentation reduces global investment and production in renewables and EVs: roughly 20 percent lower global net investment in renewable technology and EV production by 2030; up to 30 percent lower when weighted by greenhouse gas emissions; about 70 percent fewer new EVs in China-Russia+ bloc in the complete-fragmentation counterfactual. - Fiscal cost example: China’s fiscal cost to revert to net-zero path would be 1½–2 percent of GDP. - Policy recommendations to limit fragmentation costs: - First-best: prevent fragmentation via strengthened multilateral rules (WTO) on quantitative restrictions, export tariffs, discriminatory subsidies, and local-content requirements; lift export bans on food as soon as feasible. - Second-best: establish “green corridor” agreements to safeguard cross-border flow of critical minerals and analogous “food corridor” agreements for essential agricultural commodities. - Improve data and transparency: international platform for mineral production, consumption, inventories akin to JODI or AMIS. - National resilience: diversify supply, invest in domestic mining, processing, recycling, infrastructure, strategic reserves where efficient, and strengthen fiscal and financial buffers and social safety nets. - Industrial and friend-shoring policies: use cautiously; design to minimize distortions and remain consistent with WTO rules; consider international consultations on friend-shoring practices. ### Policy priorities and practical guidance (near-term to medium-term) - Monetary policy: - Maintain a tight stance where inflation and near-term expectations remain elevated; avoid premature easing while disinflation is underway. - Use financial-stability tools as needed to contain market strains; strengthen central bank communication to anchor expectations. - Fiscal policy: - Rebuild fiscal buffers eroded by pandemic and energy shock; phase out untargeted energy subsidies; protect vulnerable households via targeted support. - In countries with limited fiscal space, shift composition toward targeted transfers and domestic revenue mobilization; consider orderly debt restructuring where debt sustainability is at risk. - Structural reforms and medium-term growth: - Bundle and sequence governance, business regulation, and external-sector reforms to boost productivity; IMF staff estimates a well-designed reform package could lift output by 4 percent in two years and 8 percent in four years in cases with large initial gaps. - Facilitate labor participation, reduce job-search frictions, and consider targeted immigration policies in advanced economies to ease labor shortages. - Multilateral cooperation: - Safeguard rules-based trade and limit geoeconomic fragmentation; establish green and food corridor agreements; maintain a well-resourced IMF and global financial safety net. _International Monetary Fund | October 2023 — Excerpts from World Economic Outlook: Navigating Global Divergences (Preface; Foreword; Chapters 1–3; Statistical Appendix highlights). Source: https://www.imf.org/-/media/files/publications/weo/2023/october/english/text.pdf_ ### Prefacexii ### Prefacexii ### Contents overview - Forewordxiii - Executive Summary xvi - Chapter 1. Global Prospects and Policies 1 - Growing Global Divergences1 - Outlook: Stable but Slow10 - Risks to the Outlook: Tilted to the Downside but More B alanced19 - Policy Priorities: From Disinflation to Sustained Growth22 - Box 1.1. Dimming Growth Prospects: A Longer Path to Convergence26 - Box 1.2. Risk Assessment Surrounding the World Economic Outlook’s Baseline Projections 30 - Commodity Special Feature: Market Developments and the Commodity Price Channel of Monetary Policy 34 - References46 - Chapter 2. Managing Expectations: Inflation and Monetary Policy49 - Introduction49 - Recent Patterns in Inflation Expectations 52 - The Role of Expectations in Inflation Dynamics 55 - Expectations Formation and Monetary Policymaking 58 - Conclusions64 - Box 2.1. Firms’ Inflation Expectations, Attention, and Monetary Policy Effectiveness 65 - Box 2.2. Fiscal Imprudence and Inflation Expectations: The Role of Monetary Policy Frameworks 66 - Box 2.3. Energy Subsidies, Inflation, and Expectations: Unpacking Euro Area Measures 67 - References68 - Chapter 3. Fragmentation and Commodity Markets: Vulnerabilities and Risks 71 - Introduction71 - What Makes Commodities Vulnerable in the Event of Fragmentation? 73 - Fragmentation in Commodity Markets 76 - Which Commodities Are Most Vulnerable? 77 - Economic Impacts of Commodity Market Fragmentation 79 - Implications for the Clean Energy Transition 83 - Summary and Policy Implications 84 - Box 3.1. Commodity Trade Tensions: Evidence from Tanker Traffic Data 87 - Box 3.2. Commodity Market Fragmentation in History: Many Shades of Gray 88 - Box 3.3. The Uneven Economic Effects of Commodity Market Fragmentation 89 - References90 - Statistical Appendix 93 (Assumptions 93; What’s New 93; Data and Conventions 94; Country Notes 95; Classification of Countries 97; Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2022 99; Table B. Advanced Economies by Subgroup 100; Table C. European Union 100; Table D. Emerging Market and Developing Economies by Region and Main Source of Export Earnings 101; Table E. Emerging Market and Developing Economies by Region, Net External Position, Heavily Indebted Poor Countries, and Per Capita Income Classification 102; Table F. Economies with Exceptional Reporting Periods 104; Table G. Key Data Documentation 105; Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies 115) - List of Tables and Figures (detailed listing of tables and figures across chapters and appendices, including Figures 1.1 through 3.3.2 and many annex tables and online tables) ### Key projections, scenarios, and metrics (from Assumptions and Conventions) - Real effective exchange rates: assumed to have remained constant at their average levels during July 25, 2023–August 22, 2023, except for currencies participating in the European exchange rate mechanism II, which are assumed to have remained constant in nominal terms relative to the euro. - Policy stance: assumed that established policies of national authorities will be maintained; for specific assumptions about fiscal and monetary policies for selected economies, see Box A1 in the Statistical Appendix. - Oil price assumptions: - average price of oil will be $80.49 a barrel in 2023 - $79.92 a barrel in 2024 - Short-term government bond yield assumptions (three-month): - United States: 5.3 percent in 2023 and 5.4 percent in 2024 - Euro area: 3.0 percent in 2023 and 3.2 percent in 2024 - Japan: –0.2 percent in 2023 and –0.1 percent in 2024 - Long-term government bond yield assumptions (10-year): - United States: 3.8 percent in 2023 and 4.0 percent in 2024 - Euro area: 2.4 percent in 2023 and 2.6 percent in 2024 - Japan: average values for the 10-year government bond yield are stated to continue but the exact numbers beyond those listed above are contained in the source text. *World Economic Outlook: NAVIGATING GLOBAL DIVERGENCES — Prefacexii* ### 0.5 percent in 2023 and 0.6 percent in 2024. These are, of course, working hypotheses rather than forecasts, ### text - 0.5 percent in 2023 and 0.6 percent in 2024. These are, of course, working hypotheses rather than forecasts, ### Assumptions, conventions, and data scope - Projections are working hypotheses, not forecasts, and are based on statistical information available through September 25, 2023. - Conventions used in the WEO: - ". . ." indicates data not available or not applicable. - "–" between years or months (for example, 2022–23 or January–June) indicates the years or months covered, including the beginning and ending years or months. - "/" between years or months (for example, 2022/23) indicates a fiscal or financial year. - "Billion" means a thousand million; "trillion" means a thousand billion. - "Basis points" refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point). - Data refer to calendar years except for a few countries that use fiscal years (see Table F in the Statistical Appendix). - For some countries, figures for 2022 and earlier are based on estimates rather than actual outturns (see Table G in the Statistical Appendix). - Composite country group data represent calculations based on 90 percent or more of the weighted group data. - Minor discrepancies between sums of constituent figures and totals reflect rounding. - The terms "country" and "economy" may cover territorial entities that are not states but for which statistical data are maintained separately. ### What is new in this publication - Ecuador’s fiscal sector projections, previously omitted, are now included. - Eritrea’s data and projections for 2020–28 are excluded from the database due to constraints in data reporting. - Sri Lanka’s projections for 2023–28 are excluded from publication owing to ongoing discussions on sovereign debt restructuring. - Ukraine’s projections for 2024–28, in line with the program’s baseline scenario, are now included. - For West Bank and Gaza, certain projections for 2022–28 are excluded from publication pending methodological adjustments to statistical series. ### Data availability, corrections, and dissemination - Tables and figures citing "IMF staff calculations" or "IMF staff estimates" draw on WEO database data. - Print and digital availability: - Digital editions, including ePub, enhanced PDF, and HTML, are available on the IMF eLibrary. - A free PDF and data sets for charts are available from the IMF website. - WEO data and metadata are provided "as is" and "as available"; corrections and revisions after publication are incorporated into electronic editions. - Inquiries about WEO content should be sent to the World Economic Studies Division, Research Department, International Monetary Fund, or via the Online Forum: www.imf.org/weoforum. ### Foreword — Global outlook and key projections - Global growth projections: - Global growth will slow from 3.5 percent in 2022 to 3 percent this year and 2.9 percent next year. - The projection for 2024 was downgraded by 0.1 percentage point from July projections. - Inflation projections: - Headline inflation: 9.2 percent in 2022, 5.9 percent this year, and 4.8 percent in 2024. - Core inflation (excluding food and energy): projected to decline to 4.5 percent in 2024. - Labor market and unemployment: - US unemployment forecast increase from 3.6 to 3.9 per cent by 2025. - Sectoral and regional divergences: - Services recovery nearly complete; strong demand for services supported service-oriented economies relative to manufacturing economies. - Slowdown more pronounced in advanced economies than in emerging market and developing economies. - China faces headwinds from a real estate crisis and weakening confidence. ### Risks highlighted - China real estate: risk of deeper real estate crisis with trade-offs between restructuring developers, preserving financial stability, and local public finance strains. - Commodity price volatility: - Since June, oil prices have increased by about 25 percent, driven by extended supply cuts from OPEC+. - Food prices remain elevated and could be disrupted by escalation of the war in Ukraine. - Geoeconomic fragmentation has increased dispersion in commodity prices across regions, including critical minerals. - Inflation persistence: - Near-term inflation expectations have risen markedly above target but appear to be turning a corner. - Tight labor markets, excess savings in some countries, and adverse energy price developments could entrench inflation. - Fiscal vulnerabilities: - Fiscal buffers eroded in many countries; elevated debt levels, rising funding costs, slowing growth, and increased demands on the state. - Financial conditions: - Despite monetary tightening, financial conditions have eased in many countries, risking a sharp repricing of risk that could appreciate the US dollar, trigger capital outflows, and increase borrowing costs and debt distress. ### Policy implications and recommendations - Monetary policy: - Under the baseline, inflation continues to recede as central banks maintain a tight stance. - With many countries near the peak of tightening cycles, little additional tightening is warranted; premature easing would squander gains. - Once disinflation is underway and near-term inflation expectations decline, policy rates can be adjusted downward while keeping the real interest rate unchanged until inflation targets are in sight. - Fiscal policy: - Fiscal policy should support monetary strategy and the disinflation process. - Fiscal policy should focus on rebuilding fiscal buffers eroded by the pandemic and the energy crisis, for instance, by removing energy subsidies. - US fiscal policy should not be procyclical at this stage of the inflation cycle. - Structural reforms and medium-term focus: - Medium-term growth prospects are weak, especially for emerging market and developing economies, implying slower convergence, reduced fiscal space, increased debt vulnerabilities, and diminished opportunities to overcome scarring. - Structural reforms—especially governance, business regulations, and the external sector—are key to unlocking higher long-term growth. - Multilateral cooperation: - Avoid policies that contravene World Trade Organization rules and distort international trade. - Safeguard flows of critical minerals and agricultural commodities; consider "green corridors" to reduce volatility and accelerate the green transition. - Limit geoeconomic fragmentation and restore trust in rules-based multilateral frameworks. - Maintain a robust global financial safety net with a well-resourced IMF at its center. *Source: https://www.imf.org/-/media/files/publications/weo/2023/october/english/text.pdf* ### FoReWoRd ### FoReWoRd ### Global recovery and near-term outlook - Global growth is forecast to slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024. - The projections remain below the historical (2000–19) average of 3.8 percent. - The forecast for 2024 is down by 0.1 percentage point from the July 2023 Update to the World Economic Outlook. - For advanced economies, growth is expected to slow from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024, amid stronger-than-expected US momentum but weaker-than-expected growth in the euro area. - Emerging market and developing economies are projected to have growth modestly decline, from 4.1 percent in 2022 to 4.0 percent in both 2023 and 2024, with a downward revision of 0.1 percentage point in 2024 reflecting the property sector crisis in China. - Forecasts for global growth over the medium term, at 3.1 per cent, are at their lowest in decades. - Global inflation is forecast to decline from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024. - The forecasts for 2023 and 2024 are revised up by 0.1 percentage point and 0.6 percentage point, respectively, and inflation is not expected to return to target until 2025 in most cases. - Global GDP expanded by 3.4 percent in the second quarter of 2023 compared with a year earlier. ### Divergences, scarring, and distributional effects - Economic activity still falls short of its prepandemic path (January 2020), especially in emerging market and developing economies, with widening regional divergences. - The strongest recovery among major economies has been in the United States, where GDP in 2023 is estimated to exceed its prepandemic path. - The euro area’s output is still 2.2 per cent below prepandemic projections, reflecting greater exposure to the war in Ukraine and associated adverse terms-of-trade shocks. - In China, pandemic-related slowdown in 2022 and the property sector crisis contribute to larger output losses of about 4.2 percent compared with prepandemic predictions. - Other emerging market and developing economies have seen weaker recoveries; low-income countries’ output losses average more than 6.5 per cent. - Overall, global output for 2023 is estimated at 3.4 percent (or about $3.6 trillion in 2023 prices) below prepandemic projections. - Private consumption recovered faster in advanced economies than in emerging market and developing economies; household consumption is broadly back to prepandemic trends in advanced economies but remains especially short in China. - Employment and labor participation rates exceed prepandemic trends in advanced economies but remain significantly below them in emerging market and developing economies. - Investment remains 3 percent to 10 percent lower across regions than had been projected before the pandemic. ### Inflation, monetary tightening, and financial conditions - Part of the global slowdown is policy induced by globally synchronous central bank tightening to restore price stability. - Global headline inflation has more than halved, from its peak of 11.6 percent in the second quarter of 2022 (at a quarterly annualized rate) to 5.3 percent. - Risks include near-term inflation expectations rising and tight labor markets contributing to persistent core inflation pressures that could require higher policy rates than expected. - Swiss and US authorities’ decisive action in March contained financial turbulence, reducing the likelihood of a hard landing; nonetheless, the balance of risks to global growth remains tilted to the downside. ### China: dynamics and spillovers - China’s growth momentum faded after a reopening surge: growth slowed from 8.9 percent in the first quarter of 2023 (seasonally adjusted annualized quarterly rate) to 4.0 percent in the second quarter. - Inflation in China fell to an estimated 0.2 percent (year over year) in the second quarter of 2023. - The property sector crisis—illustrated by severe liquidity stress at Country Garden—has led to funding constraints that prevent completion of presold homes, undermining buyer confidence and prolonging the downturn. - Real estate investment and housing prices continue to decline, pressuring local government revenues from land sales and threatening fragile public finances. - Labor market uncertainty is elevated: youth unemployment reached more than 20 percent in June 2023. - Weakening industrial production, business investment, and exports in China expose commodity exporters and Asian industrial supply chain partners to spillovers. ### Risks and shocks - Major risks include a deepening of China’s property sector crisis with global spillovers; persistent core inflation due to elevated inflation expectations and tight labor markets; more climate and geopolitical shocks causing additional food and energy price spikes; and intensified geoeconomic fragmentation constraining commodity flows and complicating the green transition. - More than half of low-income developing countries are in or at high risk of debt distress amid rising debt-service costs. - The global average temperature in July 2023 was the highest on record for any month, with reports of catastrophic flooding, heat waves, and wildfires in many regions. - According to World Bank staff estimates, 75 million to 95 million more people were living in extreme poverty in 2022 compared with prepandemic estimates. - The global prevalence of undernourishment is significantly higher than before the pandemic. ### Policy priorities and recommendations - Central banks need to restore price stability while using policy tools to relieve potential financial stress when needed; effective monetary policy frameworks and communication are vital for anchoring expectations and minimizing the output costs of disinflation. - Fiscal policymakers should rebuild budgetary room for maneuver, withdraw untargeted measures, and protect the vulnerable. - Reforms to reduce structural impediments to growth—including encouraging labor market participation—would smooth disinflation and facilitate debt reduction. - Faster and more efficient multilateral coordination is needed on debt resolution to avoid debt distress. - International cooperation is required to mitigate climate change and speed the green transition, including ensuring steady cross-border flows of necessary minerals. _International Monetary Fund | October 2023_ ### CHAPTER 1 gLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 gLObaL PROsPECTs aND POLICIEs ### Inflation developments - Headline inflation has declined from its 2022 peak and was down in the second quarter of 2023; about four-fifths of the gap between the 2022 peak and the prepandemic (2017–19) annual average level of 3.5 percent has closed. - Among major economies, headline inflation in the second quarter of 2023 ranged from –0.1 percent in China (at a quarterly annualized rate) to 2.8 percent in the euro area and 2.7 percent in the United States. - The international distribution of inflation rates widened during the 2022 inflation surge, becoming skewed upward, but has since begun to normalize. - A fall in energy prices and—to a lesser extent—in food prices has driven the decline in headline inflation: - Crude oil prices declined during 2023 and are well below their June 2022 peak. - Natural gas prices remain well below their 2022 peak. - Food prices have declined modestly in 2023, with lower demand offset by supply reductions, notably those resulting from Russia’s withdrawal from the Black Sea Grain Initiative in July. - Supply-chain normalization has further contributed to the decline in headline inflation in most countries. ### Drivers of core (underlying) inflation - Global core inflation (excluding food and energy) fell from a peak of 8.5 percent in the first quarter of 2022 (at a quarterly annualized rate) to 4.9 percent in the second quarter of 2023, nearly two-thirds of the way back to the prepandemic (2017–19) annual average of 2.8 percent. - Among major economies, core inflation in the second quarter of 2023 ranged from 0.3 percent in China (at a quarterly annualized rate) to 4.6 percent in the euro area and 4.7 percent in the United States. - Drivers of core inflation differ across economies and include: - Demand pressures, linked to labor market conditions and past fiscal and monetary policy support (including COVID-19–era fiscal payments and early-pandemic monetary stimulus). - Pass-through effects from past relative price shocks, notably energy price shocks tied to external factors, with pass-through playing a larger role in the euro area and the United Kingdom than in the United States. - Rise in near-term inflation expectations as an important pass-through channel affecting wage and price setting. - Evidence indicates longer-term inflation expectations have remained well anchored and contributed little to recent movements in core inflation. ### Labor markets, wages, and profits - Labor market tightness has been an especially strong driver of inflation in the United States. The ratio of vacancies to unemployed has recently declined, suggesting some easing. - Wage developments: - Wage growth has remained contained overall; wage-price spirals have not generally taken hold in advanced economies. - Wages at the bottom of the distribution have risen faster than the average, compressing the wage distribution. - Company profits: - Profits have increased robustly over the past two years, with wages having risen more slowly than prices. - Decompositions show that in 2020–21 profits accounted for most of the rise in prices, whereas since 2022 labor costs have contributed an increasing share to rising prices—particularly in the United States. - IMF staff analysis indicates little change in firms’ markups across various sectors in major advanced economies during 2019–22; increases in profit shares do not necessarily indicate increased market power. - Some evidence suggests that since 2022 rising labor costs have accounted for a significantly larger share of US price increases than profits. ### Monetary policy, banking stress, and credit conditions - Central bank actions: - With inflation above target in almost all economies with an inflation target, the Bank of Canada, the Bank of England, the European Central Bank, and the Federal Reserve all raised rates in July. - The Bank of Japan has continued with monetary easing but in July decided to allow more flexibility in yield curve control such that the 10-year yield can now rise up to 1 percent. - The People’s Bank of China reduced interest rates in June and August amid subdued headline inflation below the authorities’ target. - Banking sector and financial conditions: - Acute stress from the March 2023 banking scare remained contained and limited to problematic regional banks in the United States and Credit Suisse, owing to swift authorities’ reactions. - Rapid rate hikes in major advanced economies over the past 18 months have produced a tight monetary policy stance—real rates above neutral rates—that is expected to endure well into 2025. - Credit and real activity: - Lending surveys in the United States and Europe indicate banks restricted access to credit considerably over the past year and expected to continue doing so. - Signs point to tighter credit conditions increasingly affecting real activity: in advanced economies, credit and investment demand contracted in the first half of the year, reflecting tighter supply and lower demand as businesses deleveraged amid higher interest rates and production overcapacity. - Housing markets have slowed or reversed since the beginning of the tightening cycle in several countries; bankruptcy rates have increased in some economies (increasing by 20 percent in the United States over the last year) as pandemic-time forbearance measures are phased out. - Debt markets reflect tighter monetary policy while spreads to risk-free government debt have stayed more or less constant, suggesting no immediate indication of a credit crunch despite significantly tightened credit conditions. ### Outlook and baseline assumptions - Outlook summary: - The global economy is slowing as inflation declines from last year’s multidecade peak. - A contraction in global per capita real GDP—which often happens in a global recession—is not part of the baseline scenario. - Growth and employment in the first half of the year remained more resilient than forecast in the April 2023 WEO. - Medium-term prospects for economic growth remain the lowest in decades, with middle- and lower-income countries facing a slower pace of convergence toward higher living standards. - Key baseline assumptions (commodity prices and policy stances): - Prices of fuel commodities are projected to fall on average by 36 percent. - Oil prices are projected to fall by about 17 percent. - Natural gas prices are projected to decline from their 2022 peaks by 61 percent. - Coal prices are projected to decline from their 2022 peaks by 51 percent. - The forecast for nonfuel commodity prices is a decline of 6.3 percent, on average, in 2023, with prices for base metals expected to decrease by 4.7 percent. - The decreases in commodity price projections reflect mainly the slowdown in global economic activity and concerns regarding real estate investment in China. - Food commodity price developments noted but truncated in the available text. *Source: CHAPTER 1 gLObaL PROsPECTs aND POLICIEs, text - CHAPTER 1 gLObaL PROsPECTs aND POLICIEs* ### 14.8 percent in 2022, are predicted to decline by ### 14.8 percent in 2022, are predicted to decline by ### Monetary policy assumptions - Global interest rate assumptions are on average revised upward compared with those in the April 2023 WEO, reflecting actual and signaled policy tightening by major central banks. - The Federal Reserve’s policy rate is expected to peak at its current level of about 5.4 percent, the Bank of England to raise its to peak at about 6.0 percent, and the European Central Bank to raise its to peak at 3.9 percent in 2023, before all three reduce rates in 2024. - For Japan, policy rates for the medium term (2026–28) are revised upward, reflecting changes to the country’s yield-curve-control framework, and long-term rates are revised upward accordingly. - As near-term inflation expectations decline, real interest rates are likely to stay elevated even after nominal rates start to fall. - Changes in monetary policy are becoming less synchronous, with some central banks that tightened earlier (such as the Central Bank of Brazil) initiating their easing cycle. ### Fiscal policy assumptions - Governments in advanced economies are on average expected to ease fiscal policy in 2023, following a rise in fiscal balances in 2022. - In emerging market and developing economies, the projected fiscal stance is on average neutral in 2023. - Fiscal consolidation is expected in 2024 in both groups of economies. - Fiscal tightening is on average expected to be greater in economies that recently experienced a sharper rise in government debt (Figure 1.16, panel 3). - A rise in government debt amounting to 10 percentage points of GDP during 2019–22 is associated on average with fiscal consolidation (rise in the structural primary balance) of 0.8 percentage point of GDP during 2022–24. - Exception example: Argentina, where despite a decline, debt levels remain high, and the fiscal stance is expected to continue tightening to secure fiscal and debt sustainability. ### Growth Outlook: Offsetting Divergences - Global growth projections: - Global growth is projected to fall from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024 on an annual average basis (Table 1.1). - There is a downward revision of 0.1 percentage point for 2024 compared with the July 2023 WEO Update. - Comparison with earlier forecasts: - January 2022 WEO Update projected global growth at 3.8 percent in 2023 and 3.4 percent in 2024. - The 2023–24 forecasts are below the historical (2000–19) annual average of 3.8 percent. - Income group and per capita outcomes: - Growth is below the historical average across broad income groups, both in overall GDP as well as in per capita GDP. - Timing and heterogeneity: - On a year-over-year basis, global growth bottomed out in the fourth quarter of 2022, but in some major economies it is not expected to have bottomed out until the second half of 2023. - Advanced economies continue to drive the decline in annual average growth from 2022 to 2023, with stronger services activity offset by weaker manufacturing and idiosyncratic factors. - Emerging market and developing economies, on average, are projected to see stable growth over 2022–24, with a slight pickup in 2025, although with sizable shifts across regions. ### Growth Forecast for Advanced Economies - Aggregate projection: - Advanced economies: 2.6 percent in 2022; 1.5 percent in 2023; 1.4 percent in 2024 — with no overall revision from the July 2023 WEO Update. - Distribution and labor market: - About 90 percent of advanced economies are projected to see lower growth in 2023. - With the projected slowdown, annual unemployment is projected to rise by an average of 0.1 percentage point over 2022–24, with larger increases in Canada (1.0 percentage point), the United Kingdom (0.9 percentage point), and the United States (0.2 percentage point). - The forecast for unemployment in 2024 is on average 0.4 percentage point lower than that in the April 2023 WEO, reflecting still-tight labor markets in a number of cases. - Country specifics: - United States: - Growth projected at 2.1 percent in 2023 and 1.5 percent in 2024. - Forecast revised upward by 0.3 percentage point for 2023 and by 0.5 percentage point for 2024 compared with July 2023 WEO Update. - Unemployment rate is forecast to rise from 3.6 percent in the second quarter of 2023 to a peak of 4.0 percent by the last quarter of 2024 (lower than previously projected peaks of 5.2 percent in April 2023 WEO and 5.6 percent in October 2022 WEO). - Euro area: - Growth projected to fall from 3.3 percent in 2022 to 0.7 percent in 2023, then rise to 1.2 percent in 2024. - Forecast revised downward by 0.2 percentage point for 2023 and by 0.3 percentage point for 2024 compared with July 2023 WEO Update. - Germany: growth projection of –0.5 percent with a downward revision of 0.2 percentage point. - France: growth projection of 1.0 percent with an upward revision of 0.2 percentage point. - United Kingdom: - Growth projected to decline from 4.1 percent in 2022 to 0.5 percent in 2023, with a 0.1 percentage point upward revision. - Japan: - Growth projected to rise from 1.0 percent in 2022 to 2.0 percent in 2023, with a 0.6 percentage point upward revision. ### Growth Forecast for Emerging Market and Developing Economies - Aggregate projection: - Emerging market and developing economies: 4.1 percent in 2022; 4.0 percent in 2023; 4.0 percent in 2024 — with a downward revision of 0.1 percentage point for 2024 compared with the July 2023 WEO Update. - Regional highlights: - Emerging and developing Asia: - Projected to rise from 4.5 percent in 2022 to 5.2 percent in 2023, then decline to 4.8 percent in 2024. - Downward revisions of 0.1 percentage point for 2023 and 0.2 percentage point for 2024 compared with July projections. - China: revised downward by 0.2 percentage point for 2023 and by 0.3 percentage point for 2024 to growth of 5.0 percent in 2023 and 4.2 percent in 2024; lower investment due to the property market crisis is the main contributor. - India: projected at 6.3 percent in both 2023 and 2024, with an upward revision of 0.2 percentage point for 2023. - Emerging and developing Europe: - Projected to rise to 2.4 percent in 2023 (upward revision of 0.6 percentage point since July) before declining to 2.2 percent in 2024. - Russia: projected rise from –2.1 percent in 2022 to 2.2 percent in 2023, with an upward revision of 0.7 percentage point for 2023. - Ukraine: forecast increased by 5.0 percentage points to growth of 2.0 percent in 2023. - Türkiye: upward revision of 1.0 percentage point to growth of 4.0 percent in 2023. - Latin America and the Caribbean: - Expected to see growth decline from 4.1 percent in 2022 to 2.3 percent in both 2023 and 2024. - Upward revisions of 0.4 percentage point for 2023 and 0.1 percentage point for 2024 since July. - Brazil: revised up by 1.0 percentage point to 3.1 percent for 2023. - Mexico: revised up by 0.6 percentage point to 3.2 percent for 2023. - Middle East and Central Asia: - Projected to decline from 5.6 percent in 2022 to 2.0 percent in 2023, then pick up to 3.4 percent in 2024. - 0.5 percentage point downward revision for 2023 and 0.2 percentage point upward revision for 2024. - Saudi Arabia: steeper-than-expected slowdown noted (context provided in source). *Source: IMF staff calculations and projections from the October 2023 World Economic Outlook chapter excerpt provided.* ### 0.8 percent in 2023, with a negative revision to the ### 0.8 percent in 2023, with a negative revision to the ### Regional growth: oil exporters, Saudi Arabia, Sudan - Growth for the region (implicit context) revised to 0.8 percent in 2023, with a negative revision to the latter of 1.1 percentage point. - Downgrade for growth in Saudi Arabia in 2023 reflects announced production cuts, including unilateral cuts and those in line with an agreement through OPEC+. - Private investment, including that from “gigaproject” implementation, continues to support non-oil GDP growth, which remains strong and unchanged from previous projections. - Downgrade for 2023 also reflects cuts to the growth forecast for Sudan to about –18.3 percent (a downward revision of nearly 20 percentage points) reflecting the outbreak of conflict, deteriorating domestic security, and the worsening humanitarian situation. - Upgrade for 2024 reflects the unwinding of some of the announced production cuts. ### Sub-Saharan Africa: projections and revisions - Growth is projected to decline to 3.3 percent in 2023 before picking up to 4.0 percent in 2024. - Revisions: 0.2 percentage point downward revision for 2023 and 0.1 percentage point downward revision for 2024. - Growth remains below the historical average of 4.8 percent. - Projected decline reflects worsening weather shocks, the global slowdown, and domestic supply issues, notably in the electricity sector. - Nigeria: - Growth projected to decline from 3.3 percent in 2022 to 2.9 percent in 2023 and 3.1 percent in 2024. - Forecast for 2023 revised downward by 0.3 percentage point, reflecting weaker oil and gas production than expected, partially as a result of maintenance work. - Negative effects of high inflation on consumption taking hold. - South Africa: - Growth expected to decline from 1.9 percent in 2022 to 0.9 percent in 2023, with the decline reflecting power shortages. - A 0.6 percentage point upward revision for 2023, thanks to the intensity of power shortages in the second quarter of 2023 being lower than expected. ### Inflation outlook: headline and core - Global headline inflation: - Peak: 8.7 percent in 2022 (annual average). - Projected: 6.9 percent in 2023 and 5.8 percent in 2024 (Table 1.1). - Forecast for 2024 is revised upward by 0.6 percentage point, reflecting higher-than-expected core inflation. - Year-over-year: projected peak at 9.5 percent in the third quarter of 2022; projected to reach 5.9 percent by the fourth quarter of 2023 and fall to 4.8 percent in the fourth quarter of 2024. - Prepandemic (2017–19) annual average was about 3.5 percent. - Drivers: monetary tightening starting to bear fruit; central driver of fall in headline inflation projected for 2023 is declining international commodity prices. - Distributional patterns: - Nearly three-quarters of economies expected to see lower headline inflation in 2023. - Advanced economies expected to see annual average inflation fall by 2.7 percentage points in 2023. - Emerging market and developing economies projected to see a decline of 1.3 percentage point in 2023. - Low-income developing countries: inflation on average projected to be in double digits and not expected to fall until 2024. - Country examples (year-over-year changes, fourth quarter comparisons): - Euro area: expected fall of 6.6 percentage points from 9.9 percent in Q4 2022 to 3.3 percent in Q4 2023. - United States: expected fall of 3.9 percentage points from 7.1 percent in Q4 2022 to 3.2 percent in Q4 2023. - China: inflation declined to near zero in Q2 2023; projected gradual rise to still-low levels in H2 2023 as drag from lower commodity prices wanes. - Core inflation: - Globally projected to decline modestly from 6.4 percent in 2022 (annual average) to 6.3 percent in 2023 and 5.3 percent in 2024. - Core inflation proving more persistent than projected, with upward revisions of 0.3 percentage point and 0.6 percentage point for 2023 and 2024, respectively, compared with the July 2023 WEO Update projections. - Drivers of upside revisions include still tight labor markets, stickier-than-expected services inflation, and in some cases (including Türkiye) effects of past currency depreciations and pass-through into underlying inflation. - On an annual average basis, over half of economies are expected to see no decline in core inflation in 2023; on a fourth-quarter-over-fourth-quarter basis about 86 percent of economies (for which quarterly data are available) are projected to see a decline. - Returning inflation to target is expected to take until at least 2025 in most cases. - Inflation-targeting economies: - Comparison for 72 inflation-targeting economies suggests annual average inflation will exceed targets (or midpoints) in 93 percent of these economies in 2023. - Countries expected below target in 2023 include China, Thailand, and Vietnam. - In 2024, inflation still expected to exceed targets (or midpoints) in 89 percent of economies, with an expected median deviation of about 1 percentage point. - By 2025, inflation expected to be within only 0.2 percentage point of target (or midpoints) in most economies. ### Medium-term growth and global output - Latest WEO forecast for global growth in 2028 is 3.1 percent. - Comparison points: - Medium-term growth projection of 3.6 percent just before the onset of the pandemic (January 2020 WEO Update). - 4.9 percent just before the onset of the global financial crisis (April 2008 WEO). - More than 80 percent of economies have seen a slowdown in growth prospects from 15 years ago (April 2008 WEO). - Three-quarters of reduction in global growth comes from weaker prospects for per capita GDP growth rather than slower population growth. - Drivers of weaker per capita growth: slower prospective capital accumulation per worker and slower total factor productivity growth; slowdown in labor force participation in advanced economies also contributed about a third of overall decline in projected per capita GDP growth. - Recovery to prepandemic path: - Latest projections for 2028 imply a global output loss of some 5.0 percent with respect to prepandemic projections, or $6.4 trillion at 2023 prices. ### Trade and external balances - World trade growth: - Expected to decline from 5.1 percent in 2022 to 0.9 percent in 2023, before rising to 3.5 percent in 2024. - Well below the 2000–19 average of 4.9 percent. - Drivers: path of global demand, shifts in composition toward domestic services, lagged effects of dollar appreciation, and rising trade barriers. - In 2022, countries imposed almost 3,000 new restrictions on trade, up from fewer than 1,000 in 2019. - Global current account balances: - Sums of absolute surpluses and deficits expected to narrow in 2023 after significant increase in 2022. - Rise in 2022 reflected largely commodity price increases triggered by the war in Ukraine, causing widening in oil and other commodity trade balances. - Over the medium term, global balances expected to narrow gradually as commodity prices decline. - Creditor and debtor stock positions reached historically elevated levels in 2022 and are expected to moderate slightly over the medium term as current account balances gradually narrow. - In some economies, gross external liabilities remain large from a historical perspective and pose risks of external stress. ### Risks to the outlook: tilt and scenarios - Overall: adverse risks have receded since the April 2023 WEO, implying a more balanced distribution of risks around global growth, but the balance of risks remains tilted to the downside. - Recent shocks contained: resolution of US debt ceiling tensions and swift action to contain banking sector turbulence reduced immediate risks of broader financial stress. - Upside risks (plausible outcomes improving growth and soft-landing chances): - Underlying inflation falls faster than expected due to stronger pass-through from lower energy prices, compression of profit margins, or declining job vacancies easing labor markets; could allow central banks to ease policy sooner. - Domestic demand recovers faster: unused pandemic excess savings could support consumption recovery; US labor market could remain tighter supporting consumption; stronger policy support in China (e.g., means-tested transfers) could bolster recovery and generate positive global spillovers. - Private investment could recover more strongly to prepandemic levels in response to policy initiatives. - Breakthroughs in artificial intelligence and green technologies could boost productivity, investment, and growth. - Downside risks (numerous and plausible): - China’s economic growth slows further: - Negative implications for trading partners; extent depends on Chinese policy response. - Effective response requires preserving financial stability via restructuring struggling property developers, facilitating completion of housing projects, and addressing strain in local government finances. - Policy space has shrunk but is not fully exhausted; People’s Bank of China has some room to ease given lack of inflationary pressure; fiscal expenditures can be reoriented toward higher-multiplier spending while keeping overall fiscal stance broadly neutral. - In most fiscally fragile provinces, financial stress in real estate could spill over to financial sector via sovereign-banking-corporate nexus and contagion through nonbank financial intermediaries. - Potential exchange rate volatility and destabilizing capital flows to other emerging market economies if financial stability concerns fester. - Commodity price volatility amid climate and geopolitical shocks: - Intense heat waves and droughts and El Niño risks could raise global food prices (past El Niño typically raised global food prices by more than 6 percent in a year as cited). - War in Ukraine and geopolitical tensions could intensify, triggering supply chain disruptions and renewed fluctuations in food, fuel, fertilizer, and other commodity prices. - Export restrictions on agricultural products could exacerbate commodity price fluctuations. - A rise in oil prices driven by reduced oil supply could reduce global economic activity and raise inflation, with differing magnitudes across regions. - Intensifying geoeconomic fragmentation could constrain commodity flows across regions, causing additional price volatility; commodities are particularly vulnerable to trade restrictions because production is highly concentrated. *International Monetary Fund | October 2023* ### 1.2 percentage points, relative to baseline. The analysis assumes ### 1.2 percentage points, relative to baseline. The analysis assumes ### Major near-term risks and asymmetric effects - Energy and clean-energy transition risks: - Corresponding increases in alternative clean energy supplies may cause more frequent energy crises. - Such adverse supply shocks may affect countries asymmetrically, with particularly acute effects on lower-income countries, where food and energy constitute a large share of household consumption. - Food averages about 40 percent of consumption in sub-Saharan Africa. - Underlying inflation persists: - Tight labor markets and wage demands to compensate for past cost-of-living increases could contribute to persistent underlying inflationary pressures. - In countries where companies’ profit margins have grown in the past two years, there may be room to accommodate a rebound in real wages without triggering further price increases. - Near-term inflation expectations remain elevated and above target inflation rates; this may contribute to more persistent wage and price pressures and complicate monetary policy. - The ample stock of excess household savings in some economies could slow the effects of monetary policy tightening on inflation. - Greater-than-expected pressures on underlying inflation could force central banks to raise rates by more than expected. - Financial market repricing and contagion risks: - Financial markets have adjusted upward expectations for monetary policy tightening; new upside inflation surprises could force reassessment, triggering sudden rises in interest rate expectations and falling asset prices. - Such movements could tighten financial conditions and stress banks and nonbank financial institutions vulnerable to interest rate risk, especially those highly exposed to commercial real estate. - A flight to safety, with an attendant appreciation of reserve currencies, would trigger negative ripple effects for global trade and growth and raise inflation in emerging market and developing economies, especially those highly dependent on imports of food and fuel. - Rising debt distress: - Global financial conditions have generally eased since the March 2023 banking stress episode, but lending standards have tightened and loan demand has declined in the United States, the euro area, and some emerging market economies. - The share of emerging market and developing economies with sovereign credit spreads above 1,000 basis points was 24 percent as of August; two years ago it was 9.3 percent. - For sub-Saharan Africa, spreads still exceed 680 basis points in more than half of cases. - The share of low-income countries in or at high risk of debt distress is 56 percent; for emerging markets it is 25 percent. - Geoeconomic fragmentation: - Ongoing separation of the world economy into blocs could intensify—more restrictions on trade (especially strategic goods), cross-border capital, technology, and worker movements, and international payments. - Trade fragmentation alone could reduce annual global GDP by up to 7 percent (Aiyar and others 2023). - Intensification would hamper multilateral cooperation on public goods like climate change, pandemics, energy and food security. - Social unrest: - Reports of social unrest have declined since late 2019, but a resumption—potentially from future food and fuel price spikes—could hurt economic activity and complicate reform passage and implementation. ### Globally consistent risk assessment of the WEO forecast - Hard-landing risk has receded since April: - Estimated probability that global growth in 2023 will fall below 2.0 percent is about 5 percent, down from an estimated 25 percent in April 2023 WEO. - For 2024, the probability of global growth below 2.0 percent is about 15 percent, down from about 25 percent in April 2023 WEO. - Probability of a contraction in global per capita real GDP in 2024 is below 10 percent. - Probability that global growth will exceed 3.8 percent (the historical average during 2000–19) is less than 20 percent for 2024. - Probability that core inflation in 2024 will be higher than in 2023 (instead of declining to 5.3 percent from 6.3 percent in 2023) is assessed at about 15 percent. ### Policy priorities: from disinflation to sustained growth — near-term actions - Durably restoring price stability: - With global core inflation still high and declining slowly, central banks should generally maintain a tight stance and avoid prematurely easing monetary policy. - Fewer cases now warrant sizable interest rate hikes, with increasing differentiation across countries’ policy needs. - Returning inflation to target: in economies with elevated and persistent inflation, a restrictive stance—with real rates above neutral—is needed until clear signs emerge that underlying inflation is durably cooling. - For countries with inflation already below target, easing policies may be necessary to reduce the risks of inflation expectations de-anchoring. - Navigating uncertainty along the disinflation path: - Central banks face difficulty estimating neutral interest rates and unemployment, lags in policy transmission, uncertainties in inflation forecasting, and differing transmission potency across sectors. - Calibrating policy requires weighing costs of premature nominal rate cuts versus delaying too long. - Coordinating monetary and fiscal policies: - Legislated government spending cuts or tax increases aimed at ensuring public debt sustainability can reduce aggregate demand and reinforce disinflation credibility. - In economies with inflation below target, fiscal expansion or reorientation toward demand-supportive items (subject to fiscal room) may be necessary. - Monitoring financing conditions: - Financing conditions in capital markets have eased in the United States and the euro area, which may complicate fighting inflation. - Careful monitoring of misalignment in financing conditions is warranted given risks of sudden repricing. - Central banks should be ready to deploy financial stability tools to contain market strain. ### Financial supervision, fiscal policy, and debt sustainability - Strengthening financial supervision and addressing stress: - Continued fast monetary tightening pressures the financial sector. - Strengthened supervision (including implementation of Basel III and removal of forbearance measures) and monitoring of risks are warranted. - Close oversight gaps in the nonbank financial sector; intensity of supervision should match banks’ risks and systemic importance. - Macroprudential measures can be used preemptively; deploy liquidity support tools promptly when market strains emerge while mitigating moral hazard. - In China, stronger central government action is needed to address property-sector financial stress, facilitate exit of insolvent developers, and protect home buyers’ interests. - Countries at risk of external shocks can use the global financial safety net, including IMF precautionary financial arrangements. - Normalizing fiscal policy: - With fiscal deficits and government debt above prepandemic levels and debt-service costs as a share of GDP rising, tightening fiscal stances is warranted in numerous cases. - In low-income and developing countries, interest payments constitute nearly one-eighth of general government revenues. - For countries with limited fiscal space, shift spending composition toward targeted support for households. - Careful communication of medium-term fiscal plans is needed to support credibility and avert disruptive market responses. - Where in or at high risk of debt distress, achieving debt sustainability may require fiscal consolidation and debt restructuring. - Domestic revenue mobilization, more efficient spending, and improved institutional fiscal frameworks are increasingly pertinent for emerging market and developing economies. ### Protecting the vulnerable, food security, and labor supply - Supporting the vulnerable: - Fiscal adjustment composition should protect the most vulnerable via targeted household support. - Phase out untargeted fiscal measures that blunt price signals—such as energy subsidies—as energy prices return to prepandemic levels. - Avoiding debt distress: - Large short-term external financing needs strain many emerging market and low-income countries. - Sovereign spreads remain elevated, impeding credit access for economies reliant on short-term borrowing. - Faster, more efficient coordination on debt resolution (e.g., G20 Common Framework, Global Sovereign Debt Roundtable) would help mitigate debt distress risk. - The recent agreement between Zambia and its official creditor committee is noted as a welcome step. - Improving food security: - Extreme weather and the war in Ukraine exacerbate risks to staple crop supply and threaten food security. - Trade restrictions aimed at reducing domestic prices could worsen global food insecurity and create shortages for the poorest. - Bans on food exports should be lifted as soon as feasible to safeguard global food supplies. - Strengthened multilateral cooperation on food security is needed, with strengthened rules-based frameworks for restrictions on food exports. - Enhancing labor supply: - Reforms that reduce labor market tightness—encouraging participation and reducing job search and matching frictions—would facilitate fiscal consolidation and help ease inflation. - Examples: short-term training programs for shortage professions; labor laws and regulations increasing work flexibility (telework, leave policies); policies to encourage more women and older people to join the workforce; reduce labor market duality; improve mobility. - Active immigration policies in advanced economies can address labor shortages and longer-term headwinds from population aging. ### Policies with medium-term payoffs and structural reforms - Intensifying macrostructural reforms: - Targeted, carefully sequenced structural reforms can provide levers to reinforce productivity despite constrained policy space. - Bundling reforms that alleviate critical binding constraints—governance, business regulation, external sector reforms—can front-load output gains and enhance public buy-in. - IMF staff analysis for emerging market and developing economies suggests that a bundled and sequenced reform package is estimated to lift the level of output by 4 percent in two years and 8 percent in four years in cases with large initial gaps in structural indicators relative to best performance. - Reforms spanning human capital (health care coverage, early childhood and higher education), reducing barriers to competition, supporting start-ups, and deepening digitalization would enhance productivity and help offset short-term growth costs of ambitious green reforms. *Source: Chapter 1, WORLD ECONOMIC OUTLOOK: Navigating Global Divergences (October 2023), International Monetary Fund.* ### CHAPTER 1 gLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 gLObaL PROsPECTs aND POLICIEs ### Policy priorities and recommendations - Structural reforms to raise potential growth should be paired with macroeconomic policies that anchor inflation expectations and preserve debt sustainability; mitigate adverse distributional effects with targeted support and regulations, including measures that address impacts across gender and age groups. - Industrial policy: pursue only where externalities or market failures are well established; avoid protectionist provisions; ensure consistency with international agreements and World Trade Organization (WTO) rules. - Speed the green transition: - Significant emissions cuts can be achieved by helping laggard firms approach current technological frontiers. - Support adoption of frontier technologies with carbon pricing and subsidies for green investments. - Carbon border-adjustment mechanisms can encourage trading partners to decarbonize and ensure an equal footing for domestic producers, but must be designed carefully to support consistency with WTO rules. - Green industrial policies complement carbon pricing but should avoid trade and investment distortions (such as domestic-content provisions) and be consistent with WTO rules. - Invest in climate adaptation activities and infrastructure, especially for regions most vulnerable to climate shocks; enhance climate-risk-monitoring systems, risk management frameworks, safety nets, and insurance. - Establish a “green corridor” agreement to safeguard international flow of critical minerals for the green transition; agreements should transcend geopolitical boundaries, be guided by common climate goals, and could be mirrored for essential agricultural commodity markets to stabilize supply volatility. - Improve data on critical minerals through an international platform or organization to reduce uncertainty and price volatility. - Strengthen multilateral cooperation: - Restore trust in multilateral frameworks to revive a rules-based platform for international cooperation. - Prioritize restoring binding dispute settlement in the WTO and clarifying application of key WTO rules to climate measures. - Coordinate joint action to address interlocking challenges and mitigate costs from geo-economic fragmentation; regulate potentially disruptive emerging technologies such as artificial intelligence. ### Evidence on firms, emissions, and cross-country differences - Environmental performance varies widely across firms within industries; laggard firms have high emissions per unit of output, operate older physical capital, and are less knowledge-intensive and productive (Capelle and others, forthcoming). - Figure evidence: kernel density of the log of the emissions-to-revenues ratio (2019 data, finance/utilities/energy excluded) shows firms headquartered in emerging market and developing economies are less green than those in advanced economies after controlling for 4-digit SIC industry fixed effects. ### Dimming growth prospects: observed changes in five-year-ahead forecasts - Global five-year-ahead growth projections from the WEO: - Peak of 4.9 percent in the April 2008 WEO for growth in 2013. - 3.0 percent in the April 2023 WEO for growth in 2028 — the lowest projection since 1990. - Of the 1.9 percentage point global decline in medium-term growth prospects from 2008 to 2023: - Advanced economies contributed 0.8 percentage point. - Emerging market and developing economies contributed 1.1 percentage points. - The global medium-term outlook declined from 3.6 percent in the January 2020 WEO to 3.0 percent in the April 2023 WEO after the shocks of 2020–22; 52 percent of economies (all middle-income) saw a decline. - Among the world’s largest 10 economies and 81 percent of all economies, medium-term growth prospects have declined; the five largest emerging markets (Brazil, China, India, Indonesia, Russia) contributed about 0.9 percentage point to the decline between 2008 and 2023. ### Drivers of the decline in per capita growth - Three-quarters of the reduction in global growth prospects (about 1.4 percentage points) over the past 15 years is due to weaker per capita growth projections rather than slower population growth. - Decomposition of per capita growth attributes (2000–04 to 2024–28 comparisons): - Advanced economies: decline predominantly attributed to lower TFP growth, followed by decline in labor force participation and slowdown in capital deepening. - Emerging market and developing economies: decline in TFP growth explains about 60 percent of the slowdown, followed by decline in capital deepening. - Potential causes for projected lower TFP: unbalanced technological advances across sectors, frictions preventing efficient resource allocation, diminishing returns to innovation, fading effects of technological and educational improvement, slowdown in reform momentum, and rising fragmentation risks that hurt world trade and global value chains. - Capital deepening slowdown particularly pronounced in some economies such as Brazil and Indonesia; scarring effects on capital formation after the global financial crisis may have contributed. ### Implications for convergence and living standards - Five-year-ahead forecasts in the April 2008 WEO implied absolute convergence with poorer countries growing faster than rich countries by 0.9 percent annually. - Up to 0.4 percentage point of the decline in per capita global growth prospects since 2008 may reflect income convergence. - April 2023 WEO forecasts imply a convergence rate of only 0.5 percent a year. - Population-weighted half-life estimate to close half the gap in income per capita with advanced economies: - Increased from 80 years (April 2008 WEO projections) to about 130 years (April 2023 WEO projections). - Unweighted regressions show even slower expected convergence rates, declining to near zero in April 2023 projections. - Poorer countries suffered greater income losses during the recovery from the pandemic. ### Forecast accuracy and bias - Examination of WEO forecast errors suggests forecasts were mostly aligned with growth outcomes during 1995–2008. - After the global financial crisis, forecasts exhibited some upward bias, with realized growth over the medium term falling short of forecasts; downward trajectory in projections may partly reflect correcting for prior forecast optimism. ### Uncertainty, confidence bands, and risk assessment - IMF’s G20 Model used to derive confidence bands and quantify alternative scenarios. - Changes since April: - Uncertainty about 2023 narrowed as outturn for first half of year is known. - Beyond 2023, risks to growth more balanced than in April but still tilted to the downside. - Probabilities and ranges: - Risk of global growth falling below 2 percent in 2024 assessed at about 15 percent (compared with 25 percent in April). - 70 percent probability that global growth will be between 2.6 percent and 3.4 percent in 2023. - 70 percent probability that global growth will be between 1.9 percent and 4.0 percent in 2024. - For global inflation: - 70 percent probability that 2023 headline inflation could be about 0.7 percentage point higher or lower than currently projected (narrower than the 1.2 percent band shown in April). - Probability that headline inflation in 2024 will be higher than in 2023 assessed at 25 percent (compared with less than 10 percent in April). - Probability that core inflation in 2024 will be higher than in 2023 assessed at 15 percent (compared with about 5 percent in April). ### Risk scenarios (quantified and directional) - Upside risks: - Greater-than-expected disinflation effects from fading supply disruptions. - Greater boost to global demand from a stronger recovery in investment in advanced economies. - Downside risks: - Further loss of growth momentum in China. - Longer-than-expected transmission lags and larger effects from the ongoing global monetary tightening cycle. - Tighter financial conditions in emerging markets. - Scenarios assume monetary policy and automatic fiscal stabilizers respond endogenously, without additional policy support. *WORLD ECONOMIC OUTLOOK: NavIgaTINg gLObaL DIvERgENCEs, October 2023, Chapter 1.* ### Box 1.2. Risk Assessment Surrounding the World Economic Outlook’s Baseline Projections ### Box 1.2. Risk Assessment Surrounding the World Economic Outlook’s Baseline Projections ### Overview and scenario design - Global disinflation scenario assumption: - The consumer price of manufactured goods relative to services is currently estimated to be 1 per cent above the global aggregate trend prior to the COVID-19 pandemic and returns to trend over a two-year horizon. - Additional impulse to core inflation: –20 basis points in 2023 and –50 basis points in 2024 (relative to baseline) for countries starting from a higher relative goods price (mainly advanced economies). - For remaining countries, except China, the impulse is two-thirds as large; China experiences a smaller shock. - Lower-than-expected inflation allows central banks to lower rates more rapidly, supporting global consumption, investment, and trade. - Stronger recovery in investment scenario assumptions: - Global gross fixed capital formation remains close to 10 per cent below prepandemic trends. - Investment grows more than baseline over the next two years in several advanced economies due to (1) greater sensitivity to expected recovery and easing financial conditions and (2) stronger-than-expected boost from current policy packages (US Inflation Reduction Act, EU recovery fund). - Phillips curves assumed twice as sensitive to demand (eliciting a stronger policy response). - Calibration: investment is 3 per cent higher than the baseline by 2025 for the advanced economies group. - China downside scenario assumptions: - Deeper-than-expected contraction in the real estate sector absent swift restructuring of property developers, weaker consumption amid subdued confidence, and lack of meaningful policy support. - China’s private consumption and gross fixed capital formation decline through 2025 by about –5 percent and –3.5 percent, relative to baseline. The shock fades beyond 2025. - Longer monetary lags scenario assumptions: - Effects of global monetary tightening are larger than in the baseline, with additional impulse in each country proportional to the change in real rates since the beginning of the tightening cycle and materializing by end-2023 and especially in 2024. - Calibration draws on differences between IMF’s G20 Model (earlier, smaller effects) and larger/longer effects from other models (FRB/US, SVAR, ECB-Base). For other G20 countries the shock is averaged from US and EU estimates multiplied by country real-rate increase. - Tighter financial conditions in emerging markets scenario assumptions: - Following an incipient tightening toward the end of 2023, emerging market economies, excluding China, experience an increase in sovereign and corporate premiums of about 200 and 150 basis points, respectively, in the first half of 2024, relative to the baseline. - Emerging market currencies depreciate 10 per cent relative to the US dollar in the first half of 2024, relative to the baseline. ### Quantified scenario impacts on output and inflation - Disinflationary scenario: - Global core inflation troughs at –0.4 percentage point in 2024 relative to the baseline. - Generates a 0.5 per cent increase in global GDP in 2024, which persists into 2025. - Advanced economies see a decrease in policy rates of 0.3 percentage point, relative to the baseline. - Stronger recovery in investment (advanced economies): - Modest increase in global output of up to 0.3 per cent by 2025. - Impact on GDP in advanced economies peaks at 0.6 percent in 2025. - Adds 0.3 percentage point to core inflation. - Requires an increase in policy rates of about 0.75 percentage point, relative to the baseline. - Spillovers to emerging markets are small. - China downside: - China’s GDP lowers by as much as –1.6 percent in 2025, relative to the baseline. - Decrease in core inflation in China of about 1 percentage point, relative to the baseline. - Spillovers reduce global output by –0.6 per cent by 2025. - Longer transmission lags and greater-than-expected monetary effects: - Decrease in global output of about –0.4 percent by 2024. - Modest decrease in global core inflation in 2024 (–0.1 percentage point). - Effects larger in advanced economies: output –0.6 percent and core inflation –0.2 percentage point. - Policy rates are lowered by 50 basis points in advanced economies in 2024 relative to the baseline, which helps soften the inflation impact. - Tighter financial conditions in emerging markets: - Lowers the level of global output by –0.5 percent by 2024. - Effects more pronounced in emerging market economies; advanced economies also negatively affected due to loss of competitiveness. - Initial divergence in inflation responses across country groups: disinflation initially muted in emerging market economies (whose currencies depreciate) and more pronounced in advanced economies (whose currencies appreciate), before converging in 2025. ### Additional relevant numeric context and calibrations - Investment-related context: - Global gross fixed capital formation remains close to 10 per cent below prepandemic trends. - Investment in the advanced-economies scenario is 3 per cent higher than the baseline by 2025. - Disinflation calibration details: - Consumer price of manufactured goods relative to services is currently estimated to be 1 per cent above the pre–COVID-19 global aggregate trend and returns to trend over two years. - Core inflation impulses: –20 basis points in 2023 and –50 basis points in 2024 for countries starting from higher relative goods prices; two-thirds as large for most other countries; China smaller. - Financial-conditions calibration details: - Sovereign premiums increase about 200 basis points and corporate premiums about 150 basis points in emerging market economies (excluding China) in first half of 2024, relative to baseline. - Emerging market currencies depreciate 10 per cent relative to the US dollar in first half of 2024, relative to baseline. *Source: IMF staff calculations as presented in Box 1.2 of the World Economic Outlook chapter "Global Prospects and Policies."* ### Annex 1.1). ### Annex 1.1) ### Conceptual channels linking US monetary policy and commodity prices - US monetary policy can affect commodity prices through four channels: - cost-of-carry channel, by affecting the opportunity cost of commodity storage; - real-economy channel, by affecting current and future commodity consumption; - liquidity-and-portfolio channel, by affecting financial conditions and thus trading liquidity in physical and derivative markets; - exchange rate channel, as most commodities are traded in dollars. - Immediate effects through the real-economy channel operate mainly through expectations and thus only for easy-to-store commodities. - The dollar functions as both an intervention currency and an anchor currency, propagating US monetary policy impulses globally and strengthening spillovers via dollar funding for global bank balance sheets and longer, more complex global supply chains. ### The effects of monetary policy shocks on commodity prices: a high-frequency approach - Methodology: - Local projections are used to estimate effects of monetary policy shocks, following Jarociński and Karadi (2020). - Only dollar-denominated commodity prices are considered for 1990–2019; the pure monetary policy surprise from Jarociński and Karadi (2020) is used. - Key peak responses to a 10 basis point monetary policy surprise (horizon of peak decline in days shown in parentheses where reported): - base metal price index: 2.5 percent drop (peak after about 20 days; figure lists "18" next to Base metals); - oil (crude oil): 2 percent drop (figure lists "21" next to Crude oil); - raw materials such as cotton and rubber: similar decline (figure lists "18" next to Cotton and rubber); - beverages: (figure lists "14"); - precious metals (gold): gold price drops by 1.1 percent after 23 days (precisely estimated); - cereals (food): decline less than 1 percent and less precisely estimated (figure lists "8" for Cereals); - other reported numbers in Figure 1.SF.3: Oilseed "18", Food "18", Meat "1". - Interpretation: - Results are consistent with cost-of-carry and real-economy channels: higher interest rates raise opportunity costs of holding inventories and reduce future demand via delayed effects on economic activity. - Effects are more relevant for commodities with high storability (for example, base metals). - Additional notes: - Monetary policy shocks also affect the dollar, which appreciates by 0.4 percent, but the impact is short-lived. - Natural gas prices (Henry Hub) responses are not considered in the main results due to structural changes in gas markets over the sample; for 1990–2019 natural gas prices do not respond to US monetary policy, while for the 2016–19 subsample a significant decline in gas prices after US monetary policy tightening is observed. ### Spillbacks: US monetary policy, commodity prices, and US inflation - Monthly proxy–structural vector autoregression approach is used to gauge domestic spillbacks. - Estimated impacts of a 10 basis point increase in the US federal funds rate: - oil prices: decline by 2 percent on impact, effect persists for eight months; - food prices: decline by 1 percent on impact, effect is less persistent. - Contribution of the commodity price channel to US headline CPI decline (from impulse responses with commodity channel shut down): - Benchmark first half-year headline CPI decline: –0.12 percentage point; - No oil (imposed): headline CPI would have declined by –0.09 percentage point (contribution of oil reported as 32 percent in Table 1.SF.1); - No oil, no food: headline CPI would have declined by –0.07 percentage point (contribution reported as 41 percent in Table 1.SF.1); - Instrumental variable–local projection mediation analysis (MA) gives Contribution MA of (43) percent over a half-year period (Table 1.SF.1). - Summary statistics from Table 1.SF.1 (United States, average response to 10 basis point increase in interest rate): - 0–6 Months: Benchmark –0.12; No oil –0.09 (32); No oil, no food –0.07 (41); Contribution MA (43). - 0–12 Months and 12–24 Months columns also reported in Table 1.SF.1 but specific numbers are presented in the source table. ### Spillovers: effects on other countries’ inflation via commodity prices - Approach: - The specification is augmented with country i CPI and the bilateral exchange rate for country i and the United States; estimates repeated for a set of 24 countries. - Decomposition performed to quantify how much of the change in country i’s CPI is due to US monetary policy’s effect on commodity prices. - Average country results: - For the average country, the commodity price channel accounts for 66 percent of the total spillover of US monetary policy onto inflation in the first half-year (Table 1.SF.1). - The oil price alone contributes 48 percent (Table 1.SF.1). - Country-level responses (one-year average responses shown in Figure 1.SF.5; blue = total CPI response; red = CPI response when oil and food prices do not react): - Most countries’ CPIs decline after a US monetary policy tightening. - The role of the commodity price channel is quantitatively important for several countries, with country labels shown using ISO codes in Figure 1.SF.5. ### Asymmetric pass-through of commodity price shocks - Tests via local projections of domestic food and energy inflation on global food and oil price shocks examine: - whether pass-through is higher during commodity price booms than busts; - whether pass-through for price increases is larger than for price decreases; - whether larger and quicker commodity price changes lead to stronger pass-through. - Findings: - For food inflation: no evidence that pass-through is higher during commodity price booms than busts, and no evidence that pass-through for price increases is larger than for price decreases. - For energy (domestic energy inflation): some evidence that the pass-through of large oil price shocks could be twice the size of that for small ones (Figure 1.SF.6, panel 1). - For food inflation: evidence that food price pass-through is heightened for larger (more salient) shocks (Figure 1.SF.6, panel 2). - Technical note on Figure 1.SF.6: shaded area is 90 percent confidence interval; coefficient on large (small) price movements estimated on subsample of price changes larger than (smaller or equal to) one standard deviation. ### Conclusions and policy implications - Monetary policy has a strong direct effect on commodity prices, especially industrial and storable commodities such as oil and metals. - Spillbacks and spillovers from US monetary policy shocks are fast: - After a 10 basis point monetary policy shock, the decline in oil and food prices over six months reduces both domestic and other countries’ inflation by 0.05 percent on average. - Relative importance of commodity channel: - Commodity price channel accounts for 41 percent of the total decline in US headline CPI (first half-year); - Commodity price channel accounts for 66 percent of the total decline in headline CPI for the average country in the sample (first half-year). - Cross-country heterogeneity: - Spillovers are more relevant for consumer prices in other advanced economies; - Reactions and commodity price channels in emerging market economies are less precisely estimated, as emerging markets tend to have more regulated prices. - Additional points: - No significant commodity price channel for core inflation is found. - Major central banks, when setting policy objectives, should consider spillbacks and spillovers through the commodity price channel and expect stronger pass-through during times of sharp commodity price changes (relative to times of small changes). - The commodity price channel could be strengthened in periods of high monetary policy coordination, given the Federal Reserve’s role in setting the tone for global monetary policy and the capacity of other major central banks (such as the European Central Bank) to affect commodity prices. *Source: Annex 1.1) (text).* ### Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment ### Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment ### Overview - Indicators shown: Real GDP (annual percent change), Consumer Prices (annual averages, percent), Current Account Balance (percent of GDP), Unemployment (percent). - Periods: 2022, 2023, 2024 (projections for 2023–24). - Aggregates exclude Venezuela where noted. - Source: IMF staff estimates. ### North America - North America (aggregate) - Real GDP: 2.3, 2.1, 1.5 - Consumer Prices: 7.9, 4.2, 2.8 - Current Account Balance: –3.4, –2.7, –2.6 - Unemployment: . . .. . .. . . - United States - Real GDP: 2.1, 2.1, 1.5 - Consumer Prices: 8.0, 4.1, 2.8 - Current Account Balance: –3.8, –3.0, –2.8 - Unemployment: 3.6, 3.6, 3.8 - Mexico - Real GDP: 3.9, 3.2, 2.1 - Consumer Prices: 7.9, 5.5, 3.8 - Current Account Balance: –1.2, –1.5, –1.4 - Unemployment: 3.3, 2.9, 3.1 - Canada - Real GDP: 3.4, 1.3, 1.6 - Consumer Prices: 6.8, 3.6, 2.4 - Current Account Balance: –0.3, –1.0, –1.0 - Unemployment: 5.3, 5.5, 6.3 - Puerto Rico - Real GDP: 2.0, –0.7, –0.2 - Consumer Prices: 5.9, 2.9, 1.5 - Current Account Balance: . . .. . .. . . - Unemployment: 6.2, 6.8, 6.6 ### South America - South America (aggregate) - Real GDP: 3.8, 1.6, 2.0 - Consumer Prices: 17.4, 18.7, 14.7 - Current Account Balance: –3.0, –1.9, –1.6 - Unemployment: . . .. . .. . . - Brazil - Real GDP: 2.9, 3.1, 1.5 - Consumer Prices: 9.3, 4.7, 4.5 - Current Account Balance: –2.8, –1.9, –1.8 - Unemployment: 9.3, 8.3, 8.2 - Argentina - Real GDP: 5.0, –2.5, 2.8 - Consumer Prices: 72.4, 121.7, 93.7 - Current Account Balance: –0.7, –0.6, 1.2 - Unemployment: 6.8, 7.4, 7.2 - Colombia - Real GDP: 7.3, 1.4, 2.0 - Consumer Prices: 10.2, 11.4, 5.2 - Current Account Balance: –6.2, –4.9, –4.3 - Unemployment: 11.2, 10.8, 10.4 - Chile - Real GDP: 2.4, –0.5, 1.6 - Consumer Prices: 11.6, 7.8, 3.6 - Current Account Balance: –9.0, –3.5, –3.6 - Unemployment: 7.9, 8.8, 9.0 - Peru - Real GDP: 2.7, 1.1, 2.7 - Consumer Prices: 7.9, 6.5, 2.9 - Current Account Balance: –4.1, –1.9, –2.1 - Unemployment: 7.8, 7.6, 7.4 - Ecuador - Real GDP: 2.9, 1.4, 1.8 - Consumer Prices: 3.5, 2.3, 1.8 - Current Account Balance: 2.4, 1.5, 1.6 - Unemployment: 3.2, 3.8, 3.9 - Venezuela - Real GDP: 8.0, 4.0, 4.5 - Consumer Prices: 186.5, 360.0, 200.0 - Current Account Balance: 3.6, 2.2, 3.4 - Unemployment: . . .. . .. . . - Bolivia - Real GDP: 3.5, 1.8, 1.8 - Consumer Prices: 1.7, 3.0, 4.4 - Current Account Balance: –0.4, –2.7, –3.3 - Unemployment: 4.7, 4.9, 5.0 - Paraguay - Real GDP: 0.1, 4.5, 3.8 - Consumer Prices: 9.8, 4.7, 4.1 - Current Account Balance: –6.0, 0.6, 0.1 - Unemployment: 6.8, 6.2, 6.0 - Uruguay - Real GDP: 4.9, 1.0, 3.2 - Consumer Prices: 9.1, 6.1, 5.9 - Current Account Balance: –3.5, –3.7, –3.3 - Unemployment: 7.9, 8.1, 8.0 ### Central America - Central America (CAPDR aggregate) - Real GDP: 5.4, 3.8, 3.9 - Consumer Prices: 7.2, 4.2, 3.6 - Current Account Balance: –3.2, –2.2, –2.1 - Unemployment: . . .. . .. . . ### Caribbean - Caribbean (aggregate) - Real GDP: 13.9, 9.8, 8.3 - Consumer Prices: 12.6, 13.2, 6.5 - Current Account Balance: 4.4, 0.8, 2.0 - Unemployment: . . .. . .. . . ### Memoranda - Latin America and the Caribbean (aggregate) - Real GDP: 4.1, 2.3, 2.3 - Consumer Prices: 14.0, 13.8, 10.7 - Current Account Balance: –2.4, –1.8, –1.5 - Unemployment: . . .. . .. . . - Eastern Caribbean Currency Union - Real GDP: 9.9, 4.7, 4.0 - Consumer Prices: 5.5, 4.2, 2.4 - Current Account Balance: –13.4, –11.3, –10.2 - Unemployment: . . .. . .. . . ### Notes and Definitions - Movements in consumer prices are shown as annual averages. Year-end to year-end changes can be found in Tables A6 and A7 in the Statistical Appendix. Aggregates exclude Venezuela. - Current Account Balance is percent of GDP. - Unemployment is percent. National definitions of unemployment may differ. - Puerto Rico is a territory of the United States, but its statistical data are maintained on a separate and independent basis. - Central America refers to CAPDR (Central America, Panama, and the Dominican Republic) and comprises Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Panama. - The Caribbean comprises Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. - Latin America and the Caribbean comprises Mexico and economies from the Caribbean, Central America, and South America. - Eastern Caribbean Currency Union comprises Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, as well as Anguilla and Montserrat, which are not IMF members. *Source: IMF staff estimates.* ### CHAPTER 1 gLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 gLObaL PROsPECTs aND POLICIEs ### Introduction - Inflation reached multidecade highs in many economies in 2022. - Headline inflation has since come down as supply chain disruptions have eased and commodity prices have declined, but core inflation is proving stickier. - Professional forecasters expect inflation rates will return closer to central banks’ targets in 2024, with a shift in their median deviation toward zero and a sharp narrowing of the distribution. - Professional forecasters also expect that, given the current contractionary stance and anticipated policy action going forward, rates will be fully back at targets only by 2026, on average. - Expectations matter for consumption, investment, price- and wage-setting; the more effective monetary policymakers are in influencing inflation expectations, the lower the cost in forgone output involved in achieving inflation objectives. ### Key questions addressed - How have inflation expectations across different agents and at alternative horizons behaved before and after the pandemic across economies? Are there signs of inflation expectations deanchoring since 2021? Or do the rapid interest rate hikes over 2022 appear to have contained risks? - How important are expectations in explaining inflation dynamics, particularly since the COVID-19 shock? Does the prevailing level of inflation (high or low) affect the explanatory power of inflation expectations? - How do expectations affect monetary policy effectiveness, and how does policy affect expectations? How does the expectations formation process affect the trade-offs that monetary policymakers face to bring inflation rates back to their targets? ### Main findings - Across economic agents, movements in near-term (next-12-months) inflation expectations broadly concur, showing a sharp rise in 2022. Survey-based measures of expectations of professional forecasters and households, financial-market-implied expectations, and a newly constructed measure of firms’ expectations (based on text analysis of firms’ earnings calls) fluctuate differently, but around a common trend. - Despite the sharp increase in inflation over 2022 across many economies, long-term (five-year-ahead) inflation expectations in the average economy have remained stable. - According to multiple metrics—including inflation target deviations, expectations’ variability, and expectations’ disagreement—long-term expectations have remained well anchored in most economies. - Historical episodes characterized by initial periods of persistently rising expectations suggest that expectations come down only slowly: in these cases, it took about three years for inflation and near-term expectations to return to their pre-episode levels. - Real policy rates were lower and are now higher, on average, compared with those in past episodes, suggesting that monetary tightening since 2022 has been unusually sharp. - Near-term expectations are critical to understanding inflation dynamics and explain a growing share of inflation since 2022. A novel causal identification strategy to estimate Phillips curves finds a strong role for inflation expectations in the group of advanced economies. - In emerging market economies, lagged inflation is also important, suggesting a greater role for more backward-looking learners. - There are signs that the pass-through from inflation expectations to inflation tends to be higher in periods of higher inflation. ### Model-based evidence and implications for monetary policy - A newly developed dynamic stochastic general equilibrium model with a mix of forward- and backward-looking agents that learn demonstrates: - The output costs of monetary tightening rise with the share of backward-looking learners in the economy or with the prevailing level of inflation. - Forward-looking learners form expectations according to the standard, full-information rational expectations assumptions; backward-looking learners form expectations through adaptive learning based on a small statistical model, updating based on recent and past experiences only. - Both inflation expectations and inflation would decline modestly more quickly with improvements in monetary policy frameworks and communication—such as simpler and more regular messaging and better targeting of audiences—that boost the share of forward-looking learners in the economy. - Such improvements may take time or be more difficult to implement than tighter cyclical policies, which come with much higher costs in terms of slowing growth. - By fostering an increase in the share of forward-looking learners, improvements in monetary policy frameworks and central bank communication strategies can help bring inflation back to target more quickly and at a lower output cost—in other words, they can increase the chances that the economy makes a “soft landing.” ### Summary of empirical patterns - Near-term (next-12-months) expectations rose markedly across economies since 2022. - Long-term (five-year-ahead) expectations have generally remained anchored on average. - Historical evidence: when inflation expectations rose over a sustained period of at least a year, it took about three years for inflation and near-term expectations to come back to pre-episode levels, given historical monetary policy reactions. - The share of backward-looking learners in the economy is estimated to be larger in emerging market than advanced economies. *Authors: Silvia Albrizio (co-lead), John Bluedorn (co-lead), Allan Dizioli, Christoffer Koch, and Philippe Wingender, with support from Yaniv Cohen, Pedro Simon, and Isaac Warren. Arash Sheikholeslam and Mona Wang provided computational and technical assistance. Yuriy Gorodnichenko was an external consultant.* ### Annex 2.5 for further details. ### Annex 2.5 for further details. ### Key findings and timing trade-offs - If policymakers were to focus solely on bringing inflation down quickly, they would tighten even further and reduce the time required to bring inflation rates back to targets by two years, but at the cost of a sharper economic slowdown. - When policymakers choose policies that take account of trade-offs among inflation close to target, output at potential, and smooth policy rate paths, a scenario for a representative advanced economy facing today’s inflation circumstances suggests it is likely to take about three to four years for inflation and expectations to converge back to the central bank’s target. - The chapter’s model-based conclusion on the two-year versus three-to-four-year timing is based on a stylized social welfare function (see Online Annex 2.5 for more details). ### Role of central banks, communications, and data - Central banks benefit from having clear understandings of the expectations formation processes in their economies and tailoring communications strategies accordingly, in parallel with structural reforms to reinforce central bank independence and transparency. - Managing expectations better could require investing more in data collection and monitoring of expectations, including across different agents. - Technological improvements enable alternative methods of measuring expectations—such as the text-based analysis of firms’ earnings calls pioneered in the chapter—which may make broader monitoring more feasible. ### Empirical caveats and scope - Data limitations constrain empirical analysis of inflation expectations across exercises and especially cross-agent comparisons; the chapter focuses on mean expectations, typically among professional forecasters, rather than distributions of individual-level expectations. - The causal interpretation of the Phillips curve estimates is conditional on the assumptions of the instrumental variables estimation strategy based on lags; findings are largely robust to varying the timing of the instruments, but if underlying assumptions do not hold the estimates should be interpreted as associational. - Structural breaks could reduce the informativeness of empirical and historical analyses; the chapter addresses state dependence in the Phillips curve and incorporates a limited form of structural change through learning in the model-based analysis. - The mapping from an increase in the share of forward- compared with backward-looking agents to monetary policy framework and communications improvements is stylized; other institutional or structural interventions could also be associated with a change in the expectations formation process. ### Recent patterns in inflation expectations (agents and horizons) - Agents compared: professional forecasters, financial markets, households, and firms (the latter proxied by a new text-analysis indicator from firms’ earnings calls). - For comparability, expectations by agent type are transformed into z-scores (sample period for z-scores: 2004:Q1 to 2023:Q2 at quarterly frequency). - Across economies, the four agents’ near-term expectations: - Agree on the inflation upswing from 2021 and that inflation peaked in 2022 and is now on the downswing. - Each indicator reached two-and-a-half to more than four standard deviations during the postpandemic recovery relative to the early 2000s experience. - Properties by agent: - Households’ expectations are noisier and may lead or lag other agents (euro area and the United Kingdom examples). - Financial-market-implied expectations are continuously available but disentangling expectations from fluctuating risk premia is challenging. - Firms’ near-term expectations tend to mark the upper bound of the cross-agent range during the recent surge. - Professional forecasters’ expectations convey more signal but may suffer from herding and strategic behavior. - For broader country coverage and time, analyses mostly use professional forecasters’ expectations. ### Cross-economy and horizon patterns - Near-term inflation expectations (deviation from central bank targets) have risen while long-term expectations have been broadly stable (Figure 2.3). - Advanced economies (AEs): - Period prior to 2020:Q1 marked by mild undershooting of inflation expectations relative to target in both near and long terms. - Long-term expectations have moved closer to inflation targets since the pandemic. - Emerging market economies (EMEs): - Distribution of near-term expectations is wider and skewed to the upside, with greater recent variation. - Median long-term expectations moved upward by a modest 10 basis points. - Interquartile range for long-term expectations narrowed and shifted up somewhat. - Multiple metrics of anchoring (average absolute deviations from target, variability over time, disagreement across individuals) suggest long-term inflation expectations have stayed anchored, reflecting in part active policy responses. ### Historical episodes and typical adjustment dynamics - The chapter identifies historical episodes (sample spanning 1989:Q4 to 2023:Q1) where near- and long-term inflation expectations rose for at least a year; total episodes identified: 32 (16 from AEs and 16 from EMEs). - After episodes with persistently rising expectations, economies typically saw a gradual but slow decline in headline inflation and near-term expectations: - Both headline inflation and near-term expectations typically take about three years to revert to pre-episode levels, though core inflation remained stickier. - Large variability across experiences is evident in interquartile ranges. - Recent differences relative to historical medians: - Current paths for actual inflation align with historical medians; near-term expectations showed a sharper increase and faster decline than historical episodes. - Real policy rates in 2022 were well below comparative historical paths (partly due to the sharp rise in inflation); they are now well above the historical median following rapid monetary tightening and recent falls in headline inflation. - Long-term inflation expectations have been unusually stable coming into the recent high inflation regime, supporting evidence of anchoring. ### Role of expectations in inflation dynamics (Phillips curve evidence) - Framework: hybrid price Phillips curve relating current inflation to inflation expectations, lagged inflation, and the output gap. - Empirical strategy includes an instrumental variables approach to identify causal impact of expectations on inflation and subsequent decomposition of drivers for recent inflation dynamics; see Online Annex 2.4 for estimation details. - Key empirical findings: - Long-term inflation expectations have lower predictive power than near-term measures. - Near-term measures (firms, financial markets, professional forecasters) show consistent predictive performance; a one-standard-deviation increase in expectations is associated with a 0.7 standard deviation increase in current inflation (standardized coefficients). - Coefficients for inflation expectations unadjusted for volatility range from 1.1 to 1.4. - Baseline hybrid Phillips curve (using near-term expectations from professional forecasters) indicates: - For advanced economies, a 1 percentage point rise in near-term expectations is associated with a 1.1 percentage point rise in current inflation. - For emerging market economies, the rise is about (text truncated here in source) [chapter continues with EME estimate]. - Estimation sample and notes: - Standardized coefficients estimated by pooled time series for euro area, United Kingdom, and United States using quarterly data from 1991:Q2 through 2023:Q1. - Dependent variable: quarterly headline inflation, seasonally adjusted at an annualized rate. - LT = long-term (five-year-ahead; for financial markets is next-five-years) inflation expectations; NT = near-term (next-12-months) inflation expectations. - Horizontal lines in reported figures show 90 percent confidence intervals with heteroskedasticity-robust standard errors. ### Policy implications and guidance - Policymakers benefit from: - Clear communication strategies tailored to the expectations formation processes in their economies. - Structural reforms that reinforce central bank independence and transparency. - Investing in improved data collection and monitoring of expectations across agents. - Model-based results suggest that improvements in monetary policy frameworks and communications are consistent with an increase in the share of forward-looking learners; however, other institutional or structural interventions (educational attainment, fiscal frameworks, governance, etc.) could also be associated with changes in expectations formation, and examining these lies outside the chapter’s scope. *Source: Annex 2.5 and accompanying text, World Economic Outlook chapter on Managing Expectations: Inflation and Monetary Policy (text - Annex 2.5 for further details.).* ### 0.8 percentage point. Lagged inflation has little explan- ### text - 0.8 percentage point. Lagged inflation has little explan- ### Key empirical findings - Lagged inflation has little explanatory power in advanced economies (slightly negative but not different from zero with statistical significance). - In emerging market economies, the carryover from the previous quarter’s inflation is about 0.2 percentage point and is statistically significant. - Near-term inflation expectations play a larger role in explaining current inflation in advanced economies than in emerging market economies (pooled quarterly regressions over 1991:Q2 through 2023:Q1). ### Causal estimates of the expectations channel - Instrumental variables estimates (using lags of near-term expectations and the output gap) imply the causal effects of near-term expectations on current inflation are about 30 percent lower in magnitude than associational estimates. - For the average advanced economy, inflation would rise by about 0.8 percentage point for a 1 percentage point rise in near-term expectations. - For the average emerging market economy, the pass-through estimate is about 0.4 percentage point. - These differences, together with a larger role for lagged inflation in emerging markets, imply expectations formation in emerging market economies tends to be more backward looking on average. ### Decomposition of recent inflation dynamics - Contributions to headline inflation are computed relative to 2019:Q4 using instrumental variables estimates from quarterly data over 1991:Q2–2023:Q1. - For the average advanced economy: - Factors other than expectations and lagged inflation (including common global factors, energy prices, and the output gap) initially drove most of the increase in inflation over 2021–22. - Near-term inflation expectations have become a large and growing contributor to inflation dynamics in the most recent quarters. - Lagged inflation had a small role. - For the average emerging market economy: - Factors other than expectations and lagged inflation were responsible for the peak in inflation in 2022. - Expectations played a significant but smaller role than in advanced economies. - Lagged inflation explained almost half of the average rise in inflation since 2020:Q1. ### State dependence: higher inflation, higher pass-through - The estimated pass-through from expectations to current inflation is higher when inflation is elevated (above its economy-specific sample median). - For advanced economies, the pass-through coefficient increases from 0.6 when inflation is low (below the sample median) to 0.9 when inflation is high; this increase is statistically significant. - The expectations channel may therefore be even more important while inflation remains high. ### Expectations formation and semistructural model insights - The analysis extends a standard DSGE framework with expectational learning, adding: - Heterogeneous agents (a mix of backward- and forward-looking learners). - Two-way influence between near-term and long-term expectations, with long-term expectations affecting inflation only via near-term expectations. - Estimated shares of backward-looking learners: - About 20 percent for the representative advanced economy. - About 30 percent for the representative emerging market economy. - Implications of heterogeneous expectations: - Following an identical cost-push shock, inflation is more persistent when agents are heterogeneous (mix of forward- and backward-looking learners) than when all agents are forward-looking. - Backward-looking learners make expectations stickier because they infer persistent future inflation from higher current inflation. - Monetary policy is less effective initially with more backward-looking learners because these agents do not take full account of policy effects on future marginal costs. ### Sacrifice ratio and state dependence - The sacrifice ratio is defined as the percentage of output forgone to achieve a 1 percentage point faster reduction in the inflation rate over a three-year period. - Key patterns: - The sacrifice ratio is larger in the heterogeneous-agents model than in the rational-expectations (forward-looking only) model, across economy groups. - The sacrifice ratio tends to be higher for an emerging market economy than for an advanced economy, reflecting a higher estimated share of backward-looking learners. - In the heterogeneous-agents model, dynamics are state dependent: in a high-inflation environment, backward-looking learners behave as though inflation will be permanently higher, causing slight endogenous de-anchoring and making disinflation more costly. - Simulation detail for the high-inflation environment: the model is run for eight periods with inflation 2 percentage points above target to establish initial conditions. ### Policy implications and channels to improve outcomes - Improvements in monetary policy frameworks, central bank independence, transparency, and communications can increase agents’ attention to and understanding of policy, helping expectations become more forward looking. - Increasing the share of forward-looking learners (through better frameworks and communications) can: - Reduce the persistence of inflation following cost-push shocks. - Strengthen the effectiveness of monetary policy in influencing inflation via expectations. - Lower the sacrifice ratio associated with disinflation. - Concrete example cited: adopting clearer operational frameworks and communications can reduce uncertainty and enhance monetary policy effectiveness. *Source: IMF staff calculations and analysis in Chapter 2 of the October 2023 World Economic Outlook (text excerpt covering 1991:Q2–2023:Q1 estimation period).* ### 2. Near-Term Inflation ### 2. Near-Term Inflation ### Overview - Near-term inflation expectations rose sharply amid the economic recovery from the pandemic and after the large cost-push shocks of 2022 (energy and commodity price rises and supply chain disruptions). - Long-term expectations have remained broadly stable, on average, with no signs of de-anchoring. - Past episodes with jointly rising near- and long-term inflation expectations over a sustained period indicate it took about three years on average for inflation and near-term expectations to return to pre-episode levels, although there has been wide variability across episodes. - An illustrative dynamic stochastic general equilibrium model is used to quantify effects of shocks and policy interventions; figures and impulse responses are based on IMF staff calculations. ### Role of Expectations in Inflation Dynamics - An estimated hybrid Phillips curve indicates near-term inflation expectations play a more prominent role in explaining current inflation than long-term expectations. - For the average advanced economy, drivers of inflation shifted from underlying cost-push shocks toward inflation expectations over recent quarters. - For the average emerging market economy, expectations play a smaller role than lagged inflation but remain significant. - The pass-through of expectations to inflation increases when inflation is already elevated. - A larger share of backward-looking learners: - Makes mean expectations more persistent and can keep expectations stuck at higher levels when inflation is elevated for a sustained period. - Reduces monetary policy potency and increases the sacrifice ratio (output forgone to lower inflation). ### Quantified Effects of Specific Shocks (Model-based) - Cost-push shock that increases inflation by 1 percentage point: impulse responses show output gap increases because potential output falls by more than real GDP (panels 1–4). - Temporary monetary policy shock that increases the policy rate by 100 basis points: the monetary policy shock’s impact on inflation peaks after five quarters in the heterogeneous-expectations model and after three quarters in the rational-expectations model (panels 5–8). - A difference in the share of backward-looking learners between a representative emerging market and a representative advanced economy is about 8 percent. ### Policy Interventions and Their Effects - Improving monetary policy frameworks and communications (boosting the share of forward-looking learners by the advanced–emerging market difference) leads to: - Stronger effects on inflation expectations and faster transmission to realized inflation. - A softer landing with only small additional output costs relative to baseline. - Tighter cyclical policies: - Fiscal consolidation (assumed: fiscal spending cut by 1 percent of GDP for two years, with monetary policy not offsetting fiscal effects). - Monetary tightening (assumed: initial 100 basis points rise in the policy rate on impact that then declines endogenously). - Both lower inflation and inflation expectations but at higher output costs compared with framework/communication improvements. - The role of fiscal policy is complex: - Worse fiscal positions (higher public debt and persistent deficits) can reduce the effectiveness of sounder monetary policy frameworks in lowering inflation expectations in emerging market and developing economies. - There may be conditions where fiscal support measures help lower inflation or smooth a shock; consumer perceived persistence of such measures is critical. ### Monetary Policy Trade-Offs and Optimal Timelines - Central bank baseline objective: minimize a welfare loss function that equally weights output gap and inflation target deviations and values interest rate smoothing. - Under heterogeneous agents’ model baseline, the central bank would calibrate policy to bring inflation back to target in about four years. - If the central bank doubles the weight on inflation in its objective, it would aim to return inflation to target in about three years. - If the central bank cares only about inflation (no weight on output gap), it would choose to bring inflation back to target in two years; however, this entails lower welfare if society values output gap and inflation deviations equally. - If there were only forward-looking learners in the economy, it would be optimal to bring inflation back to target in about three years. - If the cost-push shock has a half-life of 14 quarters (baseline), the exercise assumes the shock raises inflation 2 percentage points above target initially. - A “less persistent shock” scenario reduces the half-life to 6.5 quarters; even then, it would still be optimal to wait about two years to bring inflation back to target. - For an identical welfare function, social welfare is about 20 percent higher with rational than with heterogenous expectations, reflecting enhanced policy effectiveness and lower endogenous persistence of shocks. ### Sacrifice Ratios and Heterogeneity - Sacrifice ratios (percent of output forgone to lower inflation by 1 percentage point over three years) are larger under heterogeneous expectations (mix of forward- and backward-looking learners) than under rational expectations. - Emerging market economies tend to have higher shares of backward-looking learners, which pushes up their sacrifice ratios. - Higher prevailing inflation slightly worsens the sacrifice ratio because backward-looking learners raise their expectations. ### Conclusions and Policy Recommendations - Monetary policymakers should have a clear understanding of expectations formation in their economies; near-term expectations are particularly important for current inflation dynamics. - Improvements in data collection and monitoring of expectations across agents (professional forecasters, financial markets, households, firms) are recommended, with emphasis on near-term expectations. - Technological developments (for example, text analysis of firms’ earnings calls) can provide timely and cost-effective measures of firms’ inflation expectations. - Improvements to monetary policy frameworks—enhancing central bank independence and transparency—and communication strategies can boost the share of forward-looking learners and thereby increase monetary policy effectiveness. - Communication strategies recommended in recent literature include explanation, engagement, and education; audience segmentation; use of widely accessed media for agents with more backward-looking expectations; simple and repeated messaging; investment in financial literacy; emphasizing goals rather than instruments; and message targeting to conjuncture. - Framework and communication improvements are complementary to conventional monetary policy actions; they are not silver bullets and may face implementation challenges. *Source: IMF staff calculations and analysis from Chapter 2, "Managing Expectations: Inflation and Monetary Policy," World Economic Outlook, October 2023.* ### CHAPTER 2 ### CHAPTER 2 ### Firms’ Inflation Expectations, Attention, and Monetary Policy Effectiveness - New firm-level index of near-term inflation expectations constructed from text analysis of firms’ earnings calls; related index of firms’ attention to the Federal Reserve (ECFACB = Earnings-Calls-based Firm Attention to the Central Bank index) measures frequency of sentences discussing monetary policy. - Aggregate picture shown in Figure 2.1.1: the index is calculated by applying text-based analysis using transcripts of US-based companies’ earnings calls and measures the intensity of discussion related to the Federal Reserve. - Identification and estimation: - Dynamic responses estimated using local projections to assess effect of a monetary policy shock on a firm’s inflation expectations, conditional on firm attentiveness to monetary policy. - Attentiveness by firm is de-meaned by sectoral average attentiveness; time fixed effects included. - Specification includes interaction between a US monetary policy shock measure (from Acosta 2023) and an attention index, firm and time fixed effects, and firm-level controls, based on Ottonello and Windberry (2020). - Firm-level controls include sales growth, leverage, employment, total assets, and share of current assets in total assets. - Standard errors are two-way clustered by firms and time. - The shocks have been scaled to have unit standard deviation. - Key empirical findings: - More attentive firms decrease their inflation expectations by about 1 percent of one standard deviation more than the average after four quarters (Figure 2.1.2). - This corresponds to an amplification of about one-fourth to the sector’s average negative response. - Interpretation: - Results bolster the chapter’s argument that monetary policy is more effective when monetary policy frameworks and communication strategies help improve agents’ trust in central banks and their understanding of central banks’ monetary policy decisions. - Authors of the box: Silvia Albrizio, Pedro Vitale Simon, and Allan Dizioli. ### Fiscal Imprudence and Inflation Expectations: The Role of Monetary Policy Frameworks - Research question: how the level of inflation expectations is related to an economy’s monetary policy framework, given the level and composition of public debt. - Monetary policy framework measure: - IAPOC index (Unsal, Papageorgiou, and Garbers 2022) captures soundness through three pillars: Independence and Accountability (I and A), Policy and Operational Strategy (P and O), and Communications (C). - Index covers 13 advanced economies and 37 emerging market and developing economies; data updated to 2021. - Empirical approach and results: - Fixed-effects panel regression of mean inflation expectations on interaction of IAPOC index score and debt to GDP, controlling for economy-specific factors and time-invariant characteristics. - Higher public debt is associated with expectations of higher inflation, conditional on a given level of monetary policy framework (Figure 2.2.1, panel 1). - Effect is stronger when focusing on stock of public debt in foreign currency and when fiscal deficits are persistent (Figure 2.2.1, panel 2). - Advanced economies do not show this differential sensitivity to debt levels over different IAPOC index scores. - As monetary policy frameworks improve (distribution shift in IAPOC index for emerging market and developing economies over the past 15 years), inflation expectations become less sensitive to level and composition of public debt or persistent fiscal deficits. - Policy implication: - Difficulties posed by higher public debt for managing inflation expectations in emerging market and developing economies could be eased by adopting strong monetary policy frameworks. - Adoption of prudent fiscal policy remains key to prepare for challenges and to prevent risk of fiscal dominance. - Authors of the box: Omer Akbal, Mariarosaria Comunale, Marina Conesa Martínez, Chris Papageorgiou, and Filiz Unsal. ### Energy Subsidies, Inflation, and Expectations: Euro Area Simulation Results - Context: Several European economies used energy subsidies, tax cuts, and price caps to smooth impact of energy price shocks; effectiveness depends on design, market effects, and fiscal sustainability; inflation expectations channel is important. - Model and simulation: - IMF’s Flexible System of Global Models used to simulate impacts on expected and realized inflation of announced energy relief measures (price subsidies and caps) in the euro area. - Simulation assumes the sharp upward shock to energy prices in 2022 is temporary and unwinds; includes indirect effects of energy prices on core inflation through the supply chain. - Quantitative results (marginal impacts relative to no-measures scenario): - Fiscal relief measures lowered euro area inflation by 0.9 percentage point in 2022 and by half a percentage point in 2023 (Figure 2.3.1, panel 1). - Measures smooth out inflation over time, leading to a rise in inflation over 2024–25 (relative to the no-measures scenario) and preventing an undershoot as subsidies expire and the energy shock unwinds. - Net effect on core inflation expectations: neutral in 2022 but increase by 0.7 percentage point over 2023–24 under baseline where agents fully understand temporary nature of subsidies. - Alternative scenario (agents misperceive persistence): - If agents think subsidies will last one year longer than announced, expectations fall more in 2022. - Under misperception, fiscal policy impact on inflation increases from –0.9 to –1.1 percentage points in 2022 and from –0.5 to –0.6 percentage point in 2023 (agents later correct and inflation and expectations bounce back). - Mechanisms: - Blue bars in panel 1 show direct effects of measures (subsidies, tax cuts, or price caps on consumer energy prices); red bars show indirect effects from changes in aggregate demand, supply chain costs, and core inflation expectations. - Author of the box: Chris Jackson. ### Methodological and Data Notes (selected) - Firm attention index constructed from earnings call transcripts; ECFACB acronym denotes the earnings-calls-based firm attention to the central bank index. - Local projections used to estimate dynamic responses; interaction terms de-meaned by sector and include time fixed effects to capture marginal effect of monetary tightening for more attentive firms. - Firm-level controls: sales growth, leverage, employment, total assets, share of current assets in total assets. - Standard errors two-way clustered by firms and time. - Monetary policy shocks scaled to have unit standard deviation. - IAPOC index comprises three pillars: Independence and Accountability; Policy and Operational Strategy; Communications; data updated to 2021 and cover 50 economies (13 advanced, 37 emerging and developing). ### Policy Conclusions and Implications - Strengthening firms’ attention and understanding of monetary policy—through clear communication and credible frameworks—can amplify monetary policy effectiveness; more attentive firms reduce inflation expectations more in response to tightening. - Strong monetary policy frameworks reduce sensitivity of inflation expectations to higher public debt, especially in emerging market and developing economies; improving the IAPOC index can mitigate adverse effects of debt composition and persistence of deficits. - Temporary fiscal relief (energy subsidies) lowers inflation in the short run but can raise inflation later as subsidies expire; effects depend critically on agents’ perceptions of persistence—misperceptions amplify short-run disinflation but lead to larger rebounds when corrected. - Fiscal prudence remains essential to avoid risking fiscal dominance even as monetary frameworks improve. *International Monetary Fund | October 2023* ### Introduction ### Introduction ### Context and motivation - Since the end of the Cold War, primary commodity markets have become more integrated as a result of trade liberalization, technological innovation, and declines in transportation costs. - Integrated commodity markets have provided cheap inputs that have supported global growth and helped raise living standards, especially in emerging markets. - The war in Ukraine reversed this process: for the first time since the 1970s, commodities such as crude oil, natural gas, and wheat were broadly used to exert pressure in a major conflict, with exports restricted and countersanctions imposed; these disruptions contributed to surging inflation in 2022, food insecurity in low-income countries, and slower global growth. - Geopolitical tensions and policy actions (examples cited include the US Inflation Reduction Act, the European Chips Act, and China’s export restrictions on gallium and germanium) have increased efforts to reshore commodity supply chains for national security, geopolitical, or other reasons. - Text mining of earnings calls shows usage of fragmentation-related keywords surged after Russia’s invasion of Ukraine relative to the pre-COVID-19 period. ### Research questions, scope, and methods - The chapter studies how further fragmentation of markets for energy, agricultural, and mineral commodities could affect economies and the energy transition. - Key questions addressed: - What makes commodity markets vulnerable in the event of fragmentation? - Is there fragmentation in commodity markets, and if so, what form does it take? - Which commodities are most vulnerable to disruptions in international trade? - What would be the economic impact of commodity market fragmentation across blocs and countries, as well as on the global economy? - What might be the implications of such fragmentation for the clean energy transition? - Coverage and data: - The chapter covers nearly all countries and focuses on 48 commodities, including agricultural goods, energy commodities (coal, crude oil, and natural gas), and other mineral commodities. - It builds a database of commodity output, use, and bilateral trade and employs descriptive statistics, empirical analysis, and model simulations. - Scenario design: - Main simulation: a stylized risk scenario in which commodity trade between two geopolitical blocs is persistently disrupted, with the two theoretical blocs defined using the 2022 United Nations vote on the war in Ukraine as a starting point. - Alternative scenarios explored include the role of neutral countries and countries switching blocs; robustness checks are discussed in Online Annexes. ### Main findings (enumerated) - Commodities are vulnerable in the event of fragmentation: - The three biggest suppliers of minerals account for about 70 percent of global production, on average. - Coupled with low demand elasticities and upstream use in many manufacturing processes and key technologies, many importers rely on just a few suppliers, raising the cost of trade disruptions. - There is rising fragmentation in commodity markets: - Measures restricting commodity trade surged in 2022, much more than those restricting trade in other goods. - For selected commodities, price differentials across geographic markets have widened. - Commodity sector foreign direct investment (FDI) and cross-border mergers and acquisitions were on the decline even prior to the war in Ukraine. - Fragmentation could cause large price changes: - Price effects depend on supply-and-demand imbalances caused by fragmentation and price elasticities. - Illustrative partial equilibrium simulations suggest price effects could be particularly strong for some minerals critical for the green transition and some highly traded agricultural goods. - Spikes in agricultural commodity prices could be concerning for many low-income countries reliant on imports. - Fragmented commodity markets would lead to higher price volatility: - Smaller markets in a fragmented world would provide fewer buffers against shocks, leading to larger price responses than under free trade. - Producers would have incentives to switch allegiances given potentially significant differences in commodity prices among blocs, inducing more supply shocks, volatility, and uncertainty, challenging fiscal, monetary, and financial stability. - Macroeconomic impacts on commodity-dependent economies: - For some low-income countries and emerging market economies, illustrative trade model simulations point to long-term output losses exceeding 2 per cent. - At the global level, economic losses appear relatively modest due to offsetting impacts across net commodity-producing and net commodity-consuming countries; however, this chapter quantifies only the restriction of commodity trade between blocs and does not capture wider disruptions to goods, services, finance, technology, and know-how. - Higher volatility and uncertainty would complicate policymaking and add to costs, a channel not captured by the simulations. - Distributional impacts within countries could be strong even without large aggregate output effects. - Fragmentation in agricultural commodity markets could raise food insecurity in low-income countries, with social and humanitarian costs not included in the model simulations. - Fragmentation and the clean energy transition: - Demand for critical minerals is projected to rise severalfold in a net-zero-carbon-emissions scenario. - Minerals are highly concentrated geographically, with low demand and supply elasticities; trade disruptions could add upward pressure on mineral prices in blocs where demand exceeds supply. - Refining capacity cannot be scaled up quickly, so mineral-rich blocs cannot fully reap benefits from oversupply. - In the illustrative simulation, fragmentation results in up to 30 per cent lower-than-needed investment in renewables and electric vehicles (EVs) at the global level by 2030. ### What makes commodities vulnerable in the event of fragmentation? - Overview: - Several structural features of commodity markets raise the economic costs of disrupting trade despite commodities’ homogeneity and fungibility. - Production concentration: - The first production stage of commodities depends on natural endowments and can be heavily concentrated geographically. - The three largest-producing countries account for about 65 percent of the global output of agriculture, about 50 percent of that of energy, and about 70 percent of that of mineral commodities, on average. - Minerals are concentrated both at mining and processing stages; relocating mining production is often impossible in the short and medium term. - Elasticities of supply and demand: - Price elasticity of supply is relatively low for commodities in the short term. - Scaling up production requires large investments, environmental permitting, and community consultations that can delay supply responses (example: it takes on average 16 years from exploration to the opening of copper mines). - Setting up processing capacity faces challenges including regulations, access to know-how, technology, skilled labor, infrastructure requirements, and labor costs. - On the demand side, many commodities are inputs for key technologies and household consumption; they are often hard to substitute and demand responds little to swings in prices (low price elasticity of demand, particularly in the short term). - Importance of trade: - With production highly concentrated and demand broadly spread, commodities are heavily traded. - On average across agricultural and energy commodities, about 30 percent of output is dedicated to trade and about 45 percent for minerals. - Imports satisfy a large part of commodity demand, but many countries depend on a handful of suppliers: - Roughly half of the world’s countries rely on three or fewer exporting countries for their imports of minerals, and a quarter on only one. - Import dependence in agricultural commodities can lead to food insecurity in case of trade disruptions: - The average low-income country imports more than 80 percent of the wheat it consumes. - Low storage capacity in these countries makes consumption smoothing difficult, exposing populations to large swings in prices or food shortages. *Source: Introduction, Chapter 3, "Fragmentation and Commodity Markets: Vulnerabilities and Risks," World Economic Outlook, October 2023.* ### 3. Upstreamness in Value Chains ### 3. Upstreamness in Value Chains ### Commodity trade and geopolitics - Bilateral commodity trade flows are negatively associated with distance in military alliances. - A one-standard-deviation increase in the distance of military alliances (approximately the distance between India and Morocco in 2018) is associated with: - about a 15 percent decrease in trade in energy commodities; - more than a 35 percent decline in minerals trade. - Distance of military alliances is standardized so its standard deviation is 1 in each year. ### Evidence of fragmentation - The number of new interventions in commodity trade has risen every year since 2018. - In 2022: - there were more than six times more new restrictions affecting trade in commodities than the 2016–19 average; - trade-restricting measures on overall trade increased 3.5 times relative to the 2016–19 average. - Price dispersion across major commodity markets increased in 2022, notably for some minerals (such as lithium) and energy commodities. - Example: Russian coal traded at a price almost three times lower than Australian coal in September 2022. - Foreign direct investment and cross-border mergers and acquisitions were declining in the energy and mineral sectors even before the war in Ukraine. - Shifts in the origin and destination of commodity FDI and cross-border mergers and acquisitions have been observed: US and EU investors increasingly target projects in advanced economies, while China and Russia have increased investments in Africa. ### Modeling fragmentation: two-bloc simulation - Main illustrative scenario: two blocs constructed based on the 2022 UN vote on Russia’s war in Ukraine: - the bloc comprising countries that voted for Russia to withdraw from Ukraine is labeled the “US-Europe+ bloc”; - the remaining countries are in the “China-Russia+ bloc.” - The exercise assumes no trade in a particular commodity between blocs while intrabloc trade is unaffected; initial calibration uses observed 2019 trade flows. - Price effects from bloc-level trade bans depend on: 1. bloc-level supply-and-demand imbalances prior to fragmentation (the extent a bloc relies on imports at the integrated world price); 2. price elasticities of demand and supply. - Commodities with inelastic demand and supply and with high imbalances across blocs are most vulnerable to large price changes. ### Key simulation findings - Minerals (mined) critical for the green transition—cobalt, lithium, copper, nickel—would see substantial price rises in the China-Russia+ bloc because production of these minerals is concentrated in countries in the US-Europe+ bloc while they are largely used as inputs in the China-Russia+ bloc. - Refined minerals could experience similar large price increases in the US-Europe+ bloc because processing is concentrated in China, Russia, and South Africa. - Energy and most agricultural commodities show more subdued potential price changes in the main simulation due to less geographic concentration and more balanced supply and demand across blocs. - Important agricultural outliers: palm oil and soybean - more than 80 percent of production would occur in the US-Europe+ bloc, whereas most consumption would take place in the China-Russia+ bloc. - Alternative bloc compositions can materially change vulnerability patterns; in one alternative, the US-Europe+ bloc could face large price increases for some minerals and become more vulnerable to trade restrictions on some agricultural commodities and crude oil. ### Volatility amplification channels - Fragmentation raises commodity price volatility via at least two channels: 1. Smaller market sizes: bloc-level prices become more responsive to country-level shocks. - In the partial equilibrium model, price response is proportional to the supply shock’s size relative to the overall market. - Illustrative example: a three-standard-deviation shock to the US wheat harvest doubles the impact on wheat prices when trade is fragmented into two blocs compared with an integrated market. - The United States accounts for about 7 percent of global and 15 percent of US-Europe+ bloc wheat production. - A three-standard-deviation US harvest shock corresponds to about 60 percent of US wheat production, or 4 percent of global output, with wheat prices held constant. - The exercise uses a price elasticity of supply of 0.2 and a price elasticity of demand of –0.85. 2. Countries switching blocs: a major exporting country switching allegiances can create a large supply gap and trigger substantial price changes. - Example: South Africa produces one-third of the world’s manganese; if South Africa switched to the US-Europe+ bloc, the price of manganese in the China-Russia+ bloc could rise more than 800 percent. ### Macroeconomic implications - Fragmented commodity markets would lead to higher price volatility, challenging public finances and fiscal and monetary frameworks and potentially increasing procyclicality of fiscal and monetary policies and hurting economic stability. - Smaller markets and geopolitical switching amplify price sensitivity to supply shocks, reducing the world’s ability to cope with climate-driven increases in agricultural output variability. *Source: IMF staff calculations and analysis in Chapter 3, “Fragmentation and Commodity Markets: Vulnerabilities and Risks,” World Economic Outlook, October 2023.* ### Annex Figure 3.5.2 zooms into the results in Figure 3.7 by showing ### Annex Figure 3.5.2 zooms into the results in Figure 3.7 by showing ### Models and scope - Partial equilibrium model: - Computes changes in producer and consumer surplus due to fragmentation in individual commodity markets. - Uses the change in total surplus as an indicator of economic impact. - Does not account for sectoral spillover effects or simultaneous disruptions across many commodities. - Static multicountry, multisector trade model (general equilibrium): - Accounts for all input-output linkages across sectors. - Simulates long-term GDP losses from fragmenting all commodity trade and examines the role of neutral blocs. - Multiregion dynamic stochastic general equilibrium model: - Includes energy and critical minerals. - Examines dynamic effects on GDP and inflation. - Scope exclusions: - None of the approaches consider the impact of fragmentation on productivity and innovation. - The role of the financial sector is outside the scope of the chapter. ### Evidence from the partial equilibrium approach — key findings - Fragmentation of trade in individual commodities generally reduces bloc-level total surplus; "the global economy is worse off" from such fragmentation. - Bloc-level changes in total surplus are generally small, with notable exceptions: - Fragmentation of copper at the mining stage could reduce surplus by as much as 2.5 to 5 percent of gross national expenditure in Chile and Peru. - Fragmentation of palm oil or copper at the mining stage could lead to surplus losses in the China-Russia+ bloc of more than 1 percent of gross national expenditure. - Trade fragmentation of iron ore or soybeans could lead to surplus losses of more than 0.5 percent of gross national expenditure in the China-Russia+ bloc. - Heterogeneity within blocs: - Some countries (net-exporters in a net-importing bloc; net-importers in a net-exporting bloc) would experience surplus increases; others, declines. - Most country-level changes are small as a share of gross national expenditure but can be sizable for a few commodity importers and exporters. - Commodity characteristics and surplus impact: - Energy commodities are not particularly price-vulnerable under the baseline bloc configuration, but their widespread consumption/production means associated declines in surplus could be significant. - Minerals can experience strong price changes, but the surplus impact is more subdued given currently limited relevance in many countries’ production and consumption. - Bloc asymmetry: - Surplus declines would generally be larger in the hypothetical China-Russia+ bloc because the most vulnerable commodities are more broadly consumed there. ### Evidence from the trade (general equilibrium) model — key findings - Long-term GDP effects from disrupting all commodity trade show broad differences across countries; some countries could experience sizable losses. - Low-income countries could suffer deeper losses on average estimated at 1.2 percent of GDP, given high dependence on agricultural trade; for some of these countries losses could amount to more than 2 percent of GDP. - The China-Russia+ bloc is more affected by fragmentation, yet global GDP loss is roughly 0.3 percent because of offsetting effects across countries. - Partial restrictions scenario: - If countries that abstained from the UN vote on Ukraine are assumed to trade commodities freely, long-term changes in global GDP would be negligible, with meaningful losses only in Russia. - Comparative magnitudes: - Global GDP losses from restricting commodity flows between blocs constitute about 15 percent of the loss from restricting all trade. - Commodities represent only 10 percent of total trade. ### Evidence from the dynamic macroeconomic model — key findings - Model coverage: - Augmented IMF Global Macroeconomic Model for the Energy Transition includes crude oil, coal, natural gas, copper, nickel, cobalt, and lithium — capturing about 70 percent of the value of global commodity trade. - Fragmentation modeled as a ban on trading these commodities between two hypothetical blocs comprising six regions. - Transmission channels of fragmentation: - Expenditure switching and trade diversion. - Temporary supply–demand imbalances within blocs until prices adjust. - Rigidities affecting the speed of adjustment of output, use, and trade. - Commodity-specific dynamics: - Oil: countries can more easily switch to intra-bloc trading partners, limiting GDP impact. - Natural gas: rigidities (pipelines, infrastructure) constrain trade diversion, producing more pronounced GDP effects and inflation increases in both blocs. - Minerals: geographic concentration of mining and rigidities in scaling up refining capacity matter: - Roughly 80 percent of the supply of the four modeled minerals is mined in the US-Europe+ bloc. - Minerals are used intensively in the China-Russia+ bloc’s manufacturing and construction sectors. - The US-Europe+ bloc would take several years to scale up refining capacity and would not immediately benefit from mining oversupply; that bloc would also experience a GDP decline from mineral market fragmentation. - Aggregate impacts: - Trade fragmentation of all seven modeled commodities would be associated with a global GDP loss of about 0.3 percent. - Losses are larger in the China-Russia+ bloc. - Within the US-Europe+ bloc, Europe could experience a sizable impact on inflation (as much as 100 basis points or more) and GDP, driven mainly by fragmentation of oil and gas markets. - Caveats: - The dynamic model provides regional granularity but masks heterogeneity across countries. - Commodity coverage and modeled rigidities affect quantitative outcomes. ### Figures and notable numerical markers - Figure 3.6: Wheat price increase in the US-Europe+ bloc from a three-standard-deviation negative shock to US wheat production — bars compare price increases in a free-trade world vs a fragmented world (percent scale 0 to 10 shown). - Figure 3.7: Largest price increases induced by a single exporter switching blocs — price effects in the figure are capped at 800 percent for readability; energy refers to coal, natural gas, and crude oil. - Figure 3.8 panel highlights: - Surplus changes by commodity group measured in percent of bloc-level GNE. - Specific country-level surplus changes for top net exporters (percent of GNE) show large swings (examples labeled: PER, CHL, MNG, KAZ, SAU, CAN, RUS, IRQ, IDN, MYS, MOZ, AGO). - Figure 3.9: - Average deviation of GDP over first three years (percent deviation from baseline) and deviation of inflation in year one (percent deviation) shown by region/bloc and commodity group. - Exact numeric results preserved in the chapter text: - Copper fragmentation: 2.5 to 5 percent of gross national expenditure reduction in Chile and Peru. - Low-income countries average GDP loss: 1.2 percent. - For some low-income countries losses: more than 2 percent of GDP. - Global GDP loss from fragmenting all seven commodities: about 0.3 percent. - Global GDP losses from restricting commodity flows between blocs: about 15 percent of the loss from restricting all trade. - Commodities share of total trade: 10 percent. - Modeled commodities capture about 70 percent of the value of global commodity trade. - Roughly 80 percent of the supply of the four minerals is mined in the US-Europe+ bloc. - Europe inflation impact: as much as 100 basis points or more. _International Monetary Fund | World Economic Outlook: Navigating Global Divergences (October 2023), Chapter 3 excerpts and figures_ ### CHAPTER 3 FRagMENTaTION aND COMMODITy MaRKETs: vULNERabILITIEs aND RIsKs ### CHAPTER 3 FRagMENTaTION aND COMMODITy MaRKetS: vULNERabILITIEs aND RIsKs ### Implications for the Clean Energy Transition - Minerals cited as key inputs: copper, nickel, cobalt, and lithium. - Under the scenario of net zero emissions by 2050 (IEA 2023) projected demand changes: - copper to grow by a factor of 1.5, - nickel and cobalt to double, - lithium to increase six times by 2030. - In the integrated-world baseline, world prices of the four minerals considered could rise by about 90 percent, on average, along the net-zero-emissions-scenario path to 2030. - In a counterfactual scenario of complete mineral market fragmentation across two hypothetical blocs: - the China-Russia+ bloc would face an additional price increase of 300 percent, on average, for these minerals. - about 70 percent fewer new EVs in the China-Russia+ bloc in a fragmented world than in an integrated world (in the net zero scenario). - fragmentation generates only small gains in the US-Europe+ bloc by 2030: slightly higher number of EVs produced, but no gains in renewable-energy capacity. - On balance, global net investment in renewable technology and production of EVs would be roughly 20 percent lower compared with the baseline because of mineral market fragmentation. - The shortfall would increase to about 30 percent if one uses greenhouse gas emissions to weigh the regional response of investment in renewables and EVs. - Fiscal implication cited for fragmentation: China’s fiscal cost of supporting investment in reverting to the net-zero-emissions path would be 1½–2 percent of GDP. - Robustness note: Doubling the elasticity of substitution of the four minerals would reduce the decline in investment in renewable technology from 20 percent to 12 percent. ### Modeling Approach and Key Assumptions - Analysis uses the augmented Global Macroeconomic Model for the Energy Transition focusing on minerals as key inputs for green technologies. - Projections of demand for critical minerals follow IEA (2023) net-zero-emissions scenario assumptions that policy incentives stimulate investment in renewable-energy technologies and EVs. - The fragmentation scenario assumes complete inability of the China-Russia+ bloc to import copper, nickel, lithium, and cobalt from producers such as Chile, the Democratic Republic of the Congo, and Indonesia. - Model limitations noted: - only a subset of commodities included due to data and modeling constraints; - model does not capture the cost from a more volatile inflationary regime; - uses prepandemic data on mineral usage and trade flows, whereas projected mineral demand is expected to increase sizably throughout the green transition. ### Macro and Distributional Findings on Commodity Fragmentation - Commodity markets vulnerable because of: - highly concentrated and difficult-to-relocate production, - hard-to-substitute consumption, - critical role as inputs for manufacturing and key technologies. - Empirical and market signals: - measures restricting commodity trade surged in 2022; - price differentials across geographic markets have widened for selected commodities; - FDI flows in commodity sectors are in decline. - Fragmentation consequences: - could cause large changes in commodity prices depending on supply-and-demand imbalances and elasticities; - critical minerals and some highly traded agricultural goods are highly vulnerable; - a fragmented world would be more volatile with intensified commodity price volatility, complicating monetary policy. - Distributional impacts: - global aggregate output losses modest due to offsetting effects across consumer and producer countries; - low-income countries would experience significantly deeper long-term output declines on average; - fragmentation of agricultural commodities raises important food security concerns for many low-income countries. - Bloc-level effects: - illustrative simulations suggest a hypothetical China-Russia+ bloc could be more affected economically than a US-Europe+ bloc; - economic impact would be reduced if commodity trade were only partially restricted or there were a nonaligned bloc. ### Policy Implications and Recommendations - Preventing fragmentation is the first-best response; multilateral cooperation can provide guardrails. - First-best multilateral solutions include enhanced rules within the World Trade Organization on quantitative restrictions, export tariffs, discriminatory subsidies, local-content requirements, and other commodity-related trade measures. - Emphasis on food commodities due to food insecurity risks in low-income countries. - Second-best options: - establish a minimum “green corridor” agreement to preserve integrated markets for minerals critical for decarbonization; - consider similar “food corridor” agreements for essential agricultural commodity markets to ensure equal access to food and reduce humanitarian disaster risk. - Data and transparency: - international community could set up a platform or organization to improve sharing and standardization of international data on mineral production, consumption, and inventories, analogous to the Joint Organisations Data Initiative for fossil fuels and the Agricultural Market Information System for food commodities. - National and multilateral resilience measures: - foster investment in domestic mining, exploration, and recycling of critical minerals; - diversify supply sources; - invest in infrastructure to reduce trade costs and improve market integration; - support innovation to speed technological progress and develop substitutes; - build strategic reserves where efficient; - strengthen macroeconomic, structural, and fiscal policy frameworks; build fiscal and financial buffers; develop preparedness plans for sudden commodity supply disruptions; - reinforce social safety nets to protect vulnerable households from higher commodity prices and volatility; - consider measures to prevent disruptions in commodity-derivatives markets and financial instability (April 2023 Global Financial Stability Report referenced). - Role of industrial and “friend-shoring” policies: - industrial policies are third-best and must be designed carefully to ensure equal treatment of firms, minimize distortions, and mitigate fiscal risks and harmful political economy outcomes; - “Friend-shoring” policies can be market distorting and costly and should be used only under particular conditions (clear market failures or narrowly defined national security concerns); - developing a framework for international consultations on friend-shoring practices could help identify and mitigate negative cross-border spillovers. ### Evidence from Oil Trade Flows Since Russia’s Invasion of Ukraine - Policy actions: European Union, United Kingdom, and United States banned most imports of crude oil and petroleum products from Russia; Western restrictions on dollar payments reported as barriers; G7 members prohibited transportation and insurance services to tankers carrying Russian commodities above certain price thresholds. - Automatic Identification System (AIS) tanker data reveal substantial shifts in Russian tanker traffic patterns between April–June 2019 and April–June 2023: - tanker shipments from Russian ports to Japan, the United States, and the European Union declined over that period; - the European Union receives more shipments from countries such as Norway, the United Arab Emirates, and the United States, extending the length of tanker routes by 20 percent. - Russian oil shipments rose to countries such as China, India, Türkiye, and the United Arab Emirates. - India’s crude oil imports from Russia were about 35 to 40 percent during April–June 2023, up from less than 5 percent before the war in Ukraine. - India increased its oil exports (mostly petroleum products) to the European Union substantially. - Freight and efficiency implications: - route changes have resulted in economic inefficiencies; - UNCTAD (2022) documents a rise in tanker freight rates following the Russian invasion of Ukraine. *Source: CHAPTER 3 FRagMENTaTION aND COMMODITy MaRKetS: vULNERabILITIEs aND RIsKs (text - CHAPTER 3 FRagMENTaTION aND COMMODITy MaRKetS: vULNERabILITIEs aND RIsKs, October 2023).* ### Box 3.1. Commodity Trade Tensions: Evidence from Tanker Traffic Data ### Box 3.1. Commodity Trade Tensions: Evidence from Tanker Traffic Data ### Historical episodes of commodity-market fragmentation - World War II: trade among the three major blocs—German-controlled Europe, Japanese-controlled Asia, and the rest of the world (the Allies)—stopped. Some blocs faced commodity shortages, for example crude oil shortages in Germany and Japan and natural rubber shortages in the Allies. - Cold War: trade between the US-led and the Soviet Union–led blocs was limited as a result of the Soviet strategy of self-sufficiency. East-West trade was sharply reduced by the Cold War, from three-quarters of trade by the East in 1938 to 14 percent in 1953. - 1973 Arab-Israeli war: Arab members of OPEC initiated an export embargo against the United States and other countries and announced a 25 percent cut in output; oil prices more than quadrupled between September 1973 and January 1974. - Apartheid-era South Africa: governments implemented wide-ranging bans on exports to South Africa, particularly crude oil, but sanctions were blunted by traders willing to risk violating sanctions to supply oil at high prices. - 1980 Soviet grain imports: the Soviet Union planned to import 35 million metric tons of grain—25 million of that from the United States—but ended up importing only 8 million tons, committed to under a previous treaty. ### Mechanisms that limit the duration and effectiveness of fragmentation - Fungibility and arbitrage: fungible commodities and arbitrage opportunities enable diversion of supplies and re-routing of trade, limiting the persistence of fragmentation absent near-absolute trade barriers. - Trader behavior: traders have often skirted government policies or violated sanctions to facilitate trade and supply embargoed markets at high prices. - Production responses: non-embargoed producers have increased output in response to embargo-driven price spikes, further mitigating disruptions. - Market substitution: importers have replaced sources (for example, Soviet wheat imports falling from the United States were largely replaced by Argentina). ### Policy responses and adaptation during disruptions - Industrial adaptation: Germany developed a coal-based synthetic fuel industry; by 1940 that synthetic fuel accounted for nearly half of Germany’s oil supply and 95 percent of its aviation fuel. - Stockpiling and synthetic alternatives: the US government stockpiled natural rubber and worked with industry to develop synthetic rubber. - Efficiency and strategic inventories: importers mandated efficiency improvements and created strategic oil inventories in response to the 1973 embargo. - Export controls and embargoes: political considerations have led to grain export embargoes (for example, after the Soviet invasion of Afghanistan) though such embargoes can be ineffective due to global markets. ### Key statistics and exact figures from the box - Tungsten price: between 1941 and 1943, the price of tungsten rose 13-fold. - Synthetic fuel in Germany by 1940: nearly half of Germany’s oil supply and 95 percent of its aviation fuel came from coal-based synthetic fuel. - East-West trade shift: from three-quarters of trade by the East in 1938 to 14 percent in 1953. - OPEC 1973 action: announced a 25 percent cut in output; oil prices more than quadrupled between September 1973 and January 1974. - Soviet grain plans and outcome (1980): planned imports of 35 million metric tons of grain—25 million of that from the United States; actual imports of 8 million tons (committed under a previous treaty). *Author of the box: Peter Nagle. Source: Box 3.1, text provided from the World Economic Outlook chapter.* ### 2023. The figures for 2023–24 are shown with the ### 2023. The figures for 2023–24 are shown with the ### Assumptions - Real effective exchange rates for the advanced economies are assumed to remain constant at their average levels measured during July 25, 2023–August 22, 2023. - For 2023 and 2024 these assumptions imply average US dollar–special drawing right conversion rates of 1.340 and 1.340, US dollar–euro conversion rates of 1.088 and 1.094, and yen–US dollar conversion rates of 139.1 and 143.1, respectively. - It is assumed that the price of oil will average $80.49 a barrel in 2023 and $79.92 a barrel in 2024. - National authorities’ established policies are assumed to be maintained. - With regard to interest rates: - Three-month government bond yield averages: - United States: 5.3 percent in 2023 and 5.4 percent in 2024. - Euro area: 3.0 percent in 2023 and 3.2 percent in 2024. - Japan: –0.2 percent in 2023 and –0.1 percent in 2024. - 10-year government bond yield averages: - United States: 3.8 percent in 2023 and 4.0 percent in 2024. - Euro area: 2.4 percent in 2023 and 2.6 percent in 2024. - Japan: 0.5 percent in 2023 and 0.6 percent in 2024. - Box A1 (referenced) describes more specific policy assumptions underlying the projections for selected economies. ### What’s New - Ecuador’s fiscal sector projections, which were previously omitted due to ongoing program discussions, are now included. - Eritrea’s data and projections for 2020–28 are excluded from the database due to constraints in data reporting. - Sri Lanka’s projections for 2023–28 are excluded from publication owing to ongoing discussions on sovereign debt restructuring. - Ukraine’s projections for 2024–28, in line with the program’s baseline scenario, are now included. - For West Bank and Gaza, certain projections for 2022–28 are excluded from publication pending methodological adjustments to statistical series. ### Data and Conventions — key points - Data and projections for 196 economies form the statistical basis of the WEO database. - Data are maintained jointly by the IMF’s Research Department and regional departments, with regular updates to country projections based on consistent global assumptions. - Most countries’ macroeconomic data as presented in the WEO conform broadly to the 2008 version of the System of National Accounts (SNA 2008). - IMF sector statistical standards aligned with SNA 2008 include: - Balance of Payments and International Investment Position Manual (BPM6). - Monetary and Financial Statistics Manual and Compilation Guide. - Government Finance Statistics Manual 2014 (GFSM 2014). - Conversion to updated standards depends on provision of revised country data; WEO estimates are only partly adapted to these manuals. - Fiscal gross and net debt data are drawn from official data sources and IMF staff estimates; deviations from GFSM 2014 definitions can occur due to data limitations or country circumstances. - Composite data for country groups are either sums or weighted averages of individual country data: - Arithmetically weighted averages are used for emerging market and developing economies group—except inflation and money growth, for which geometric averages are used. - Country group composites for exchange rates, interest rates, and growth rates of monetary aggregates are weighted by GDP converted to US dollars at market exchange rates (averaged over the preceding three years) as a share of group GDP. - Composites for other domestic economy data (growth rates or ratios) are weighted by GDP valued at purchasing power parity as a share of total world or group GDP. - For aggregation of world and advanced economies (and subgroups) inflation, annual rates are simple percentage changes from the previous years; for emerging market and developing economies (and subgroups) inflation, annual rates are based on logarithmic differences. - Composites for real GDP per capita in purchasing-power-parity terms are sums of individual country data after conversion to international dollars in the years indicated. - Unless noted otherwise, composites for all sectors for the euro area are corrected for reporting discrepancies in transactions within the area. - Unadjusted annual GDP data are used for the euro area and the majority of individual countries, except Cyprus, Ireland, Portugal, and Spain, which report calendar-adjusted data. - For data prior to 1999, data aggregations apply 1995 European currency unit exchange rates. - Composites for fiscal data are sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated. - Composite unemployment rates and employment growth are weighted by labor force as a share of group labor force. - Composites relating to external sector statistics are sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated for balance of payments data and at end-of-year market exchange rates for debt denominated in currencies other than US dollars. - Composites of changes in foreign trade volumes and prices are arithmetic averages of percent changes for individual countries weighted by the US dollar value of exports or imports as a share of total world or group exports or imports (in the preceding year). - Group composites are computed if 90 percent or more of the share of group weights is represented. - Data refer to calendar years, except for a few countries that use fiscal years; exceptional reporting periods are listed in Table F (referenced). - For some countries, figures for 2022 and earlier are based on estimates rather than actual outturns; latest actual outturns are listed in Table G (referenced). ### introduction in 2019 of the Real Time Gross Settlement ### introduction in 2019 of the Real Time Gross Settlement ### Overview of Country Classification - The WEO divides the world into two major groups: advanced economies and emerging market and developing economies. - The classification is not based on strict criteria and has evolved over time; the objective is to facilitate analysis by organizing data. - Some economies remain outside the WEO country classification (examples given: Cuba and the Democratic People’s Republic of Korea). ### Advanced Economies: composition and subgrouping - Table B lists the 41 advanced economies. - The seven largest by GDP based on market exchange rates form the Group of Seven: the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada. - The euro area members are distinguished as a subgroup; composite euro area data cover the current members for all years. - Table C lists European Union members (not all classified as advanced economies). ### Emerging Market and Developing Economies: composition and regional breakdown - The group of emerging market and developing economies comprises 155 economies (all those not classified as advanced economies). - Regional breakdowns: - Emerging and developing Asia - Emerging and developing Europe (also “central and eastern Europe”) - Latin America and the Caribbean - Middle East and Central Asia (subgroups: Caucasus and Central Asia; and Middle East, North Africa, Afghanistan, and Pakistan) - Sub-Saharan Africa ### Analytical classification criteria within emerging market and developing economies - Source of export earnings: distinguishes fuel (SITC 3) and nonfuel, with focus on nonfuel primary products (SITCs 0, 1, 2, 4, and 68). An economy is placed in a group if its main source of export earnings exceeded 50 percent of total exports on average between 2018 and 2022. - Financial and income criteria: classify economies as net creditor or net debtor, heavily indebted poor countries (HIPCs), low-income developing countries (LIDCs), and emerging market and middle-income economies (EMMIEs). - Net debtor definition: latest net international investment position < zero or cumulative current account balance from 1972 (or earliest available) to 2022 negative. Net debtors are further differentiated by experience with debt servicing. - During 2018–22, 39 economies incurred external payments arrears or entered into debt-rescheduling—this group is labeled “economies with arrears and/or rescheduling during 2018–22.” - HIPC group: countries considered by IMF and World Bank for the HIPC Initiative to reduce external debt burdens to a “sustainable” level in a reasonably short period; many have benefited and graduated. - LIDCs: countries with per capita income below a threshold (set at $2,700 in 2016 by the World Bank’s Atlas method), with structural features of limited development and weak external financial linkages. - EMMIEs: emerging market and developing economies not classified as LIDCs. ### Key statistical and aggregate highlights (selected figures preserved exactly) - Table A: Classification shares in aggregate measures, 2022 (percent of world or group): - Advanced Economies: Number of economies 41; GDP share 100.0 (for group) and 41.7 (world); Exports of goods and services share 100.0 (group) and 60.5 (world); Population share 100.0 (group) and 13.9 (world). - Emerging Market and Developing Economies: Number of economies 155; GDP share 100.0 (group) and 58.3 (world); Exports share 100.0 (group) and 39.5 (world); Population share 100.0 (group) and 86.1 (world). - Regional GDP shares (Emerging and Developing Asia: 30 economies, GDP 56.2 percent of group, 32.8 percent of world). - Analytical groups by source of export earnings: Fuel 26 economies, 10.3 percent of group GDP and 6.0 percent of world GDP; Nonfuel 127 economies, 89.7 percent of group GDP and 52.3 percent of world GDP; Of which, Primary Products 33 economies, 4.4 percent of group GDP and 2.6 percent of world GDP. - By external financing source: Net Debtor Economies 120 economies, 51.9 percent of group GDP and 30.3 percent of world GDP; Of which, economies with arrears and/or rescheduling during 2018–22: 39 economies, 5.3 percent of group GDP and 3.1 percent of world GDP. - Table A1. Summary of World Output (real GDP, annual percent change; selected rows): - World: Average 2005–14 = 3.9; 2022 = 3.5; 2023 = 3.0; 2024 = 2.9; 2028 = 3.1. - Advanced Economies: 2005–14 = 1.5; 2022 = 2.6; 2023 = 1.5; 2024 = 1.4; 2028 = 1.7. - Emerging Market and Developing Economies: 2005–14 = 6.0; 2022 = 4.1; 2023 = 4.0; 2024 = 4.0; 2028 = 3.9. - Regional example: Emerging and Developing Asia: 2005–14 = 8.3; 2022 = 4.5; 2023 = 5.2; 2024 = 4.8; 2028 = 4.5. - Table A5. Summary of Inflation (percent; selected rows): - Advanced Economies, GDP deflators: 2005–14 = 1.5; 2022 = 5.4; 2023 = 4.0; 2024 = 2.8; 2028 = 1.9. - Emerging Market and Developing Economies, consumer prices: 2005–14 = 6.2; 2022 = 9.8; 2023 = 8.5; 2024 = 7.8; 2028 = 5.0. - Analytical group: Economies with arrears and/or rescheduling during 2018–22: inflation average = 10.2; 2022 = 17.6; 2023 = 21.9; 2024 = 26.1; 2028 = 23.1. - Table A9. World Trade volumes and prices (selected): - World trade (goods and services) volume: 2005–14 average = 4.7 percent; 2022 = 5.1 percent; 2023 = 0.9 percent; 2024 = 3.5 percent. - Average oil price (percent change) series: 2005–14 average = 9.8 percent; 2022 = 65.8 percent; 2023 = 39.2 percent; 2024 = –16.5 percent. - Table A10. Summary of Current Account Balances (billions of US dollars; selected rows): - Advanced Economies total: 2015 = 269.2; 2019 = 388.3; 2021 = 502.7; 2022 = –234.8; 2023 = 111.3; 2024 = 192.9; 2028 = 286.8. - Emerging Market and Developing Economies total: 2015 = –94.6; 2019 = –10.4; 2021 = 363.7; 2022 = 645.7; 2023 = 195.8; 2024 = 171.1; 2028 = –196.8. - Table A13. Summary of Financial Account Balances (billions of US dollars; selected rows): - Advanced Economies financial account balance: 2015 = 273.0; 2019 = 136.6; 2021 = 535.1; 2022 = 6.2; 2023 = 71.7; 2024 = 246.8. - Emerging Market and Developing Economies financial account balance: 2015 = –314.1; 2019 = –163.9; 2021 = 243.0; 2022 = 489.0; 2023 = 180.4; 2024 = 180.1. ### Fiscal and monetary policy assumptions (summary of approach and selected country assumptions) - Fiscal policy assumptions: - Short-term fiscal assumptions: normally based on officially announced budgets, adjusted for differences between national authorities and IMF staff macroeconomic assumptions and projected fiscal outturns. When no budget is announced, projections incorporate policy measures judged likely to be implemented. Medium-term projections reflect judgment about the most likely policy path. Where insufficient information exists, an unchanged structural primary balance is assumed unless indicated otherwise. - Selected country-specific notes (examples preserved exactly as in source): - Argentina: Fiscal projections are based on available information regarding budget outturn, budget plans, and IMF-supported program targets for the federal government; on fiscal measures announced by the authorities; and on IMF staff macroeconomic projections. - Australia: Fiscal projections are based on data from the Australian Bureau of Statistics, the fiscal year (FY)2023/24 budgets published by the Commonwealth government and the respective state/territory governments, and the IMF staff’s estimates and projections. - Russia: The fiscal rule was suspended last year by the government in response to the sanctions imposed after the invasion of Ukraine, allowing for windfall oil and gas revenues above benchmark to be used to finance a larger deficit in 2022. Savings accumulated in the National Welfare Fund can also now be used this way. A new fiscal rule will become fully effective in 2025. The new rule allows for higher oil and gas revenues to be spent, but it simultaneously targets a smaller primary structural deficit. - Monetary policy assumptions: - Based on established country policy frameworks; generally a nonaccommodative stance over the cycle (rates rise when inflation is projected above target/range and fall when below and slack exists). - Selected country-specific notes (examples preserved exactly): - Canada: Projections reflect the gradual unwinding monetary policy tightening by the Bank of Canada, as inflation slowly goes back to its mid-range target of 2 percent by early 2025. - China: The overall monetary policy stance was moderately accommodative in 2022 and is expected to remain broadly accommodative in 2023. - Russia: Monetary policy projections assume that the Central Bank of the Russian Federation is adopting a tight monetary policy stance. - United States: The IMF staff expects the Federal Open Market Committee to continue to adjust the federal funds target rate in line with the broader macroeconomic outlook. ### Medium-term baseline and projections (selected summary figures preserved exactly) - Table A15. Summary of World Medium-Term Baseline Scenario (annual percent change / percent of GDP where indicated): - World Real GDP: 2005–14 average = 3.9; 2022 = 3.5; 2023 = 3.0; 2024 = 2.9; 2021–24 average = 3.9; 2025–28 = 3.2. - Advanced Economies real GDP: 2005–14 = 1.5; 2022 = 2.6; 2023 = 1.5; 2024 = 1.4; 2021–24 = 2.8; 2025–28 = 1.8. - Emerging Market and Developing Economies real GDP: 2005–14 = 6.0; 2022 = 4.1; 2023 = 4.0; 2024 = 4.0; 2021–24 = 4.7; 2025–28 = 4.0. - World trade volume (goods and services): 2005–14 = 4.7; 2022 = 5.1; 2023 = 0.9; 2024 = 3.5; 2021–24 = 5.0; 2025–28 = 3.5. - Consumer prices: Advanced Economies 2005–14 = 1.9; 2022 = 7.3; 2023 = 4.6; 2024 = 3.0; Emerging Market and Developing Economies 2005–14 = 6.2; 2022 = 9.8; 2023 = 8.5; 2024 = 7.8. - World real long-term interest rate (GDP-weighted 10-year): 2005–14 average = 1.2; 2022 = –5.0; 2023 = –1.4; 2024 = 0.6; 2025–28 = –2.0. *Source: WORLD ECONOMIC OUTLOOK: NAVIGATING GLOBAL DIVERGENCES, Statistical Appendix (October 2023).* ### Box 1.1 ### Box 1.1 ### Executive Board assessment (September 26, 2023) - Executive Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities. - Directors welcomed the continued global economic resilience, particularly of some advanced and emerging market economies, but noted divergent growth prospects across regions that challenge returning to pre-pandemic output trends. - For many emerging market and developing economies (EMDEs), the loss of momentum has reduced prospects for income convergence. - Directors recognized that tight monetary policies and the withdrawal of fiscal policy support—necessary to fight inflation and tackle soaring global debt—are headwinds to growth in the short run. - Most Directors agreed that increasing geoeconomic fragmentation is weighing on the recovery and welcomed the Fund’s analysis on the costs of fragmentation; a few Directors emphasized that diversification in supply chains is important to build resilience. - Directors generally agreed that ending Russia’s war against Ukraine remains the single most impactful action to improve the global outlook. ### Risks and financial stability - Directors judged risks to the outlook to be more balanced relative to April 2023, but still tilted to the downside. - While acute stress in the banking system seen in March this year has subsided, Directors noted that financial stability risks remain elevated. - Key vulnerabilities highlighted: - Persistence in global underlying inflation could warrant higher-for-longer policy rates, risking a correction in financial markets and capital flow volatility. - Commodity prices could see more volatility due to climate and geopolitical shocks. - Risk of a further deterioration in China’s property sector. - Risk of further debt distress in EMDEs heavily reliant on external borrowing. - Presence of a weak tail of banks in some major economies. - Directors warned that abrupt tightening of financial conditions could trigger adverse feedback loops testing the resilience of the global financial system. - On the banking and financial sector response: - Directors acknowledged the need for careful monitoring of risks, better risk assessment and strengthened supervision, and closing supervision gaps in the nonbank financial sector. - They called for an assessment of how consistently international standards in banking regulation were implemented during recent financial stresses. - Noting vulnerabilities in the commercial real estate sector of some countries, Directors called for continued vigilance and close monitoring. ### Monetary policy and inflation - Directors noted that global core inflation remains persistent and declining only slowly. - They stressed that monetary policy should maintain a restrictive policy stance, tailored to country circumstances, until inflation declines sustainably to target. - Directors called for clear and transparent communication to avoid a de-anchoring of inflation expectations. - They also indicated that policies aimed at encouraging labor market participation can help ease labor market tightness in many advanced economies, supporting disinflation. ### Fiscal policy and debt - Directors stressed the need to gradually tighten fiscal policies as deficits and debt remain elevated. - They considered that, although the primary responsibility for restoring price stability lies with central banks, tightening the fiscal stance can further ease inflation by reducing aggregate demand and reinforcing the overall credibility of disinflation strategies. - Recommendations for fiscal adjustment: - Mobilize revenues through tax capacity building. - Achieve efficiency gains in spending to help restore fiscal space. - Safeguard targeted measures to protect the most vulnerable. - Directors noted that some countries in debt distress may require preemptive and orderly debt restructuring and underscored the importance of multilateral cooperation in this regard. ### Growth, productivity, and structural policies - Directors expressed concern over dimming medium-term growth prospects. - They emphasized the importance of facilitating investment and of targeted and carefully sequenced supply-side reforms to enhance productivity growth despite constrained policy space and to help dampen inflationary pressures. ### Climate policy and the green transition - Directors called for accelerating decarbonization efforts while balancing climate goals, fiscal sustainability, and political feasibility. - They judged that relying mostly on spending-based measures will be costly and favored a combination of revenue, expenditure, and other financing and structural policies to deliver on climate goals. - Most Directors supported a policy package containing carbon pricing, complemented with measures to: - Address market failures. - Catalyze private finance and green investment. - Mitigate distributional concerns. - Some Directors reiterated that carbon pricing is not an adequate solution in all countries. - Directors acknowledged that the green transition will be challenging, particularly for EMDEs with high debt and sizable investment needs, and that delaying the transition will increase its costs. - They generally agreed that incorporating climate change considerations into debt sustainability analyses could improve policy planning, taking into consideration country-specific characteristics. - On international cooperation: - Directors underscored that internationally coordinated efforts are indispensable to minimize the cost of decarbonization, especially for low-income countries and small developing states. - They highlighted the catalytic role that the Resilience and Sustainability Trust could play in attracting green financing and investments. - Directors stressed that green industrial policies should avoid distortions to trade and investment flows, in line with the rules of the World Trade Organization (WTO). - A few Directors emphasized that measures such as carbon border adjustment mechanisms should also be WTO-compliant to safeguard international trade. - While green and food corridor agreements could help safeguard the energy transition and avert food insecurity, a few Directors underscored the difficulty of implementing these mechanisms. - Directors emphasized that safeguarding the rules-based trading system is important for global prosperity. *Source: Remarks by the Chair at the conclusion of the Executive Board’s discussion of the Fiscal Monitor, Global Financial Stability Report, and World Economic Outlook on September 26, 2023 (World Economic Outlook, October 2023).* --- _Source: https://www.imf.org/-/media/files/publications/weo/2023/october/english/text.pdf_