## WORLD ECONOMIC OUTLOOK UPDATE, JULY 2023 — International Monetary Fund | July 2023

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### Inflation and monetary policy
- Headline world consumer prices: 6.8 percent in 2023 and 5.2 percent in 2024.
- Core (underlying) inflation is projected to decline more gradually and forecasts for inflation in 2024 have been revised upward.
- Major central bank actions and signals:
  - Federal Reserve paused rate hikes at its June meeting but signaled further ones ahead.
  - Reserve Bank of Australia, Bank of Canada, Bank of England, and European Central Bank have continued to raise rates.
  - Bank of Japan has kept interest rates near zero under quantitative and qualitative monetary easing with yield curve control policy.
  - In China, where inflation is well below target, the central bank recently cut policy interest rates.
- Policy rate assumptions:
  - Federal Reserve expected to raise rates to a peak of about 5.6 percent before reducing them in 2024.
  - European Central Bank assumed to raise its policy rate to a peak of 3¾ percent in 2023 and to ease gradually in 2024.
- With near-term inflation expectations falling, real interest rates are likely to stay up even after nominal rates start to fall.

### Forces shaping the outlook
- Global recovery dynamics:
  - The global recovery from the COVID-19 pandemic and Russia’s invasion of Ukraine is slowing amid widening divergences among sectors and regions.
  - WHO announced in May that it no longer considers COVID-19 to be a “global health emergency.”
  - Supply chains have largely recovered; shipping costs and suppliers’ delivery times are back to pre-pandemic levels.
- Persisting headwinds:
  - Inflation remains high and continues to erode household purchasing power.
  - Policy tightening by central banks has raised cost of borrowing, constraining economic activity.
  - Banks in advanced economies have significantly tightened lending standards, curtailing credit supply.
  - Higher interest rates affect public finances, especially in poorer countries with elevated debt costs.
- Sectoral dynamics:
  - Services sector drove resilience in Q1 2023; rotation of consumption back toward services approaching completion in advanced economies.
  - Nonservices sectors including manufacturing have shown weakness; gross fixed capital formation and industrial production have slowed sharply or contracted in major advanced economies.
  - Excess savings built up during the pandemic are declining in advanced economies, especially in the United States.

### Financial sector and credit conditions
- Recent developments:
  - Resolution of the US debt ceiling standoff and strong action to contain turbulence in US and Swiss banking reduced immediate risks of financial sector turmoil.
  - Acute stress in the banking sector has receded after March 2023 banking scare remained contained.
  - Since April 2023 WEO, global financial conditions have eased.
- Ongoing pressures:
  - Tight monetary policy continues to put banks under pressure via higher funding costs and increased credit risk.
  - Bank lending surveys indicate considerable restriction of credit in the first quarter of 2023 and continued tightening expected.
  - Corporate loans and commercial real estate lending have been declining.

### Risks to the outlook
- Balance of risks remains tilted to the downside.
- Downside scenarios include:
  - Inflation could remain high or rise if further shocks occur (e.g., intensification of the war in Ukraine, extreme weather), triggering more restrictive monetary policy.
  - Financial sector turbulence could resume as markets adjust to further policy tightening.
  - China’s recovery could slow due to unresolved real estate problems, with negative cross-border spillovers.
  - Sovereign debt distress could spread to a wider group of economies.
- Upside possibilities:
  - Inflation could fall faster than expected, reducing the need for tight monetary policy.
  - Domestic demand could prove more resilient.
- Additional risk details:
  - Tight labor markets, exchange rate pass-through, and institutional wage-setting could sustain inflation pressures.
  - El Niño could exacerbate droughts and raise commodity prices.
  - The war in Ukraine could intensify; suspension of the Black Sea Grain Initiative is a concern.
  - Share of emerging market and developing economies with sovereign credit spreads above 1,000 basis points remained at 25 percent as of June (compared with only 6.8 percent two years ago).

### Policy priorities and recommendations
- Main priorities:
  - Achieve sustained disinflation while ensuring financial stability.
  - Central banks should remain focused on restoring price stability and strengthening financial supervision and risk monitoring.
- Financial stability measures:
  - Provide liquidity promptly if market strains materialize while mitigating the possibility of moral hazard.
  - Strengthen supervision by implementing Basel III and removing forbearance measures.
  - Monitor oversight gaps in the nonbank financial sector and employ macroprudential policy measures preemptively.
  - Rebuild fiscal space to mobilize real resources if insolvency problems arise; countries at risk can use the global financial safety net, including IMF precautionary financial arrangements.
- Fiscal strategy:
  - Build fiscal buffers, ensuring the composition of fiscal adjustment provides targeted support for the most vulnerable.
  - Fiscal adjustment projected to average 0.5 percent of GDP in 2024 (based on the change in structural fiscal balances) in both advanced economies and emerging market and developing economies.
  - Phase out untargeted fiscal measures, including energy subsidies that blunt price signals.
  - In cases in or at high risk of debt distress, achieving debt sustainability may require timely fiscal consolidation and debt restructuring.
- Supply-side and resilience:
  - Improvements to the supply side would facilitate fiscal consolidation and a smoother decline of inflation toward target levels.
  - Reforms to loosen labor markets (short-term training programs, labor laws increasing work flexibility, facilitating regular immigration flows).
  - Carefully designed industrial policies if market failures are established; avoid domestic-content requirements and barriers to trade.
  - Push on clean energy investment and multilateral cooperation to speed green transition and mitigate climate change.

### Growth projections and regional outlook (selected figures)
- Global and trade:
  - Global growth projected to fall from 3.5 percent in 2022 to 3.0 percent in both 2023 and 2024.
  - Compared with April 2023 WEO, growth upgraded by 0.2 percentage point for 2023, with no change for 2024.
  - Historical (2000–19) annual average was 3.8 percent.
  - World trade growth: 5.2 percent in 2022 to 2.0 percent in 2023, before rising to 3.7 percent in 2024.
  - 2000–19 average was 4.9 percent.
- Oil price assumptions (based on futures markets as of June 1, 2023):
  - Average assumed price of oil in US dollars a barrel is $76.43 in 2023 and $71.68 in 2024.
- Advanced economies:
  - Growth from 2.7 percent in 2022 to 1.5 percent in 2023, and 1.4 percent in 2024.
  - About 93 percent of advanced economies are projected to have lower growth in 2023.
- United States:
  - Growth projected at 1.8 percent in 2023 and 1.0 percent in 2024.
  - Forecast revised upward by 0.2 percentage point for 2023.
- Euro area:
  - 0.9 percent in 2023 and 1.5 percent in 2024.
- China:
  - Forecast unchanged at 5.2 percent for 2023 and 4.5 percent for 2024.
  - Youth unemployment at 20.8 percent in May 2023.
- Emerging market and developing economies:
  - 4.0 percent in 2023 and 4.1 percent in 2024 (modest revisions of 0.1 percentage point for 2023 and –0.1 percentage point for 2024).
  - Emerging and developing Asia: 5.3 percent in 2023 and 5.0 percent in 2024.
  - India (fiscal year presentation): 6.1 percent in 2023; calendar-year projections noted as 6.6 percent in 2023 and 5.8 percent in 2024 in a footnote.
- Selected country projections (year-over-year percent change):
  - Germany: –0.3 in 2023 and 1.3 in 2024.
  - France: 0.8 in 2023 and 1.3 in 2024.
  - Italy: 1.1 in 2023 and 0.9 in 2024.
  - Spain: 2.5 in 2023 and 2.0 in 2024.
  - Japan: 1.4 in 2023 and 1.0 in 2024.
  - United Kingdom: 0.4 in 2023 and 1.0 in 2024.
  - Brazil: 2.1 in 2023 and 1.2 in 2024.
  - Mexico: 2.6 in 2023 and 1.5 in 2024.
- Commodity prices:
  - Oil change: 39.2 percent rise in 2022 and projected –20.7 percent in 2023 and –6.2 percent in 2024.
  - Nonfuel (average): 7.9 percent in 2022 and projected –4.8 percent in 2023 and –1.4 percent in 2024.
- World consumer prices:
  - 8.7 percent in 2022, 6.8 percent in 2023, and 5.2 percent in 2024.
  - Advanced economies: 7.3 percent in 2022, 4.7 percent in 2023, and 2.8 percent in 2024.
  - Emerging market and developing economies: 9.8 percent in 2022, 8.3 percent in 2023, and 6.8 percent in 2024.
  - Euro area inflation: 5.2 percent in 2023 and 2.8 percent in 2024.
  - Japan inflation: 3.4 percent in 2023 and 2.7 percent in 2024.
  - United States inflation: 4.4 percent in 2023 and 2.8 percent in 2024.

### Global and regional growth outlook (selected updates)
- World growth:
  - 2.5 percent in 2023, with a downward revision of 0.4 percentage point (mainly attributable to Saudi Arabia).
- Saudi Arabia:
  - Growth slowed from 8.7 percent in 2022 to 1.9 percent in 2023, a negative revision of 1.2 percentage points.
  - Downgrade reflects production cuts announced in April and June in line with an agreement through OPEC+.
  - Private investment and “giga-project” implementation continue to support strong non-oil GDP growth.
- Sub-Saharan Africa:
  - Growth projected to decline to 3.5 percent in 2023 before picking up to 4.1 percent in 2024.
  - Nigeria: Growth in 2023 and 2024 is projected to gradually decline, in line with April projections, reflecting security issues in the oil sector.
  - South Africa: Growth expected to decline to 0.3 percent in 2023; forecast revised upward by 0.2 percentage point since the April 2023 WEO due to resilience in services activity in the first quarter.

### Global Financial Stability update (Box 1)
- Financial markets and conditions:
  - Financial markets appear sanguine and financial conditions have mostly continued to ease since the April 2023 Global Financial Stability Report.
  - Central banks have communicated potential need to tighten monetary policy further.
  - Yield curves remain inverted; recession concerns are prominent, but equity rallies (notably in technology) have supported easing.
  - Upside inflation surprises could cause sudden sharp repricing of financial assets and tighten global financial conditions, interacting with financial system vulnerabilities.
- Banking and credit conditions:
  - Immediate banking sector concerns have eased, but growth in bank loans in advanced economies has slowed; high interest rates likely to lead to tighter credit conditions.
  - In the euro area, mandatory repayments of loans from targeted longer-term refinancing operations confront banks that relied on this funding.
  - In the United States, ongoing quantitative tightening and issuance of large amounts of Treasury bills after the debt ceiling episode could lead to further outflows from the banking system.
  - Quality of business borrowers’ credit is weakening as higher rates bite, raising credit costs, curtailing bank lending, and slowing corporate debt issuance.
  - Falling prices for commercial real estate—particularly office space—and residential property in many jurisdictions could add pressure on indebted households and firms and weaken nonbank financial institutions.
- Emerging markets:
  - Major emerging markets have generally remained resilient and largely avoided the March 2023 banking turmoil.
  - Many lower-rated issuers in emerging and frontier markets struggle to maintain access to international markets.
  - In the second quarter, spreads for investment-grade sovereigns have stayed at about average historical levels, while spreads on those below investment grade have remained well above the historical range for issuances (880 basis points).
  - Notably, 18 countries have spreads at distressed levels (more than 1,000 basis points).
  - High spreads have made issuance of new hard-currency debt very challenging for frontier markets so far in 2023.

*WORLD ECONOMIC OUTLOOK UPDATE, JULY 2023 — International Monetary Fund | July 2023*

### 6.8 percent in 2023 and 5.2 percent in 2024. Underlying (core) inflation is projected to decline more gradually,

### 6.8 percent in 2023 and 5.2 percent in 2024. Underlying (core) inflation is projected to decline more gradually, 

### Inflation and monetary policy
- Headline world consumer prices: 6.8 percent in 2023 and 5.2 percent in 2024.
- Core (underlying) inflation is projected to decline more gradually and forecasts for inflation in 2024 have been revised upward.
- Major central banks signaled further tightening in response to persistent core inflation:
  - Federal Reserve paused rate hikes at its June meeting but signaled further ones ahead.
  - Reserve Bank of Australia, Bank of Canada, Bank of England, and European Central Bank have continued to raise rates.
  - Bank of Japan has kept interest rates near zero under quantitative and qualitative monetary easing with yield curve control policy.
  - In China, where inflation is well below target, the central bank recently cut policy interest rates.
- Policy rate assumptions:
  - Federal Reserve expected to raise rates to a peak of about 5.6 percent before reducing them in 2024.
  - European Central Bank assumed to raise its policy rate to a peak of 3¾ percent in 2023 and to ease gradually in 2024.
- With near-term inflation expectations falling, real interest rates are likely to stay up even after nominal rates start to fall.

### Forces shaping the outlook
- The global recovery from the COVID-19 pandemic and Russia’s invasion of Ukraine is slowing amid widening divergences among sectors and regions.
- WHO announced in May that it no longer considers COVID-19 to be a “global health emergency.”
- Supply chains have largely recovered; shipping costs and suppliers’ delivery times are back to pre-pandemic levels.
- Persisting headwinds:
  - Inflation remains high and continues to erode household purchasing power.
  - Policy tightening by central banks has raised cost of borrowing, constraining economic activity.
  - Banks in advanced economies have significantly tightened lending standards, curtailing credit supply.
  - Higher interest rates affect public finances, especially in poorer countries with elevated debt costs.
- Services sector drove resilience in Q1 2023; rotation of consumption back toward services approaching completion in advanced economies.
- Nonservices sectors including manufacturing have shown weakness; gross fixed capital formation and industrial production have slowed sharply or contracted in major advanced economies.
- Excess savings built up during the pandemic are declining in advanced economies, especially in the United States.

### Financial sector and credit conditions
- Recent resolution of the US debt ceiling standoff and strong action to contain turbulence in US and Swiss banking reduced immediate risks of financial sector turmoil.
- Acute stress in the banking sector has receded after March 2023 banking scare remained contained.
- Since April 2023 WEO, global financial conditions have eased.
- Tight monetary policy continues to put banks under pressure via higher funding costs and increased credit risk.
- Bank lending surveys indicate considerable restriction of credit in the first quarter of 2023 and continued tightening expected.
- Corporate loans and commercial real estate lending have been declining.

### Risks to the outlook
- Balance of risks to global growth remains tilted to the downside.
- Downside risk scenarios include:
  - Inflation could remain high or rise if further shocks occur (e.g., intensification of the war in Ukraine, extreme weather), triggering more restrictive monetary policy.
  - Financial sector turbulence could resume as markets adjust to further policy tightening.
  - China’s recovery could slow due to unresolved real estate problems, with negative cross-border spillovers.
  - Sovereign debt distress could spread to a wider group of economies.
- Upside possibilities:
  - Inflation could fall faster than expected, reducing the need for tight monetary policy.
  - Domestic demand could prove more resilient.

### Policy priorities and recommendations
- In most economies the priority remains achieving sustained disinflation while ensuring financial stability.
- Central banks should remain focused on restoring price stability and strengthening financial supervision and risk monitoring.
- If market strains materialize, countries should provide liquidity promptly while mitigating the possibility of moral hazard.
- Build fiscal buffers, ensuring the composition of fiscal adjustment provides targeted support for the most vulnerable.
- Improvements to the supply side of the economy would facilitate fiscal consolidation and a smoother decline of inflation toward target levels.

### Growth projections and regional outlook (selected figures)
- Global growth:
  - Projected to fall from 3.5 percent in 2022 to 3.0 percent in both 2023 and 2024.
  - Compared with April 2023 WEO, growth upgraded by 0.2 percentage point for 2023, with no change for 2024.
  - Historical (2000–19) annual average was 3.8 percent.
- World trade growth:
  - 5.2 percent in 2022 to 2.0 percent in 2023, before rising to 3.7 percent in 2024.
  - 2000–19 average was 4.9 percent.
- Oil price assumptions (based on futures markets as of June 1, 2023):
  - Average assumed price of oil in US dollars a barrel is $76.43 in 2023 and $71.68 in 2024.
- Advanced economies:
  - Growth from 2.7 percent in 2022 to 1.5 percent in 2023, and 1.4 percent in 2024.
  - About 93 percent of advanced economies are projected to have lower growth in 2023.
- United States:
  - Growth projected at 1.8 percent in 2023 and 1.0 percent in 2024.
  - Forecast revised upward by 0.2 percentage point for 2023.
- Euro area:
  - 0.9 percent in 2023 and 1.5 percent in 2024.
- China:
  - Forecast unchanged at 5.2 percent for 2023 and 4.5 percent for 2024.
  - Youth unemployment at 20.8 percent in May 2023.
- Emerging market and developing economies:
  - 4.0 percent in 2023 and 4.1 percent in 2024 (modest revisions of 0.1 percentage point for 2023 and –0.1 percentage point for 2024).
  - Emerging and developing Asia: 5.3 percent in 2023 and 5.0 percent in 2024.
  - India (fiscal year presentation): 6.1 percent in 2023; calendar-year projections noted as 6.6 percent in 2023 and 5.8 percent in 2024 in a footnote.
- Selected country projections (year-over-year percent change):
  - Germany: –0.3 in 2023 and 1.3 in 2024.
  - France: 0.8 in 2023 and 1.3 in 2024.
  - Italy: 1.1 in 2023 and 0.9 in 2024.
  - Spain: 2.5 in 2023 and 2.0 in 2024.
  - Japan: 1.4 in 2023 and 1.0 in 2024.
  - United Kingdom: 0.4 in 2023 and 1.0 in 2024.
  - Brazil: 2.1 in 2023 and 1.2 in 2024.
  - Mexico: 2.6 in 2023 and 1.5 in 2024.
- Commodity prices and nonfuel commodities:
  - Oil change: 39.2 percent rise in 2022 and projected –20.7 percent in 2023 and –6.2 percent in 2024 (percent change column in Table 1).
  - Nonfuel (average): 7.9 percent in 2022 and projected –4.8 percent in 2023 and –1.4 percent in 2024.
- World consumer prices:
  - 8.7 percent in 2022, 6.8 percent in 2023, and 5.2 percent in 2024.
  - Advanced economies: 7.3 percent in 2022, 4.7 percent in 2023, and 2.8 percent in 2024.
  - Emerging market and developing economies: 9.8 percent in 2022, 8.3 percent in 2023, and 6.8 percent in 2024.
  - Euro area inflation: 5.2 percent in 2023 and 2.8 percent in 2024.
  - Japan inflation: 3.4 percent in 2023 and 2.7 percent in 2024.
  - United States inflation: 4.4 percent in 2023 and 2.8 percent in 2024.

_ WORLD ECONOMIC OUTLOOK UPDATE, JULY 2023 — International Monetary Fund | July 2023 _

### 2.5 percent in 2023, with a downward revision of 0.4 percentage point, mainly attributable to a

### text - 2.5 percent in 2023, with a downward revision of 0.4 percentage point, mainly attributable to a

### Global and regional growth outlook
- World growth:
  - 2.5 percent in 2023, with a downward revision of 0.4 percentage point (mainly attributable to Saudi Arabia).
- Saudi Arabia:
  - Growth slowed from 8.7 percent in 2022 to 1.9 percent in 2023, a negative revision of 1.2 percentage points.
  - Downgrade reflects production cuts announced in April and June in line with an agreement through OPEC+.
  - Private investment and “giga-project” implementation continue to support strong non-oil GDP growth.
- Sub-Saharan Africa:
  - Growth projected to decline to 3.5 percent in 2023 before picking up to 4.1 percent in 2024.
  - Nigeria: Growth in 2023 and 2024 is projected to gradually decline, in line with April projections, reflecting security issues in the oil sector.
  - South Africa: Growth expected to decline to 0.3 percent in 2023; forecast revised upward by 0.2 percentage point since the April 2023 WEO due to resilience in services activity in the first quarter.

### Inflation: headline and core dynamics
- Global headline inflation:
  - Annual average of 8.7 percent in 2022.
  - Projected 6.8 percent in 2023 and 5.2 percent in 2024.
  - Forecast for 2023 revised down by 0.2 percentage point (largely due to subdued inflation in China).
  - Forecast for 2024 revised upward by 0.3 percentage point (upgrade reflecting higher-than-expected core inflation).
  - About three-quarters of the world’s economies expected to see lower annual average headline inflation in 2023.
  - Inflation projected to remain above target in 2023 in 96 percent of economies with inflation targets and in 89 percent of those economies in 2024.
- Global core inflation:
  - Annual average of 6.5 percent in 2022.
  - Set to decline to 6.0 percent in 2023 and 4.7 percent in 2024.
  - Core inflation proving more persistent than projected, mainly for advanced economies.
  - Forecasts for advanced economies revised upward by 0.3 percentage point for 2023 and by 0.4 percentage point for 2024 compared with the April 2023 WEO.
  - Global core inflation revised down by 0.2 percentage point in 2023 (reflecting lower-than-expected core inflation in China) and up by 0.4 percentage point in 2024.
  - On an annual average basis, about half of economies are expected to see no decline in core inflation in 2023.
  - On a fourth-quarter-over-fourth-quarter basis, about 88 percent of economies for which quarterly data are available are projected to see a decline.

### Risks to the outlook
- General assessment:
  - Balance of risks to global growth remains tilted downward, but adverse risks have receded since April 2023 WEO.
  - Resolution of US debt ceiling tensions reduced the risk of disruptive rises in interest rates for sovereign debt.
  - Authorities’ quick and strong action to contain banking sector turbulence in the United States and Switzerland reduced risk of an immediate and broader crisis.
- Upside risks:
  - Core inflation could fall faster than expected due to greater-than-expected pass-through of lower energy prices and compression of profit margins.
  - Declining job vacancies could ease labor markets, reducing the need for unemployment to rise to curb inflation.
  - Unspent excess savings could further sustain consumption.
  - Stronger policy support in China—particularly through means-tested transfers to households—could sustain recovery and generate positive global spillovers, though such support would increase inflation pressure.
- Downside risks (enumerated):
  - Inflation persists:
    - Tight labor markets and pass-through from past exchange rate depreciation could push up inflation and risk de-anchoring longer-term inflation expectations.
    - Institutional wage-setting could amplify inflation pressures on wages.
    - El Niño could exacerbate droughts and raise commodity prices.
    - The war in Ukraine could intensify, raising food, fuel, and fertilizer prices; the suspension of the Black Sea Grain Initiative is a concern.
  - Financial markets reprice:
    - Markets adjusted expectations of monetary policy tightening upward since April but still expect less tightening than policymakers signaled.
    - Unfavorable inflation data could trigger a sudden rise in interest rate expectations and falling asset prices, tightening financial conditions and stressing banks and nonbank financial institutions exposed to interest rate risk and commercial real estate.
    - Contagion effects and a flight to safety with appreciation of reserve currencies would trigger negative ripple effects for global trade and growth.
  - China’s recovery underperforms:
    - Risks include a deeper-than-expected contraction in the real estate sector, weaker-than-expected consumption, and unintended fiscal tightening with lower local government tax revenues.
  - Debt distress increases:
    - Borrowing costs for emerging market and developing economies remain high.
    - Share of emerging market and developing economies with sovereign credit spreads above 1,000 basis points remained at 25 percent as of June (compared with only 6.8 percent two years ago).
  - Geoeconomic fragmentation deepens:
    - Risk of the world economy separating into blocs, with more restrictions on trade (particularly strategic goods), capital, technology, workers, and international payments, contributing to commodity price volatility and hampering multilateral cooperation.

### Policy priorities and recommendations
- Conquer inflation:
  - Central banks in economies with elevated and persistent core inflation should continue to clearly signal commitment to reducing inflation.
  - A restrictive stance—with real rates above neutral—is needed until there are clear signs that underlying inflation is cooling.
  - Adjust policy in a data-dependent manner and avoid premature easing before price pressures have receded.
  - Legislated government spending cuts or tax increases aimed at ensuring public debt sustainability can reduce aggregate demand and reinforce credibility of disinflation strategies, especially in overheated economies.
- Maintain financial stability and prepare for stress:
  - Strengthen supervision by implementing Basel III and removing forbearance measures.
  - Monitor risks to anticipate further episodes of banking sector stress; intensity of supervision should match banks’ risks and systemic importance.
  - Address oversight gaps in the nonbank financial sector.
  - Employ macroprudential policy measures preemptively.
  - Deploy liquidity support tools promptly when market strains emerge, while mitigating moral hazard.
  - Governments should rebuild fiscal space to mobilize real resources if insolvency problems arise.
  - Countries at risk of external shocks can use the global financial safety net, including IMF precautionary financial arrangements.
- Rebuild fiscal buffers while protecting the vulnerable:
  - Fiscal deficits and government debt are above pre-pandemic levels; credible medium-term fiscal consolidation is often needed.
  - Fiscal adjustment projected to average 0.5 percent of GDP in 2024 (based on the change in structural fiscal balances) in both advanced economies and emerging market and developing economies.
  - Pace of consolidation should depend on the strength of private demand for economies with market access.
  - Composition of fiscal adjustment should protect targeted support for the most vulnerable.
  - Phase out untargeted fiscal measures, including those that blunt price signals—such as energy subsidies—especially since energy prices have broadly returned to pre-pandemic levels.
  - In cases in or at high risk of debt distress, achieving debt sustainability may require timely fiscal consolidation and debt restructuring.
- Ease the funding squeeze for developing and low-income countries:
  - Large short-term external financing needs strain many emerging market economies and low-income countries.
  - Faster and more efficient coordination on debt resolution—including through the Group of Twenty (G20) Common Framework and the Global Sovereign Debt Roundtable—is needed.
  - Recent agreement between Zambia and its official creditor committee noted as a welcome step.
- Enhance the supply side and strengthen resilience to climate change:
  - Reforms to loosen labor markets—encouraging participation and reducing job search and matching frictions—would facilitate fiscal consolidation and smoother decline in inflation.
  - Suggested measures: short-term training programs, labor laws increasing work flexibility (telework and leave policies), facilitating regular immigration flows.
  - Carefully designed industrial policies could be pursued if market failures are well established; avoid domestic-content requirements and barriers to trade.
  - Push on clean energy investment to ensure sufficient energy supplies given decarbonization goals.
  - Multilateral cooperation is essential to speed green transition, mitigate climate change, and regulate potentially disruptive emerging technologies such as artificial intelligence.

### Global Financial Stability update (Box 1)
- Financial markets and conditions:
  - Financial markets appear sanguine and financial conditions have mostly continued to ease since the April 2023 Global Financial Stability Report.
  - Central banks have communicated potential need to tighten monetary policy further.
  - Yield curves remain inverted; recession concerns are prominent, but equity rallies (notably in technology) have supported easing.
  - Upside inflation surprises could cause sudden sharp repricing of financial assets and tighten global financial conditions, interacting with financial system vulnerabilities.
- Banking and credit conditions:
  - Immediate banking sector concerns have eased, but growth in bank loans in advanced economies has slowed; high interest rates likely to lead to tighter credit conditions.
  - In the euro area, mandatory repayments of loans from targeted longer-term refinancing operations confront banks that relied on this funding.
  - In the United States, ongoing quantitative tightening and issuance of large amounts of Treasury bills after the debt ceiling episode could lead to further outflows from the banking system.
  - Quality of business borrowers’ credit is weakening as higher rates bite, raising credit costs, curtailing bank lending, and slowing corporate debt issuance.
  - Falling prices for commercial real estate—particularly office space—and residential property in many jurisdictions could add pressure on indebted households and firms and weaken nonbank financial institutions.
- Emerging markets:
  - Major emerging markets have generally remained resilient and largely avoided the March 2023 banking turmoil.
  - Many lower-rated issuers in emerging and frontier markets struggle to maintain access to international markets.
  - In the second quarter, spreads for investment-grade sovereigns have stayed at about average historical levels, while spreads on those below investment grade have remained well above the historical range for issuances (880 basis points).
  - Notably, 18 countries have spreads at distressed levels (more than 1,000 basis points).
  - High spreads have made issuance of new hard-currency debt very challenging for frontier markets so far in 2023.

*WORLD ECONOMIC OUTLOOK UPDATE, JULY 2023 — International Monetary Fund | July 2023*

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_Source: https://www.imf.org/-/media/files/publications/weo/2023/update/july/english/text.pdf_