## FOREWORD

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### The Global Battle against Inflation — Key Findings
- Headline inflation rates peaked at 9.4 percent year over year in the third quarter of 2022.
- Headline inflation rates are projected to reach 3.5 percent by the end of 2025, below the average level of 3.6 percent between 2000 and 2019.
- Global growth is projected to hold steady at 3.2 percent in 2024 and 2025.
- Medium-term global growth remains lackluster, at 3.1 percent.
- Despite a sharp and synchronized tightening of monetary policy around the world, the global economy avoided a global recession and remained unusually resilient throughout the disinflationary process.
- Some countries, especially low-income developing countries, have seen sizable downside growth revisions, often as a result of increased conflicts.
- Inflation in services remains almost twice as high as before the pandemic.

### Downside Risks Dominating the Outlook
- Principal downside risks identified:
  - An escalation in regional conflicts.
  - Monetary policy remaining tight for too long.
  - A possible resurgence of financial market volatility with adverse effects on sovereign debt markets (see October 2024 Global Financial Stability Report).
  - A deeper growth slowdown in China.
  - Continued ratcheting up of protectionist policies.
- The world is now dominated by supply disruptions—from climate, health, and geopolitics—which increase prices and reduce output, making it harder for monetary policy to maintain price stability.
- Some emerging market economies are facing a resurgence of inflationary pressures, sometimes because of elevated food prices.
- Inflation expectations have remained well anchored this time, but may be harder to anchor next time as workers and firms will be more vigilant in protecting their standards of living and profits.

### What Drove the Surge and Subsequent Decline in Inflation
- The surge and subsequent decline in global inflation reflect a combination of shocks:
  - Broad supply disruptions coupled with strong demand pressures in the wake of the pandemic.
  - Sharp spikes in commodity prices caused by the war in Ukraine.
- These shocks led to an upward shift and a steepening of the relationship between activity and inflation, the Phillips curve.
- Disinflation drivers:
  - Unwinding of the shocks themselves.
  - Improvements in labor supply, often linked to immigration.
  - Monetary policy helping to keep inflation expectations anchored and avoiding wage-price spirals.

### Policy Triple Pivot — Overview
- The return of inflation to near central bank targets paves the way for a policy triple pivot:
  1. Monetary policy pivot (already started).
  2. Fiscal policy pivot.
  3. Structural reform pivot (the hardest).

### Monetary Policy Pivot — Findings and Implications
- Since June, major central banks in advanced economies have started to cut their policy rates, moving their policy stance toward neutral.
- Expected effects:
  - Support activity as many advanced economies’ labor markets show signs of weakness, with rising unemployment rates.
  - Help ward off downside risks.
- Change in global monetary conditions is easing pressure on emerging market economies:
  - Currencies strengthening against the US dollar.
  - Financial conditions improving.
  - These developments will help reduce imported inflation pressures, allowing these countries to pursue their own disinflation paths.
- Vigilance remains key given elevated services inflation and supply-side shocks.

### Fiscal Policy Pivot — Findings and Recommendations
- Fiscal space is a cornerstone of financial stability; after years of loose fiscal policy, it is time to stabilize debt dynamics and rebuild fiscal buffers.
- Despite lower policy rates providing some fiscal relief, this will not be sufficient given that long-term real interest rates are much above prepandemic levels.
- Primary balances (the difference between fiscal revenues and public expenditures net of debt service) need to improve in many countries.
- For some countries, like the United States and China, debt dynamics are not stabilized under current fiscal plans (see October 2024 Fiscal Monitor).
- Concerns:
  - Early post-pandemic and cost-of-living crisis fiscal plans are showing increasing signs of slippage.
  - Unduly delaying adjustment increases the risk of disorderly market-imposed adjustments.
  - An excessively sharp turn toward fiscal consolidation would be self-defeating and hurt economic activity.
- Recommended approach:
  - Implement gradual and credible multiyear adjustments without delay, where consolidation is necessary.
  - The more credible and disciplined the fiscal adjustment, the more monetary policy will be able to play a supporting role.
- Note: The willingness and ability to deliver disciplined and credible adjustments have been lacking.

### Structural Reform Pivot — Challenges and Priorities
- Much more needs to be done to improve growth prospects and lift productivity; this is necessary to:
  - Rebuild fiscal buffers.
  - Address aging and declining populations in many parts of the world.
  - Provide opportunities for young and growing populations in Africa.
  - Tackle the climate transition.
  - Increase resilience and improve the lives of the most vulnerable.
- Structural weaknesses and diminished prospects noted in regions such as Latin America and the European Union.
- Many countries are implementing industrial and trade policy measures to protect workers and industries; concerns about these measures:
  - They can sometimes boost investment and activity in the short run, especially when relying on debt-financed subsidies.
  - They often lead to retaliation and are unlikely to deliver sustained improvements in standards of living.
  - Such measures should be firmly resisted when they do not carefully address well-identified market failures or national security concerns.
- Recommended sources of sustained growth:
  - Ambitious domestic reforms that boost technology and innovation.
  - Improve competition and resource allocation.
  - Further economic integration.
  - Stimulate productive private investment.
- Social and political constraints:
  - Structural reforms often face significant social resistance.
  - Chapter 3 explores social acceptability of reforms and finds that:
    - Better communication can only go so far.
    - Building trust between the government and its people—a two-way process throughout policy design—and inclusion of proper compensatory measures to mitigate distributional effects are essential features.

*Pierre-Olivier Gourinchas, Economic Counsellor*

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_Source: https://www.imf.org/-/media/files/publications/weo/2024/october/english/foreword.pdf_