## CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ## Source details **Canonical URL:** [CHAPTER 1 GLObaL PROsPECTs aND POLICIEs](https://www.imf.org/-/media/files/publications/weo/2025/october/english/ch1.pdf) ## Other formats - [Markdown version](/-/media/files/publications/weo/2025/october/english/ch1.pdf.md) - [Structured JSON version](/-/media/files/publications/weo/2025/october/english/ch1.pdf.json) --- ### Recent developments and near-term risks - Global activity slowed across major economies with both common and idiosyncratic drivers. - United States: - GDP grew at an annualized 3.8 percent in the second quarter of 2025, following a contraction of –0.6 percent in the first quarter of 2025. - Investment slowed (reduction in commercial and residential construction spending); surge in equipment and intellectual property spending (including AI-related) masked broader weakness. - Unemployment rate edged up to 4.3 percent in August 2025. - Net international migration flows plunged in H1 2025; if current trends continue, it could imply about 1.0–1.6 million fewer immigrants than in 2024 and 2.5 million fewer than in 2023. - China: - Growth slowed to 4.2 percent in Q2 2025 from 6.1 percent in Q1 2025 (staff seasonally adjusted estimates). - Net exports’ contribution receded; domestic demand possibly accelerated due to policy stimulus. High-frequency indicators decelerated in July–August 2025. - Euro area: - GDP growth slowed to 0.5 percent in Q2 2025 from 2.3 percent in Q1 2025; declines in Germany, Italy, and Ireland (Ireland Q1 partly front-loading pharmaceutical-sector transactions). - Japan: - Annualized growth 2.2 percent in Q2 2025, up from 0.3 percent in Q1 2025; driven by capital spending and strong exports (especially cars). - New export orders fell in July 2025 for the first time since December 2024; export values dropped in tariff-affected sectors. - Emerging market and developing economies (excluding China): - Stronger-than-expected H1 2025 growth driven by record agricultural output in Brazil, robust services in India, resilient domestic demand in Türkiye; external conditions becoming more challenging and domestic momentum slowing in some cases. - Low-income and fragile countries: - Some poorest economies grow about 2 percentage points lower than peers in this group; cuts to international aid and scarce external financing flows weigh on growth. ### Uncertainty, investment dynamics, and timing effects - Empirical estimates: - A one-standard-deviation increase in economic policy uncertainty leads to a 2 percent drop in investment, peaking about two years after the shock and fading in about three years. - Trade policy uncertainty estimates range between 0.7 percent and 2 percent, peaking in the first couple of quarters and fading in the second year. - Mechanisms: - Real-options: firms defer irreversible projects; households postpone durables. - Precautionary saving: households raise savings when perceived income risk increases, softening consumption. - Timing / front-loading effects (open-economy New Keynesian model exercises): - Realized uncertainty on impact: front-loading temporarily lifts output; firms raise prices causing a small, short-lived rise in consumer price inflation; thereafter uncertainty acts as a negative demand shock and inflation eases. - News shock (uncertainty expected later): front-loading via inventory building and slow repricing produces gradual and potentially more persistent inflation increases. ### Inflation pass-through, tariffs, and exchange rates - Aggregate inflation: - Headline and core inflation in the tariff-imposing country (United States) ticked up only slightly to date; US core goods prices show a more visible climb while services inflation remained persistent. - Tariff pass-through: - Actual effective tariff rate (actual duty paid on imports at customs as a share of the value of imports) lagged the effective rate based on announced statutory rates using pre-substitution trade weights. - Partial pass-through observed: household appliances reflected tariffs; many categories (including food and clothing) did not reflect expected pass-through. - High-frequency retail pricing: in tariff-exposed categories, prices of both imported and domestic goods rose—evidence of wider pricing and supply-chain spillovers. - Exchange rates and pricing: - US dollar weakened markedly in April and May 2025 and remained mostly stable at the weaker level thereafter. - Aggregate US ex-tariff import price remained broadly stable since April 2025. - Under dominant currency pricing, a weaker dollar reduces exporters’ margins independently of tariffs; universal tariffs may make margin reductions less likely. - Notable sectoral price moves: - US import price of capital goods increased significantly since April 2025. - Japan: export price of standard passenger cars bound for North America plummeted more than 20 percent (both invoiced in US dollars), while export prices of cars bound for the rest of the world remained stable. - Risk note: - Firms that absorbed cost increases may eventually pass them on to consumers; a decline in aggregate investment could be sharp given recent large contributions from investment in data centers and AI. ### Financial markets and global financial conditions - Market reactions: - Early August 2025 risk-off episode: global equity indices declined and US Treasury yields plunged, but equity recovered rapidly (one of the fastest recoveries on record). - Much of the year’s equity gains came from an AI stock rally; stretched valuations and calm relative to macro challenges raise the risk of volatility and asset-price corrections. - Global financial conditions: - Remain accommodative by historical standards despite recent steepening of the US yield curve. - Broader implications: - Muted pass-through to date, exchange rate movements, and sectoral heterogeneity obscure potential future inflation pressures and distributional impacts across firms, households, and countries. ### Baseline projections — growth, inflation, and policy paths - Global growth (baseline): - World output projected to grow 3.2 percent in 2025 and 3.1 percent in 2026, down from 3.3 percent in 2024. - Fourth-quarter-to-fourth-quarter growth projected: 2024 = 3.6 percent; 2025 = 2.6 percent; 2026 = 3.3 percent. - World growth at market exchange rates projected at 2.6 percent in both 2025 and 2026 (down from 2.8 percent in 2024). - Selected country/region projections (percent change): - World Output: 2024 = 3.3, 2025 = 3.2, 2026 = 3.1. - Advanced Economies: 2024 = 1.8, 2025 = 1.6, 2026 = 1.6. - United States: 2024 = 2.8, 2025 = 2.0, 2026 = 2.1. - Euro area: 2024 = 0.9, 2025 = 1.2, 2026 = 1.1. - China: 2024 = 5.0, 2025 = 4.8, 2026 = 4.2. - India: 2024 = 6.5, 2025 = 6.6, 2026 = 6.2. - World consumer prices (annual): 2024 = 5.8, 2025 = 4.2, 2026 = 3.7. - Oil price assumptions (table footnote vs main text slight variants preserved exactly where cited): - Oil (simple average of UK Brent, Dubai Fateh, WTI): 2024 = $79.17 a barrel; assumed price $68.92 in 2025 and $65.84 in 2026 (table footnote). - Elsewhere: petroleum spot price index expected to average $68.90 a barrel in 2025 and decrease to $67.30 by 2030. - Monetary policy explicit projections: - United States: federal funds rate projected to drop to 3.50–3.75 percent at the end of 2025 and to reach a terminal range of 2.75–3.0 percent around the end of 2028. - Euro area: policy rates expected to hold steady at 2 percent. - Japan: policy rates expected to be lifted, gradually rising over the medium term toward a neutral setting of about 1.5 percent (consistent with the Bank of Japan’s 2 percent inflation target). - Fiscal outlook highlights: - Fiscal policy remains too loose in many large advanced and developing economies; 2025 projected primary deficits generally lower than 2020–21 peak but sizably larger than pre-pandemic levels (exceptions: Brazil and India). - Stabilizing debt to GDP at its 2024 level requires significant consolidation for most countries; under projected 2025 primary balances, debt ratios are set to rise. - US public debt projected to rise from 122 percent of GDP in 2024 to 143 percent of GDP in 2030, 15 percentage points higher than projected in April. - Euro area debt-to-GDP ratio expected to reach 92 percent in 2030, up from 87 percent in 2024. - Emerging market and developing economies on average projected to modestly tighten fiscal policy in 2026 by about 0.2 percentage point of GDP; public debt in these economies projected to reach 82 percent of GDP in 2030, compared with just under 70 percent in 2024. ### World trade, external balances, and exchange-rate channels - Trade activity and front-loading: - Global trade robust in Q1 2025 due to strong US import growth and exports from Asia and the euro area because of front-loading; higher-frequency data show deceleration in Q2 2025. - Bilateral trade decoupling between the United States and China appears to be happening sooner than in the 2018–19 episode. - Key current-account and NIIP figures (first half / Q1–Q2 2025): - US current account deficit: 4.6 percent of GDP, 1.9 percentage points wider than the 2013–24 average. - Euro area current account surplus: 1.9 percent of GDP (first half of 2025) vs 3 percent over same period in 2024 and 2.3 percent during 2013–24. - China current account surplus: 3.2 percent of GDP (first half of 2025). - Japan current account surplus: 4.7 percent of GDP (first half of 2025). - NIIP trends: US liabilities have risen strongly due to record FDI and inflows into equities and US Treasuries; euro area and Japan NIIP see assets building faster than liabilities; China’s NIIP shows relative stability in low-frequency trends. ### Scenario analysis — two modeled scenarios and key probabilities - Models and scenarios: - Models used: G20 model (confidence bands) and GIMF (10-region, including China, the United States, the euro area; monetary policy responds endogenously; most regions have floating exchange rates). - Two new scenarios in addition to April 2025 scenarios: - Scenario A: shocks/policies that reduce global output and narrow global imbalances. - Scenario B: shocks/policies that increase global output without strong implications for imbalances. - Forecast uncertainty (confidence bands): - US recession probability for 2026: about 30 percent. - Probability that 2026 US headline inflation will rise above 3 percent: about 30 percent. - Probability that global growth in 2026 will fall below 2 percent: about 25 percent. - Probability that 2026 global headline inflation will rise above 5 percent: about 25 percent. - Growth distributions skewed to the downside; inflation distributions skewed to the upside. - Scenario A calibrated shocks and impacts: - Tariffs and supply-chain disruptions: - Imports from China face largest tariff hikes close to 30 percentage points. - Emerging Asia, the euro area, and Japan face tariff increases of about 10 percentage points. - Effective tariff rate on US imports increases by 10 percentage points overall. - Temporary disruption lowers total factor productivity in trade-intensive sectors (about 20 percent of global value added) by 1 percent globally in 2026–27 (returning to baseline in 2028). - Inflation expectations and sovereign yields: - One-year-ahead inflation expectations increase by 60 basis points in emerging markets with inflation above target; increase by 50 basis points in the United States; increase by about 25 basis points in other advanced economies and remaining emerging markets (excluding China). - Term premiums on public debt increase in all countries except China by 100 basis points starting in 2026 and lasting 10 years. - Safe/neutral global real rate increases gradually and permanently by up to 50 basis points relative to baseline. - Financial tightening and foreign demand: - Corporate spreads increase in 2026 by 50 basis points in advanced economies and China, and by 100 basis points in emerging markets (excluding China). - Lower foreign demand for US assets raises expected returns on US assets by up to 80 basis points relative to baseline; increase in US external risk premium lasts 20 years. - Scenario A outcomes: - Global activity decreases by 0.3 percent relative to baseline in 2026; permanent loss in global GDP of one-half percent. - United States: temporary 40 basis point surge in US inflation and a 20 basis point increase in policy rates in 2026; moderate reduction in current account deficit (partly because decline in investment larger than in other countries). - China: sustained reduction in inflation of 40–50 basis points; most affected among tariff-facing regions because of larger tariff hike and limited renminbi adjustment. - Other regions: modest inflation increases of 10–20 basis points. - In extended sovereign yields / global financial layer: global investment reduced by 3 percent in 2026; global GDP reduced by 0.6 percent in 2026 relative to baseline; global inflation falls by about 0.2 percentage point in 2026; over the long term all countries see permanent GDP decreases of about 1.5 percent. - Combined multi-layer shocks example: World GDP in 2026 is 1.2 percent lower than baseline, with activity declining further in 2027. - Scenario B calibrated shocks and impacts: - Return to low tariffs: - Tariffs imposed since January 2025 permanently removed; effective tariff rates on US imports fall by about 15 percentage points relative to baseline. - Imports from China see the largest decrease in effective tariff rates (about 22 percentage points); Japan, Europe, and emerging Asia face 10–20 percentage point reductions. - Trading partners also remove tariffs on US exports; US exports to China see a decrease in effective tariff rates of about 20 percentage points. - Reduced trade policy uncertainty and AI benefits: - Uncertainty reduction equivalent to a two-standard-deviation decrease in the global economic policy uncertainty measure observed in 2018–19. - Modest increase in AI-specific investment; global total factor productivity increases by about 0.8 percent over a 10-year period. - Scenario B outcomes: - Return to low tariffs supports global activity; increases in all three large countries with largest short-term gain in China. - United States: temporary reduction in inflation of about 60 basis points in 2026 and a 7 percent depreciation of the dollar relative to baseline as US import demand increases and renminbi-dollar rate adjusts. - Lower trade policy uncertainty raises global investment by about 2 percent in 2026–27. - Higher-than-expected AI benefits raise global GDP by about 0.3 percent in 2026, with global investment increasing by an additional 1.5 percent over 2026–27. - Combined effect: increase in global GDP of about 1 percent in 2026 and about 2 percent over the long term; return to low tariffs explains about 0.7 percentage point of the increase; AI benefits explain 1.4 percentage points. ### Commodities, markets, and network-adjusted exposure (NAVAS) - Commodity price developments (March–August 2025 and near-term forecasts): - Primary commodity prices declined by 2.6 percent between March and August 2025; precious metals gains partly offset declines in energy, base metals, and agriculture. - Oil prices decreased 5.4 percent between March and August 2025; traded between $60 and $70 per barrel since early April 2025 (temporary mid-June spike from Israel–Iran war). - Futures markets: oil prices averaging $68.90 per barrel in 2025, $65.80 in 2026, and rising to $67.30 by 2030 (text preserves multiple cited averages). - TTF natural gas prices in Europe fell 16.6 percent to $11.0/MMBtu; Asian LNG fell 12.2 percent; US Henry Hub fell 30 percent to $2.9/MMBtu. - Metals: IMF metals price index rose 6.8 percent between March and August 2025; gold increased 12.8 percent above $3,400/ounce. - Rare earths / magnets: Chinese export licensing in April caused dramatic slowdowns in April–May; rebounds after US–China trade agreement on June 11; rare earth carbonate feedstock prices jumped 30.2 percent. - Agriculture: food and beverages price index fell 4.8 percent between March and August 2025; cereal prices dropped 11.1 percent; coffee plunged 16.7 percent; corn fell 11.9 percent. - Commodity-driven macro implications: - Commodity sectors are, on average, larger in emerging market and developing economies than in advanced economies: - Average Domar weight: three times larger in emerging market and developing economies than in advanced economies overall. - By commodity: metals twice as large, energy three times as large, agriculture almost four times as large in emerging market and developing economies compared with advanced economies. - NAVAS (network-adjusted value-added share) better predicts macro responses to commodity shocks than sector size alone: - NAVAS differences across country groups are smaller than Domar-weight differences; average commodity sector Domar weight three times larger in emerging markets but NAVAS only 31 percent higher. - Example: Thailand’s commodity sector six times larger than Switzerland’s by size, but NAVAS values almost identical (0.68 Thailand; 0.65 Switzerland). - Model experiments: - Two net exporters with equal commodity sector size (39 percent of GDP) but different NAVAS (Kazakhstan NAVAS = 0.90; South Africa NAVAS = 0.73) show divergent consumption responses to a 1 percent terms-of-trade shock: positive and large in Kazakhstan but negative in South Africa. - Policy implication: macroeconomic frameworks and monetary policy should incorporate production-network structure (NAVAS / NAW) when assessing commodity price shocks; relying on sector size alone leads to systematic policy miscalibration (advanced economies overestimate commodity importance by ~32 percent on average; emerging market and developing economies by ~27 percent). ### Risks, medium-term outlook, and policy priorities - Risks tilted to the downside (selected downside risks): - Prolonged trade policy uncertainty and rising protectionism: dampens investment, hampers inventory optimization (front-loading then payback), fragments supply chains, reduces technological diffusion, and may cause social and political spillovers. - Shocks to labor supply (e.g., stricter immigration): reduce potential output, raise sectoral inflation pressures in construction, hospitality, personal services, and agriculture, and complicate monetary policy easing. - Fiscal vulnerabilities and financial fragilities: rising long-term sovereign yields, maturity shortening, increased reliance on private creditors for low-income countries, and nonbank liquidity risks. - Repricing of new technologies: AI valuation reversals could trigger market corrections; risk of capital misallocation. - Eroding institutional independence and governance: political pressure on central banks harms credibility and may de-anchor expectations. - Commodity price spikes from climate shocks or conflicts: amplify food/fuel price risks and fiscal strains, especially for importers and low-income countries. - Upside risks: - Breakthroughs in trade negotiations and restoration of rules-based frameworks could lower tariffs, reduce uncertainty, and unlock productivity and investment gains. - Faster structural reforms (labor, competition, product markets) can lift medium-term growth. - AI adoption combined with enabling policies could reignite productivity growth. - Policy recommendations — bringing confidence, predictability, and sustainability: - Anchor trade in predictable rules: - Set clear, transparent trade policy road maps and modernize trade rules for services, digital trade, data flows, complex subsidies, and supply-chain security. - Pursue bilateral, regional, and plurilateral negotiations that are open-access and avoid discriminatory managed-trade provisions. - Pair trade diplomacy with macroeconomic adjustment (examples: Europe infrastructure investment; China rebalancing toward household consumption; United States credible fiscal consolidation). - Rebuild fiscal buffers and safeguard debt sustainability: - Implement credible medium-term fiscal consolidation that protects spending for the vulnerable and prioritizes efficiency. - Broaden tax bases, strengthen revenue administration, reprioritize expenditure toward high-multiplier uses, and allow automatic stabilizers to operate. - Publish medium-term fiscal frameworks with clear anchors and guardrails against monetary financing. - Where debt is unsustainable, restructuring may be required; operationalize international sovereign debt resolution mechanisms. - Monetary policy: tailored, transparent, independent: - Preserve price stability; calibrate policy to country circumstances and where activity stands relative to potential. - Interest-rate cuts only when disinflation is durably established and slack has widened. - Central banks should articulate reaction functions, publish scenarios, tailor communications, maintain predictable calendars, and safeguard independence. - Exchange rate and macrofinancial stability: - Generally allow flexible exchange-rate adjustment; use IMF Integrated Policy Framework guidance if movements become disorderly. - Contain liquidity risks in nonbank finance, enforce robust capital and liquidity standards in banking, and develop crypto/stablecoin regulatory frameworks. - Policies for severe shock mitigation and readiness: - Use scenario analysis with baseline and severe plausible alternatives; prepare policy response templates for monetary, fiscal, and financial-stability toolkits. - Industrial policy and structural reforms: - Favor horizontal reforms over open-ended vertical support; clearly diagnose market failures before interventions and embed interventions in strong institutions, governance, and fiscal discipline. - Advance labor market, demographic, digitalization/AI adoption, competition, and product market reforms (portable benefits, childcare, upskilling, data governance, support for small firms). - Low-income country priorities and aid: - Strengthen domestic resource mobilization and administrative capacity; donors should explore front-loading commitments prioritizing grants and highly concessional finance. - Climate change: - Invest in renewable technologies and resilience, implement carbon pricing, and complement with fiscal incentives and adaptation finance, especially for low-income countries. *International Monetary Fund | Chapter 1, World Economic Outlook (October 2025), IMF staff estimates.* ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### Recent developments: resilience giving way to warning signs - Slowing activity across major economies with common and idiosyncratic drivers. - United States: - GDP grew at an annualized 3.8 percent in the second quarter of 2025, following a contraction of –0.6 percent in the first quarter of 2025. - Investment slowed (reduction in commercial and residential construction spending), while a surge in equipment and intellectual property spending (including AI-related) masked broader weakness. - Jobs reports since July were much weaker than expected; unemployment rate edged up to 4.3 percent in August. - Net international migration flows plunged in the first half of 2025; if current trends continue, it could imply about 1.0–1.6 million fewer immigrants than in 2024 and 2.5 million fewer than in 2023 (Duzhak and New-Schmidt 2025). - China: - Growth slowed to 4.2 percent in the second quarter of 2025 from 6.1 percent in the first quarter of 2025 (staff seasonally adjusted estimates). - Contribution of net exports receded; acceleration in domestic demand possibly driven by policy stimulus. - High-frequency indicators point to deceleration in July and August 2025. - Euro area: - GDP growth slowed to 0.5 percent in the second quarter of 2025 from 2.3 percent in the first quarter. - Declines in Germany, Italy, and Ireland; Ireland’s strong Q1 contribution partly reflected front-loading in pharmaceutical-sector transactions. - Japan: - Annualized growth of 2.2 percent in Q2 2025, up from 0.3 percent in Q1 2025, propelled by solid capital spending and strong exports (especially cars). - New export orders fell in July 2025 for the first time since December 2024; export values dropped in sectors most affected by tariffs. - Emerging market and developing economies (excluding China): - Stronger-than-expected growth in H1 2025 driven by record agricultural output in Brazil, robust services in India, and resilient domestic demand in Türkiye. - External conditions becoming more challenging; domestic momentum slowing in some cases (e.g., Brazil amid tight monetary and fiscal policies). - Low-income and fragile countries: - Some of the world’s poorest economies see feeble growth—about 2 percentage points lower than other peers in this group—affected by a dearth of external financing flows and cuts to international aid. - Other fragile countries affected by internal or regional conflicts are falling even further behind (Chabert and Powell 2025). ### Uncertainty impact and investment dynamics - Empirical estimates: - A one-standard-deviation increase in economic policy uncertainty leads to a 2 percent drop in investment, peaking about two years after the shock and fading in about three years (Londono, Ma, and Wilson 2025). - Estimates for trade policy uncertainty range between 0.7 percent and 2 percent, peaking in the first couple of quarters and fading in the second year. - Channels: - Real-options mechanism: firms defer irreversible projects; households postpone durable purchases. - Precautionary behavior: households save more when perceived income risk increases, softening consumption growth. - Timing and front-loading: - Front-loading to avoid potentially higher future prices from tariffs can temporarily offset wait-and-see and precautionary motives. - Two model exercises (open-economy New Keynesian model): - If uncertainty rises on impact (realized uncertainty): front-loading lifts output briefly; firms raise prices to protect margins causing a small, short-lived increase in consumer price inflation; once front-loading fades, uncertainty becomes a negative demand shock and inflation eases as margins compress. - If agents receive news that uncertainty will rise later (news shock): similar front-loading motivated by anticipated future price changes; firms build inventories and reprice slowly, producing gradual and potentially more persistent inflation increases. ### Rising prices and tariff pass-through - Aggregate inflation: - Headline and core inflation in the tariff-imposing country (United States) have ticked up only slightly to date, but core goods prices in the United States show a more visible climb while services inflation remained persistent. - Effective versus actual tariffs and pass-through: - The actual effective tariff rate (actual duty paid on imports at customs as a share of the value of imports) lagged the effective rate based on announced statutory rates using pre-substitution trade weights. - Examination of certain categories suggests partial pass-through: - Household appliances have reflected the cost of tariffs. - Many categories, including food and clothing, have not reflected expected pass-through. - High-frequency retail pricing data indicate that in categories with exposure to tariffs, prices of both imported and domestic goods are affected—evidence of wider pricing and supply-chain spillovers (Cavallo, Llamas, and Vazquez 2025). - Exchange rate dynamics: - The US dollar weakened markedly in April and May 2025 and has remained mostly stable at the weaker level since then, unlike in the 2018–19 episode. - The aggregate US ex-tariff import price has remained broadly stable since April 2025. - Under dominant currency pricing, a weaker dollar reduces exporters’ margins independently of tariffs; universal tariffs may make margin reductions less likely since competitors are also tariffed. - Sectoral patterns and notable figures: - US import price of capital goods increased significantly since April 2025. - Japan: export price of standard passenger cars bound for North America plummeted more than 20 percent, while export prices of cars bound for the rest of the world remained stable (both invoiced in US dollars). - Risks: - Firms that have absorbed cost increases so far may not be able to continue doing so; at some point they may pass increases on to consumers. - A decline in aggregate investment could be sharp given recent large contributions from investment in data centers and AI. ### Financial markets and near-term risks - Market reactions: - Renewed economic fears (especially in the United States) briefly set a risk-off tone in financial markets in early August 2025: global equity indices declined and US Treasury yields plunged, but these movements reversed quickly with one of the fastest equity recoveries on record. - Much of the year’s equity gains came from an AI stock rally; stretched valuations and calm relative to challenges raise the risk of market volatility and asset-price corrections if uncertainty or economic indicators disappoint. - Global financial conditions: - Remain accommodative by historical standards despite recent steepening of the US yield curve. - Broader implications: - The muted pass-through to date, exchange rate movements, and sectoral heterogeneity in prices obscure potential future inflation pressures and distributional impacts across firms, households, and countries. *International Monetary Fund | October 2025* ### 2. Inflation Pass-Through ### 2. Inflation Pass-Through ### Pass-through, trade, and prices - Korea’s automobile export prices have risen, while export prices of German cars sold to non-EU countries have remained relatively stable so far; exporters face margin pressures that may limit the ability to keep prices lower. - When firms’ pricing decisions are based on beliefs about when competitors will raise prices, price increases tend to be gradual rather than a one-off jump. - An appreciation of the dollar — which has been range-bound recently — may put the exchange rate offset back in action to mitigate the impact of tariffs on US consumer prices. ### Recent global trade and external balances (first half / Q1–Q2 2025) - Global trade activity was robust in the first quarter of 2025, driven by strong US import growth and exports from Asia and the euro area because of front-loading in anticipation of higher US tariffs; higher-frequency data show signs of deceleration in the second quarter. - Goods exports to the United States from major European economies—particularly Germany, Spain, and the United Kingdom—have fallen notably; total euro area exports remain resilient, supported by larger intra-European trade flows. - China’s decline in exports to the United States has been partly offset by higher exports to the euro area and ASEAN countries, supported in part by renminbi depreciation against most currencies (excluding the US dollar). - Bilateral trade decoupling between the United States and China appears to be happening sooner compared with the 2018–19 tariff shock. Key current-account and NIIP figures: - US current account deficit: 4.6 percent of GDP in the first half of 2025, 1.9 percentage points wider than the 2013–24 average. - Euro area current account surplus: 1.9 percent of GDP in the first half of 2025, compared with 3 percent over the same period in 2024 and 2.3 percent during 2013–24. - China current account surplus: 3.2 percent of GDP (first half of 2025). - Japan current account surplus: 4.7 percent of GDP (first half of 2025). - Net international investment positions (NIIP): US liabilities have risen strongly as the economy attracted record inflows of foreign direct investment and inflows into equities and US Treasuries; the euro area’s and Japan’s NIIP continue to see assets building faster than liabilities; China’s NIIP shows relative stability in low-frequency trends. ### Fiscal and monetary policy mix - Fiscal policy remains too loose in many large advanced and developing economies; 2025 projected primary deficits are generally lower than the record-setting 2020–21 deficits but remain sizably larger than prior to the pandemic, except in Brazil and India. - In China, the fiscal stance remains appropriately expansionary given weak domestic demand but departs from the stance needed to avoid rising debt-to-GDP over the medium term. - Stabilizing debt to GDP at its 2024 level requires significant consolidation for most countries; under projected 2025 primary balances, debt ratios are set to rise and in some cases—Brazil, China, France, and the United States—significantly so. - Rising cost of borrowing and refinancing risks: mid-segment and long-end yields have crept upward since end-2023; increased reliance on Treasury bills shortens average debt maturity and raises exposure to short-term interest rate fluctuations. - Global monetary policy has shifted from aggressive tightening to a more nuanced stance leaning toward easing or neutral, but stances are becoming more divergent across jurisdictions. Monetary policy projections (explicit projections preserved): - United States: federal funds rate projected to drop to 3.50–3.75 percent at the end of 2025 and to reach a terminal range of 2.75–3.0 percent around the end of 2028. - Euro area: policy rates expected to hold steady at 2 percent. - Japan: policy rates expected to be lifted, gradually rising over the medium term toward a neutral setting of about 1.5 percent (consistent with the Bank of Japan’s 2 percent inflation target). ### Commodity, trade policy, and baseline assumptions - Commodity price projections: - Fuel commodity prices projected to decline in 2025 by 7.9 percent and in 2026 by 3.7 percent. - Oil futures curve implies the petroleum spot price index is expected to average $68.90 a barrel in 2025 and decrease to $67.30 by 2030. - Nonfuel commodity prices projected to increase by 7.4 percent in 2025 and by 4.1 percent in 2026. - Trade policy assumptions: - Tariffs announced and implemented as of the beginning of September are included in the baseline and are assumed to remain in effect indefinitely (pauses and expirations treated as remaining in place past stated expiration dates). - Trade policy uncertainty is assumed to remain elevated through 2025 and 2026. ### Growth and inflation outlook (baseline projections) - Global growth: - World output projected to grow 3.2 percent in 2025 and 3.1 percent in 2026, down from 3.3 percent in 2024. - Fourth-quarter-to-fourth-quarter growth projected to decline from 3.6 percent in 2024 to 2.6 percent in 2025 and to recover to 3.3 percent in 2026. - World growth at market exchange rates projected at 2.6 percent in both 2025 and 2026, down from 2.8 percent in 2024. - Specific projection highlights from Table 1.1 (percent change): - World Output: 2024 = 3.3, 2025 = 3.2, 2026 = 3.1. - Advanced Economies: 2024 = 1.8, 2025 = 1.6, 2026 = 1.6. - United States: 2024 = 2.8, 2025 = 2.0, 2026 = 2.1. - Euro area: 2024 = 0.9, 2025 = 1.2, 2026 = 1.1. - China: 2024 = 5.0, 2025 = 4.8, 2026 = 4.2. - India: 2024 = 6.5, 2025 = 6.6, 2026 = 6.2. - World Consumer Prices (annual): 2024 = 5.8, 2025 = 4.2, 2026 = 3.7. - Oil (simple average of UK Brent, Dubai Fateh, WTI): 2024 = $79.17 a barrel; assumed price $68.92 in 2025 and $65.84 in 2026 (table footnote). - Fiscal projections and impacts: - Advanced economies as a group expected to maintain a broadly neutral fiscal policy stance, a departure from the tighter stance assumed in April 2025 WEO. - United States general government fiscal-balance-to-GDP ratio expected to deteriorate by 0.5 percentage point in 2026 (largely reflecting passage of the One Big Beautiful Bill Act (OBBBA) and an offset of about 0.7 percentage point of GDP from projected tariff revenues). - Euro area: fiscal balance projected to worsen in 2026, including a 0.8 percentage point widening of the deficit in Germany from increased infrastructure and military spending. - Under current policies, US public debt projected to rise from 122 percent of GDP in 2024 to 143 percent of GDP in 2030, 15 percentage points higher than projected in April. - Euro area debt-to-GDP ratio expected to reach 92 percent in 2030, up from 87 percent in 2024. - Emerging market and developing economies on average projected to modestly tighten fiscal policy in 2026 by about 0.2 percentage point of GDP; public debt in these economies projected to reach 82 percent of GDP in 2030, compared with just under 70 percent in 2024. ### Outlook summary - The outlook points to dim prospects in both the short and long term, with growth forecasts decisively below the pre-pandemic average of 3.7 percent. - The global economy is projected to grow at an annualized average rate of 3.0 percent over the six quarters from the second half of 2025 into 2026, a slowdown of 0.6 percentage point from the 3.6 percent average rate in 2024. - The forecast for 2025–26 is lower, by a cumulative 0.2 percentage point, than projected in the October 2024 WEO. *Source: Chapter 1, "Inflation Pass-Through", World Economic Outlook (October 2025), IMF staff estimates.* ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### Growth Forecast for Advanced Economies - Aggregate projection for advanced economies: 1.6 percent in 2025 and 1.6 percent in 2026; both 0.2 percentage point lower than recorded in 2024 and projected in the October 2024 WEO. - United States: - Growth projected at 2.0 percent in 2025 and 2.1 percent in 2026. - Projection: cumulative downward revision of 0.1 percentage point relative to the October 2024 WEO and 0.7 percentage point relative to the January 2025 WEO Update. - Drivers of downward revision: greater policy uncertainty, higher trade barriers, and lower growth in both the labor force and employment. - Euro area: - Growth expected at 1.2 percent in 2025 and 1.1 percent in 2026. - Cumulative downward revision of 0.4 percentage point compared with the October 2024 WEO. - Drivers: elevated uncertainty, higher tariffs; partial offsets from recovering private consumption (higher real wages) and fiscal easing in Germany in 2026; strong performance in Ireland lifts 2025 growth. Euro area economy expected to grow at potential in 2026. - Other advanced economies (selected): - Canada: growth forecast 2025 = 1.2 percent; 2026 = 1.5 percent — cumulatively 1.7 percentage points below the October 2024 projection. - Japan: growth expected 2025 = 1.1 percent; 2026 = 0.6 percent — cumulative downward revision of 0.2 percentage point relative to October 2024. - United Kingdom: growth in 2025 and 2026 expected to be 1.3 percent — cumulatively 0.4 percentage point lower than October 2024 despite being slightly revised upward relative to April. - Table-based Q4-over-Q4 projections excerpt (selected rows preserved exactly as in source): - World Output: 2024 = 3.6; 2025 = 2.6; 2026 = 3.3; Difference from July 2025 WEO Update = –0.1 (2025), 0.1 (2026); Difference from April 2025 WEO = 0.2 (2025), 0.3 (2026). - Advanced Economies: 2024 = 1.9; 2025 = 1.3; 2026 = 1.8; Difference from July 2025 WEO Update = –0.1 (2025), 0.1 (2026); Difference from April 2025 WEO = 0.1 (2025), 0.3 (2026). - United states: 2024 = 2.4; 2025 = 1.9; 2026 = 2.0; Difference from July 2025 WEO Update = 0.2 (2025), 0.0 (2026); Difference from April 2025 WEO = 0.4 (2025), 0.3 (2026). - Euro area: 2024 = 1.3; 2025 = 0.7; 2026 = 1.7; Differences recorded similarly in table. - Japan: 2024 = 1.3; 2025 = 0.2; 2026 = 1.1; Difference from April 2025 WEO = –0.2 (2026). - United Kingdom: 2024 = 1.5; 2025 = 1.4; 2026 = 1.4; Difference from July 2025 WEO Update = –0.1 (2025), 0.2 (2026); Difference from April 2025 WEO = –0.3 (2025), 0.5 (2026). - Canada: 2024 = 2.3; 2025 = 0.5; 2026 = 2.3; Difference from July 2025 WEO Update = –0.6 (2025), –0.2 (2026); Difference from April 2025 WEO = –0.1 (2025), 0.1 (2026). ### Growth Forecast for Emerging Market and Developing Economies - Aggregate projection: moderate from 4.3 percent in 2024 to 4.2 percent in 2025 and 4.0 percent in 2026. - This is virtually unchanged from the July WEO Update and a cumulative upward revision of 0.6 percentage point from the April 2025 WEO. - Compared with October 2024 WEO, it is cumulatively 0.2 percentage point lower; low-income developing countries experience larger downward revision than middle-income economies. - Emerging and Developing Asia: - Growth expected to decline from 5.3 percent in 2024 to 5.2 percent in 2025 and to 4.7 percent in 2026. - China: 2025 GDP growth forecast was revised downward by 0.6 percentage point in the April 2025 WEO and upward by 0.8 percentage point in the July WEO Update; compared with October 2024 WEO projection, growth at 4.8 percent is expected to be 0.3 percentage point higher. - India: projected growth 2025 = 6.6 percent; 2026 = 6.2 percent. Compared with July WEO Update, upward revision for 2025; compared with pre-tariff October 2024 forecast, cumulatively 0.2 percentage point lower. - Latin America and the Caribbean: - Region projected: 2025 = 2.4 percent; 2026 = 2.3 percent. - 2025 forecast revised upward by 0.4 percentage point relative to April; Mexico expected to grow at 1.0 percent in 2025 (1.3 percentage points higher than April 2025 WEO). Brazil projection for 2025 revised upward; 2026 revised downward partly due to higher tariff rate on exports to the United States. - For the region as a whole, forecast for this year and next is cumulatively 0.5 percentage point lower than October 2024 WEO. - Emerging and Developing Europe: - Projected to decline from 3.5 percent in 2024 to 1.8 percent in 2025 and recover to 2.2 percent in 2026. - Largely driven by Russia: growth forecast from 4.3 percent in 2024 to 0.6 percent in 2025 and 1.0 percent in 2026. 2025 growth is 0.9 percentage point lower than April 2025 WEO forecast. - Türkiye: growth projections revised upward for 2025 and 2026. - Region cumulatively 0.7 percentage point lower than October 2024 WEO. - Middle East and Central Asia: - Projected to accelerate from 2.6 percent in 2024 to 3.5 percent in 2025 and 3.8 percent in 2026. - Projection for 2025 revised upward by 0.5 percentage point relative to April; developments in Gulf Cooperation Council countries (notably Saudi Arabia) and Egypt are important contributors. - Compared with October 2024 WEO, region’s growth projection cumulatively 0.8 percentage points lower for 2025 and 2026. - Sub-Saharan Africa: - Growth expected to remain at 4.1 percent in 2025 (unchanged from 2024) and pick up to 4.4 percent in 2026. - Upward revision relative to April 2025 WEO by a cumulative 0.5 percentage point; downward revision of 0.1 percentage point compared with October 2024 WEO. - Nigeria: growth revised upward on account of supportive domestic factors including higher oil production, improved investor confidence, supportive fiscal stance in 2026, and limited exposure to higher US tariffs. - Loss of preferential access under the African Growth and Opportunity Act (expired in September) expected to have sizable negative effects, particularly on Lesotho and Madagascar. - Market-exchange-rate weighted projections (selected table excerpts preserved exactly): - World Output: 2024 = 2.8; 2025 = 2.6; 2026 = 2.6; Difference from July 2025 WEO Update = 0.1 (2025), 0.0 (2026); Difference from April 2025 WEO = 0.3 (2025), 0.2 (2026). - Advanced Economies (MER): 2024 = 1.8; 2025 = 1.6; 2026 = 1.7; Difference from July 2025 WEO Update = 0.1 (2025), 0.0 (2026); Difference from April 2025 WEO = 0.2 (2025), 0.2 (2026). - Emerging Market and Developing Economies (MER): 2024 = 4.2; 2025 = 4.0; 2026 = 3.8; Difference from April 2025 WEO = 0.1 (2026). ### Inflation Forecast - Global headline inflation projected to decline to 4.2 percent in 2025 and to 3.7 percent in 2026 (baseline). - Advanced economies: - Notable upward revisions relative to the October 2024 WEO include the United Kingdom and the United States. - United Kingdom: headline inflation expected to continue rising in 2025 partly because of changes in regulated prices; projected temporary with inflation returning to target at the end of 2026. - United States: inflation expected to pick up beginning in the second half of 2025 as tariffs’ impact is passed to consumers; inflation then expected to return to the Federal Reserve’s 2 percent target during 2027. Forecast assumes only modest second-round effects, implying potential upside risks to US inflation amid downside risks to employment. - Emerging market and developing economies: - Inflation forecasts revised upward for Brazil and Mexico. - Brazil: more pronounced upward revision; stabilization of inflation expectations above target rates tied to fiscal policy uncertainties last year; relief from recent currency appreciation expected in late 2025 and in 2026. - Mexico: upward revision driven by volatile categories such as food and more-persistent-than-expected services inflation. - Several economies (notably much of emerging and developing Asia including China, India, Thailand) have downward revisions owing to lower-than-expected outturns, with food, energy, and administrative prices playing roles. - Combined picture: - US growth in 2025 forecast at 2.0 percent (lower than 2.2 percent projected in October 2024 WEO); US inflation in 2025 forecast at 2.7 percent (higher than 1.9 percent projected in October 2024 WEO). - The US experiences a sharper growth slowdown and slower disinflation compared with pre-policy-shift forecasts; China shows a less sharp growth slowdown and muted inflation. ### World Trade Outlook and Global Imbalances - World trade: - Expected to decline modestly over the five-year forecast horizon. - Compared with April 2025 WEO: trade volume expected to grow faster in 2025 but more slowly in 2026 due to front-loading patterns. - Trade volume growth averaging 2.9 percent in 2025–26, even with temporary boost from front-loading in 2025, is lower than the October 2024 WEO projection of an average growth rate of 3.3 percent. - Global current account imbalances: - In 2025, global current account imbalances expected to exceed those in the October 2024 WEO and to narrow thereafter. - Preemptive trade ahead of prospective tariffs widens the US deficit and China’s surplus before unwinding as pull-forward behavior dissipates. - Three channels for narrowing global imbalances: 1. Trade policy shifts: - In the United States, higher import costs and greater uncertainty dampen investment and soften import demand; tariffs on intermediate inputs raise production costs for US manufacturers and have ambiguous net effects on the current account. - Higher tariff receipts may lift public savings, but decreasing private savings can offset this; model-based and empirical analysis suggest limited overall impact on the current account. 2. Exchange rate movements: - Higher unilateral tariffs normally accompany a stronger currency for the tariffing country; however, recent US dollar depreciation enhances export price competitiveness and restrains import-intensive consumption—possibly helping to narrow US external deficits. - A weaker dollar tends to ease global financial conditions but may be eroded by higher US inflation relative to the rest of the world and associated real effective exchange rate adjustments. 3. Fiscal changes: - China and Germany: announced and expanded spending measures to boost domestic demand, lowering net savings and reducing external surpluses. - United States: the OBBBA is expected to widen the fiscal deficit over the medium term relative to previous WEO projections despite back-loaded spending cuts and sizable tariff receipts, weighing on public saving and tending to widen the current account deficit or temper narrowing from other channels. ### Medium-Term Outlook - A more fragmented international economic landscape, aging populations, and subdued productivity growth add to challenges in lifting medium-term growth. - Without durable structural reforms, five-year WEO horizon growth forecasts remain mediocre. - World output is projected to expand at an average annual pace of 3.2 percent in 2027–30, which is characterized as a persistently lackluster performance compared with the prepandemic (2000–19) historical average. *source: IMF staff estimates.* ### 3.7 percent. ### 3.7 percent. ### Medium-term outlook and growth prospects - Relative to October 2019, prior to the pandemic, Russia’s invasion of Ukraine, the inflation surge, and recent protectionist trade policies, the medium-term outlook is decidedly weaker. - Medium-term growth prospects are dimming for about two-thirds of the world economy (measured by purchasing power parity). - The decline in medium-term growth is more pronounced for emerging market and middle-income economies. - The stronger downward revisions for emerging market and developing economies portend challenges to the pace of global income convergence. - The world’s poorest economies, including those suffering from prolonged conflict, are particularly at risk of seeing their growth momentum decelerate and their per capita income gap relative to advanced economies widen. ### Projected GDP growth deceleration and revisions - Panel descriptions (Figure 1.15): - 1. Projected GDP Growth Deceleration (Percent, five-year-ahead GDP growth) - 2. Medium-Term Growth Revisions (Percentage points) - Medium-term growth revisions are defined as 2030 real GDP growth from October 2025 WEO minus 2024 growth from October 2019 WEO. - Country-group labels used: AEs = advanced economies; EMMIEs = emerging market and middle-income economies; LIDCs = low-income developing countries. ### Impact of declining official development assistance (ODA) - Official development assistance constitutes a significant share of gross national income in some of the most vulnerable countries in the Middle East and in Africa. - Based on tracking of donor announcements, countries such as Afghanistan, the Central African Republic, and Somalia may be hit hardest by aid cuts in proportion to their gross national income. - Short- and medium-term implications of ODA cuts: - Direct short-term macroeconomic impact of aid cuts may not be large and will depend on details of the cuts and recipient governments’ responses. - Options to replace lost aid may be limited as debt service burdens climb and government revenues stagnate. - Over time, likely deterioration in energy access and human capital accumulation will reduce potential output, on top of humanitarian costs. - Declining ODA could heighten geopolitical instability, migration pressures, and security risks in fragile regions. - Recipient countries may increasingly rely on a patchwork of smaller, less coordinated, and potentially less accountable donors. ### Migration, labor flows, and remittances - The global stock of international migrants is estimated at 285 million as of 2022, with 168 million participating in the labor force. - About a quarter of those international migrants in the labor force are in North America—primarily the United States—and another quarter are in western Europe. - On average, roughly 15 percent of advanced economies’ populations are immigrants. - Emigrants constitute a significant portion of populations in emerging Europe, Latin America and the Caribbean, and the Middle East and North Africa. - Remittances: - Remittances alleviate poverty and under some circumstances modestly but permanently raise GDP. - Remittances are a significant resource for many migrant-source countries. - Migration policy effects (United States example): - New immigration policies could reduce the country’s GDP by 0.3 percent to 0.7 percent a year. - A decline in immigrant labor supply would lower potential output and may erase recent disinflationary momentum. - Sectors with high immigrant labor shares—construction, hospitality, personal services, and farm work—could experience stronger inflationary pressures. - Monetary policy easing would need to proceed cautiously depending critically on incoming data. ### Risks to the outlook: still tilted to the downside - General statement: Risks to the outlook remain tilted to the downside, as in the July 2025 WEO Update. - Downside risks: - Prolonged trade policy uncertainty and ratcheting up of protectionist trade measures: - Would weigh on firms’ investment decisions and growth. - Could hamper inventory optimization, leading to short-term output volatility (front-loading of imports followed by payback periods). - Further increases in tariffs could depress global output over the medium term given supply chain disruption. - Rise in protectionist measures—including export controls on new technologies—could lead to fragmentation of supply chains and reverse efficiency gains from trade liberalization. - Ad hoc bilateral deals that erode previous agreements and contain discriminatory measures may generate negative spillovers and tit-for-tat dynamics. - Fragmentation could stunt global technological diffusion, hurting emerging market and developing economies and potentially causing domestic polarization and social unrest. - Shocks to labor supply: - Stricter immigration policies in advanced economies could reduce labor supply, weigh on firms’ investment and hiring, and act as a negative supply-side shock reducing potential output capacity. - Emerging pockets of labor market tightness could put upward pressure on services prices and increase core inflation. - Fiscal vulnerabilities, financial market fragilities, and their interactions: - Recent surge in long-term sovereign bond yields in major advanced economies raises the risk that abrupt market reactions to fiscal vulnerabilities could have amplified effects. - Rising borrowing costs or erosion of the “convenience yield” on sovereign debt could increase debt-service costs and reduce critical spending (e.g., capital spending or support for shock-prone households). - Low-income countries facing reduced official aid flows are increasingly reliant on private creditors, adding to fiscal vulnerability. - Repricing of core government bond yields could be amplified by maturity mismatches and leverage among nonbank financial institutions and ripple through asset markets, triggering disorderly price corrections. - Worsened balance sheets for households and firms could weigh down consumption and investment. - Rapid rise of stablecoins may encourage currency substitution; a run on a stablecoin could jeopardize markets for assets that back it and pose systemic risks. - Repricing of new technologies: - Excessively optimistic growth expectations about AI could be revised, triggering a market correction. - If productivity gains fail to materialize, earnings disappointment could lead to reassessment of AI-driven valuations and a drop in tech stock prices with systemic implications. - A potential bust of the AI boom could rival the dot-com crash of 2000–01 in severity. - Overconcentration of capital in a narrow set of firms and sectors could entail a slow economic recovery hampered by capital misallocation. - Constrained fiscal space may limit policy response effectiveness. - Eroding good governance and institutional independence: - Intensification of political pressure on policy institutions (e.g., central banks) could erode public confidence and de-anchor inflation expectations. - Evidence shows political pressure on central banks tends to increase the intensity and persistence of inflationary pressures. - Political interference in statistical and technocratic institutions could erode trust in official data, complicating policy decisions and price discovery in financial markets, and raising the likelihood of policy mistakes. - Renewed spikes in commodity prices from climate shocks, regional conflicts, or geopolitical tensions: - Escalation in regional conflicts could sustain higher prices of food, fuel, and other essential commodities, with commodity-importing nations especially vulnerable amid constrained fiscal space. - Extreme heat, prolonged drought, and other natural disasters may adversely affect agricultural yields, sparking food supply shocks and amplifying food security challenges. - Low-income countries would be disproportionately impacted given high shares of household expenditure on essential commodities. - Upside risks: - Breakthrough in trade negotiations: - Lower tariffs and improved policy predictability could reduce costs from trade fragmentation and supply chain dislocation. - Restoring rules-based nondiscriminatory frameworks could improve trade policy predictability and facilitate efficiency gains. - Strengthening cooperation in trade in services, streamlining business regulation, and fostering capital market integration could unlock investment and boost productivity growth. - Faster pace of structural reforms: - Macroeconomic structural reforms—such as increasing labor force participation, reducing resource misallocation, and promoting business innovation—could contribute to stronger medium-term growth. - Artificial intelligence reigniting productivity growth: - Faster AI adoption could unleash strong productivity gains if accompanied by enabling policies. - Adequate regulatory frameworks and labor market programs for upskilling and re-skilling could help ensure gains exceed potential employment costs. ### Policy recommendations: bringing confidence, predictability, and sustainability - Anchoring trade in predictable rules: - Removing trade policy uncertainty: - Countries should set out and respect clear and transparent trade policy road maps to reduce volatility, stabilize expectations, and support investment. - Pragmatic cooperation and predictable processes limit costly precautionary adjustments and anchor confidence in a rules-based system. - Modernizing trade rules and cooperating to lower barriers: - Update trade rules to reflect services, digital trade and data flows, complex subsidies, and supply-chain security. - Practical avenues include interoperable standards for data and services and trade and investment facilitation platforms. - Modernization should be targeted to clearly identified cross-border spillovers and respect legitimate prudential objectives. - Cooperation across regional and multilateral platforms can keep trade regimes interoperable. - Effective, trusted dispute-settlement mechanisms can increase credibility and uptake of new rules. - Pursuing bilateral, regional, and plurilateral negotiations to lower barriers: - Aim for agreements that remain open to those willing to accept similar obligations and avoid raising barriers against third parties. - Design options include open-accession clauses to promote inclusivity and minimize fragmentation and disciplinary measures that curb discriminatory procurement. - Negotiations should de-escalate tensions, prevent tariff hikes, emphasize nondiscriminatory market opening, and lower trade and investment barriers. - Managed trade provisions—such as purchase commitments and quantitative restrictions—should be avoided because they lead to distortions and diversion and are unlikely to address external imbalances. - Pairing trade diplomacy with macroeconomic adjustment: - Align trade diplomacy with domestic policies that address root causes of large external imbalances. - Examples: - Europe: higher public infrastructure investment to raise potential growth and close the postpandemic productivity gap with the United States. - China: rebalancing toward household consumption—including through fiscal measures with a greater focus on social spending and the property sector—and scaling back industrial policies to reduce external surpluses and alleviate domestic deflationary pressures. - United States: credible fiscal consolidation to ease demand pressures and lower global interest rate spillovers. - Aligning trade diplomacy with macroeconomic measures can defuse persistent sources of friction. - Rebuilding fiscal buffers and safeguarding debt sustainability: - Restoring buffers: - Fiscal policy space has significantly declined during the recent series of shocks. - Additional spending demands arise from population aging and the need to ensure national and economic security. - Countries should implement credible medium-term fiscal consolidation designed to rebuild buffers while protecting spending to support the vulnerable. - With debt ratios already elevated and projected to rise further under current policies, heavy debt burdens will likely weigh on growth, crowd out priority spending, and heighten rollover and interest rate risks. - Fiscal strategies that rest on benign baselines or assume extraordinary growth are themselves a source of fragility. *Source: Chapter 1, October 2025 World Economic Outlook (PDF chapter).* ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### Fiscal policy: durable adjustment and debt sustainability - Durable adjustment should rely on a balanced package drawn from a realistic set of available options—spending rationalization and revenue mobilization—rather than reliance on financial repression, monetary financing, or financial market complacency, given that these involve material macro-financial risks. - Fiscal consolidation should prioritize measures that raise efficiency and crowd in private investment (October 2025 Fiscal Monitor): - Broaden tax bases and strengthen revenue administration. - Reprioritize expenditure toward high-multiplier uses—such as infrastructure, skills development, and well-targeted social protection. - Allow automatic stabilizers to operate fully over the cycle to support macroeconomic smoothing. - Institutional and governance requirements: - Robust frameworks and credible rules, well-resourced independent fiscal institutions, improved fiscal governance, and greater debt transparency are critical to fiscal adjustment efforts (Acalin and others, forthcoming). - New discretionary support should be: - Tightly targeted, transparently costed, and explicitly temporary. - Include clear sunset clauses with a preset expiration date and a preannounced step-down path. - Offset measures should be specified before introduction, with explicit identification of savings from expenditure reprioritization or additional revenue, particularly where fiscal space is constrained. - Where debt is unsustainable, restructuring may be required in addition to fiscal consolidation. Continued progress in operationalizing international sovereign debt resolution mechanisms—including the Group of Twenty (G20) Common Framework—and greater convergence of practices through the Global Sovereign Debt Roundtable can make restructuring more timely, predictable, and less costly. - Ensuring debt sustainability: - Publish medium-term fiscal frameworks with clear anchors, preannounced adjustment paths, and contingency plans to manage shocks (IMF 2025b). - Communication should include explicit guardrails against monetary financing to avoid the inflationary risks of fiscal dominance. ### Monetary policy: tailored, transparent, independent - Calibrating monetary policy to country circumstances: - Central banks should preserve price stability, considering where activity stands relative to potential output. - Tariffs operate as supply shocks—pushing up inflation, at least temporarily, while weighing on activity. - Interest rate cuts should be contingent on clear evidence that inflation is durably low and stable. - In economies that have not imposed tariffs, the dominant impulse may be weaker demand; any reduction in policy rates should be considered cautiously and is not presumed. - Only where disinflation is firmly established and slack has clearly widened would a gradual easing of the policy rate be appropriate. - Clear central bank communication: - Articulate the reaction function (for example, data dependencies, balance of risks). - Publish a small number of scenarios for inflation and economic activity, with concise explanations of the transmission mechanism. - Tailor messages to distinct audiences; release information promptly and with equal accessibility. - Use a predictable calendar and a consistent format across statements, minutes, and projections to facilitate learning about the reaction function over time (Bernanke 2024). - Independence and credibility: - Safeguarding central bank independence is essential; re-anchoring expectations after credibility erosion usually requires a prolonged period of tight monetary policy and elevated interest rates (Pastén and Reis 2021). - Fiscal dominance pressures—when elevated public financing needs encroach on monetary decisions—amplify risks. - Political interference has measurable effects: Box 2.3 in Chapter 2 documents 134 politically motivated central bank governor exits since 2000 and finds such interference loosens policy, weakens currencies, and lifts inflation and inflation expectations. ### Exchange rate and macrofinancial stability - Exchange rate policy: - In most cases, exchange rates should move flexibly in line with market conditions to facilitate macroeconomic adjustment. - If exchange rate movements become disorderly, the IMF’s Integrated Policy Framework provides country-specific guidance; where appropriate—and alongside sound monetary and fiscal stances—temporary foreign exchange intervention or targeted capital flow measures may be warranted. - Preserving macrofinancial stability: - Prioritize containing liquidity risks in nonbank finance and preserving resilience in the core banking system. - In line with Financial Stability Board guidance, private credit funds should limit stock creation and redemption frequency. - Regulators should mandate liquidity tools and regular stress tests to ensure resilience in downturns. - In banking, fully implement internationally agreed capital and liquidity standards and strengthen the financial sector safety net. - Develop a comprehensive, risk-based regulatory and supervisory framework for crypto assets, including robust frameworks to accommodate the rapid rise in stablecoins (see Chapter 1 of the October 2025 Global Financial Stability Report). - Data and institutions: - Macroeconomic performance rests on quality and independence of institutions across the policy ecosystem—fiscal frameworks, financial supervision, competition and insolvency regimes, the judiciary, and national statistical systems. - High-quality, timely, and professionally independent data reduce uncertainty and improve private sector planning and policy design; weak data governance undermines accountability and blunts policy effectiveness. - Best practices combine legal and operational safeguards for central banks with strong supporting institutions (budgetary autonomy, ability to set monetary policy free of interference, prohibition of short- and long-term direct lending to government). ### Policies for severe shock mitigation and readiness - Use of scenario analysis: - Develop a baseline and a small set of severe but plausible alternatives that jointly span macroeconomic and financial risks. - Each scenario should be accompanied by an outline of plausible policy responses to frame private sector expectations. - Policy response templates: - For monetary policy: alternative rate paths, balance sheet options, and communication templates. - For fiscal policy: calibrated use of automatic stabilizers and time-bound, targeted support. - For financial stability: liquidity backstops and activation thresholds for available macroprudential buffers. - Where warranted, capital flow measures consistent with the IMF’s Integrated Policy Framework. ### Policies with medium-term impact and industrial policy - Urgent need to lift medium-term growth prospects given mounting challenges. - Industrial policy trade-offs: - “Vertical” policies target support to particular firms and sectors and come with opportunity costs and trade-offs—most notably, a large fiscal cost. - Horizontal reforms that improve the general business environment and apply uniformly across the economy deserve prominent consideration. - Disciplined use of industrial policy: - Diagnose market failures clearly and identify areas where intervention yields largest benefits. - Embed interventions in a robust institutional and macroeconomic framework, ensure coordination among agencies, and maintain fiscal discipline. - Set explicit, measurable goals for industrial interventions (job creation, technological advancement, increased domestic production). - Strong governance: transparent selection processes, independent oversight, accountability mechanisms, regular evaluation and recalibration, and readiness to scale back ineffective measures. - Cross-border constraint: industrial policies should not be deployed to expand exports to compensate for lost markets; support to affected firms should be cautious, narrowly targeted, and time-bound, aimed at well-diagnosed market failures. - Prioritize instruments found in international agreements for pressures like trade diversion or surges in foreign direct investment rather than ad hoc industrial policy. ### Structural reforms: labor, technology, competition - Labor market and demographic policies: - Comprehensive policy packages to raise labor utilization and potential growth are central. - Modernize public employment services, digital job-matching platforms, and provide relocation assistance to speed reallocation. - Portable benefits across jobs and contract types, affordable childcare, and parental leave can raise participation—especially among women—and smooth earnings risks during transitions. - Migration policies calibrated to domestic skill shortages can clear bottlenecks while protecting domestic workers (see Chapter 3 of the April 2025 WEO). - Pensions and retirement: - Pension and retirement systems should support longer, healthier working lives through flexibility and actuarially fair incentives. - Encourage gradual retirement—partial pensions and phased work schedules—to keep older workers engaged (see Chapter 2 of the April 2025 WEO). - Digitalization and AI: - Advances in digitalization and AI can lift productivity and expand potential growth when paired with investments in workforce skills, management, interoperable infrastructure, competitive markets, and sound data governance and cybersecurity (Gopinath 2023). - Emphasize diffusion-oriented policies: support uptake of digital tools by small firms, management upgrading, and data interoperability alongside traditional R&D incentives. - Competition and product market reforms: - Foster entry and reduce barriers to reallocating resources toward high-productivity firms. - Where trade shocks are concentrated, replace open-ended protection with time-bound, well-targeted adjustment assistance—training, relocation support, and wage insurance. - Improve business climate through infrastructure, education, and regulatory reform to amplify industrial policy impact. ### Low-income country priorities and aid - For low-income countries facing cuts to international aid: - Strengthen capacity to mobilize domestic resources via rationalization of public spending, increased transparency, anti-corruption measures, and administrative reforms to support provision of basic services. - For donors: - Explore ways to mobilize more development assistance—meeting and front-loading existing commitments, with priority on grants and highly concessional terms. ### Addressing climate change efficiently - Policy mix for low-carbon, resilient growth: - Invest in technologies such as solar and wind and in energy-efficient systems to reduce carbon emissions and create new industries and jobs. - Implement carbon pricing mechanisms, such as carbon taxes or cap-and-trade systems, to incentivize emissions reduction. - Complement carbon pricing with fiscal incentives like tax breaks or subsidies for green technologies. - Provide technical assistance and financial support for adaptation projects, especially in low-income countries, including funding for infrastructure improvements and capacity-building initiatives. - Benefits of transition: - Transition from fossil fuels to renewables can enhance energy security, create employment in the green energy sector, improve the balance of payments by reducing energy importation costs, and enhance economic stability by reducing volatility associated with fossil fuel markets. ### Trade policy and tariff shocks: preliminary evidence from 2018–19 vs 2025 - The shift in US trade policy in 2025 differs notably from 2018–19: - 2018–19 tariff increases were directed primarily at a single trading partner—China. - The 2025 period is characterized by broader-based tariff hikes affecting a wider range of countries and a marked rise in trade policy uncertainty. - Question addressed: Has the distinct nature of the 2025 tariff shock led to different patterns of adjustment in bilateral trade between the United States and China, both with each other and with third-party countries, relative to the aftermath of 2018–19 tariff hikes? - Evidence from the 2018–19 episode: - China’s exports to the United States fell by about 6 percent within two years (Figure 1.1.1). - The bilateral US-China decoupling was accompanied by increased trade and investment ties with third countries—China’s exports to substitutes rose steadily while exports to complements rose less. - Preliminary 2025 trade data: - Early signs of further decoupling between the United States and China are visible in preliminary monthly bilateral trade flow data (marked in dashed lines in Figure 1.1.1). - Methodological notes: - Countries are classified as substitutes or complements to China based on how their exports respond to tariffs on Chinese goods. Substitutes (complements) are countries whose exports increase (decrease) when Chinese exports are taxed, reflecting positive (negative) substitution elasticity with respect to China. - Changes are calculated using 12-month rolling sums to smooth seasonal fluctuations. - X-axis value 0 corresponds to tariff start dates February 2018 and February 2025; each series is normalized to its respective date 0, at which the value equals 100. - Data sources cited: Fajgelbaum and others 2024; Trade Data Monitor; and IMF staff calculations. *Source: CHAPTER 1 GLObaL PROsPECTs aND POLICIEs, October 2025, International Monetary Fund.* ### Box 1.1. Trade Reallocation in Response to Tariffs: Will This Time Be Different? ### Box 1.1. Trade Reallocation in Response to Tariffs: Will This Time Be Different? ### Trade patterns and early signals - Early data through February–April 2025 show potentially faster trade shifts than in 2018–19: - Chinese exports to third-country markets—especially in Asia and Europe—increased more in February–April 2025 than in February–April 2018. - Canada and Mexico have accounted for a small share of China’s change in exports since February 2025 and have made a negative contribution to US export growth, in contrast to 2018–19. - In 2018–19: - Asian and USMCA countries absorbed China’s falling exports to the United States. - Falling US exports to China were accompanied by increases in other destinations such as the European Union, with stable exports to Canada and Mexico. - Policy and enforcement changes that may reduce reallocation include: - Higher tariffs on non-USMCA-compliant products and on steel and aluminum content on a value-added basis. - Tighter rules of origin, customs enforcement of transshipment, duties on value-added content, and extended screening procedures for foreign direct investment. - Caveats: - Gross trade data shifts can reflect changes unrelated to trade policy (competitiveness, exchange rates, relative prices). - Increased Chinese exports to third countries are not necessarily the same products whose exports to the United States dropped. - The 2018–19 reallocation picked up speed only after about 12 months; it is too soon to assess the magnitude of longer-term reallocation in the 2025 episode. ### Sectoral patterns - Early evidence shows redirection of trade to specific regions and sectors: - Automobiles and parts: redirected to Asia in the 2025 episode. - Steel and aluminum: redirected to Europe in the 2025 episode. - There is some evidence that changes in third countries’ imports from China in a given sector are correlated with changes in their exports in the same sector to other regions, consistent with trade reallocation, trade rerouting, or both. ### Quantitative estimates and model-based assessments - Stylized model result cited (Rotunno and Ruta 2025): - Once uncertainty is resolved, China’s exports to non-US markets could increase by 4–6 percent in the baseline, with diversion depending on distribution of tariffs and third-country policies. ### Forecast uncertainty (confidence bands) - US recession probability for 2026: about 30 percent. - Probability that 2026 US headline inflation will rise above 3 percent: about 30 percent. - Probability that global growth in 2026 will fall below 2 percent: about 25 percent. - Probability that 2026 global headline inflation will rise above 5 percent: about 25 percent. - Growth distributions are skewed to the downside; inflation distributions are skewed to the upside. ### Scenario analysis — Model framework - Models used: - G20 model: to derive confidence bands around the WEO baseline. - GIMF (Global Integrated Monetary and Fiscal) model: to analyze shocks over the five-year WEO horizon. - Two new scenarios are considered in addition to April 2025 scenarios: - Scenario A: combines shocks and policies that result in a fall in global output and narrowing global imbalances relative to baseline. - Scenario B: combines shocks and policies that increase global output relative to baseline without strong implications for imbalances. - Model features: - 10-region GIMF (including China, the United States, the euro area). - Monetary policy responds endogenously; most regions have floating exchange rates. - Scenario A assumes China’s currency is managed through capital flow measures (limited renminbi adjustment); Scenario B assumes renminbi adjusts as in a flexible exchange rate regime. - Automatic stabilizers operate on the fiscal side. - Model modified to allow higher pass-through to capture inflation risks from tariffs and exchange rate movements. ### Scenario A: layers and calibrated shocks - Higher tariffs and supply-chain disruptions: - Imports from China face the largest tariff hikes relative to baseline, close to 30 percentage points. - Emerging Asia, the euro area, and Japan face tariff increases of about 10 percentage points. - The effective tariff rate on US imports increases by 10 percentage points overall. - Tariff revenue used to pay down public debt over the WEO horizon. - Temporary disruption of global supply chains: total factor productivity in sectors more involved in global trade (about 20 percent of global value added) falls by 1 percent, globally, in 2026–27, before returning to baseline in 2028. - Higher inflation expectations: - One-year-ahead inflation expectations increase by 60 basis points in emerging markets currently facing inflation above target. - Increase by 50 basis points in the United States. - Increase by about 25 basis points in other advanced economies (excluding Japan) and in the remaining emerging markets (excluding China). - Higher sovereign yields: - Term premiums on public debt increase in all countries except China by 100 basis points, starting in 2026 and lasting 10 years. - The safe/neutral global real rate increases gradually but permanently relative to baseline, by up to 50 basis points. - Fiscal policy does not adjust over the WEO horizon; public debt is eventually stabilized at higher levels in most countries. - Tighter global financial conditions: - Corporate spreads increase in 2026 by 50 basis points in advanced economies and China, and by 100 basis points in emerging markets (excluding China). - Modest decline in US equity prices (partly reflecting a correction of AI stock valuations). - The tightening lasts for two years. - Lower global demand for US assets: - Lower foreign demand raises expected returns on US assets—partial loss of the “exorbitant privilege”—by up to 80 basis points relative to baseline. - The increase in the US external risk premium lasts for 20 years. ### Scenario B: layers and calibrated shocks - A return to low tariffs: - Tariffs imposed since January 2025 are permanently removed, reducing effective tariff rates on US imports by about 15 percentage points relative to the current baseline. - Imports from China see the largest decrease in effective tariff rates (about 22 percentage points), followed by Japan, Europe, and emerging Asia (10–20 percentage points). - Trading partners also remove tariffs on US exports; US exports to China see a decrease in effective tariff rates of about 20 percentage points. - Reduced trade policy uncertainty: - Agreements from ongoing negotiations and multilateral initiatives reduce economic uncertainty relative to baseline. - The decrease in uncertainty is equivalent to a two-standard-deviation decrease in the global economic policy uncertainty measure in Davis (2016), or about the absolute size of the spike observed in 2018–19. - Higher-than-expected benefits from AI: - Modest increase in investment in new AI-specific capital (information processing equipment, software intellectual property) in several countries, notably the United States and China. - Global total factor productivity increases by about 0.8 percent over a 10-year period. ### Scenario impacts (selected outcomes) - Scenario A: - Global activity decreases by 0.3 percent relative to baseline in 2026, with the effect building through 2028. - Permanent loss in global GDP of one-half percent. - China: most affected among tariff-facing regions because of larger tariff hike and limited renminbi adjustment; results in a lower current account surplus than in baseline. - United States: - Higher tariffs reduce production efficiency and cause dollar appreciation that lowers demand for US exports. - Experiences a moderate reduction in its current account deficit (in part because the decline in investment is larger than in other countries). - Temporary 40 basis point surge in US inflation and a 20 basis point increase in policy rates in 2026. - China: sustained reduction in inflation of 40–50 basis points. - Other regions (including the euro area): modest increase in inflation of 10–20 basis points. - For countries facing shocks to inflation expectations: higher nominal and real policy rates and decreased purchasing power contribute to negative demand effects. - Scenario B: - Positive GDP impacts from lower tariffs, reduced uncertainty, and AI-driven productivity and investment gains (see model figures for regional magnitudes). - Global total factor productivity gains and investment in AI support higher output relative to baseline over the medium term. *Italic: International Monetary Fund, World Economic Outlook, October 2025 — Box 1.1, “Trade Reallocation in Response to Tariffs: Will This Time Be Different?”* ### 0.4 percent from this shock alone. The impact on the ### ch1 - 0.4 percent from this shock alone. The impact on the ### Macroeconomic impacts of the scenario’s shocks - Global GDP is reduced by 0.3 percent in 2026, and global inflation increases by 20 basis points. The impact on activity fades as inflation is stabilized. - In the sovereign yields and global financial conditions layer: - Global investment is reduced by 3 percent in 2026, relative to the baseline. - Global GDP is reduced by 0.6 percent in 2026, relative to the baseline. - Global inflation falls by about 0.2 percentage point in 2026. - Over the long term, all countries see a permanent decrease in GDP of about 1.5 percent. - Regional heterogeneity: - Short-term hit is larger in emerging markets excluding China because corporate spreads widen more. - China: smaller short-term hit as term premia do not increase. - United States and the euro area: impacts similar to the global average in the sovereign yields layer. - Effects of lower global demand for US assets: - United States experiences higher domestic real interest rates and a depreciation of the US dollar, which: - raises demand for US exports, - compresses domestic absorption, - lowers GDP somewhat, - reduces the US current account deficit sizably. - Real interest rates outside the United States decrease, including in the euro area. - Euro area GDP increases modestly, and its current account surplus is lowered as domestic absorption increases. - China benefits more than other regions in the short term. Under the assumption that the exchange rate relative to the dollar is managed, the renminbi depreciates in real effective terms, supporting China’s external demand and limiting adjustment in its current account. - Combined effect from shocks in the scenario: - World GDP in 2026 is 1.2 percent lower than baseline, with activity declining further relative to baseline in 2027. - The United States is hit harder than China and the euro area: larger decrease in GDP, higher inflation, and higher real interest rates. - Other countries, including emerging markets, experience a decrease broadly similar in magnitude to the world economy’s decrease. - Impact on the US dollar’s real effective exchange rate is muted, reflecting offsetting effects of various shocks. - Global imbalances narrow. ### Scenario B: return to low tariffs and AI benefits - Short-term and medium-term impacts: - Return to low tariffs supports activity globally, with gains in all three large countries but largest in China in the short term. - United States sees a temporary reduction in inflation of about 60 basis points in 2026 and a 7 percent depreciation of the dollar relative to baseline as US demand for imports increases and the renminbi-dollar rate adjusts. - Lower trade policy uncertainty raises global investment by about 2 percent in 2026–27. - Higher-than-expected benefits from AI raise global GDP by about 0.3 percent in 2026, with global investment increasing by an additional 1.5 percent over 2026–27. - Increase in short-term activity and investment is somewhat larger in the United States and China than in the euro area, with limited impact on inflation. - Economic gains build over time as productivity rises. - Combined effect from layers in scenario B: - Increase in global GDP of about 1 percent in 2026 and about 2 percent over the long term. - Return to low tariffs explains about 0.7 percentage point of the increase. - Higher-than-expected benefits from AI explain 1.4 percentage points of the increase. - Global imbalances do not change much in this scenario because shocks generate relatively small cross-country variation and exchange rates play a larger role in global adjustment. ### Commodity market developments (March–August 2025 and near-term forecasts) - Aggregate movements: - Primary commodity prices declined by 2.6 percent between March and August 2025, with large gains in precious metals partly offsetting declines in energy, base metals, and agriculture. - Oil markets: - Oil prices decreased 5.4 percent between March 2025 and August 2025. - Oil prices traded between $60 and $70 since the US announcement of tariffs in early April, barring a temporary mid-June spike from the Israel-Iran war. - International Energy Agency forecast: 0.7 mb/d of global demand growth in 2025 and 1.4 mb/d of non-OPEC+ supply growth. - Latest OPEC+ production schedule gradually brought back 2.5 mb/d through September, one year ahead of schedule, with plans to further increase production. - Futures markets indicate oil prices will average $68.90 per barrel in 2025, decline to $65.80 in 2026, and steadily increase to $67.30 through 2030. - Risks: potential Russian supply disruptions (upside) and accelerated OPEC+ supply increases combined with tariff-induced cloudy global economic environment (downside to prices). - Some US break-even prices sit in the low to mid $60s. - Natural gas: - Title Transfer Facility (TTF) prices in Europe dropped 16.6 percent between March 2025 and August 2025 to $11.0 per million British thermal units (MMBtu). - Asian liquefied natural gas prices fell by 12.2 percent. - US Henry Hub prices fell by 30 percent to $2.9 per MMBtu. - Futures markets suggest TTF prices will average $12.1/MMBtu in 2025, steadily decreasing to $8.4/MMBtu in 2030. - Henry Hub prices expected to fluctuate around $3.5/MMBtu between 2025 and 2030. - Metals and precious metals: - IMF’s metals price index rose 6.8 percent between March and August 2025. - Gold increased 12.8 percent, reaching record highs above $3,400/ounce. - Futures markets suggest base metal modest increases of 0.3 percent in 2025 and 3.0 percent in 2026. - Rare earths and magnets: - China launched export licensing requirements for seven critical rare earth elements and their corresponding magnets in April, causing dramatic export slowdowns during April and May. - Following a US-China trade agreement on June 11, Chinese magnet exports rebounded in June and had fully recovered by July, rising 5 percent year over year. - Rare earth carbonate feedstock prices jumped 30.2 percent due to reduced US raw material exports to China. - Agriculture and food: - IMF’s food and beverages price index fell by 4.8 percent between March and August 2025, led by declines in coffee, cereal, and sugar. - Cereal prices dropped by 11.1 percent amid strong harvest prospects in the United States, Russia, Brazil, and Argentina. - Coffee prices plunged by 16.7 percent, retreating from their February historic high. - Corn prices fell 11.9 percent, pressured by Brazil’s large harvest in the second quarter and promising crop conditions in the United States. - Upside risks to food prices: new export restrictions and potential bad weather resulting from La Niña in the fourth quarter. - Downside risks: larger-than-expected harvests and higher tariffs. ### Commodity-driven macroeconomic fluctuations: size versus interconnectedness - Average size differences: - Commodity sectors are, on average, larger in emerging market and developing economies than in advanced economies: - Average Domar weight: three times larger in emerging market and developing economies than in advanced economies overall. - By commodity: metals twice as large, energy three times as large, agriculture almost four times as large in emerging market and developing economies compared with advanced economies. - Network-adjusted value-added share (NAVAS): - NAVAS measures the commodity sector’s total (direct and indirect) exposure to the economy’s factors of production. - Commodity sector NAVAS is larger than its Domar weight in both advanced and emerging market economies. - Differences in NAVAS across country groups tend to be smaller than differences in Domar weights. - The average commodity sector is three times larger (Domar weight) in emerging market and developing economies than in advanced economies, but its NAVAS is only 31 percent higher, with energy exhibiting the biggest difference and metals and agricultural products the smallest. - There is large overlap between the right tail of the NAVAS distribution in advanced economies and the left tail in emerging market and developing economies, implying that commodity sectors in many advanced economies can be highly interconnected. - Implications for consumption responses: - Countries with higher NAVAS display stronger annual correlation between aggregate consumption and commodities’ terms of trade. - NAVAS interaction coefficient (marginal impact of deeper interconnectedness on the response of consumption to terms-of-trade changes) is substantially larger than the coefficient for size interaction and is always significant (based on local projection analysis; Jordà 2005). - Example: Thailand’s commodity sector is six times larger than Switzerland’s by size, but their NAVAS values are almost identical (0.68 in Thailand and 0.65 in Switzerland), resulting in a very similar impact of terms-of-trade shocks on consumption. - Key interpretive point: - Understanding consumption patterns and macroeconomic propagation of commodity shocks depends more on commodity sector interconnectedness (NAVAS) than on sector size alone. *International Monetary Fund | October 2025 (excerpt from ch1)* ### 1. Size across Country Groups ### ch1 - 1. Size across Country Groups ### Importance of Interconnectedness over Size - The network-adjusted value-added share (NAVAS) captures how interconnected a commodity sector is with the rest of the economy and is a stronger predictor of macroeconomic responses to commodity price shocks than the sector’s size alone. - Empirical evidence (66 countries, 1990–2023, annual frequency) shows a positive relationship between NAVAS (year 2018) and the correlation between countries’ cyclical consumption and cyclical terms of trade. - Examples cited: - Norway energy sector NAVAS = 0.94; Vietnam NAVAS = 0.48, despite similar sector sizes. - Terms of trade are measured by the Commodity Net Export Price Index, weighted by net exports as a share of GDP and deflated using the US consumer price index. - In visual results: - Panel 2 local projections compute consumption coefficient estimates in response to a one-standard-deviation terms-of-trade shock (direct shock, interaction with NAVAS, interaction with Domar weight). ### Model-Based Analysis and Mechanisms - A small open economy dynamic stochastic general equilibrium model (based on Silva and others (2024) and Gomez-Gonzalez and others (2025)) is calibrated to OECD input-output data covering 66 countries and 44 sectors to match 2018 sectoral final consumption shares, input-output shares, and the commodity sector’s net exports. - Benchmark calibration aggregates six commodity sectors into 1 commodity sector and 38 non-commodity sectors. - Two experiments: - Relationship between NAVAS and co-movement of consumption and commodity terms of trade: model simulations replicate empirical positive slope—higher NAVAS associated with higher correlation of cyclical consumption and terms-of-trade shocks. - Transmission mechanism analysis: two commodity net exporters with equal commodity sector size (39 percent of GDP) but different NAVAS: - Kazakhstan: NAVAS = 0.90 - South Africa: NAVAS = 0.73 - A 1 percent commodity terms-of-trade shock: - Impact on aggregate consumption is positive and large in Kazakhstan but negative in South Africa. - Key propagation channels: - Real wages increase in both countries because nominal wages increase more than prices as commodity-sector revenues boost labor demand. - Final consumption depends on labor income and households’ real wealth (net foreign assets denominated in units of real commodity goods). - In South Africa, aggregate price index increases more than commodity prices on impact (more than 1 percent), causing a decline in the real value of net foreign assets and a decline in consumption. - Explanation: higher NAVAS implies greater role of intermediate input prices in marginal cost fluctuations, diluting direct wage impacts; low-NAVAS economies see shocks feed more directly into factor costs, producing larger aggregate price increases, lower real net foreign assets, and smaller (or negative) wealth effects. ### Implications for Monetary Policy in Small Open Economies - Standard closed-economy prescriptions (respond only to inflation in sticky-price sectors; ignore commodity fluctuations) may be inappropriate for small open economies because domestic commodity-price pass-through is incomplete and domestic commodity prices are stickier. - Relying on Domar weights (sector size) instead of network-adjusted weight (NAW, which depends on NAVAS) can lead to welfare losses that are inversely proportional to NAVAS. - Monetary policy “mistake” findings: - Both advanced economies and emerging market and developing economies would make monetary policy mistakes by over-weighting the commodity sector by roughly a third when relying on size instead of NAW. - Advanced economies tend to overestimate by 32 percent, on average, the importance of the commodity sector in monetary policy design. - Emerging market and developing economies tend to overestimate by 27 percent, on average. - Numerical example: average commodity sector size in advanced economies = 13 percent; given average monetary policy mistake = 34 percent, the adjusted weight should be 8.6 percent. - Numerical example: average commodity sector size in emerging market and developing economies = 39 percent; given average monetary policy mistake = 24 percent, the adjusted weight should be 30 percent. - Policy implication: when commodity sector NAVAS is low (sector relies more on foreign than domestic factors), there is less need for monetary response to commodity price fluctuations because they do not lead to commensurate output gap fluctuations. ### Conclusion and Policy Recommendations - Main conclusion: The macroeconomic impact of commodity price shocks depends less on the size of the commodity sector and more on its interconnectedness with the rest of the economy as measured by NAVAS. - Policy recommendations: - Macroeconomic frameworks should incorporate the structure of domestic production networks when assessing commodity price shocks. - Central banks in both advanced economies and emerging market economies should account for production network structures (NAVAS / NAW) when calibrating monetary policy responses to commodity price movements to reduce policy miscalibration and enhance macroeconomic stability. - Robustness notes: - The relationship between NAVAS and consumption response to terms-of-trade shocks is robust to alternative asset denomination (importable goods versus exportable goods) and varies across commodity types (energy, metals, agricultural). *Source: ch1 - 1. Size across Country Groups, IMF World Economic Outlook October 2025 (chapter excerpt).* ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### Asia and Pacific Economies (Annex Table 1.1.2) - Regional aggregates: - Asia: Real GDP 4.6 (2024), 4.5 (2025), 4.1 (2026); Consumer Prices 2.1 (2024), 1.6 (2025), 2.1 (2026); Current Account Balance 2.6 (2024), 2.9 (2025), 2.5 (2026). - Advanced Asia: Real GDP 1.6 (2024), 1.6 (2025), 1.4 (2026); Consumer Prices 2.6 (2024), 2.5 (2025), 2.1 (2026); Current Account Balance 5.3 (2024), 5.0 (2025), 4.7 (2026); Unemployment 2.9 (2024), 3.0 (2025), 3.0 (2026). - Emerging and Developing Asia: Real GDP 5.3 (2024), 5.2 (2025), 4.7 (2026); Consumer Prices 1.9 (2024), 1.3 (2025), 2.1 (2026). - Selected economy projections: - Japan: Real GDP 0.1 (2024), 1.1 (2025), 0.6 (2026); Consumer Prices 2.7 (2024), 3.3 (2025), 2.1 (2026); Current Account Balance 4.8 (2024), 3.9 (2025), 3.6 (2026); Unemployment 2.6 (2024), 2.6 (2025), 2.6 (2026). - China: Real GDP 5.0 (2024), 4.8 (2025), 4.2 (2026); Consumer Prices 0.2 (2024), 0.0 (2025), 0.7 (2026); Current Account Balance 2.3 (2024), 3.3 (2025), 2.8 (2026); Unemployment 5.1 (2024), 5.1 (2025), 5.1 (2026). - India: Real GDP 6.5 (2024), 6.6 (2025), 6.2 (2026); Consumer Prices 4.6 (2024), 2.8 (2025), 4.0 (2026); Current Account Balance –0.6 (2024), –1.0 (2025), –1.4 (2026); Unemployment 4.9 (2024), 4.9 (2025), 4.9 (2026). - Indonesia: Real GDP 5.0 (2024), 4.9 (2025), 4.9 (2026); Consumer Prices 2.3 (2024), 1.8 (2025), 2.9 (2026); Current Account Balance –0.6 (2024), –1.1 (2025), –1.2 (2026); Unemployment 4.9 (2024), 5.0 (2025), 5.0 (2026). - Vietnam: Real GDP 7.1 (2024), 6.5 (2025), 5.6 (2026); Consumer Prices 3.6 (2024), 3.4 (2025), 3.2 (2026); Current Account Balance 6.6 (2024), 4.0 (2025), 2.4 (2026); Unemployment 2.2 (2024), 2.3 (2025), 2.5 (2026). - Memoranda: - ASEAN-5: Real GDP 4.6 (2024), 4.2 (2025), 4.1 (2026); Consumer Prices 2.0 (2024), 1.4 (2025), 2.3 (2026). - Emerging Asia: Real GDP 5.4 (2024), 5.2 (2025), 4.7 (2026); Consumer Prices 1.6 (2024), 1.0 (2025), 1.8 (2026). ### Western Hemisphere Economies (Annex Table 1.1.3) - Regional aggregates: - North America: Real GDP 2.6 (2024), 1.8 (2025), 2.0 (2026); Consumer Prices 3.1 (2024), 2.8 (2025), 2.5 (2026); Current Account Balance –3.6 (2024), –3.6 (2025), –3.3 (2026). - South America: Real GDP 2.3 (2024), 2.7 (2025), 2.2 (2026); Consumer Prices 3.6 (2024), 9.8 (2025), 5.8 (2026); Current Account Balance –1.1 (2024), –1.6 (2025), –1.5 (2026). - Latin America and the Caribbean (memorandum): Real GDP 2.4 (2024), 2.4 (2025), 2.3 (2026); Consumer Prices 16.6 (2024), 7.6 (2025), 5.0 (2026); Current Account Balance –0.9 (2024), –1.1 (2025), –1.1 (2026). - Selected economy projections: - United States: Real GDP 2.8 (2024), 2.0 (2025), 2.1 (2026); Consumer Prices 3.0 (2024), 2.7 (2025), 2.4 (2026); Current Account Balance –4.0 (2024), –4.0 (2025), –3.6 (2026); Unemployment 4.0 (2024), 4.2 (2025), 4.1 (2026). - Mexico: Real GDP 1.4 (2024), 1.0 (2025), 1.5 (2026); Consumer Prices 4.7 (2024), 3.9 (2025), 3.3 (2026); Current Account Balance –0.9 (2024), –0.2 (2025), –0.3 (2026). - Brazil: Real GDP 3.4 (2024), 2.4 (2025), 1.9 (2026); Consumer Prices 4.4 (2024), 5.2 (2025), 4.0 (2026); Current Account Balance –2.7 (2024), –2.5 (2025), –2.3 (2026); Unemployment 6.9 (2024), 7.1 (2025), 7.3 (2026). - Argentina: Real GDP –1.3 (2024), 4.5 (2025), 4.0 (2026); Consumer Prices 219.9 (2024), 41.3 (2025), 16.4 (2026); Current Account Balance 0.9 (2024), –1.2 (2025), –0.4 (2026); Unemployment 7.2 (2024), 7.5 (2025), 6.6 (2026). - Colombia: Real GDP 1.6 (2024), 2.5 (2025), 2.3 (2026); Consumer Prices 6.6 (2024), 4.9 (2025), 3.5 (2026); Current Account Balance –1.7 (2024), –2.3 (2025), –2.6 (2026); Unemployment 10.1 (2024), 10.0 (2025), 9.8 (2026). - Other items: - Caribbean aggregate: Real GDP 12.1 (2024), 3.6 (2025), 8.2 (2026); Consumer Prices 6.2 (2024), 6.1 (2025), 6.4 (2026). ### Middle East and Central Asia Economies (Annex Table 1.1.4) - Regional aggregates: - Middle East and Central Asia: Real GDP 2.6 (2024), 3.5 (2025), 3.8 (2026); Consumer Prices 14.0 (2024), 10.9 (2025), 9.5 (2026); Current Account Balance 2.3 (2024), 1.1 (2025), 0.6 (2026). - Oil Exporters: Real GDP 2.7 (2024), 3.2 (2025), 3.5 (2026); Consumer Prices 8.5 (2024), 10.0 (2025), 10.0 (2026); Current Account Balance 4.5 (2024), 2.8 (2025), 2.2 (2026). - Oil Importers: Real GDP 2.4 (2024), 4.0 (2025), 4.4 (2026); Consumer Prices 23.6 (2024), 12.2 (2025), 8.8 (2026); Current Account Balance –3.9 (2024), –3.2 (2025), –3.7 (2026). - Selected economy projections: - Saudi Arabia: Real GDP 2.0 (2024), 4.0 (2025), 4.0 (2026); Consumer Prices 1.7 (2024), 2.1 (2025), 2.0 (2026); Current Account Balance –0.5 (2024), –2.1 (2025), –2.5 (2026); Unemployment 3.5 (2024). - Iran: Real GDP 3.7 (2024), 0.6 (2025), 1.1 (2026); Consumer Prices 32.5 (2024), 42.4 (2025), 41.6 (2026); Current Account Balance 3.2 (2024), 1.8 (2025), 2.0 (2026); Unemployment 7.6 (2024), 9.2 (2025), 9.2 (2026). - United Arab Emirates: Real GDP 4.0 (2024), 4.8 (2025), 5.0 (2026); Consumer Prices 1.7 (2024), 1.6 (2025), 2.0 (2026); Current Account Balance 14.5 (2024), 13.2 (2025), 12.3 (2026). - Egypt: Real GDP 2.4 (2024), 4.3 (2025), 4.5 (2026); Consumer Prices 33.3 (2024), 20.4 (2025), 11.8 (2026); Current Account Balance –5.4 (2024), –5.1 (2025), –4.3 (2026); Unemployment 7.4 (2024), 7.4 (2025), 7.3 (2026). - Pakistan: Real GDP 2.5 (2024), 2.7 (2025), 3.6 (2026); Consumer Prices 23.4 (2024), 4.5 (2025), 6.0 (2026); Current Account Balance –0.6 (2024), 0.5 (2025), –0.4 (2026); Unemployment 8.3 (2024), 8.0 (2025), 7.5 (2026). - Memoranda: - Caucasus and Central Asia: Real GDP 5.5 (2024), 5.6 (2025), 4.7 (2026); Current Account Balance –1.4 (2024), –2.0 (2025), –3.0 (2026). - Middle East, North Africa, Afghanistan, and Pakistan: Real GDP 2.1 (2024), 3.2 (2025), 3.7 (2026); Consumer Prices 15.2 (2024), 11.2 (2025), 9.8 (2026). ### Sub-Saharan African Economies (Annex Table 1.1.5) - Regional aggregates: - Sub-Saharan Africa: Real GDP 4.1 (2024), 4.1 (2025), 4.4 (2026); Consumer Prices 20.3 (2024), 13.1 (2025), 10.9 (2026); Current Account Balance –1.5 (2024), –1.7 (2025), –1.8 (2026). - Oil Exporters: Real GDP 3.9 (2024), 3.6 (2025), 3.9 (2026); Consumer Prices 29.1 (2024), 21.7 (2025), 19.8 (2026); Current Account Balance 5.3 (2024), 3.3 (2025), 1.9 (2026). - Middle-Income Countries: Real GDP 3.1 (2024), 3.3 (2025), 3.5 (2026); Consumer Prices 6.3 (2024), 5.0 (2025), 4.5 (2026); Current Account Balance –2.2 (2024), –1.9 (2025), –1.9 (2026). - Low-Income Countries: Real GDP 6.0 (2024), 5.9 (2025), 6.2 (2026); Consumer Prices 28.1 (2024), 12.1 (2025), 7.2 (2026); Current Account Balance –5.3 (2024), –5.3 (2025), –4.4 (2026). - Selected economy projections: - Nigeria: Real GDP 4.1 (2024), 3.9 (2025), 4.2 (2026); Consumer Prices 31.4 (2024), 23.0 (2025), 22.0 (2026); Current Account Balance 6.8 (2024), 5.7 (2025), 3.6 (2026). - South Africa: Real GDP 0.5 (2024), 1.1 (2025), 1.2 (2026); Consumer Prices 4.4 (2024), 3.4 (2025), 3.4 (2026); Current Account Balance –0.7 (2024), –0.9 (2025), –1.2 (2026); Unemployment 32.6 (2024), 32.7 (2025), 32.7 (2026). - Ethiopia: Real GDP 8.1 (2024), 7.2 (2025), 7.1 (2026); Consumer Prices 21.0 (2024), 13.0 (2025), 9.4 (2026); Current Account Balance –4.2 (2024), –2.9 (2025), –2.6 (2026). - Uganda: Real GDP 6.3 (2024), 6.4 (2025), 7.6 (2026); Consumer Prices 3.3 (2024), 3.8 (2025), 4.3 (2026); Current Account Balance –7.5 (2024), –5.0 (2025), –3.7 (2026). ### Summary of World Real per Capita Output (Annex Table 1.1.6) - World (annual percent change, constant 2021 international dollars at PPP): - Average 2007–16: 2.0 - 2017: 2.5 - 2018: 2.5 - 2019: 1.8 - 2020: –3.9 - 2021: 5.7 - 2022: 2.8 - 2023: 2.4 - 2024: 2.3 - 2025: 2.7 - 2026: 2.2 - Advanced Economies: - Average 2007–16: 0.8; 2017: 2.2; 2018: 1.9; 2019: 1.5; 2020: –4.4; 2021: 5.9; 2022: 2.4; 2023: 0.9; 2024: 1.2; 2025: 1.2; 2026: 1.4. - Emerging Market and Developing Economies: - Average 2007–16: 3.6; 2017: 3.2; 2018: 3.3; 2019: 2.5; 2020: –3.2; 2021: 5.9; 2022: 3.2; 2023: 3.6; 2024: 3.2; 2025: 3.7; 2026: 3.0. - Selected regional and country entries (annual percent change): - Emerging and Developing Asia: 6.5 (2007–16), 5.6 (2017), 5.6 (2018), 4.5 (2019), –1.4 (2020), 7.1 (2021), 4.1 (2022), 5.5 (2023), 4.7 (2024), 4.7 (2025), 4.2 (2026). - China: 8.4 (2007–16), 6.3 (2017), 6.4 (2018), 5.7 (2019), 2.2 (2020), 8.5 (2021), 3.2 (2022), 5.5 (2023), 5.1 (2024), 5.1 (2025), 4.4 (2026). - India: 5.3 (2007–16), 5.6 (2017), 5.3 (2018), 2.8 (2019), –6.7 (2020), 8.8 (2021), 6.8 (2022), 8.2 (2023), 5.6 (2024), 5.7 (2025), 5.2 (2026). - Latin America and the Caribbean: 1.2 (2007–16), 0.3 (2017), 0.2 (2018), –0.9 (2019), –8.0 (2020), 6.6 (2021), 3.6 (2022), 1.6 (2023), 1.6 (2024), 1.7 (2025), 1.6 (2026). - Middle East and Central Asia: 1.5 (2007–16), 0.0 (2017), 0.7 (2018), 0.3 (2019), –4.5 (2020), 2.9 (2021), 4.1 (2022), 0.4 (2023), 0.5 (2024), 6.0 (2025), 2.0 (2026). - Sub-Saharan Africa: 1.8 (2007–16), 0.0 (2017), 0.5 (2018), 0.4 (2019), –5.7 (2020), 1.2 (2021), 1.9 (2022), 1.2 (2023), 1.5 (2024), 1.6 (2025), 1.8 (2026). - Memoranda: - European Union: 0.7 (2007–16), 2.9 (2017), 2.1 (2018), 1.8 (2019), –5.7 (2020), 6.7 (2021), 3.5 (2022), 0.0 (2023), 0.8 (2024), 1.2 (2025), 1.3 (2026). - ASEAN-5: 3.6 (2007–16), 4.0 (2017), 3.8 (2018), 3.2 (2019), –5.5 (2020), 3.3 (2021), 4.6 (2022), 3.1 (2023), 3.6 (2024), 3.2 (2025), 3.2 (2026). *Source: IMF staff estimates. Annex tables and notes as published in CHAPTER 1 GLObaL PROsPECTs aND POLICIEs.* --- _Source: https://www.imf.org/-/media/files/publications/weo/2025/october/english/ch1.pdf_