## CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ## Source details **Canonical URL:** [CHAPTER 1 GLOBAL PROSPECTS AND POLICIES](https://www.imf.org/-/media/files/publications/weo/2024/october/english/ch1.pdf) ## Other formats - [Markdown version](/-/media/files/publications/weo/2024/october/english/ch1.pdf.md) - [Structured JSON version](/-/media/files/publications/weo/2024/october/english/ch1.pdf.json) --- ### Inflation dynamics, disinflation, and sectoral composition - A temporarily steeper Phillips curve helps explain the rapid surge in inflation and the—so far—relatively painless disinflation. - Since the beginning of 2024, cyclical imbalances have been gradually resorbed, bringing inflation rates across countries closer together. - Disinflation continued broadly as expected but showed signs of slowing in the first half of the year (July 2024 World Economic Outlook Update). - Core drivers: - Core services price inflation: 4.2 percent; about 50 percent higher than before the pandemic in major advanced and emerging market economies (excluding the US). - Core goods price inflation: declined to zero. - Recent increases in shipping rates (routes to and from China) have put upward pressure on goods prices, mitigated so far by declining prices for exports from China. - Labor and wages: - Services inflation persistence partly reflects higher nominal wage growth relative to prepandemic trends. - Wage negotiators continue to aim for sizable raises after the 2021–22 inflation surge. - Continued higher nominal wage growth can reflect real-wage catch-up to productivity and does not necessarily imply a wage-price spiral. - With output gaps expected to close and absent labor-supply disruptions in advanced economies, wage growth is expected to moderate. - Cross-country differences: - United States: wage growth has reflected productivity gains, keeping unit labor costs contained. - Euro area: wage increases have exceeded productivity, raising unit labor costs; firms may absorb costs given large increases in profit shares. ### Policy mix, monetary-fiscal interplay, and financial market developments - Policy mix: - Monetary policy tightened significantly following initial easing; many emerging markets started earlier than major advanced economies. - Most central banks stopped increasing nominal policy rates in the first half of 2023; real rates continued to rise as inflation expectations declined. - Real policy rates are currently above estimates of natural rates and are cooling activity to bring inflation back to target. - Fiscal policy has remained relatively loose despite rebound in activity and inflationary pressures, with some slippage from consolidation plans (except in low-income developing countries). - From 2022 to 2024: monetary policy tightened significantly in most countries, but fiscal policy lagged and even eased in many instances, complicating inflation control and delaying rebuilding of fiscal buffers. - Baseline assumption: rotation of the policy mix as public-debt-servicing costs rise (including a recent jump in the United States), prompting necessary fiscal consolidation that slows growth and calls for looser monetary policy. - Financial market volatility and exchange rates: - Early August episode: weaker-than-expected US jobs data and the Bank of Japan’s rate hike triggered rapid unwinding of yen-funded carry trades and a stock market correction; markets stabilized thereafter and the VIX Index returned to its historical average. - Persisting vulnerabilities: disconnect between economic uncertainty and market volatility; overstretched equity valuations, especially in technology. - Revised market expectations on US policy aligned US rate-cut outlook with other advanced economies, halting US dollar appreciation versus major advanced-economy currencies; depreciation pressures remain high in emerging market and developing economies. - Many emerging market and developing economies that began hiking earlier have started easing earlier, narrowing policy rate differentials with the United States. - Sovereign spreads: for some emerging market and developing economies with large short-term external financing needs, spreads have increased since April; few are in debt distress (spreads > 1,000 basis points), but reliance on short-term external financing is a risk. ### Geopolitics, trade fragmentation, and trade flows - Global trade volume as a share of world GDP has not deteriorated so far despite ongoing geopolitical tensions. - Evidence of geoeconomic fragmentation (comparing 2017–2022 and 2022–2024:Q1): goods trade growth declined by approximately 2½ percentage points more between geopolitically distant blocs than within blocs. - Potential consequences of continued fragmentation: - Reduced resilience of global supply chains. - Increased funding costs and disrupted cross-border capital flows. - Lower market efficiency and slower transfer of knowledge (hampering income convergence). - Increased costs and risks for businesses and larger economic cost for the green transition. - Fragmentation with increased intrabloc trade may not imply rapid deglobalization but can materially affect economic outcomes. ### Global outlook: growth, inflation, and regional projections - Global growth: - Postpandemic rebound followed by a projection hovering at about 3 percent in both the short and medium term. - Five-year-ahead forecast for global growth: 3.1 percent. - Weak growth beyond disinflation suggests potential durable effects on potential growth. - Regional growth highlights and revisions: - Middle East and Central Asia: projected to pick up from an estimated 2.1 percent in 2023 to 3.9 percent in 2025; 2024 projection revised downward by 0.4 percentage point versus April. - Sub-Saharan Africa: projected to increase from an estimated 3.6 percent in 2023 to 4.2 percent in 2025; regional forecast revised downward by 0.2 percentage point for 2024 and upward by 0.1 percentage point for 2025. - Latin America and the Caribbean: projected to decline from 2.2 percent in 2023 to 2.1 percent in 2024 then rebound to 2.5 percent in 2025; overall broadly unchanged since April. - Brazil: projected 3.0 percent in 2024 and 2.2 percent in 2025; upward revision of 0.9 percentage point for 2024 versus July 2024 WEO Update. - Mexico: projected 1.5 percent in 2024 and 1.3 percent in 2025. - Emerging and developing Europe: steady at 3.2 percent in 2024, easing to 2.2 percent in 2025. - Russia: projected to slow from 3.6 percent in 2023 to 1.3 percent in 2025. - Türkiye: expected to slow from 5.1 percent in 2023 to 2.7 percent in 2025. - Inflation outlook: - Global headline inflation: projected to decrease from an average of 6.7 percent in 2023 to 5.8 percent in 2024 and 4.3 percent in 2025. - Advanced economies: disinflation expected to be faster, declining 2 percentage points from 2023 to 2024 and stabilizing at about 2 percent in 2025. - EMDEs: inflation projected to decline from 8.1 percent in 2023 to 7.9 percent in 2024 and to 5.9 percent in 2025. - Core inflation: expected to drop by 1.3 percentage points in 2024 following a 0.1 percentage point decrease in 2023. - Policy target alignment: annual average inflation expected to exceed official targets in more than three-quarters of a representative group of inflation-targeting economies in 2025 due to carryover from 2024; by end-2025 most economies expected to be at target or within a stone’s throw. ### Risks, scenario analysis, and probabilities - Overall risk tilt: adverse risks have gained prominence; risks to growth are moderately tilted to the downside. - Key downside risks: - Monetary policy tightening could bite more than intended, causing faster-than-expected deceleration in growth and rising unemployment. - Repricing of financial markets if inflation proves more persistent, tightening financial conditions and risking contagion and sovereign debt stress in emerging markets. - Sovereign debt risks: countries with large external financing needs and low reserve buffers are most at risk; low-income countries are particularly vulnerable. - China-specific downside: deeper contraction in the property sector could weaken consumption and produce negative global spillovers. - Commodity price spikes from climate shocks or conflicts could raise inflation and restrict central banks’ room to maneuver. - Protectionist policy escalation and renewed social unrest could materially slow growth and complicate reforms. - Upside risks: - Stronger recovery in public investment (green transition, infrastructure, science and technology) could crowd in private investment and raise demand. - Accelerated structural reforms (labor, integration of immigrants/women, reduced misallocation) could raise medium-term growth. - Quantified risk assessments and probabilities (WEO risk box): - Risk of global growth falling below 2 percent in 2025: 17 percent (up from 12 percent in April). - Probability of US growth falling below 0.8 percent in 2025: about 25 percent (up from 17 percent in April). - Risk of average US headline inflation falling below 1.5 percent in 2025: about 40 percent. - Risk of the federal funds rate falling below 3 percent for 2025: about 28 percent. - Probabilities of global average headline and core inflation falling below 3 percent in 2025: about 20 percent and 15 percent, respectively. ### Scenario A (downside, five layers) — summarized impacts - Scenario design (selected elements): - 10 percent tariffs among United States, euro area, and China; 10 percent tariff on flows between the United States and rest of world; affects about one-quarter of goods trade (~6 percent of global GDP). - Greater trade policy uncertainty reducing US aggregate investment by about 4 percent relative to baseline from mid-2025. - Renewal of many TCJA provisions lowered business income taxes by about 4.0 percent of baseline GDP cumulatively between 2025 and 2034 (scenario element). - Reduced migration: US labor force permanently reduced by 1 percent by 2030; euro area labor force permanently reduced by 0.75 percent by 2030. - Global financial conditions tighten: sovereign premiums in emerging markets (excluding China) increase by 50 basis points; corporate premiums increase by 50 basis points in advanced economies and China and by 100 basis points in other emerging markets; term premiums increase by 40 basis points in the United States and by 25 basis points in the euro area. - Simulated impacts (percent deviations from baseline): - United States GDP: falls by 0.4 percent in 2025 and by 0.6 percent in 2026. - World and other regions: reach –0.3 percent of GDP by 2026. - Global imports and exports: fall by about 4 percent relative to baseline. - Global investment: falls by close to 2 percent by 2026, lowering GDP by 0.4 percent over the same period. - Combined effect: decrease in global GDP of about 0.8 percent by 2025 and 1.3 percent by 2026, relative to baseline. - Global inflation effect: falls by 10 basis points due to trade policy uncertainty layer. - Alternative presentation (Scenario A, extended): - Temporary renewal of US TCJA provisions raises US investment by about 2 percent in 2025 and 4 percent in 2026 relative to baseline; US GDP increases by 0.4 percent and inflation increases by an average of 20 basis points over 2025–30, prompting higher US policy rates. - Net effect described: combined decrease in global GDP of about 0.8 percent by 2025 and 1.3 percent by 2026; US GDP falls by about 1 percent relative to baseline in 2025 in some combined settings; global inflation muted (–10 basis points by 2026). ### Scenario B (policy-focused, two layers) — summarized impacts - Scenario design: - Layer 1 (China rebalancing): reforms expand social safety net access; private saving rate gradually falls starting in 2025 and is 3 percentage points of GDP lower by 2027 (gradually converging back to baseline starting in 2030). - Layer 2 (EU public investment): EU increases public investment by 1.5 percent of baseline GDP on average during 2025–30; public investment remains permanently higher by 0.5 percent of baseline GDP after 2030. - Simulated impacts: - China rebalancing: - China domestic absorption increases; China GDP peaks at 2.5 percent above baseline by 2027. - Headline inflation in China: increases by 90 basis points in 2025 and by as much as 140 basis points in 2027. - China current account: reduced by more than 1 percent of GDP. - EU public investment: - Euro area GDP: peaks at 2.5 percent above baseline by 2030. - Inflation: about 40 basis points higher than baseline over 2025–30. - Combined effect of Scenario B layers: - World GDP increases by 0.5 percent. - Headline inflation rises by 30 basis points in 2025. ### Production, commodity shocks, and network exposure - Network exposure analysis (2018): - Sectoral exposures weighted by sectors’ value-added share (Production) and sectors’ final consumption share (Consumption). - Impulse-response results to a 10 percent price increase (12-month cumulative): - Copper, high network exposure: headline inflation 0.5 percentage point; core inflation 0.3 percentage point. - Oil, high network exposure: headline inflation 0.7 percentage point; core inflation 0.1 percentage point. - Copper, low network exposure: headline inflation 0.1 percentage point; core inflation 0.2 percentage point. - Oil, low network exposure: headline inflation 0.5 percentage point; core inflation 0.1 percentage point. - 48-month cumulative effects: - 10 percent increase in copper prices → cumulative 0.5 percentage point increase over 48 months in core inflation for countries with high network exposure to metals. - 10 percent increase in oil prices → no significant increase in core inflation over the long term. - Interpretation: - Metals price shocks have delayed and persistent effects on headline and core inflation via production networks and marginal costs. - Oil price shocks have substantial effects on headline inflation but not on core inflation over the long term. - Copper accounts for 30 percent of the IMF’s trade-weighted base metals index; a 10 percent base metals aggregate shock would have an effect about three times greater than the copper-only estimates. - Monetary policy implication: - Central banks have historically “looked through” oil price shocks when not excessively large; as the economy becomes more metals-intensive, monetary authorities may need to react to metal supply shocks given their more persistent effects on core inflation. ### Policy priorities and guidance - Near-term sequencing: - Carefully calibrate and sequence policies to ensure a smooth landing; as central banks ease, urgent emphasis on medium-term fiscal consolidation is necessary to restore budgetary flexibility and fund priority investments. - Monetary and financial stability guidance: - Maintain restrictive real interest rates above neutral in economies with core inflation persistently above target until sustained cooling is evident. - Where underlying inflation and inflation expectations are diminishing in sync, transition to a more neutral stance and gradually lower policy rates to avoid undue increases in real rates. - Consistent communication of commitment to price stability is critical. - Mitigate foreign exchange volatility by allowing exchange rate flexibility where markets are deep and using temporary interventions, capital flow management, or macroprudential measures where markets are shallow or foreign-currency debt is large. - Use rapid, decisive liquidity support in market stress while avoiding moral hazard; consider global financial safety nets for vulnerable countries. - Rebuild macroprudential buffers, implement Basel III reforms, strengthen supervision, and be prepared to deploy financial stability tools. - Fiscal policy and debt management: - Fiscal deficits and government debt remain above prepandemic levels; many countries need fiscal tightening to ensure debt sustainability. - Reallocate spending to productivity- and competitiveness-enhancing initiatives where fiscal space is limited, while protecting social spending and safety nets. - Design credible medium-term fiscal plans with realistic assumptions and strong institutions; calibrate consolidation pace to country-specific conditions to avoid disruptive adjustments. - In cases of high risk or debt distress, timely consolidation and debt restructuring may be required; continue progress on international sovereign debt resolution frameworks. - Structural reforms and green transition: - Targeted reforms in health care, education, labor markets, competition, and digitalization to boost productivity. - Advance carbon pricing, subsidies for green investments, carbon border-adjustment mechanisms (consistent with WTO rules), and non-discriminatory green industrial policies. - Scale back fossil fuel investments while increasing clean energy supply; invest in climate adaptation and strengthen climate-risk monitoring and insurance. - Mobilize climate finance for low-income countries through coordinated international efforts. - Multilateral cooperation: - Essential to limit costs and risks from geoeconomic fragmentation and climate change, support the green transition, and facilitate debt restructuring and technology transfer. - Restore a fully functioning WTO dispute settlement system and align climate and trade rules. ### Selected key regional aggregates (Real GDP, Consumer Prices, Current Account Balance) - Europe (Real GDP 2023, 2024, 2025): 1.5, 1.7, 1.7 - Consumer Prices (2023, 2024, 2025): 0.9, 7.9, 5.3 - Current Account Balance (2023, 2024, 2025): 2.2, 2.5, 2.3 - Asia (Real GDP 2023, 2024, 2025): 5.0, 4.6, 4.4 - Consumer Prices (2023, 2024, 2025): 2.6, 2.2, 2.6 - Current Account Balance (2023, 2024, 2025): 1.9, 1.9, 1.9 - North America (Real GDP 2023, 2024, 2025): 2.8, 2.5, 2.1 - Consumer Prices (2023, 2024, 2025): 4.2, 3.1, 2.0 - Current Account Balance (2023, 2024, 2025): −2.9, −3.0, −2.8 - Middle East and Central Asia (Real GDP 2023, 2024, 2025): 2.1, 2.4, 3.9 - Consumer Prices (2023, 2024, 2025): 15.6, 14.6, 10.7 - Current Account Balance (2023, 2024, 2025): 3.7, 1.7, 0.8 - Sub-Saharan Africa (Real GDP 2023, 2024, 2025): 3.6, 3.6, 4.2 - Consumer Prices (2023, 2024, 2025): 17.6, 18.1, 12.3 - Current Account Balance (2023, 2024, 2025): −2.7, −3.2, −2.9 *Source: CHAPTER 1 GLOBAL PROSPECTS AND POLICIES, World Economic Outlook, October 2024 (IMF).* ### Chapter 2, a temporarily steeper Philips curve helps ### Chapter 2, a temporarily steeper Philips curve helps ### Inflation dynamics and disinflation - A temporarily steeper Phillips curve helps explain both the rapid surge in inflation and the—so far—relatively painless disinflation (Figure 1.3, panel 1). - Since the beginning of 2024, signs that cyclical imbalances are being gradually resorbed have helped bring inflation rates across countries closer together (Figure 1.3, panel 2). - Disinflation has continued broadly as expected but showed signs of slowing in the first half of the year, suggesting potential bumps on the road to price stability (July 2024 World Economic Outlook Update). ### Sectoral composition of inflation - Persistence in core inflation has been driven primarily by services price inflation. - Core services price inflation is 4.2 percent and is about 50 percent higher than before the pandemic in major advanced and emerging market economies (excluding the US). - Core goods price inflation has declined to zero (Figure 1.3, panel 3). - Recent increases in shipping rates, especially for routes to and from China, have put upward pressure on goods prices; this has been mitigated so far by declining prices for exports from China (Figure 1.3, panel 4). ### Labor markets, wages, and unit labor costs - Stubborn services inflation partly reflects higher nominal wage growth relative to prepandemic trends. - Even as labor market pressure has started to ease (Figure 1.4, panel 2), wage negotiators have continued to aim for sizable raises to counter the cost-of-living squeeze after the 2021–22 inflation surge (Figure 1.4, panel 1). - Continued higher nominal wage growth after the inflation surge is consistent with past episodes—when real wages catch up to equilibrium determined by labor productivity—and does not necessarily imply a wage-price spiral. - With output gaps expected to close, and assuming no disruptions to labor supply in advanced economies, wage growth is expected to moderate. - Whether recent wage increases lead to further persistence in core inflation depends on: - the impact of recent real wage increases on unit labor costs, which itself depends on labor productivity, and - the willingness of firms to absorb increased unit labor costs in profit margins. - Recent developments differ across major advanced economies: - United States: wage growth has reflected productivity gains lately, keeping unit labor costs contained. - Euro area: recent wage increases have exceeded productivity, raising unit labor costs (Figure 1.4, panel 3); however, European firms should be able to absorb those costs given large increases in profit shares in recent years (Figure 1.4, panel 4). ### Policy mix: tight monetary, loose fiscal - Monetary policy tightened significantly following initial easing, with many emerging markets starting earlier than major advanced economies (Chapter 2). - Most central banks stopped increasing nominal policy rates in the first half of 2023. Real rates continued to rise as inflation expectations declined (Figure 1.5, panel 1). - Real policy rates are currently above estimates of natural rates and are acting to cool economic activity and bring inflation back to target. - Higher policy rates raised mortgage and bank lending rates; pass-through to market rates has been gradual but seems to have finished, contributing to slower private credit growth and investment (Figure 1.5, panels 2 and 3). - Fiscal policy contrast: despite rebound in activity and inflationary pressures, fiscal policy remained looser with some slippage from consolidation plans (except in low-income developing countries where limited fiscal space constrained responses) (Figure 1.6, panel 1). - From 2022 to 2024, monetary policy tightened significantly in most countries, but fiscal policy lagged and even eased in many instances (Figure 1.6, panel 2), complicating central banks’ efforts to rein in inflation and delaying rebuilding of fiscal buffers. - Tight monetary policy combined with relatively loose fiscal policy, particularly in the United States, may have contributed to dollar appreciation in 2024. - Baseline assumes a rotation of the policy mix as public-debt-servicing costs rise (including a recent jump in the United States) and necessary fiscal consolidation slows growth and calls for looser monetary policy, which should help trim deficits (see “Policy Priorities: From Restoring Price Stability to Rebuilding Buffers”). ### Financial market volatility and exchange rate pressures - In the first week of August, global financial markets experienced significant turbulence: weaker-than-expected US jobs data and the Bank of Japan’s rate hike prompted a rapid unwinding of Japanese-yen-funded carry trades and a stock market correction. - Markets have rapidly stabilized; the VIX Index, after surging to its highest point since 2020, returned to its historical average. - Persisting vulnerabilities include a disconnect between economic uncertainty and market volatility and overstretched equity valuations, particularly in the technology sector. - Revised market expectations on US monetary policy have aligned the outlook for US rate cuts more closely with those for other advanced economies, halting US dollar appreciation against major advanced economy currencies. Depreciation pressures remain high in emerging market and developing economies (Figure 1.7, panel 1). - Many emerging market and developing economies that began hiking earlier have started easing earlier, narrowing policy rate differentials with the United States. - For some emerging market and developing economies with large short-term external financing needs (often a significant share of net international reserves), sovereign borrowing spreads have increased since April, raising vulnerability to currency swings (Figure 1.7, panel 2). Few of these economies are in debt distress (spreads > 1,000 basis points), but reliance on short-term external financing is a risk. ### Geopolitics, trade fragmentation, and trade volumes - Despite ongoing geopolitical tensions, global trade volume as a share of world GDP has not deteriorated so far. - Signs of geoeconomic fragmentation have started to emerge: comparing averages for 2017–2022 and 2022–2024:Q1, goods trade growth declined by approximately 2½ percentage points more between geopolitically distant blocs than within blocs. - Continued geopolitical tensions could lead to greater fragmentation—potentially resembling Cold War–era dynamics—which could: - reduce resilience of global supply chains, - increase funding costs, - disrupt cross-border capital flows, - lower market efficiency, - slow transfer of knowledge between advanced and emerging market and developing economies (hampering income convergence), - increase costs and risks for businesses, and - induce a larger economic cost for the green transition (Box 1.1). - Fragmentation accompanied by increased intrabloc trade may not imply rapid deglobalization but can still materially affect economic outcomes (Gopinath and others 2024). ### Outlook: growth, sectoral shifts, and assumptions - Little change in the global growth outlook since April 2024 WEO: following the postpandemic rebound, the global projection for GDP growth has been hovering at about 3 percent in both the short and medium term. - Weak growth extends beyond the disinflation period, suggesting potential durable effects on potential growth (see Chapter 3 of the April 2024 WEO). - Sectoral and regional shifts underlie the stable global outlook: - Relative to prepandemic trends, goods prices remain elevated compared with services; consumption is shifting from goods to services. - This rebalancing boosts services-sector activity in advanced and emerging markets but dampens manufacturing. - Manufacturing production is increasingly shifting toward emerging market economies, particularly China and India, as advanced economies lose competitiveness (Figure 1.10, panel 2). - Baseline projection is flanked by two alternative scenarios that map implications for growth and inflation of shifts in trade and fiscal policy, acknowledging exceptional policy uncertainty tied to newly elected governments in 2024 (in 64 countries representing about half of the global population). *Source: Chapter 2, "a temporarily steeper Philips curve helps", World Economic Outlook, October 2024* ### 1. Trade between Blocs ### 1. Trade between Blocs ### Empirical approach and samples - The figure plots the change in global trade between blocs (panel 1) and with nonaligned countries (panel 2) during two episodes: - Cold War (blue line), with t0 = 1947. - Since Russia’s invasion of Ukraine (red line), with t0 = 2021:Q4. - For each episode the plotted statistic is the semi-elasticity of trade for flows, estimated using a difference-in-differences approach. - Outcome variable: bilateral goods trade values on the y-axis, with importer-exporter, importer-year, and exporter-year fixed effects controlled for. - The figure shows associated 90 percent confidence bands. - The missing category in the estimations is trade within blocs. - Cold War sample and definitions: - Yearly data from 1920 to 1990—excluding the World War II years (1939–45), and with 1947 as an excluded year. - Bloc definition based on Gokmen (2017). - Recent-period sample and definitions: - Quarterly trade data from 2017:Q1 to 2024:Q1 (with 2021:Q4 as an excluded quarter). - Wider bloc definition based on the ideal point distance (a measure based on voting patterns in the United Nations General Assembly computed by Bailey, Strezhnev, and Voeten [2017]). ### Items identified in the figure (labels/categories) - United States - Euro area - Developed markets: Manufacturing - Emerging markets: Manufacturing - Developed markets: Services - Emerging markets: Services ### Key methodological notes - Semi-elasticities are estimated controlling for importer-exporter, importer-year, and exporter-year fixed effects to net out multilateral and time-varying country effects. - The plotted confidence bands reflect 90 percent confidence intervals around the estimated semi-elasticities. - Two distinct historical definitions of blocs are used to reflect institutional/political realignments across the two episodes (Gokmen 2017 for Cold War; ideal point distance for the recent period). ### Related indicators shown on adjacent panels (figure continuation) - Rotation to Services: - Panel on relative price of core goods versus core services (Core-goods-to-services ratio) with time series spanning Jan. 2015 through Jul. 24. - Panel on recent PMI trends (Index, 50+ = expansion) with time series spanning Jan. 2022 through Aug. 24. - Sources for these panels: Haver Analytics; and IMF staff calculations. - Note: Solid lines denote GDP growth from the October 2024 World Economic Outlook, and dashed lines denote GDP growth forecasts from the April 2024 World Economic Outlook. *Source: Gopinath and others 2024; and IMF staff calculations; chapter 1, “Trade between Blocs,” October 2024 World Economic Outlook.* ### CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ### CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ### Regional Growth Projections - Middle East and Central Asia: projected to pick up from an estimated 2.1 percent in 2023 to 3.9 percent in 2025; projection revised downward by 0.4 percentage point for 2024 compared with April, mainly due to the extension of oil production cuts in Saudi Arabia and ongoing conflict in Sudan. - Sub-Saharan Africa: GDP growth projected to increase from an estimated 3.6 percent in 2023 to 4.2 percent in 2025; regional forecast revised downward by 0.2 percentage point for 2024 and upward by 0.1 percentage point for 2025 compared with April; ongoing conflict has led to a 26 percent contraction of the South Sudanese economy; revision also reflects slower growth in Nigeria. - Latin America and the Caribbean: growth projected to decline from 2.2 percent in 2023 to 2.1 percent in 2024 before rebounding to 2.5 percent in 2025; overall regional forecast broadly unchanged since April due to offsetting revisions. - Brazil: growth projected at 3.0 percent in 2024 and 2.2 percent in 2025; this is an upward revision of 0.9 percentage point for 2024 compared with July 2024 WEO Update. - Mexico: growth projected at 1.5 percent in 2024 and 1.3 percent in 2025. - Emerging and developing Europe: growth projected to remain steady at 3.2 percent in 2024 but ease to 2.2 percent in 2025. - Russia: projected to slow from 3.6 percent in 2023 to 1.3 percent in 2025. - Türkiye: growth expected to slow from 5.1 percent in 2023 to 2.7 percent in 2025. - Note: Recent policy measures may provide upside risk to near-term growth in some cases. ### Inflation Outlook: Gradual Decline to Target - Global headline inflation: projected to decrease from an average of 6.7 percent in 2023 to 5.8 percent in 2024 and 4.3 percent in 2025 in the baseline. - Advanced economies: disinflation expected to be faster, with a decline of 2 percentage points from 2023 to 2024 and stabilization at about 2 percent in 2025. - Emerging market and developing economies (EMDEs): inflation projected to decline from 8.1 percent in 2023 to 7.9 percent in 2024 and then to 5.9 percent in 2025. - Regional specifics: - Emerging Asia: inflation projected at 2.1 percent in 2024 and 2.7 percent in 2025. - Emerging and developing Europe, Middle East and North Africa, and sub-Saharan Africa: inflation forecasts remain in double-digit territory for some countries due to pass-through of past currency depreciation, administrative price adjustment (Egypt), and underperformance in agriculture (Ethiopia). - Latin America and the Caribbean: for most countries inflation rates have dropped significantly from peaks; however, large countries show upward revisions since April 2024 due to robust wage growth (Brazil, Mexico), weather events (Colombia), and hikes in regulated electricity tariffs (Chile). - Core inflation: expected to drop by 1.3 percentage points in 2024 following a 0.1 percentage point decrease in 2023, with advanced economies leading the decline. - Policy target alignment: - Annual average inflation is expected to exceed official targets (or midpoints of target ranges) in more than three-quarters of a representative group of inflation-targeting advanced and emerging market economies in 2025, largely reflecting annual carryover effects from 2024. - By the end of 2025, most economies are expected to be either at target or within a stone’s throw of it. ### Medium-Term Outlook: A Low-Growth Regime Setting In - Five-year-ahead forecast for global growth stands at 3.1 percent. - For many advanced and emerging market economies, the five-year-ahead forecast is weaker than the one-year-ahead forecast, suggesting persistent headwinds to growth. - Structural challenges constraining growth: population aging, weak investment, and historically low total factor productivity growth. - Expectations: - Monetary policy is expected to return to a neutral stance by 2025 in the world’s largest economies. - Investment is expected to pick up and productivity growth to see some normalization, but demographic drag likely offsets gains. - Emerging market and developing economies: medium-term prospects have not improved compared with April 2024 WEO and remain much weaker than prepandemic projections, reflecting prolonged scarring from recent shocks and a slower pace of structural reforms. - Distributional risks: IMF staff analysis suggests periods of low economic growth lasting four years or more tend to widen income inequality within countries. ### Trade, Current Accounts, and External Positions - Global trade growth: expected to grow in line with GDP, reaching an average of 3¼ percent growth annually in 2024 and 2025, following near stagnation in 2023. - Global trade-to-GDP ratio: expected to remain stable despite an increase in cross-border restrictions affecting trade between geopolitically distant blocs. - Global current account balances (sums of absolute surpluses and deficits): expected to continue to decline from their 2022 peaks; moderation in 2023 reflected reversal of large surpluses in commodity-exporting countries, continued economic recovery, and slowdown in global goods trade. - Medium-term expectation: 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; gross external liabilities remain large in some economies and pose risks of external stress. ### Risks to the Outlook: Tilted to the Downside - Overview: adverse risks have gained prominence since the July 2024 WEO Update. - Monetary risks: - Monetary policy tightening could bite more than intended if a back-loaded strengthening of transmission leads to faster-than-anticipated deceleration in near-term growth and rising unemployment. - A rapid weakening of activity could depress consumer and business sentiment, reduce household spending, and prompt firms to cut investment, creating negative feedback loops. - Lower energy prices could cushion some negative effects as demand weakens and oil prices fall. - Financial market risks: - Repricing of financial markets could occur if underlying inflation proves more persistent than expected, prompting adjustments to monetary policy normalization and tighter financial conditions. - Market repricing and tighter conditions could slow recovery and, given existing vulnerabilities, could resurge financial market turbulence with sizable price corrections and possible contagion effects, including sovereign debt stress in emerging markets. - Sovereign debt risks in EMDEs: - Some emerging market and developing economies remain vulnerable to a repricing of risk, which could increase sovereign spreads and push countries into debt distress. - Countries with large external financing needs and low international reserve buffers are most at risk; low-income countries are particularly vulnerable given limited fiscal space and high expenditure needs for vulnerable populations. - China-specific downside risk: - China’s property sector could contract more deeply, with further price corrections amid falling sales and investment. - Further price drops could further weaken already low consumer confidence and household consumption, causing domestic demand to falter and producing negative spillovers to advanced and emerging market economies. *Source: CHAPTER 1 GLOBAL PROSPECTS AND POLICIES (PDF).* ### CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ### CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ### Downside Risks and Shock Scenarios - Government stimulus to counter weakness in domestic demand would place further strain on public finances; subsidies targeted to boost exports could exacerbate trade tensions with China’s trading partners. - Renewed spikes in commodity prices could arise from climate shocks, regional conflicts, or broader geopolitical tensions: - Intensification of regional conflicts, especially a wider span of conflict in the Middle East or the war in Ukraine, could further disrupt trade, leading to sustained increases in food, energy, and other commodity prices. - Commodity price volatility may result in higher inflation, especially for commodity-importing countries, and restrict central banks’ room to maneuver. - Extreme heat and prolonged droughts amid record high temperatures worldwide could affect harvests and add pressure on food prices and food security, disproportionately affecting low-income countries where food and energy costs take up a large part of household expenditures. - Countries ratchet up protectionist policies: - A broad-based retreat from a rules-based global trading system and intensified protectionist measures could exacerbate global trade tensions, disrupt global supply chains, and weigh down medium-term growth by limiting spillovers from innovation and technology transfer. - Social unrest resumes: - Reports of social unrest (including protests, riots, and major demonstrations) have picked up in some regions, though globally they remain fewer than the recent peak in late 2019 to early 2020. - A resurgence of social turmoil—potentially driven by higher inflation, higher taxes, spillovers from conflicts, and rising inequality—could slow economic growth, particularly in countries with limited scope to cushion impacts through policies. - Social unrest could complicate passage and implementation of necessary reforms; Chapter 3 emphasizes the crucial role of social consensus for successful and sustainable reform implementation. ### Upside Risks - Stronger recovery in investment in advanced economies: - Public investment could accelerate to meet objectives from the green transition to upgrading infrastructure and boosting investment in science and technology. - Such investment could crowd in private sector investment, leading to a higher-than-projected recovery in global demand and trade. - Higher aggregate demand could be inflationary, though pressure could be mitigated if investments enhance supply-side capacity; the inflation impact also depends on how investments are financed, with fiscal slippage in advanced economies potentially slowing central banks’ ability to bring inflation to target. - Stronger momentum of structural reforms: - Accelerated structural reform efforts—such as measures to better integrate immigrants and women, reduce misallocation in labor and capital markets, or stimulate business innovations—could lead to higher medium-term growth. ### Policy Priorities: From Restoring Price Stability to Rebuilding Buffers - Near-term policies should be carefully calibrated and sequenced to ensure a smooth landing. - As central banks adopt a less restrictive stance, a renewed emphasis on medium-term fiscal consolidation is urgent to restore budgetary flexibility, fund priority investments, and ensure long-term debt sustainability. - If inflation descends and approaches targets, central banks should consider implications of monetary policy for growth and employment, provided price stability is not undermined. - Easing monetary policy while keeping inflation and inflation expectations on a downward path to target would support growth and employment and ease debt-servicing costs, facilitating fiscal consolidation in a favorable feedback loop. - Implementing robust supply-enhancing reforms would help curb inflation and reduce debt, enabling economies to boost growth toward prepandemic rates and accelerate progress toward higher income standards. - Multilateral cooperation is essential to limit costs and risks associated with geoeconomic fragmentation and climate change, speed up the transition to green energy, and support debt restructuring. ### Ensuring a Smooth Landing: Monetary and Financial Stability Guidance - Carefully calibrate monetary policy: - Maintain a restrictive stance with real interest rates above the neutral level in economies with core inflation persistently above target until clear evidence of sustained cooling in underlying inflation. - Where underlying inflation is diminishing in sync with inflation expectations, transition to a more neutral policy stance is warranted; policy rates can be dropped gradually to avoid undue increases in real interest rates. - If the economy cools faster than expected and inflation remains on a downward path to target, real rates could be reduced to support growth and employment, accounting for lags in monetary transmission. - Consistent communication of commitment to price stability is important throughout. - Mitigate disruptive foreign exchange volatility: - Divergent disinflation paths across countries could increase capital flows and exchange rate volatility (for example, persistent US inflation could elevate interest rate expectations and cause the US dollar to appreciate). - For countries with deep foreign exchange markets and low foreign currency debt: adjust policy rates and allow exchange rate flexibility. - When market stress arises, rapid and decisive liquidity support—while avoiding moral hazard—can help limit contagion. - For countries with shallow foreign exchange markets or substantial foreign currency debt: tightening global financial conditions might trigger rises in risk premiums and “taper tantrums,” posing systemic risks; temporary foreign exchange interventions or capital flow management measures could be appropriate, alongside macroprudential measures to mitigate vulnerabilities from large foreign-currency-denominated debt exposures. - When sharp exchange rate movements threaten to de-anchor inflation expectations, temporary foreign exchange interventions may support monetary policy provided sufficient reserves are available and the cost of using monetary policy alone is excessive. - Countries vulnerable to external shocks could consider using global financial safety nets such as precautionary financial arrangements from the IMF. - Restore macroprudential buffers and ensure financial stability: - Carefully monitor misalignments in financing conditions and strengthen supervision given higher borrowing costs than before the pandemic. - Implement Basel III reforms to protect the financial system from potential repercussions of sudden repricing of risk and anticipate banking sector stress. - Gradually rebuild macroprudential buffers deployed during the pandemic and the 2021 global energy crisis, considering a rapidly evolving real estate market. - In the event of market strains, central banks should be prepared to deploy necessary financial stability tools, providing prompt and forceful liquidity support to limit contagion. ### Rebuilding Fiscal Buffers while Avoiding Debt Distress - Fiscal deficits and government debt are still above pre-pandemic levels, and debt-service costs remain high and rising in many countries. - Many countries, including advanced and emerging market economies, need to tighten fiscal policy to ensure debt sustainability and restore long-term budgetary flexibility. - In countries where inflation remains elevated, fiscal consolidation can reduce aggregate demand and help ease inflationary pressures. - For countries with limited fiscal space, reallocating spending toward productivity- and competitiveness-enhancing initiatives can stimulate growth and reduce pressure on overall spending, while ensuring continuous support to the most vulnerable and safeguarding key social spending and safety nets. - Strong commitments, clearly defined medium-term fiscal plans, clear communication of objectives and policy rationale, and careful sequencing are essential to maintain popular support, credibility, and confidence; prevent disruptive market reactions; and ensure debt sustainability. Key fiscal guidance and considerations: - Urgently devise credible fiscal plans to avoid disruptive adjustments: - Consolidation paths should be carefully calibrated to country-specific conditions. - Unduly delaying consolidation may lead to market-imposed disruptive adjustments; excessively front-loading can hurt activity and burden vulnerable groups. - Where consolidation is necessary, the pace should be gradual and well communicated; in some cases front-loading may be necessary to alleviate sovereign stress or loss of market access. - Credible medium-term plans should identify measures sufficient for meeting medium-term targets based on realistic assumptions about interest rates, revenues and spending, and growth effects of consolidation, supported by strong institutional frameworks (including binding legislation and fiscal frameworks). - Safeguard growth-enhancing measures while reducing inequality: - Maintain growth-friendly adjustments and mitigate adverse impacts on poverty and inequality to enhance social acceptability and political support. - Continue public investments that boost productivity and competitiveness, particularly public and digital infrastructure, which can yield positive growth. - Implement structural reforms to reduce market inefficiencies and increase labor supply to amplify the benefits of growth-friendly investments. - Ensure debt sustainability: - Many emerging market and low-income countries face stretched debt-servicing capacity with elevated borrowing costs and sovereign spreads and require significant fiscal adjustments for debt sustainability. - In cases of high risk or actual debt distress, achieving debt sustainability may require timely fiscal consolidation and debt restructuring. - Recent progress in international sovereign debt resolution frameworks (including the G20 Common Framework and the Global Sovereign Debt Roundtable) helps bring together debtors and creditors and facilitate predictable restructuring; it is critical to continue building on these initiatives and improve creditor coordination for cases outside the Common Framework. ### Engineering Faster Medium-Term Growth and Combating Climate Change - Targeted reforms in health care, education, labor markets, competition, and digitalization are vital to boost productivity and resolve structural bottlenecks. - Effective and clear communication to build consensus and stakeholder engagement is essential for successful reform implementation. - First-generation reforms aimed at revitalizing domestic markets and opening up economies (including governance reforms to strengthen institutions) can have significant growth impacts in some countries. - Advance macrostructural reforms: - Carefully sequenced reforms targeting long-term structural weaknesses are crucial for reviving productivity growth and attracting infrastructure and human capital. - Evidence on public investment during consolidations: - “Fiscal consolidation” is defined as a reduction of 1 percent of GDP or more in the primary deficit in two consecutive years after the fiscal deficit has climbed above 3 percent of GDP. - The spending share of public investment is as important during consolidations as in good times; public investment (percent of government spending) is positively associated with future income growth (with charts showing predictions and 95 percent confidence bands). *Source: CHAPTER 1 GLOBAL PROSPECTS AND POLICIES, World Economic Outlook, October 2024 (IMF).* ### CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ### CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ### Structural reforms to boost medium-term growth - Key reform areas: - Enhance human capital by expanding health care coverage and increasing access to early childhood and higher education, with a focus on affordability and quality. - Reduce labor market rigidity and increase labor force participation, especially among women. - Reduce barriers to competition and support start-ups. - Advance digitalization. - Design and implementation guidance: - Engage early and continuously with key stakeholders during policy design. - Craft complementary and compensatory measures that consider potential distributional effects. - Use active and effective communication to build consensus. - Ensure reforms are sustainable and that benefits are widely shared. - Expected benefits: - Accelerating growth can alleviate concerns about potential short-term growth costs of the transition to clean energy and create fiscal space for implementation. ### Accelerate the green transition and address climate change - Objectives: - Meet greenhouse gas reduction goals aiming to limit global temperature increases to 1.5–2.0°C above preindustrial levels. - Policy tools recommended: - Carbon pricing. - Subsidies for green investments. - Carbon border-adjustment mechanisms (designed to be consistent with WTO rules). - Design green industrial policies to complement carbon pricing, avoid discriminatory elements, and be consistent with international law obligations. - Implementation priorities: - Help high-emissions-per-unit firms adopt frontier technologies to achieve significant emissions cuts. - Scale back fossil fuel investments while increasing clean energy supplies to reduce long-term energy security risks. - Invest in climate adaptation and infrastructure, particularly in regions most vulnerable to climate shocks. - Improve climate-risk-monitoring systems and risk management frameworks; strengthen safety nets and insurance to build climate resilience. - Mobilize climate finance for adaptation and mitigation in low-income countries through coordinated efforts by international organizations, private investors, country authorities, and donors. ### Strengthen multilateral cooperation - Rationale: - Multilateral cooperation is essential to prevent fragmentation, sustain economic growth and stability, and address climate change. - Trade and industrial policy guidance: - Ensure trade policies are clear and transparent to stabilize expectations and reduce volatility in markets, including agricultural and critical mineral commodities. - Establish a “green corridor” agreement to secure the flow of critical minerals for the green transition and increase sharing of data on these minerals to reduce uncertainty and price volatility. - Industrial policies can address negative externalities or market failures that horizontal policies cannot; such policies should have benefits greater than costs, protect fiscal sustainability and external stability, avoid protectionist measures, and remain compliant with WTO agreements. - Promote a common platform for the transfer of low-carbon technologies to emerging market and developing economies. - Regulate disruptive technologies such as artificial intelligence to help reduce emissions and foster global prosperity. - Institutional priorities: - Restore a fully and well-functioning WTO dispute settlement system. - Achieve greater clarity and coherence between climate considerations and trade rules. ### Box 1.1 — The Global Automotive Industry and the Shift to Electric Vehicles (EVs) - Sector characteristics: - The car industry is capital intensive with high investment and a significant capital share of value added. - Relies on skilled labor and pays wages that reflect high value added per worker. - Multinational firms operate along deep global value chains measured by the share of foreign value added in production. - Effective product differentiation allows carmakers to extract a sizable share of consumer surplus, particularly at the top end. - Transportation sector emissions (2022): - United States: 36 percent of greenhouse gas (GHG) emissions. - European Union: 21 percent of GHG emissions. - China: 8 percent of GHG emissions. - Policy examples to foster EV adoption: - European Union: goal of reducing emissions from cars by 50 percent for 2030–35 from 2021 levels in the “Fit for 55” package. - United States: Inflation Reduction Act includes subsidies for EV purchases and deployment of charging stations. - Supply-side focus: - Policies target vehicles, batteries, and extraction and processing of metals to close cost and convenience gaps between EVs and internal combustion engine vehicles. - Cost reduction drivers: - Innovation and increasing returns to scale; global race for innovation among carmakers and battery manufacturers. - Geographic shifts: - China’s role in production and exports has dramatically increased compared with 15 years ago. - Macro implications (IMF working paper, application to EU by 2035): - Under realistic EV market penetration scenarios, GDP in Europe is reduced by about 0.3 percent in the medium term. - Employment declines in the automotive sector with gradual labor reallocation to less capital-intensive sectors (with lower value added per worker). - Ability to import EVs from China softens trade-offs between economic and climate goals; with fewer imports, climate policies must be more stringent to reach the same climate goal and households’ purchasing power is reduced. - EV transition implications extend to the energy sector (shift from gasoline to electricity) and demand for minerals. ### Box 1.2 — Risk Assessment Surrounding the WEO’s Baseline Projections - Overall risk assessment: - Risks to growth are moderately tilted to the downside. - The risk of global growth falling below 2 percent in 2025 is assessed at 17 percent (up from 12 percent in April). - Risks for global inflation are considered broadly balanced. - Confidence band methodology: - Uses IMF’s G20 and GIMF models to derive predictive distributions. - Shocks from years with US recessions are oversampled (1969, 1982, 1990, 2001, and 2008). - Key probabilities and distributions: - Probability of US growth falling below 0.8 percent in 2025: about 25 percent (a modest increase from 17 percent in April). - Risk of average US headline inflation falling below 1.5 percent in 2025: about 40 percent. - Risk of the federal funds rate falling below 3 percent for 2025: about 28 percent. - Probability of global growth in 2025 falling below 2 percent: about 17 percent. - Probabilities of global average headline and core inflation falling below 3 percent in 2025: about 20 percent and 15 percent, respectively. - Scenario analysis (models used: G20 and GIMF) - Two scenarios simulated: - Scenario A: a plausible downside alternative to the baseline (uses GIMF). - Scenario B: policies advocated to address imbalances (uses G20); if implemented, policies in scenario B could reduce the likelihood of scenario A. Scenario A (five layers) - Layer 1 — Global increase in tariffs: - United States, euro area, and China impose a 10 percent tariff on trade flows among the three regions. - A 10 percent tariff is levied on trade flows (in both directions) between the United States and the rest of the world. - The increase in tariffs directly affects about one-quarter of all goods trade, representing close to 6 percent of global GDP. - Tariff revenue is transferred back to households. - Layer 2 — Greater trade policy uncertainty: - Assumes tariff increases raise trade policy uncertainty from mid-2025 onward. - Assumed US aggregate investment declines by about 4 percent relative to the baseline, about twice the estimated effect from the previous episode; the increase in uncertainty is global. - Euro area experiences a decrease in investment similar to the United States; other regions including China experience a hit about half as large. - The impact on investment fades starting in 2027. - Layer 3 — Taxation of business income in the United States: - Many TCJA provisions are due to expire at the end of 2025; scenario assumes these expiring provisions are renewed for 10 years, lowering business income taxes by about 4.0 percent of baseline GDP, cumulatively, between 2025 and 2034. - Layer 4 — Migration flows to the United States and Europe: - Scenario assumes further reductions in net migration starting in 2025. - US labor force is permanently reduced by 1 percent by 2030 relative to baseline. - Euro area labor force is permanently reduced by 0.75 percent by 2030 relative to baseline. - Layer 5 — Global financial conditions tighten moderately in 2025–26: - Sovereign premiums in emerging markets (excluding China) increase by 50 basis points. - Corporate premiums increase by 50 basis points in advanced economies and China and by 100 basis points in other emerging markets. - Term premiums increase by 40 basis points in the United States and by 25 basis points in the euro area. Scenario B (two layers) - Layer 1 — Rebalancing in China: - Reforms expand social safety net coverage and accessibility of social security benefits. - Private saving rate gradually falls relative to the baseline starting in 2025 and is 3 percentage points of GDP lower by 2027. - The saving rate gradually converges back to the baseline starting in 2030. - Layer 2 — Higher EU public investment: - European Union countries undertake a region-wide expansion in public investment, increasing by 1.5 percent of the region’s baseline GDP on average during 2025–30. - Public investment remains permanently higher by 0.5 percent of baseline GDP after 2030 to sustain higher public capital. - About half of the surge is financed by higher deficits and the rest by a reallocation of government spending. Impact on world output and inflation (selected simulation results) - Scenario A effects: - United States GDP falls by 0.4 percent in 2025 and by 0.6 percent in 2026 (percent deviations from baseline). - Other regions and the world reach –0.3 percent of GDP by 2026. - Global imports and exports fall by about 4 percent relative to the baseline. - Global investment falls by close to 2 percent by 2026, lowering GDP by 0.4 percent over the same period. - Global inflation falls by 10 basis points due to the trade policy uncertainty layer. - Notes on presentation: - Effects on GDP are percent deviations from the baseline; effects on headline inflation are percentage point deviations from the baseline. *Source: CHAPTER 1 GLOBAL PROSPECTS AND POLICIES (PDF).* ### 1. GDP Level ### 1. GDP Level ### Scenario A: Temporary renewal of US TCJA provisions and global spillovers - Temporary renewal of US TCJA provisions raises US investment by about 2 percent in 2025 and 4 percent in 2026, relative to the baseline. - US GDP increases by 0.4 percent, and inflation increases by an average of 20 basis points over 2025–30, prompting higher US policy rates. - Spillovers to other regions are negative as investment demand decreases slightly outside the United States. - Decrease in migration flows to the United States and euro area permanently reduces potential output in both regions and raises inflation along the adjustment path. - GDP falls by 0.5 percent in the United States and by 0.4 percent in the euro area in 2025, whereas inflation increases by about 20 basis points and 15 basis points for the two, respectively. - As domestic demand falls in the United States and the euro area, GDP in the rest of the world also dips. - Tightening in global financial conditions reduces activity globally, more so in emerging markets excluding China (not shown). - Combined effect of scenario A: - Decrease in global GDP of about 0.8 percent by 2025 and 1.3 percent by 2026, relative to the baseline, with some effects fading over time. - US GDP falls by about 1 percent relative to the baseline in 2025. - Impact on global inflation is muted: –10 basis points by 2026. ### Scenario B: China rebalancing and EU public investment layer - China rebalancing layer: - Generates an increase in China’s domestic absorption. - Positive effect on China’s GDP peaks at 2.5 percent by 2027 relative to the baseline. - Headline inflation increases by 90 basis points in 2025 and by as much as 140 basis points in 2027. - Rebalancing reduces China’s current account by more than 1 percent of GDP and benefits global activity; effect on inflation outside China is small. - EU public investment layer: - Steadily raises the level of GDP in the euro area, peaking at 2.5 percent above the baseline by 2030. - Productivity increases, raising private investment and potential output and limiting inflationary pressures: inflation is about 40 basis points higher than the baseline over 2025–30. - Spillovers to other regions are small. - Combined effect of layers in scenario B: - 0.5 percent increase in world GDP. - Rise of 30 basis points in headline inflation in 2025. ### Note on presentation of results - Results are shown as deviations from baseline projections. *Source: IMF staff calculations.* ### 1. Production ### 1. Production ### Network exposure: production and consumption (figure notes) - The figure depicts countries’ network exposure for the year 2018 using ISO country codes. - Sectoral exposures are weighted by (1) sectors’ value-added share in total value added (panel 1: Production) and (2) sectors’ final consumption share (panel 2: Consumption). - Sources: Organisation for Economic Co-operation and Development; and IMF staff calculations. ### Impulse responses: metals (copper) versus oil shocks - The figure shows impulse responses to a 10 percent increase in the prices of copper (left) and oil (right) for countries with a high (90th percentile) and low (10th percentile) network exposure to metals and oil. - 12-month cumulative effects of a 10 percent increase in prices: - Copper, countries with high network exposure: headline inflation 0.5 percentage point; core inflation 0.3 percentage point. - Oil, countries with high network exposure: headline inflation 0.7 percentage point; core inflation 0.1 percentage point. - Copper, countries with low network exposure: headline inflation 0.1 percentage point; core inflation 0.2 percentage point. - Oil, countries with low network exposure: headline inflation 0.5 percentage point; core inflation 0.1 percentage point. - 48-month cumulative effects: - A 10 percent increase in copper prices leads to a cumulative 0.5 percentage point increase over 48 months in core inflation for the group of countries with high network exposure to metals. - A 10 percent increase in oil prices does not cause any significant increase in core inflation over the long term. - Note on impulse response visualization: - Panel 1 shows the 12-month responses; panel 2 shows the 48-month responses. - “High” and “Low” indicate the 90th and 10th percentiles of network exposure to metals (for copper shock) and oil (for oil shock). - Blue and red squares are the response for headline consumer price index (CPI) and core CPI. Whiskers indicate the 90 percent confidence intervals. - Sources for impulse responses: Baumeister and Hamilton 2019; Baumeister, Ohnsorge, and Verduzco-Bustos 2024; and IMF staff calculations. ### Interpretation of empirical results - Metals price shocks have delayed and persistent effects on headline and core inflation through production networks’ long-lasting effects on marginal costs via the cost of capital. - Oil price shocks show a substantial effect on headline inflation, but not on core inflation over the long term. - The persistence of copper and oil price shocks is roughly similar; however, copper price shocks have a stronger 48-month effect on copper prices than oil supply shocks have on oil prices. Country heterogeneity is not significant for oil. - Copper represents 30 percent of the IMF’s trade-weighted base metals index; therefore, estimates are a lower bound in the case of a supply shock that increases base metals prices by 10 percent (the effect is expected to be three times greater for base metals aggregate). ### Conclusions and Policy Implications - Primary metals play a major role as intermediate inputs for investment goods in production networks. - Metal supply shocks can have significant, persistent effects on core and headline inflation because of how metals enter the production network. - Oil supply shocks affect mostly headline inflation. - Monetary policy implications: - Central banks have typically “looked through” oil price shocks, provided these shocks were not excessively large. - As the energy system moves away from fossil fuels, the approach of looking through commodity price shocks may not work well when economies face major fluctuations in metals prices. - Monetary authorities may eventually need to react to metal supply shocks because these shocks have a more persistent effect on core inflation. - Central banks must be prepared for a potentially more metals-intensive global economy in which metals price shocks could become increasingly more relevant; their impact on inflation may initially appear subtle but could prove to be quite persistent. - Additional notes: - Supply shocks to metals markets are more dispersed than those for oil markets, as they typically do not hit each of the metals markets at the same time; this has so far made the magnitude of supply shocks for the aggregate primary metals sector smaller than that for the petroleum sector. ### Annex: Selected regional aggregates from Annex Tables (Real GDP, Consumer Prices, Current Account Balance, Unemployment) - Europe: - Real GDP (2023, 2024, 2025): 1.5, 1.7, 1.7 - Consumer Prices (2023, 2024, 2025): 0.9, 7.9, 5.3 - Current Account Balance (2023, 2024, 2025): 2.2, 2.5, 2.3 - Asia: - Real GDP (2023, 2024, 2025): 5.0, 4.6, 4.4 - Consumer Prices (2023, 2024, 2025): 2.6, 2.2, 2.6 - Current Account Balance (2023, 2024, 2025): 1.9, 1.9, 1.9 - North America: - Real GDP (2023, 2024, 2025): 2.8, 2.5, 2.1 - Consumer Prices (2023, 2024, 2025): 4.2, 3.1, 2.0 - Current Account Balance (2023, 2024, 2025): −2.9, −3.0, −2.8 - Middle East and Central Asia (regional aggregate): - Real GDP (2023, 2024, 2025): 2.1, 2.4, 3.9 - Consumer Prices (2023, 2024, 2025): 15.6, 14.6, 10.7 - Current Account Balance (2023, 2024, 2025): 3.7, 1.7, 0.8 - Sub-Saharan Africa (regional aggregate): - Real GDP (2023, 2024, 2025): 3.6, 3.6, 4.2 - Consumer Prices (2023, 2024, 2025): 17.6, 18.1, 12.3 - Current Account Balance (2023, 2024, 2025): −2.7, −3.2, −2.9 *Source: IMF staff calculations and IMF staff estimates (World Economic Outlook: Policy Pivot, Rising Threats, October 2024).* ### Annex Table 1.1.6. Summary of World Real per Capita Output ### Annex Table 1.1.6. Summary of World Real per Capita Output ### Overview - World (Average 2006–15; 2016; 2017; 2018; 2019; 2020; 2021; 2022; 2023; 2024; 2025): 2.2 1.9 2.5 2.5 1.8 –3.9 5.6 2.6 2.3 2.7 2.3 ### Advanced Economies - Advanced Economies (Average 2006–15; 2016; 2017; 2018; 2019; 2020; 2021; 2022; 2023; 2024; 2025): 0.9 1.3 2.1 1.8 1.4 –4.5 5.8 2.5 1.1 1.3 1.5 - United States: 0.8 1.1 1.8 2.4 2.1 –3.0 5.7 2.2 2.4 2.3 1.7 - Euro Area (calculated as sum of individual euro area countries): 0.5 1.5 2.4 1.5 1.3 –6.5 6.4 3.2 0.0 0.5 1.0 - Germany: 1.4 1.5 2.3 0.8 0.8 –4.2 3.6 0.6 –1.1 –0.4 0.6 - France: 0.5 0.5 2.0 1.3 1.7 –7.8 6.4 2.3 0.8 0.8 0.8 - Italy: –0.9 1.5 1.8 1.0 0.6 –8.6 9.7 5.0 0.8 0.7 0.8 - Spain: –0.1 2.8 2.7 2.0 1.1 –11.4 6.7 5.5 2.3 1.7 1.0 - Japan: 0.6 0.8 1.8 0.8 –0.2 –3.9 3.0 1.5 2.2 0.8 1.6 - United Kingdom: 0.4 1.1 2.0 0.8 1.1 –10.7 8.3 4.0 –0.1 0.6 1.1 - Canada: 0.6 0.0 1.8 1.3 0.4 –6.1 4.7 2.1 –1.5 –1.5 1.0 - Other Advanced Economies (excludes G7 and euro area countries): 2.1 1.8 2.5 2.1 1.3 –2.2 6.0 1.8 0.7 1.5 1.7 ### Emerging Market and Developing Economies - Emerging Market and Developing Economies: 4.0 2.8 3.3 3.4 2.4 –3.1 5.9 2.9 3.3 3.7 3.1 - Emerging and Developing Asia: 6.7 5.8 5.6 5.5 4.5 –1.4 7.0 3.9 5.2 4.7 4.4 - China: 9.0 6.2 6.4 6.3 5.6 2.1 8.4 3.0 5.4 4.9 4.6 - India (see country-specific note in Statistical Appendix): 5.3 7.0 5.6 5.3 2.8 –6.7 8.8 6.3 7.3 6.0 5.5 - Emerging and Developing Europe: 2.7 1.2 3.6 3.3 2.3 –1.8 7.4 2.0 3.6 3.4 2.5 - Russia: 2.4 –0.1 1.6 2.7 2.1 –2.5 6.2 –0.9 3.9 3.8 1.7 - Latin America and the Caribbean: 1.8 –2.0 0.3 0.2 –0.9 –7.9 6.6 3.5 1.5 1.2 1.8 - Brazil: 1.9 –4.0 0.7 1.1 0.6 –3.9 4.3 2.6 2.5 2.6 1.8 - Mexico: 0.5 0.8 0.9 1.0 –1.3 –9.1 5.4 2.9 2.3 0.6 0.5 - Middle East and Central Asia: 1.6 2.0 0.0 1.0 0.1 –4.3 2.7 3.3 0.1 4.8 2.1 - Saudi Arabia: 0.5 –1.9 0.8 5.9 1.5 –8.1 7.7 2.8 –2.7 –0.5 2.5 - Sub-Saharan Africa: 2.2 –1.4 0.1 0.5 0.4 –4.3 2.1 1.4 0.9 0.9 1.6 - Nigeria: 3.6 –4.2 –1.8 –0.7 –0.4 –4.3 1.1 0.7 0.3 0.4 0.7 - South Africa: 1.1 –0.8 –0.3 0.0 –1.3 –7.5 3.8 0.7 –0.8 –0.4 0.0 ### Memorandum Groups - European Union: 0.9 1.7 2.8 2.0 1.8 –5.8 6.7 3.5 0.2 0.8 1.4 - ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand): 3.7 3.5 4.0 3.8 3.2 –5.5 3.3 4.5 3.0 3.5 3.6 - Middle East and North Africa: 1.2 2.5 –0.5 0.5 –0.3 –4.5 2.9 3.3 0.0 0.2 2.2 - Emerging Market and Middle-Income Economies: 4.2 3.1 3.6 3.7 2.6 –2.9 6.5 3.3 3.7 3.5 3.4 - Low-Income Developing Countries: 3.1 0.9 2.0 2.2 2.5 –2.3 1.9 2.0 1.7 3.1 2.4 *Source: IMF staff estimates.* --- _Source: https://www.imf.org/-/media/files/publications/weo/2024/october/english/ch1.pdf_