## World Economic Outlook (October 2025) — Preface and Chapter Summaries ## Source details **Canonical URL:** [World Economic Outlook (October 2025) — Preface and Chapter Summaries](https://www.imf.org/-/media/files/publications/weo/2025/october/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/weo/2025/october/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/weo/2025/october/english/text.pdf.json) --- ### Assumptions and Conventions - Real effective exchange rates assumed constant at their average levels during August 1–August 29, 2025, except currencies in the European exchange rate mechanism II, which are assumed to have remained constant in nominal terms relative to the euro. - Established policies of national authorities are assumed to be maintained. - Commodity and financial market assumptions: - Average price of oil: $68.92 a barrel in 2025 and $65.84 a barrel in 2026. - Three-month government bond yields (average): United States 4.3 percent in 2025 and 3.7 percent in 2026; euro area 2.0 percent in 2025 and 2.1 percent in 2026; Japan 0.4 percent in 2025 and 0.8 percent in 2026. - Ten-year government bond yields (average): United States 4.3 percent in 2025 and 4.1 percent in 2026; euro area 2.5 percent in 2025 and 2.6 percent in 2026; Japan 1.5 percent in 2025 and 1.7 percent in 2026. - Estimates and projections based on statistical information available through September 30, 2025. - Conventions: “. . .” indicates data not available; “–” and “/” explained; “Billion” and “trillion” defined; “Basis points” defined. - “What’s New”: Data for Liechtenstein added to the database and included in advanced economies composites. ### Key Global Outlook and Topline Projections - Global growth projections: - Global growth is projected at 3.2 percent this year and 3.1 percent next year. - World growth by year: 3.3 percent (2024), 3.2 percent (2025), 3.1 percent (2026). - Q4 over Q4: 3.6 percent (2024), 2.6 percent (2025). - World output at market exchange rates: 2.6 percent (2025) and 2.6 percent (2026). - Cumulative global output loss vs October 2024 WEO: about 0.2 percent by the end of 2026. - Regional and country projections: - Advanced economies: about 1½ percent in 2025–26; United States slowing to 2.0 percent (2025) and 2.1 percent (2026). - Emerging market and developing economies: just above 4.0 percent (aggregate: 4.3 (2024), 4.2 (2025), 4.0 (2026)). - China: 5.0 (2024), 4.8 (2025), 4.2 (2026). - India: 6.5 (2024), 6.6 (2025), 6.2 (2026). - Euro area: 0.9 (2024), 1.2 (2025), 1.1 (2026). - Inflation and trade: - Global inflation: 5.8 (2024), 4.2 (2025), 3.7 (2026). - Inflation in advanced economies (selected): euro area 2.1 percent (2025) and 1.9 percent (2026); Japan 3.3 percent (2025) and 2.1 percent (2026); United States 2.7 percent (2025) and 2.4 percent (2026). - World trade volume growth: average rate of 2.9 percent in 2025–26 (3.5 percent in 2024). ### Recent Developments and Drivers - US trade policy shock: - April 2025: United States imposed sizable tariffs; US effective tariff rate remains high (about 19 percent). - Six months later: negative impact assessed at the modest end of April range because of private-sector front-loading of imports, supply-chain reorganization, negotiated deals, and restraint from other countries. - United States specifics: - Stricter immigration policies reduce labor supplied by foreign-born workers (negative supply shock). - Unemployment rate mostly unchanged; net international migration flows plunged in H1 2025 (possible implication: about 1.0–1.6 million fewer immigrants than in 2024 and 2.5 million fewer than in 2023 if trends continue). - Q2 2025 GDP annualized: 3.8 percent; Q1 2025 contraction: –0.6 percent; unemployment 4.3 percent in August 2025. - AI-related investment boom and modestly expansionary fiscal policy in 2026 supporting demand and adding price pressures. - China specifics: - Q2 2025 growth slowed to 4.2 percent from 6.1 percent in Q1 2025. - Sharp depreciation of real effective exchange rate, front-loaded exports to Asia and Europe, and some fiscal expansion limit impact from tariffs. - Structural concerns: real estate investment continues to shrink more than four years after the property bubble burst. - Trade and external balances (H1 2025): - US current account deficit: 4.6 percent of GDP (1.9 percentage points wider than 2013–24 average). - Euro area current account surplus: 1.9 percent of GDP in H1 2025 (3 percent in same period 2024). - China current account surplus: 3.2 percent of GDP. - Japan current account surplus: 4.7 percent of GDP. ### Inflation, Prices, and Pass-Through - Tariff pass-through and pricing: - Actual effective tariff rate (duty paid) lags effective rate based on announced statutory rates. - Sectoral pass-through incomplete: household appliances reflect tariff costs; many categories (food, clothing) show little pass-through. - Japanese export price of standard passenger cars bound for North America down more than 20 percent; US import price of capital goods increased significantly; automobiles moderate increase since April. - Exchange rates: - US dollar weakened markedly in April and May 2025 and remained mostly stable at the weaker level thereafter. - Aggregate US ex-tariff import price broadly stable since April 2025. - Energy and commodity price assumptions/statistics: - Oil (percent change): –1.8 (2024), –12.9 (2025), –4.5 (2026). - Nonfuel (percent change): 3.7 (2024), 7.4 (2025), 4.1 (2026). - Petroleum spot price index: expected average $68.90 a barrel in 2025 and $67.30 by 2030. - Fuel commodity prices projected to decline in 2025 by 7.9 percent and in 2026 by 3.7 percent. - IMF metals price index rose 6.8 percent between March and August 2025; gold increased 12.8 percent in same period (record highs above $3,400/ounce). ### Fiscal and Debt Dynamics - Fiscal stance: - Fiscal policy remains too loose in many large advanced and developing economies; 2025 projected primary deficits generally lower than 2020–21 but larger than pre-pandemic levels except Brazil and India. - Stabilizing debt to GDP at its 2024 level requires significant consolidation for most countries. - Country fiscal specifics: - United States: projected offset of about 0.7 percentage point of GDP from projected tariff revenues; under current policies US public debt rises 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 public debt projected to rise to 82 percent of GDP in 2030, compared with just under 70 percent in 2024. - China deficit: expected to narrow slightly through 2030 after widening 1.2 percentage points in 2025. - Borrowing-cost developments: - Since end-2023, mid-segment yields and long-end yields crept upward. - Significant refinancing requirements as share of GDP for some large economies; increased reliance on Treasury bills shortens average debt maturity and raises refinancing risk. ### Monetary Policy Projections (Major Jurisdictions) - United States: Federal funds rate projected to drop to 3.50–3.75 percent at the end of 2025; terminal range of 2.75–3.0 percent reached around end-2028. - Euro area: policy rates expected to hold steady at 2 percent. - Japan: policy rates expected to be lifted, gradual rise toward neutral setting of about 1.5 percent. - Monetary stances expected to become more divergent across countries reflecting differing inflation outlooks. ### Risks to the Outlook (tilted to the downside) - Downside risks include: - Prolonged policy uncertainty dampening consumption and investment. - Further escalation of protectionist measures (including nontariff barriers). - Larger-than-expected shocks to labor supply (notably from restrictive immigration policies). - Fiscal vulnerabilities and financial market fragilities interacting with rising borrowing costs. - Abrupt repricing of tech stocks if AI-related earnings and productivity gains disappoint. - Institutional risks: - Political pressure on central banks and other technocratic institutions could erode credibility and weaken anchors for inflation expectations. - Social and development risks: - Lower-income countries face increased vulnerability from reduced official aid flows and rising social unrest tied to youth unemployment. ### Quantified Scenarios (Box 1.2 and scenario summaries) - Scenario A (higher tariffs, inflation-expectations shock, tighter financial conditions, lower demand for US assets): - Global activity decreases by 0.3 percent relative to baseline in 2026 (effect builds through 2028); permanent loss in global GDP of one-half percent. - Combined effect in a broader combined experiment: world GDP in 2026 is 1.2 percent lower than baseline. - Tariff increases: effective tariff rate on US imports increases by 10 percentage points overall in the scenario; imports from China face largest hikes (close to 30 percentage points). - Total factor productivity in trade-intensive sectors falls by 1 percent globally in 2026–27 before returning to baseline in 2028. - Sovereign term premiums rise by 100 basis points starting in 2026 lasting 10 years (in all countries except China). - 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 global demand for US assets raises expected returns on US assets by up to 80 basis points relative to baseline; US external risk premium increase lasts 20 years. - Scenario B (return to low tariffs, lower uncertainty, higher-than-expected AI benefits): - Return to low tariffs and lower uncertainty increases global GDP: about 1 percent in 2026 and about 2 percent over the long term. - Temporary reduction in US inflation of about 60 basis points in 2026; 7 percent depreciation of the dollar relative to baseline in the scenario. - Lower trade policy uncertainty raises global investment by about 2 percent in 2026–27. - Higher-than-expected AI benefits: global total factor productivity increases by about 0.8 percent over a 10-year period and global GDP raised by about 0.3 percent in 2026; global investment increases by an additional 1.5 percent over 2026–27. - Combined Scenario B: return to low tariffs explains about 0.7 percentage point of the increase and AI benefits explain 1.4 percentage points. ### Near-term Quantified Upside Buffers - Material decrease in global economic policy uncertainty from clearer trade agreements can raise global output by 0.4 percent in the very near term. - Lowering tariffs based on agreements adds about 0.3 percent to global output. - Modest AI-induced TFP improvements could add another 0.4 percent to global output in the near term. ### Policy Priorities and Recommendations (summarized) - Trade policy: - Update trade rules to reflect changing trade relations and deepen trade relations where possible. - Reduce tariffs and limit protectionist fragmentation. - Modernize trade rules for the digital age; pursue multilateral, bilateral, and plurilateral negotiations; avoid managed trade provisions. - Fiscal policy: - Reduce fiscal vulnerabilities gradually and credibly; rebuild fiscal buffers. - Improve efficiency of public spending to limit crowding out of private investment. - New support measures should be temporary, well-targeted, and offset by clear savings. - Where debt unsustainable, consider restructuring and operationalizing international sovereign debt resolution mechanisms. - Monetary policy: - Remain tailored and transparent; preserve central bank independence. - Calibrate policy to country circumstances; interest rate cuts contingent on durably low and stable inflation. - Protect technocratic institutions and ensure adequate data provision. - Industrial and long-term growth policy: - Favor horizontal policies over sectoral industrial policies; emphasize education, public research, infrastructure, governance, and regulatory balance. - Discipline industrial policy: transparent selection, independent oversight, accountability, evaluation, sunset clauses. - Financial stability: - Contain liquidity risks in nonbank finance; implement Financial Stability Board guidance on private credit funds and stress tests. - Implement comprehensive, risk-based regulation for crypto assets and stablecoins. - Preparedness: - Use scenario analysis and policy playbooks for readiness across monetary, fiscal, and financial-stability tools. - Multilateral cooperation: - Strengthen multilateral frameworks and institutions to preserve benefits of open global trading system. ### Emerging Market Resilience — Key Findings and Policy Lessons (Chapter 2 / Global Financial Stability Report excerpts) - Improved resilience attributed to "good policies" and "good luck": - Improvements in monetary, macroprudential, and fiscal frameworks added 0.5 percentage point higher growth and 0.6 percentage point lower inflation in postcrisis risk-off episodes compared with precrisis. - Favorable external conditions contributed another 0.5 percentage point to faster growth but not to lower inflation. - Evidence and model results: - Post-GFC period: six-month output losses after risk-off episodes are 1 percent of GDP versus 1.8 percent precrisis. - In response to a 10 percent nominal depreciation from a risk-off shock, economies with strong frameworks experience 85 percent smaller output contractions the following year than weak-framework economies. - Foreign exchange interventions can reduce output losses by 0.9 percentage point two years after the shock in weak-framework countries; benefits marginal in strong-framework countries. - Delaying monetary tightening in weak-framework EMs increases cumulative rate hikes required (up to 1.4 percentage points more) and results in larger output losses (about 0.7 percentage point larger five quarters after the shock). - Policy recommendations for EMs: - Strengthen monetary, macroprudential, and fiscal frameworks; safeguard central bank independence. - Use IMF precautionary instruments (FCL, PLL, SLL) when eligible; event studies show spreads decline after approvals and precautionary arrangements reduce spread and outflow increases during risk-off episodes. - Limit costly foreign exchange intervention reliance; focus on reducing balance-sheet mismatches and de-dollarization. ### Industrial Policy Findings and Trade-Offs (Chapter 3 highlights) - Recent trends: - Since 2009, number of new industrial policy (IP) interventions increased significantly; about one-third targeted energy products; about 80 percent of energy-targeted IPs rolled out in energy-dependent countries (2009–22). - Subsidy-based measures predominate: subsidized financing and direct support account for over 80 percent of interventions. - Empirical associations (sector-level panel estimates): - One additional direct support measure (three years after implementation): about 0.5 percent higher value added in targeted sector and about 0.3 percent higher TFP in targeted sector. - Direct support in energy sectors: one additional direct support measure linked to 0.7 percent higher TFP in targeted energy sector within a year; linked to 2.5 percent increase in value added for downstream sectors one to three years after the shock and a temporary 1.7 percent decrease in allocative efficiency in downstream sectors. - Heterogeneity: direct support associated with medium-term improvements in advanced economies but not in emerging market and developing economies; subsidized financing linked to a 0.5 percent decrease in allocative efficiency in EMDEs (not always significant). - Infant vs mature industries: one additional financial subsidy linked to 0.5 percent increase in value added of infant industries and to a 1.2 percent decrease in value added for mature industries. - Quantitative model results and scenarios: - Energy-sector optimal subsidies scenario: fiscal cost in new long-run steady state: 1.8 percent of GDP (annual); energy imports as share of energy consumption fall by 5.1 percentage points; aggregate efficiency falls and public expenditure rises. - Well-targeted IP across sectors (optimal in AEs): required fiscal resources close to 5.5 percent of GDP (annual); aggregate TFP gains only if targeting is highly precise. - Mistargeted uniform subsidies with same fiscal envelope (5.5 percent of GDP): aggregate productivity declines slightly despite large fiscal cost. - China estimate: equivalent fiscal cost of industrial policy about 4 percent of GDP between 2011 and 2023; factor misallocation induced by IP reduced China’s aggregate TFP by 1.2 percent and GDP by as much as 2 percent. - Clean-tech / EU reshoring calibration (2024–2035): - Learning rate (baseline): 19 percent. - Home country initial cost disadvantage: 30 percent. - Foreign leader experience: five times more experience. - Stylized IP example: 10 percent tariff and a 12 percent production subsidy (illustrative). - Reshoring EV calibration: 15 percent production subsidy (in reshoring scenario notes). - Fiscal cost of reshoring in EU: 0.4 percent of EU GDP annually (model estimate). - Labor effects by 2035: no-IP scenario reduces clean-tech manufacturing employment by "more than 0.5 percent of the labor force"; reshoring increases clean-tech manufacturing employment by "more than 1 percent of the labor force". - Energy-use change by 2035: oil use in passenger transportation declines by 20 to 30 percent relative to baseline. - European reshoring fiscal cost in another framing: approximately €80 billion in annual subsidies (2025–2035), equivalent to about €30,000 per job created in the sector. - Policy guidance on IP: - Ground IP in clear diagnostics of market failures and evidence of increasing returns to scale. - Prefer targeted interventions, include evaluation, recalibration, and sunset clauses. - Embed IP in strong institutional and macroeconomic framework; prioritize structural reforms that often deliver more cost-effective gains. ### Statistical Appendix and Data Notes (selected) - Projections and assumptions based on data through September 30, 2025. - IMF staff conventions: composites use GDP weights; composite data represent calculations based on 90 percent or more of the weighted group data unless noted otherwise. - Exchange rate and currency conversion assumptions: - US dollar–SDR conversion rates: 1.351 (2025) and 1.373 (2026). - US dollar–euro conversion rates: 1.130 (2025) and 1.167 (2026). - Yen–US dollar conversion rates: 147.7 (2025) and 145.3 (2026). - Country-specific reporting caveats: a number of economies have omitted projections or special treatments (examples include Afghanistan, Lebanon, Sri Lanka, Sudan, Venezuela) — see country notes. *International Monetary Fund | World Economic Outlook, October 2025 — Preface, Executive Summary, Chapters 1–3 and Statistical Appendix (text as provided in the source PDF).* ### Preface ### Preface ### Assumptions and Conventions - Real effective exchange rates assumed constant at their average levels during August 1–August 29, 2025, except currencies in the European exchange rate mechanism II, which are assumed to have remained constant in nominal terms relative to the euro. - Established policies of national authorities are assumed to be maintained (see Box A1 in the Statistical Appendix for specific fiscal and monetary policy assumptions for selected economies). - Commodity and financial market assumptions: - Average price of oil: $68.92 a barrel in 2025 and $65.84 a barrel in 2026. - Three-month government bond yields (average): United States 4.3 percent in 2025 and 3.7 percent in 2026; euro area 2.0 percent in 2025 and 2.1 percent in 2026; Japan 0.4 percent in 2025 and 0.8 percent in 2026. - Ten-year government bond yields (average): United States 4.3 percent in 2025 and 4.1 percent in 2026; euro area 2.5 percent in 2025 and 2.6 percent in 2026; Japan 1.5 percent in 2025 and 1.7 percent in 2026. - Estimates and projections are based on statistical information available through September 30, 2025. - Conventions: - “. . .” indicates data not available or not applicable. - “–” between years or months (for example, 2024–25 or January–June) indicates the years or months covered, including beginning and ending periods. - “/” between years or months (for example, 2024/25) indicates a fiscal or financial year. - “Billion” means a thousand million; “trillion” means a thousand billion. - “Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point). - Data refer to calendar years except for a few countries that use fiscal years (see Table F in the Statistical Appendix). - For some countries, figures for 2024 and earlier are based on estimates rather than actual outturns (see Table G in the Statistical Appendix). - Table and figure conventions: - Sources labeled “IMF staff calculations” or “IMF staff estimates” draw on data from the WEO database. - When countries are not listed alphabetically, ordering is by economic size. - Minor discrepancies between sums of constituent figures and totals reflect rounding. - Composite data represent calculations based on 90 percent or more of the weighted group data unless noted otherwise. - Terminology: The terms “country” and “economy” may cover territorial entities that are not states but for which statistical data are maintained on a separate and independent basis. ### What’s New - Data for Liechtenstein have been added to the database and are included in the advanced economies group composites. ### Data, Availability, and Use - The WEO data and metadata are provided “as is” and “as available.” - Historical data and projections reflect information gathered by IMF country desk officers, updated continually; structural breaks may be adjusted using splicing and other techniques. - WEO data may differ from other official sources, including the IMF’s International Financial Statistics, because IMF staff estimates are used when complete information is unavailable. - Corrections and revisions discovered after publication are incorporated into the digital editions available from the IMF eLibrary and the IMF website; all substantive changes are listed in the online table of contents. - Data access and inquiries: - Digital editions (ePub, enhanced PDF, HTML) are available on the IMF eLibrary at eLibrary.IMF.org/WEO. - A free PDF of the report and data sets for charts is downloadable from www.IMF.org/publications/weo. - The WEO web page contains a larger compilation of WEO database files than included in the report itself. - Inquiries about the WEO and the WEO database: - World Economic Studies Division, Research Department, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA - Email: DataHelp@IMF.org ### Corrections, Editions, and Access - Print copies can be ordered from the IMF bookstore at imfbk.st/555871. - Multiple digital editions are available on the IMF eLibrary at eLibrary.IMF.org/WEO and on the IMF website at www.imf.org. - When errors are discovered, corrections and revisions are reflected in the electronic editions and listed in the online tables of contents. ### Editorial Coordination and Contributors - Analysis and projections are products of an interdepartmental review coordinated in the Research Department under the general direction of Pierre-Olivier Gourinchas, Economic Counsellor and Director of Research. - Project directors: Petya Koeva Brooks, Deputy Director, Research Department, and Deniz Igan, Division Chief, Research Department. - Primary contributors: Shekhar Aiyar, Hippolyte Balima, Mehdi Benatiya Andaloussi, Christian Bogmans, Marijn Arend Bolhuis, Patricia Gomez-Gonzalez, Francesco Grigoli, Thomas Kroen, Toh Kuan, Rafael Machado Parente, Chiara Maggi, Vida Maver, Jorge Miranda Pinto, Jean-Marc Natal, Diaa Noureldin, Galip Kemal Ozhan, Andrea Paloschi, Andrea F. Presbitero, Yu Shi, Sebastian Wende, and Zhao Zhang. - Additional contributors and editorial/production support are listed in the Preface (source text). - Editorial lead from the Communications Department: Gemma Rose Diaz; production and editorial support from Michael Harrup, Kristina Harwood, Lucy Scott Morales, James Unwin, MPS Limited, and Absolute Service, Inc. - The analysis benefited from comments and suggestions by IMF departmental staff and from Executive Directors following their discussion of the report on September 29, 2025; however, estimates, projections, and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities. *International Monetary Fund | World Economic Outlook Preface (October 2025) — text as provided in the source PDF.* ### PREFACE ### PREFACE ### Overview - In April 2025 the United States announced the imposition of sizable tariffs against most of its trading partners, triggering a range of estimated downward revisions in global growth depending on the ultimate severity of the trade shock. - Six months later, the negative impact on the global economy is assessed to be at the modest end of the April range, with private-sector front-loading of imports, supply-chain reorganization, negotiated deals, and general restraint from other countries helping to limit the immediate impact. - Despite the modest immediate effect, the shock is not neutral: the US effective tariff rate remains high (at about 19 percent), trade policy uncertainty remains high, and longer-term effects may emerge as tariffs are passed through and trade is rerouted more permanently. ### Growth projections and key statistics - Global growth is projected at 3.2 percent this year and 3.1 percent next year. - Global growth is also stated as projected to slow from 3.3 percent in 2024 to 3.2 percent in 2025 and to 3.1 percent in 2026. - On an end-of-year basis, global growth is projected to slow down from 3.6 percent in 2024 to 2.6 percent in 2025. - Compared with October 2024 WEO projections, there is a cumulative global output loss of about 0.2 percent by the end of 2026. - Advanced economies are forecast to grow about 1½ percent in 2025–26, with the United States slowing to 2.0 percent. - Emerging market and developing economies are projected to moderate to just above 4.0 percent. - Inflation is expected to decline to 4.2 percent globally in 2025 and to 3.7 percent in 2026, with above-target inflation in the United States and subdued inflation in much of the rest of the world. - World trade volume is forecast to grow at an average rate of 2.9 percent in 2025–26, compared with a 3.5 percent growth rate in 2024. - Historical policy action cited: between June 1999 and May 2000 the Federal Reserve needed to raise its policy rate by a cumulative 175 basis points to contain inflationary pressures. ### Drivers, offsets, and country-specific notes - United States: - Stricter immigration policies are reducing labor supplied by foreign-born workers (a negative supply shock). - This has been offset so far by a roughly equivalent decline in labor demand from cyclical cooling after many years of strong job growth, leaving the unemployment rate mostly unchanged. - Financial conditions remain very accommodative, with a dollar that has lost some strength. - A strong boom in artificial intelligence (AI)–related investment, coupled with a modestly expansionary fiscal policy in 2026, is supporting demand and adding to price pressures from the tariffs. - China: - Despite being the country hardest hit by US tariffs, growth is projected to decline only modestly due to a sharp depreciation of the real effective exchange rate, a front-loaded surge in exports toward Asian and European partners, and some fiscal expansion. - Structural concerns persist: more than four years after the property bubble burst, real estate investment continues to shrink and the economy risks a debt-deflation cycle; large-scale manufacturing subsidies appear to have reached limits and contribute to resource misallocation. - Euro area and other emerging markets: - Fiscal expansion in Germany contributed to boosting growth in 2025. - Emerging market and developing economies benefited from easier financial conditions on the back of a depreciated dollar and have shown resilience partly due to stronger policy frameworks. ### Risks to the outlook - Downside risks dominate and include: - Prolonged policy uncertainty dampening consumption and investment. - Further escalation of protectionist measures (including nontariff barriers) suppressing investment, disrupting supply chains, and stifling productivity growth. - Larger-than-expected shocks to labor supply (notably from restrictive immigration policies), reducing growth for aging and skill-shortage economies. - Fiscal vulnerabilities and financial market fragilities interacting with rising borrowing costs and increased rollover risks for sovereigns. - An abrupt repricing of tech stocks if AI-related earnings and productivity gains disappoint, ending the AI investment boom. - Specific institutional risks: - Increased pressure on policy-setting institutions such as central banks could erode credibility gains and weaken anchors for inflation expectations. - Social and development risks: - Lower-income countries face increased vulnerability from reduced official aid flows and rising social unrest tied to unemployment among youth. ### Upside scenarios and quantified near-term boosts - A material decrease in global economic policy uncertainty from clearer and more stable bilateral and multilateral trade agreements can raise global output by 0.4 percent in the very near term. - Lowering tariffs based on these agreements adds about 0.3 percent to global output. - Under modest assumptions, AI-induced improvements in total factor productivity could add another 0.4 percent to global output in the near term. ### Policy recommendations - Trade policy: - Update trade rules to reflect changing trade relations and deepen trade relations where possible to reduce policy uncertainty. - Reduce tariffs and limit protectionist fragmentation to restore confidence and improve growth prospects. - Fiscal policy: - Reduce fiscal vulnerabilities gradually and credibly. - Improve the efficiency of public spending to limit crowding in private investment (as discussed in the October 2025 Fiscal Monitor). - Monetary policy: - Remain tailored and transparent; preserve the independence of monetary policy institutions as a precondition for macroeconomic stability. - Protect technocratic institutions, allowing focus on core mandates and ensuring adequate data provision. - Industrial and long-term growth policy: - Favor horizontal policies over sectoral industrial policies, with emphasis on investment in education, public research, public infrastructure, good governance, financial and macroeconomic stability, and a regulatory environment balancing flexibility, innovation, and risk containment. - Multilateral cooperation: - Strengthen multilateral frameworks and institutions to preserve the benefits of an open global trading system; pragmatic cooperation remains essential for global resilience. *Source: PREFACE, World Economic Outlook, October 2025 (text - PREFACE).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### A New Global Economic Landscape - The year 2025 has been "fluid and volatile," driven by a reordering of policy priorities in the United States and adaptations elsewhere. - A series of new US tariff measures in April 2025 raised tariff rates "to levels not seen in a century," followed by trade deals and resets that moved US effective tariff rates toward "a range between 10 percent and 20 percent for most countries." - Trade policy uncertainty remains elevated; attention is shifting from tariff levels to their impact on prices, investment, and consumption. ### Recent Developments and Outlook Revisions - The April 2025 WEO: global growth projection for 2025 was revised downward by "0.5 percentage point to 2.8 percent" because of the tariff shock and associated uncertainty. - The July 2025 WEO Update: 2025 global growth projection was revised up "0.2 percentage point" to "3.0 percent", largely reflecting lower tariff rates and reduced uncertainty. - Growth held up in H1 2025 with year-over-year quarterly annualized growth rates persisting at "about 3½ percent." - Global inflation revisions were small in April and July but diverged across countries (upward in the United States; downward in many other jurisdictions). ### Recent Economic Activity and Country Snapshots - United States: - GDP grew at an annualized "3.8 percent" in Q2 2025, following a contraction of "–0.6 percent" in Q1 2025. - Investment slowed, with reduced commercial and residential construction spending. - Unemployment rate edged up to "4.3 percent" in August 2025. - Net international migration flows plunged in H1 2025; if trends continue, this 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). - Consumer price inflation remained at very low levels; producer price inflation continued to be negative. - Euro area: - GDP growth slowed to "0.5 percent" (Q2) from "2.3 percent" (Q1). - Declines in Germany, Italy, and Ireland contributed to the slowdown. - Japan: - Economy grew at an annualized rate of "2.2 percent" in Q2 2025, up from "0.3 percent" in Q1 2025, supported by capital spending and strong exports, though new export orders fell in July. - Emerging markets and developing economies: - Growth for emerging market economies excluding China was stronger than expected in H1 2025 due to factors including record agricultural output in Brazil, robust services expansion in India, and resilient domestic demand in Türkiye. - Low-income countries: growth is "about 2 percentage points lower than other peers in this group" and adverse impacts are amplified by cuts to international aid and constrained external financing. - International aid and migration: - Official development assistance dropped by "9 percent" in 2024; "a drop of similar magnitude is expected in 2025" based on announced cuts by major donors. ### Financial Markets and Investment Dynamics - Markets briefly reacted to renewed economic fears (notably US weakness), with global equity declines in early August and US Treasury yields plunging, but markets recovered quickly. - Equity gains in 2025 were concentrated in AI stocks; stretched valuations raise the risk of market volatility and asset price corrections. - Investment dynamics: - Households and firms front-loaded consumption and investment ahead of anticipated tariffs, temporarily boosting activity in early 2025. - Investment in data centers and AI contributed significantly to recent investment growth; a decline in such investment could produce a sharp drop in aggregate investment. - Inventory buildups, implementation delays, long-term contracts, and healthy profit margins have slowed pass-through of rising costs. ### Risks, Transmission Channels, and Longer-Term Concerns - Short-term resilience masks underlying fragility; front-loading and trade diversion provide temporary support but are costly and unsustainable. - Fragmentation risks: - Suboptimal resource reallocation, technological decoupling, and limitations on knowledge diffusion could restrain longer-term growth. - More restrictive cross-border labor flows exacerbate pressures from aging populations and could reduce potential growth. - Uncertainty effects on investment: - 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. - 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. - Tariff-uncertainty modeling (open-economy New Keynesian exercises): - Initial uncertainty can trigger front-loading of imports, temporarily lifting output and creating a small, short-lived rise in consumer price inflation. - Once front-loading fades, uncertainty operates like a negative demand shock—activity softens and inflation eases as firms compress margins. ### Policy Priorities and Recommendations - Restore confidence through "credible, predictable, and sustainable policy actions." - Trade policy: - Establish clear, transparent, and rules-based trade policy road maps to reduce uncertainty, support investment, and reap productivity and growth benefits from more trade. - Modernize trade rules for the digital age and pursue stronger multilateral cooperation where possible. - Pair trade diplomacy with macroeconomic adjustment to correct persistent external imbalances and secure lasting gains. - Fiscal policy: - Rebuild fiscal buffers and safeguard debt sustainability. - Medium-term fiscal consolidation should involve "realistic, balanced plans" combining spending rationalization and revenue generation. - Any new support measures should be "temporary, well-targeted, and offset by clear savings." - Monetary policy and institutions: - Calibrate monetary policy to balance price stability and growth risks, consistent with central banks' mandates. - Preserve central bank independence to anchor inflation expectations and enable mandate fulfillment. - Structural reforms: - Redouble efforts on structural reforms: promote labor mobility, encourage workforce participation, invest in digitalization, and strengthen institutions. - Embrace reforms without delay to enhance resilience as the new global economic landscape takes shape. - Chapter 3 notes industrial policy may have a role in resilience and growth but requires full consideration of opportunity costs and trade-offs. - Low-income countries: - Mobilize domestic resources through governance and administrative reforms as external aid declines. - Preparedness: - Use scenario planning and predesigned policy playbooks to improve preparedness and credibility, ensuring effective and timely policy responses. *International Monetary Fund | October 2025* ### 1. Output and Imports ### 1. Output and Imports ### Tariff uncertainty and real effects - Two illustrative tariff-uncertainty shocks examined: - Realized uncertainty: a tariff-uncertainty shock that materializes in the first quarter (solid lines in figures). - News shock: news announced in the first quarter that materializes in the fourth quarter (dashed lines). - When uncertainty is known to increase in the future: - Firms build inventories and reprice slowly. - Inflation increases in gradual increments and may appear more stubborn than when uncertainty increases immediately (though less pronounced in magnitude). ### Inflation developments and pass-through in the United States - Headline and core inflation in the tariffing country—the United States—have ticked up only slightly (see Figure 1.6 panels). - Core goods prices in the United States show a more visible climb compared with other countries (blue line in Figure 1.6, panel 3), occurring alongside persistent services inflation. - Actual effective tariff rate (actual duty paid on imports at customs as a share of the value of imports) has lagged the effective rate based on announced statutory rates using pre-substitution trade weights (Figure 1.7, panel 1). - Sectoral pass-through to consumer prices remains incomplete (Figure 1.7, panel 2): - Household appliances have reflected tariff costs. - Many categories, including food and clothing, have shown very little of expected pass-through. - High-frequency retail pricing data indicate that in categories exposed to tariffs, prices of both imported and domestic goods are affected, suggesting broader pricing and supply-chain spillovers. - Exporters’ pricing responses vary by sector and destination: - Japanese export price of standard passenger cars bound for North America has plummeted more than 20 percent, while exports to the rest of the world have remained stable (both invoiced in US dollars). - US import price of capital goods has increased significantly; automobiles have seen only a moderate increase since April. ### Exchange rate dynamics and import prices - Conventional expectation: the currency of a tariff-imposing country appreciates, mitigating import-price effects. Evidence in the current episode departs from that: - The US dollar weakened markedly in April and May 2025 and stayed mostly stable at the weaker level since then, unlike in the 2018–19 episode (Figure 1.8, panel 1). - Aggregate US ex-tariff import price has remained broadly stable since April 2025 (Figure 1.8, panel 2). - Implications of dollar movements under dominant currency pricing: - Dollar depreciation directly reduces exporters’ margins, separately from tariffs. - The universal nature of tariffs may make exporters less likely to reduce margins when competitors are also tariffed. - The lack of a decline in import prices to date suggests exporters have not broadly absorbed tariffs through markups or export price adjustment, leaving US firms and households to bear the burden. - An appreciation of the dollar (range-bound recently) could restore an exchange rate offset that mitigates tariff impacts on US consumer prices. ### Trade flows and evolving external balances - Global trade activity was robust in Q1 2025, driven by strong growth in US imports 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 Q2 2025. - Goods exports to the United States from Germany, Spain, and the United Kingdom have fallen notably; total euro area exports remain supported by intra-Europe trade. - In China, declines in exports to the United States have been partly offset by higher exports to the euro area and ASEAN, aided by renminbi depreciation against most currencies (excluding the US dollar). - Bilateral trade decoupling between the United States and China appears to be happening sooner than in the 2018–19 tariff shock. - Current account positions (first half of 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 in H1 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. - Japan current account surplus: 4.7 percent of GDP. - Net international investment positions: - US NIIP has generally seen a stronger rise in liabilities in recent years, reflecting record inflows of foreign direct investment and inflows into equities and US Treasuries. - Euro area and Japan NIIPs see assets building faster than liabilities. - China NIIP shows relative stability in low-frequency trends. ### Fiscal policy, debt dynamics, and monetary stance - Fiscal policy remains too loose in many of the largest advanced and developing economies; 2025 projected primary deficits are generally lower than 2020–21 but remain sizably larger than pre-pandemic levels except in Brazil and India (Figure 1.9, panel 1). - China’s 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; given 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 yields: - Since end-2023, mid-segment yields and long-end yields have crept upward (Figure 1.9, panel 2). - Significant refinancing requirements as a share of GDP for some large economies increase vulnerability (Figure 1.9, panel 3). - Increased reliance on Treasury bills shortens average debt maturity and raises refinancing risk. - Monetary policy has shifted from aggressive tightening toward a more nuanced stance leaning toward easing or neutral; monetary stances are expected to become more divergent across countries, reflecting differing inflation outlooks and domestic considerations. ### Outlook and global assumptions - Overall assessment: prospects for the global economy remain dim in both the short and long term, after accounting for trade-related distortions and volatile trade-policy developments. - Baseline global assumptions (selected commodity and price projections): - Fuel commodity prices projected to decline in 2025 by 7.9 percent and in 2026 by 3.7 percent. - Petroleum spot price index (oil futures curve) 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. - These commodity-price projections imply a slightly lower path than assumed in April 2025, driven by lower projected food and beverage prices. - Box 1.2 (referenced) assesses impacts on growth and inflation of plausible deviations from baseline assumptions. *Source: Chapter 1, "Output and Imports," World Economic Outlook, October 2025 (text).* ### 1. Energy and Food Prices ### 1. Energy and Food Prices ### Energy and commodity price developments - Index baseline: (Index, 2024:Q4 = 100). - Commodity price dynamics noted: wheat, rice, coffee, and cocoa prices are "retreating faster from their historical highs than previously forecast." - Oil price assumptions (simple average of UK Brent, Dubai Fateh, and West Texas Intermediate): average price was $79.17 in 2024; the assumed price, based on futures markets, is $68.92 in 2025 and $65.84 in 2026. - Nonfuel (average based on world commodity import weights) changes shown in Table 1.1: 3.7 (2024), 7.4 (2025), 4.1 (2026). ### Key statistics from commodity and price tables - Oil (Table 1.1, percent change): –1.8 (2024), –12.9 (2025), –4.5 (2026). - Nonfuel (Table 1.1, percent change): 3.7 (2024), 7.4 (2025), 4.1 (2026). - World Consumer Prices (Table 1.1): 5.8 (2024), 4.2 (2025), 3.7 (2026). - Advanced economies consumer price assumptions (note 8): for 2025 and 2026 respectively — euro area: 2.1 percent and 1.9 percent; Japan: 3.3 percent and 2.1 percent; United States: 2.7 percent and 2.4 percent. ### Note on figures and presentation - Panels referenced: panels 1 and 2 (solid lines = October 2025 WEO projections; dashed lines = April 2025 WEO); panel 3 uses general government structural primary balance in percent of potential GDP (structural primary balance = cyclically adjusted primary balance excluding net interest payments and corrected for a broader range of noncyclical factors such as changes in asset and commodity prices). ### Source attribution *Source: IMF staff calculations.* --- ### 2. Monetary Policy Projections ### Major-jurisdiction policy-rate paths - United States: - Federal funds rate projected to drop to 3.50–3.75 percent at the end of 2025. - Terminal range of 2.75–3.0 percent reached around the end of 2028. - Path described as "slightly more front-loaded" than April WEO. - Euro area: - Policy rates expected to hold steady at 2 percent (broadly the same as April projection). - Japan: - Policy rates expected to be lifted, along "broadly the same path" as April WEO. - Gradual rise over the medium term toward a neutral setting of about 1.5 percent. - Objective: keep inflation and inflation expectations anchored at the Bank of Japan’s 2 percent target. ### Charting convention - Panel 2 (Monetary Policy Projections) displays percent quarterly average; solid = October 2025 WEO, dashed = April 2025 WEO. --- ### 3. Fiscal Policy Projections ### Aggregate fiscal stances and country specifics - Advanced economies (group): expected to maintain a "broadly neutral fiscal policy stance" — a significant departure from the tighter stance assumed in the April 2025 WEO. - United States: - General government fiscal-balance-to-GDP ratio expected to deteriorate by 0.5 percentage point in 2026. - Deterioration largely reflecting passage of the One Big Beautiful Bill Act (OBBBA). - Projected offset of about 0.7 percentage point of GDP from projected tariff revenues. - Under current policies, US public debt rises 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. - Fiscal balance projected to worsen in the euro area, including a 0.8 percentage point widening of the deficit in Germany due to increased infrastructure and military spending. - Emerging market and developing economies (group): - On average, projected to modestly tighten fiscal policy in 2026 by about 0.2 percentage point of GDP (reversing the widening expected in 2025). - Public debt in emerging market and developing economies projected to rise to 82 percent of GDP in 2030, compared with just under 70 percent in 2024. - China: - Deficit expected to narrow slightly through 2030, following a widening of 1.2 percentage points in 2025. ### Charting convention - Panel 3 (Fiscal Policy Projections) measures changes in fiscal balance in percentage points (change in fiscal balance); the fiscal balance used is the general government structural primary balance in percent of potential GDP. --- ### 4. Trade Policy Assumptions - Tariffs announced and implemented as of the beginning of September are included in the baseline. - Assumption: these measures remain in effect indefinitely, even when explicitly stated to have an expiration date (pauses on higher tariffs are assumed to remain past expiration; higher rates are assumed not to take effect). - Trade policy uncertainty assumed to remain elevated through 2025 and 2026. - Factors noted: additional pause of higher tariffs between China and the United States through November; ongoing legal proceedings in the United States concerning use of the International Emergency Economic Powers Act as legal basis for imposition of tariffs. --- ### 5. Growth Forecast (Global and Regional) ### Global projections (Table 1.1 opening summary) - World growth: 3.3 percent (2024), 3.2 percent (2025), 3.1 percent (2026). - Q4 over Q4: 3.6 percent (2024), 2.6 percent (2025), 3.3 percent (2026). - World output at market exchange rates: 2.6 percent (2025) and 2.6 percent (2026), down from 2.8 percent in 2024. ### Aggregate and sample country projections (percent change) - Advanced Economies: 1.8 (2024), 1.6 (2025), 1.6 (2026). - United States: 2.8 (2024), 2.0 (2025), 2.1 (2026). - Euro area: 0.9 (2024), 1.2 (2025), 1.1 (2026). - China: 5.0 (2024), 4.8 (2025), 4.2 (2026). - India (note 3 uses fiscal year basis): 6.5 (2024), 6.6 (2025), 6.2 (2026). - Emerging Market and Developing Economies: 4.3 (2024), 4.2 (2025), 4.0 (2026). ### Trends, revisions, and context - Global growth projected to decelerate from 3.3 percent in 2024 to 3.2 percent in 2025 and to 3.1 percent in 2026 (Table 1.1). - On a Q4-to-Q4 basis, growth projected to decline from 3.6 percent in 2024 to 2.6 percent in 2025 and recover to 3.3 percent in 2026. - World output at market exchange rates projected to grow by 2.6 percent in both 2025 and 2026, slowing from 2.8 percent in 2024. - Forecast is "decisively below the pre-pandemic average of 3.7 percent." - Sequential growth from second half of 2025 into 2026: projected annualized average rate of 3.0 percent over six quarters, a slowdown of 0.6 percentage point from the 3.6 percent average rate in 2024. - Forecast for 2025–26 cumulatively 0.2 percentage point lower than projected in the October 2024 WEO. --- ### 6. Advanced Economies — Key Growth Details - Aggregate: growth projected at 1.6 percent in 2025 and 2026 (both 0.2 percentage point lower than recorded in 2024 and projected in October 2024 WEO). - United States: - 2.0 percent in 2025 and 2.1 percent in 2026. - Factors: lower effective tariff rates, fiscal boost from OBBBA, easing financial conditions; downward revisions due to greater policy uncertainty, higher trade barriers, and lower labor force and employment growth. - Euro area: - 1.2 percent in 2025 and 1.1 percent in 2026. - Cumulative downward revision of 0.4 percentage point vs October 2024 WEO. - Drivers: elevated uncertainty and higher tariffs; partial offsets from recovering private consumption and fiscal easing in Germany in 2026; Ireland strong in 2025. - Other advanced economies: - Canada: 1.2 percent (2025) and 1.5 percent (2026) — cumulatively 1.7 percentage points below October 2024 projection. - Japan: 0.1 percent (2024), 1.1 percent (2025), 0.6 percent (2026) — cumulative downward revision of 0.2 percentage point vs October 2024. - United Kingdom: 1.3 percent (2025 and 2026), cumulatively 0.4 percentage point lower vs October 2024 despite upward revision vs April. --- ### 7. Emerging Market and Developing Economies — Key Growth Details - Aggregate: 4.3 percent (2024), 4.2 percent (2025), 4.0 percent (2026). - Emerging and Developing Asia: 5.3 (2024), 5.2 (2025), 4.7 (2026). - China: 5.0 (2024), 4.8 (2025), 4.2 (2026). - 2025 forecast revised downward by 0.6 percentage point in April 2025 WEO then upward by 0.8 percentage point in July WEO Update following pause on higher rates in May. - Compared with October 2024 WEO, growth at 4.8 percent expected to be 0.3 percentage point higher. - India: 6.6 (2025), 6.2 (2026); 2025 upward revision from July WEO Update; cumulative 0.2 percentage point lower than pre-tariff October 2024 forecast. - Latin America and the Caribbean: 2.4 (2024), 2.4 (2025), 2.3 (2026). - 2025 forecast revised upward by 0.4 percentage point relative to April (Mexico and Brazil drivers). - Emerging and Developing Europe: 3.5 (2024), 1.8 (2025), 2.2 (2026). - Russia: 4.3 (2024), 0.6 (2025), 1.0 (2026); 2025 forecast 0.9 percentage point lower than April 2025 WEO. - Middle East and Central Asia: growth projected to accelerate (Table 1.1 shows Middle East and Central Asia 2.6 in 2024, 3.5 in 2025, 3.8 in 2026). --- *Source: IMF staff estimates; figures and notes as presented in the October 2025 World Economic Outlook text.* ### 3.5 percent in 2025 and to 3.8 percent in 2026, as ### 3.5 percent in 2025 and to 3.8 percent in 2026, as ### Regional growth projections and revisions - Overall projection: growth of 3.5 percent in 2025 and 3.8 percent in 2026 as effects of disruptions to oil production and shipping dissipate and impacts of ongoing conflicts abate. - Revision versus April 2025 WEO: projection for 2025 revised upward by 0.5 percentage point, largely reflecting developments in Gulf Cooperation Council countries (in particular Saudi Arabia) and Egypt. - Revision versus October 2024 WEO: region’s growth projection is cumulatively 0.8 percentage points lower for 2025 and 2026 due to indirect effects of subdued world demand on commodity prices. - Sub-Saharan Africa: - Growth expected to remain subdued, unchanged in 2025 from 4.1 percent in 2024, before picking up to 4.4 percent in 2026. - Revision versus April 2025 WEO: cumulative upward revision of 0.5 percentage point. - Revision versus October 2024 WEO: downward revision of 0.1 percentage point. - Nigeria: growth revised upward due to higher oil production, improved investor confidence, a supportive fiscal stance in 2026, and limited exposure to higher US tariffs. - Several other economies in the region see significant downward revisions due to changing international trade and official aid landscape; Lesotho and Madagascar expected to be particularly affected by expiration of preferential access under the African Growth and Opportunity Act. ### Inflation forecast and country cases - Global headline inflation: projected to decline to 4.2 percent in 2025 and to 3.7 percent in 2026; path virtually the same as previous projections though variation across countries and regions exists. - Advanced economies: - United Kingdom: headline inflation expected to continue rising in 2025 partly because of changes in regulated prices; projected to be temporary with return to target at the end of 2026 as labor market loosens and wage growth moderates. - United States: - Inflation expected to pick up beginning in the second half of 2025 as the impact of tariffs passes 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: - Brazil and Mexico: inflation forecasts revised upward; Brazil’s revision more pronounced, reflecting stabilization of inflation expectations above target rates and fiscal policy uncertainties; relief from recent currency appreciation expected in late 2025 and in 2026. Mexico: upward revision driven by volatile food categories and more-persistent-than-expected services inflation. - Several economies in emerging and developing Asia (for example, China, India, and Thailand): inflation forecasts revised downward, largely reflecting lower-than-expected outturns with food, energy, and administrative prices playing significant roles. - United States specific comparisons: - US growth in 2025 forecast at 2.0 percent, lower than the 2.2 percent projected in the October 2024 WEO. - US inflation in 2025 forecast at 2.7 percent, higher than the 1.9 percent projected in the October 2024 WEO. ### World trade outlook and global imbalances - World trade: - World trade volume expected to grow at an average rate of 2.9 percent in 2025–26, even with a temporary boost from front-loading in 2025. - This 2.9 percent average is lower than the October 2024 WEO projection which envisioned an average growth rate of 3.3 percent. - Compared with April 2025 WEO: world trade volume expected to grow faster in 2025 but more slowly in 2026 due to front-loading patterns. - Global current account imbalances: - Global current account imbalances in 2025 expected to exceed those in the October 2024 WEO and to narrow thereafter. - Among largest contributors (China, Germany, United States): preemptive trade ahead of prospective tariffs widens the US deficit and China’s surplus before unwinding as pull-forward behavior dissipates. - Channels influencing imbalances: - Trade policy shifts: higher import costs and uncertainty in the United States dampen investment and soften import demand; tariffs on intermediate inputs raise production costs for US manufacturers and leave net effects on the current account ambiguous; higher tariff receipts likely to lift public savings but decreasing private savings may offset this increase. - Exchange rate movements: recent depreciation of the US dollar enhances export price competitiveness and restrains import-intensive consumption, possibly helping to narrow US external deficits; weaker dollar tends to ease global financial conditions but may be eroded by higher US inflation relative to the rest of the world. - Fiscal changes: China and Germany announced expanded spending to boost domestic demand, lowering net savings and reducing external surpluses; in the United States, the OBBBA is expected to widen the fiscal deficit over the medium term relative to previous WEO projections, weighing on public saving and tending to widen the current account deficit. ### Medium-term outlook and structural risks - Medium-term growth: world output projected to expand at an average annual pace of 3.2 percent in 2027–30, compared with the prepandemic (2000–19) historical average of 3.7 percent. - Relative to October 2019 (pre-shocks), medium-term outlook is decidedly weaker: - Medium-term growth prospects dimming for about two-thirds of the world economy (measured by purchasing power parity). - Decline more pronounced for emerging market and middle-income economies. - Impact on poorest economies: - Stronger downward revisions for emerging market and developing economies threaten global income convergence. - Poorest economies, especially those with prolonged conflict, at risk of decelerating growth momentum and widening per capita income gap relative to advanced economies. - Financing and aid: - Significant decline in financing flows to vulnerable economies, including cuts in grants and concessional lending; higher reliance on commercial creditors for external financing. - Official development assistance constitutes a significant share of gross national income in some of the most vulnerable countries in the Middle East and Africa. - Countries such as Afghanistan, the Central African Republic, and Somalia may be hit hardest by aid cuts in proportion to their gross national income. - Direct short-term macroeconomic impact of aid cuts may not be large but effects will materialize over time via deterioration in energy access and human capital accumulation, reducing potential output and raising humanitarian costs. - Declining official development assistance could heighten geopolitical instability, migration pressures, and security risks; recipient countries may increasingly rely on smaller, less coordinated donors. - Migration and labor supply: - Global stock of international migrants estimated at 285 million as of 2022, with 168 million participating in the labor force. - About a quarter of those migrants in the labor force are in North America and another quarter in western Europe. - On average, roughly 15 percent of advanced economies’ populations are immigrants. - Remittances are a significant resource for many source countries and can modestly and permanently raise GDP under some circumstances. - US immigration policy changes could reduce US GDP by 0.3 percent to 0.7 percent a year. - Reduced labor supply from restrictive immigration would lower potential output and could erase disinflationary momentum when compounded with tariff-induced negative supply shocks; sectors with high immigrant labor share (construction, hospitality, personal services, farm work) could see stronger inflationary pressures. ### Risks to the outlook — still tilted to the downside - Downside risks highlighted: - Prolonged trade policy uncertainty and escalation of protectionist measures: - Would weigh on investment, worsen growth outlook, hamper inventory optimization, and create short-term output volatility (front-loading followed by payback). - Further tariffs and nontariff measures (including export controls) could disrupt and fragment supply chains, reversing efficiency gains from trade liberalization. - Ad hoc bilateral deals and discriminatory measures may generate negative spillovers, tit-for-tat dynamics, and further depress global output over the medium term. - Protectionism could stunt global technological diffusion, especially hurting emerging market and developing economies, and increase domestic polarization and social unrest. - Shocks to labor supply: - More stringent immigration policies in advanced economies could reduce labor supply, weighing on investment and hiring, acting as a negative supply shock and lowering potential output capacity. - Emerging pockets of labor market tightness could raise services prices and increase core inflation. - Fiscal vulnerabilities and financial market fragilities: - Recent surge in long-term sovereign bond yields in major advanced economies raises risk of abrupt market reactions to fiscal vulnerabilities. - Rising borrowing costs could increase debt-service costs in countries that roll over a high share of debt annually, potentially reducing capital spending or support for shock-prone households. - Reduced official aid increases reliance on private creditors for low-income countries, adding fiscal vulnerability. - Repricing of core government bond yields could be amplified by maturity mismatches and leverage among nonbank financial institutions, triggering disorderly price corrections where asset valuations exceed fundamentals. *International Monetary Fund | October 2025* ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### Major downside risks to the global outlook - Market repricing could worsen balance sheets for households and firms, weighing on consumption and investment; stablecoin runs could jeopardize markets for assets that back them—such as short-term government bonds or demand deposits—and pose systemic risks to the financial system (Chapter 1 of the October 2025 Global Financial Stability Report). - Repricing of new technologies: excessively optimistic growth expectations about AI could be revised, triggering a market correction. Elevated valuations in tech and AI-linked sectors could lead to earnings disappointment, a drop in tech stock prices, and systemic implications. - A potential bust of the AI boom could rival the dot-com crash of 2000–01 in severity, given the dominance of a few tech firms in market indices and involvement of less-regulated private credit loans funding much of the industry’s expansion. - Wealth erosion could dampen consumption; capital misallocation from concentrated flows into a narrow set of firms could slow recovery. - Constrained fiscal space may limit effectiveness of policy responses. - Eroding good governance and institutional independence: - Intensified political pressure on policy institutions (for example, central banks) could de-anchor inflation expectations. - Evidence shows political pressure on central banks tends to increase the intensity and persistence of inflationary pressures (Binder 2021; Drechsel 2025). - Pressure on institutions mandated with data collection and dissemination could erode trust in official statistics, complicating policy decisions and price discovery, and raising the likelihood of policy mistakes. - Renewed spikes in commodity prices from climate shocks, regional conflicts, or geopolitical tensions: - Sustained increases in food, fuel, and essential commodity prices would heighten inflationary pressures, especially in commodity-importing nations with constrained fiscal space. - Extreme heat, prolonged drought, and disasters may reduce agricultural yields, sparking food supply shocks and amplifying food security challenges—disproportionately affecting low-income countries where households allocate a substantial share of expenditures to essentials. ### Upside risks - Breakthroughs in trade negotiations leading to lower tariffs and improved policy predictability: - Reduced aggregate tariff rates and restored rules-based nondiscriminatory frameworks could improve trade policy predictability and deliver broad-based efficiency gains (see Box 1.2). - Cooperation in trade in services, streamlined business regulation, and capital market integration could unlock investment and boost productivity. - A faster pace of structural reforms: - Accelerating macrocritical reforms—raising labor force participation, reducing resource misallocation, promoting business innovation—could strengthen medium-term growth. - Artificial intelligence reigniting productivity growth: - Faster AI adoption could generate strong productivity gains if policies enable high-productivity firms to grow and allow unproductive firms to exit. - Gains from AI could exceed potential employment costs, particularly with regulatory frameworks and labor market programs for upskilling and re-skilling. ### Policies: bringing confidence, predictability, and sustainability - Anchoring trade in predictable rules - Remove trade policy uncertainty: set and respect clear, transparent trade policy road maps to reduce volatility, stabilize expectations, and support investment. - Modernize trade rules to reflect services, digital trade and data flows, complex subsidies, and supply-chain security—while avoiding overreach and targeting clearly identified cross-border spillovers. - Pursue bilateral, regional, and plurilateral negotiations to lower tariffs, quotas, and behind-the-border frictions; include open-accession clauses to promote inclusivity and avoid fragmentation. Avoid managed trade provisions such as purchase commitments and quantitative restrictions. - Pair trade diplomacy with macroeconomic adjustment: - Europe: higher public infrastructure investment to raise potential growth and close the postpandemic productivity gap with the United States. - China: rebalancing toward household consumption—through fiscal measures focused 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. - Rebuilding fiscal buffers and safeguarding debt sustainability - Restore buffers through credible medium-term fiscal consolidation designed to rebuild buffers while protecting spending for the vulnerable. - Prioritize measures that raise efficiency and crowd in private investment (October 2025 Fiscal Monitor): broaden tax bases, strengthen revenue administration, and 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; strengthen frameworks, independent fiscal institutions, fiscal governance, and debt transparency (Acalin and others, forthcoming). - New discretionary support should be tightly targeted, transparently costed, explicitly temporary, include sunset clauses and a preannounced step-down path, and specify offsetting measures before introduction. - Where debt is unsustainable, restructuring may be required; progress in operationalizing international sovereign debt resolution mechanisms—including the Group of Twenty (G20) Common Framework—and convergence through the Global Sovereign Debt Roundtable can improve timeliness and reduce cost. - Ensure credibility: publish medium-term fiscal frameworks with clear anchors, preannounced adjustment paths, and contingency plans to manage shocks (IMF 2025b); include explicit guardrails against monetary financing. - Monetary policy priorities: tailored, transparent, independent - Calibrate monetary policy to country circumstances: preserve price stability and consider activity relative to potential output. Interest rate cuts should be contingent on clear evidence that inflation is durably low and stable. - Recognize tariffs as supply shocks that push up inflation while weighing on activity; sector-targeted tariffs warrant close scrutiny as they steepen the Phillips curve and alter the inflation-output trade-off (Chapter 2 of the October 2024 WEO). - Emphasize clear central bank communication: articulate the reaction function, publish a small number of scenarios for inflation and activity, explain transmission mechanisms, tailor messages to audiences, and maintain a predictable calendar and consistent formats (Bernanke 2024). - Safeguard independence and credibility: erosion of credibility requires prolonged tight policy and elevated rates to re-anchor expectations (Pastén and Reis 2021). Political interference risks monetary dominance, higher term and risk premiums, and higher medium- to long-term nominal yields (Leeper 2023). - Evidence: 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. - Strengthen the broader policy ecosystem: fiscal frameworks, financial supervision, competition and insolvency regimes, the judiciary, and national statistical systems; high-quality, timely, independent data reduce uncertainty and improve planning. - Tackle excessive exchange rate volatility: allow flexible exchange rates to facilitate adjustment; if disorderly, consider IMF Integrated Policy Framework guidance, temporary foreign exchange intervention, or targeted capital flow measures alongside sound monetary and fiscal stances. - Preserve macrofinancial stability: contain liquidity risks in nonbank finance and preserve resilience in core banking. Follow Financial Stability Board guidance: private credit funds should limit stock creation and redemption frequency; mandate liquidity tools and regular stress tests; fully implement internationally agreed capital and liquidity standards and strengthen the financial safety net. - Implement comprehensive, risk-based regulatory and supervisory frameworks for crypto assets, including robust frameworks for stablecoins (see Chapter 1 of the October 2025 Global Financial Stability Report). - Policies for severe shock mitigation - Use scenario analysis to strengthen policy readiness: develop a baseline and a small set of severe but plausible alternatives that jointly span macroeconomic and financial risks. - For each scenario, outline plausible policy responses: - Monetary policy: alternative rate paths, balance sheet options, communication templates. - Fiscal policy: calibrated use of automatic stabilizers and time-bound, targeted support. - Financial stability: liquidity backstops and activation thresholds for macroprudential buffers. - Where warranted, capital flow measures consistent with the IMF’s Integrated Policy Framework. - Policies with medium-term impact - Prioritize measures that sustainably lift medium-term growth prospects. - Use caution with industrial (“vertical”) policies because of opportunity costs, fiscal cost, higher consumer prices, and resource misallocation; consider horizontal reforms that improve the general business environment and apply uniformly across the economy. *Source: CHAPTER 1 GLObaL PROsPECTs aND POLICIEs, text - CHAPTER 1 GLObaL PROsPECTs aND POLICIEs (October 2025).* ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### CHAPTER 1 GLObaL PROsPECTs aND POLICIEs ### Disciplined use of industrial policy - Governments must diagnose market failures clearly, identifying specific areas where intervention can yield the largest benefits. - All policies should be embedded in a robust institutional and macroeconomic framework, ensuring coordination among agencies and maintaining fiscal discipline, especially where debt is high and fiscal space limited. - Governments should set explicit, measurable goals for industrial interventions, such as job creation, technological advancement, or increased domestic production. - Policies should focus on areas with the highest potential for positive innovation spillovers and transformative impact (see also Chapter 2 of the April 2024 Fiscal Monitor). - Strong governance requirements: - Transparent selection processes. - Independent oversight. - Accountability mechanisms to reduce wasteful spending and corruption. - Mechanisms for regular evaluation and recalibration; governments should be prepared to scale back or discontinue ineffective measures. - Caution on cross-border use: - Industrial policies should not be deployed to expand exports to compensate for lost markets due to cost and trade-distortion risks. - If support to affected firms is considered, it should be cautious, narrowly targeted, and time-bound, aimed at specific, well-diagnosed market failures with clearly identified externalities, known magnitude, and well-established key demand and supply elasticities. - Where pressures to protect the local economy arise (trade diversion or surges in foreign direct investment), countries should prioritize instruments found in international agreements and designed for that purpose rather than ad hoc industrial policy. ### Implementing structural reforms - Rationale: - With challenges on multiple fronts and persistently dim medium-term prospects, growth-enhancing reforms have more urgency than ever. - Population aging, rapid technological change, and shifting patterns of comparative advantage in skills are reshaping labor markets across advanced and emerging market economies. - Labor market policies to raise utilization and potential growth: - Modernized public employment services, digital job-matching platforms, and relocation assistance to speed reallocation across sectors. - Portable benefits across jobs and contract types. - Affordable childcare and parental leave to raise participation—especially among women—and smooth earnings risks during transitions. - Migration policies calibrated to domestic skill shortages to clear bottlenecks while protecting domestic workers (see Chapter 3 of the April 2025 WEO). - Pension and retirement systems: - 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 while easing physical demands (see Chapter 2 of the April 2025 WEO). - Evidence (Nikolova and Graham 2014) suggests voluntary part-time work at older ages can raise well-being and support participation and life satisfaction. - Digitalization and AI: - Can lift productivity and expand potential growth when paired with complementary investments in workforce skills, strong management, interoperable infrastructure, competitive markets, and sound data governance and cybersecurity (Gopinath 2023). - Diffusion-oriented policies recommended: support uptake of digital tools by small firms, management upgrading, and data interoperability to complement 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: - 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. - Donors should 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 - Recommended policy mix to drive low-carbon, resilient growth: - Invest in technologies such as solar and wind and in energy-efficient systems to reduce carbon emissions and create 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. - Expected benefits of transitioning from fossil fuels to renewables: - Enhance energy security by reducing dependence on imported fuels. - Create employment opportunities in the green energy sector. - Improve the balance of payments by reducing energy importation costs. - Enhance economic stability by reducing volatility associated with fossil fuel markets. ### Box 1.1 — Trade Reallocation in Response to Tariffs: preliminary evidence on 2025 vs 2018–19 - Context: - The 2025 US trade policy shift differs from 2018–19: 2018–19 tariff increases were directed primarily at China; 2025 is broader-based, affecting a wider range of countries and accompanied by a marked rise in trade policy uncertainty. - Key question: Has the 2025 tariff shock led to different bilateral trade adjustment patterns between the United States and China relative to 2018–19? - Empirical findings from bilateral monthly trade flow data (preliminary): - 2018–19 episode: - China’s exports to the United States fell by about 6 percent within two years. - China increased exports to substitute countries and less to complements. - Asian and USMCA countries absorbed much of 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. - 2025 episode (early signs, dashed lines in figures): - Early signs of further decoupling between the United States and China—similar directionally to 2018–19 but appearing to happen sooner. - Increase in Chinese exports to third countries, especially in Asia and Europe—February–April 2025 increases exceeded February–April 2018 increases. - 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. - High 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, and extended screening procedures for foreign direct investment may be partially responsible. - Caveats and interpretation: - Too soon to assess longer-term reallocation magnitude—2018–19 reallocation picked up speed only after about 12 months. - Observed shifts in gross trade data can be induced by other factors unrelated to trade policy, including broader changes in competitiveness; increased exports to third countries are not necessarily the same products whose exports to the United States fell. - Movements in exchange rates and relative prices may affect real reallocation. - Further analysis required to isolate roles of different factors once sufficient data are available. - Model-based projection: - Model simulations (Rotunno and Ruta 2025) suggest that, once uncertainty is resolved, China’s exports to non-US markets could increase by 4–6 percent in the baseline, with extent and direction of diversion depending crucially on the distribution of tariffs and third-country policies. - Sectoral signals: - Early evidence suggests redirection of trade to Asia in sectors targeted by tariff increases, including automobiles and parts, and to Europe in steel and aluminum. - Some correlation between changes in third countries’ imports from China in a given sector and their exports in the same sector to other regions—consistent with trade reallocation, trade rerouting, or both. ### Box 1.2 — Risk assessment surrounding the baseline projection - Methods: - The IMF’s G20 model derives confidence bands around the WEO baseline by drawing shocks recovered from historical data (Andrle and Hunt 2020). Distribution is tilted to align with the growth-at-risk assessment in the October 2025 Global Financial Stability Report. - The IMF’s Global Integrated Monetary and Fiscal (GIMF) model analyzes shocks that could materialize over the five-year WEO horizon. GIMF has 10 regions and assumes monetary policy responds endogenously, with floating exchange rates in most regions. The model was modified to allow higher pass-through to capture inflation risks from tariffs and exchange rate movements. - Confidence band findings: - Distributions are skewed: growth distributions skewed to the downside; inflation distributions skewed to the upside. - US outcomes: - Probability of a recession occurring in 2026 is assessed at about 30 percent, somewhat smaller than the recession probability estimated in the April 2025 WEO. - The risk that 2026 US headline inflation will rise above 3 percent is similar (about 30 percent). - These probabilities are larger than at the time of the October 2024 WEO (25 and 20 percent, respectively). - Global outcomes: - Probability that global growth in 2026 will fall below 2 percent is assessed at about 25 percent, slightly lower than in April. - Probability that 2026 global headline inflation will rise above 5 percent is broadly similar, at about 25 percent. - Summary: downside risks to growth have receded slightly relative to April but remain elevated; upside risks to inflation are broadly the same. - Scenarios analyzed with GIMF: - Scenario A (fall in global output and narrowing global imbalances relative to baseline): - Higher tariffs and supply-chain disruptions: - Permanently higher US tariffs than in baseline, starting end-2025. - Increase in tariffs is the higher of either tariff increases announced in April or rates announced in letters sent in June and July. - 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. - Effective tariff rate on US imports increases by 10 percentage points overall, with tariff revenue used to pay down public debt over the WEO horizon. - Scenario assumes no retaliation by other countries. - Cumulative tariff increases lead to a 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. - Safe/neutral global real rate increases gradually but permanently relative to baseline, by up to 50 basis points, affecting all countries equally. - 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 equity prices in the US, reflecting in part a correction of AI stock valuations; 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; increase in US external risk premium lasts for 20 years. - Scenario B (increase in global output relative to baseline without strong implications for imbalances): - 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 coming out of ongoing bilateral negotiations and multilateral... *Italic: International Monetary Fund | October 2025* ### Box 1.2 (continued) ### Box 1.2 (continued) ### Scenario A: Higher tariffs, inflation expectations shock, tighter financial conditions, and lower demand for US assets — Impacts on growth, inflation, rates, and balances - Global activity decreases by 0.3 percent relative to baseline in 2026, with the effect building through 2028, and with a permanent loss in global GDP of one-half percent. - China is most affected among tariff-facing regions because of the larger tariff hike and the limited adjustment assumed in the renminbi-to-dollar rate, which also results in a lower current account surplus than in the baseline. - United States: - Production efficiency reduces; dollar appreciation lowers demand for US exports. - Experiences a moderate reduction in its current account deficit partly because the decline in investment is larger than in other countries. - Tariffs lead to a temporary 40 basis point surge in US inflation and a 20 basis point increase in policy rates in 2026. - For countries facing shocks to inflation expectations, the United States in 2026 sees an additional increase of 30 basis points in inflation and policy rates and a decrease in activity of about 0.4 percent from this shock alone. - China: - Sustained reduction in inflation of 40–50 basis points from tariffs. - Impact of inflation-expectations shock on activity is negligible. - Euro area: - Experiences a modest increase in inflation of 10–20 basis points from tariffs. - Aggregate current-account impact is limited. - Sovereign yields and global financial conditions layer: - Combination of higher real interest rates and corporate spreads reduces global investment by 3 percent and GDP by 0.6 percent in 2026, relative to the baseline. - Moderately disinflationary: global inflation falls by about 0.2 percentage point in 2026. - Short-term hit larger in emerging markets excluding China; smaller in China as term premia do not increase. - Over the long term, all countries see a permanent decrease in GDP, of about 1.5 percent. - Lower global demand for US assets layer: - United States: higher domestic real interest rates and a depreciation of the US dollar; raises demand for US exports but compresses domestic absorption, lowers GDP somewhat, and reduces the US current account deficit sizably. - Outside the United States: real interest rates decrease; 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 of Scenario A: - Sizable decrease in world GDP in 2026, 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 average. - Impact on the US dollar’s real effective exchange rate is muted; global imbalances narrow. ### Scenario B: Return to low tariffs, lower uncertainty, and higher-than-expected AI benefits — Impacts on growth, investment, inflation, and exchange rates - Return to low tariffs supports global activity, with gains in all three large countries but largest in China in the short term. - United States: - Temporary reduction in inflation of about 60 basis points in 2026. - 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: - Global total factor productivity increases by about 0.8 percent over a 10-year period. - Global GDP is raised by about 0.3 percent in 2026. - Global investment increases by an additional 1.5 percent over 2026–27. - Countries more exposed to gains in automation and better prepared for AI adoption see larger productivity gains. - Combined effect of 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 and higher-than-expected benefits from AI explain 1.4 percentage points. - Global imbalances do not change much; shocks generate relatively small cross-country variation and exchange rates play a larger role in global adjustment. ### Mechanisms highlighted across scenarios - Tariffs: - Reduce global goods demand and disrupt supply. - Reduce production efficiency in the United States and cause dollar appreciation. - Inflation-expectations shocks: - Elicit higher nominal and real policy rates; faster response in prices relative to wages reduces purchasing power and aggregate demand. - Most pronounced impact in emerging markets facing higher-than-target inflation and in the United States. - Financial tightening (higher sovereign yields and corporate spreads): - Substantially reduces investment and GDP; can be disinflationary in the short term. - Exchange rate adjustments: - Play a central role in cross-country adjustment, influencing current-account dynamics and distribution of gains/losses. ### Commodity market developments and commodity-driven macroeconomic fluctuation (Special Feature highlights) - Primary commodity prices declined by 2.6 percent between March and August 2025, with large gains in precious metals partly offsetting a broad-based decline in other commodity groups, including energy, base metals, and agriculture. - Oil markets: - Oil prices decreased 5.4 percent between March 2025 and August 2025. - Since the US announcement of tariffs in early April, oil prices traded between $60 and $70 per barrel, barring a temporary spike in mid-June from the Israel-Iran war. - International Energy Agency forecast cited: 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. - US futures markets indicate that oil prices will average $68.90 per barrel in 2025, a 12.9 percent decline from the previous year, before decreasing to $65.80 in 2026 and steadily increasing to $67.30 through 2030. - Risks balanced: potential Russian supply disruptions (upside risk) versus accelerated OPEC+ supply increases and tariff-induced weaker global demand (downside pressure). - Higher-cost producers set a loose price floor, with some US breakeven prices in the low to mid $60s. - Natural gas: - Title Transfer Facility (TTF) trading hub prices in Europe dropped 16.6 percent between March 2025 and August 2025 to $11.0 per million British thermal units (MMBtu). - Prices fell on lower demand and ample supply despite a temporary spike in June amid the Israel-Iran war. - Broader note: - Tariffs drove some commodities lower, especially base metals. - The Special Feature analyzes interlinkages between commodity sectors and the rest of the economy to understand cyclical fluctuations following commodity price shocks. *Source: IMF staff estimates; Box 1.2 (continued), World Economic Outlook, October 2025.* ### 2. Brent Crude Oil Price Forecasts ### 2. Brent Crude Oil Price Forecasts ### Commodity price and energy market developments - Asian liquefied natural gas prices fell by 12.2 percent between March and August 2025, tracking the decreasing trend in European prices. - US Henry Hub prices fell by 30 percent to $2.9 per MMBtu owing to trade-policy-induced demand uncertainty and record-high domestic production. - Futures markets forecasts: - TTF prices: average $12.1/MMBtu in 2025, steadily decreasing to $8.4/MMBtu in 2030, reflecting ample global liquefied natural gas supply and near-doubling of US export capacity through 2027. - Henry Hub prices: expected to fluctuate around $3.5/MMBtu between 2025 and 2030. ### Metals, precious metals, and rare earths - IMF metals price index rose 6.8 percent between March and August 2025. - Gold increased 12.8 percent over the same period, reaching record highs above $3,400/ounce as investors sought safe-haven assets amid rising geopolitical uncertainty and central banks increased gold reserves. - Futures markets suggest metals price changes of 0.3 percent in 2025 and 3.0 percent in 2026. - China’s April export licensing requirements for seven critical rare earth elements and corresponding magnets caused dramatic export slowdowns in April and May 2025; after 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 as reduced US raw material exports to China tightened global supplies of processed rare earths amid strengthening demand. ### Agricultural commodities and food prices - After a strong start to 2025, agricultural commodity prices declined from March to August 2025: - IMF food and beverages price index fell by 4.8 percent. - Cereal prices dropped by 11.1 percent amid strong harvest prospects in major producers (United States, Russia, Brazil, Argentina). - Coffee prices plunged by 16.7 percent, with the IMF Coffee Index retreating from its February historic high as supply prospects improved in Brazil and tariff uncertainty grew in the United States. - Corn prices fell 11.9 percent, pressured by Brazil’s large harvest in Q2 2025 and promising crop conditions in the United States. - Short-run upside risks to the food price outlook: - New export restrictions that tighten international supply. - Potential bad weather resulting from La Niña in Q4 2025. - Main downside risks: - Larger-than-expected harvests and higher tariffs. ### Size, interconnectedness, and macroeconomic transmission of commodity shocks - Definitions and measurement: - Domar weight: ratio of sectoral gross output to national GDP. - NAVAS (network-adjusted value-added share): sector’s total (direct and indirect) exposure to the economy’s factors of production; measures upstream and downstream linkages (Silva and others 2024; Qiu and others 2025). - Comparative facts: - Average commodity sector Domar weight in emerging market and developing economies is: - twice as large for metals, - three times as large for energy, - almost four times as large for agriculture, compared with advanced economies. - 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 across country groups and metals and agricultural products the smallest. - Distributional observation: - The commodity sector NAVAS is larger than its Domar weight in both advanced and emerging market economies, but differences in NAVAS across groups are smaller than those in Domar weights. - There is overlap between the right tail of NAVAS in advanced economies and the left tail in emerging market and developing economies—meaning some advanced economies have commodity sectors that are highly interconnected. ### Empirical relationships between NAVAS and consumption responses - Empirical finding: - Countries with higher NAVAS display stronger annual correlation between aggregate consumption and commodity terms of trade (commodity net export price index). - The NAVAS interaction coefficient (marginal impact of deeper interconnectedness on consumption response to terms-of-trade changes) is substantially larger than the coefficient for size (Domar weight) and is always significant in panel local projections. - Country examples and NAVAS values: - Thailand: NAVAS 0.68; Switzerland: NAVAS 0.65—similar NAVAS despite Thailand’s commodity sector being six times larger, yielding similar impacts of terms-of-trade shocks on consumption. - Norway energy sector: NAVAS 0.94; Vietnam: NAVAS 0.48—higher correlation of energy shocks with consumption in Norway than in Vietnam. - Kazakhstan: NAVAS 0.90; South Africa: NAVAS 0.73—both with commodity sectors equal to 39 percent of GDP in the model experiment. ### General equilibrium model experiments and transmission channels - Model setup: - Small open economy dynamic stochastic general equilibrium model (Silva and others 2024; Gomez-Gonzalez and others 2025). - Calibration: Organisation for Economic Co-operation and Development input-output data covering 66 countries and 44 sectors, matching 2018 sectoral final consumption shares, input-output shares, and commodity sector net exports. - Benchmark: six commodity sectors aggregated into 1 commodity sector and 38 non-commodity sectors. - Key simulated results: - Model replicates empirical positive slope: higher NAVAS associated with stronger co-movement between consumption and commodity terms-of-trade shocks; some advanced economies show higher NAVAS and stronger co-movement than emerging markets. - Two-country experiment (both commodity exporters with commodity sectors equal to 39 percent of GDP): - Kazakhstan (NAVAS 0.90): a 1 percent commodity terms-of-trade shock yields a positive and large impact on aggregate consumption. - South Africa (NAVAS 0.73): the same shock yields a negative impact on aggregate consumption. - Transmission mechanism insights: - Real wages increase in both countries (nominal wages increase more than prices) because higher commodity-sector revenues boost labor demand. - Consumption response depends on labor income and changes in households’ real wealth (net foreign assets denominated in units of real commodity goods). - In South Africa, the aggregate price index increases more than commodity prices on impact (more than 1 percent), reducing the real value of net foreign assets—a negative wealth shock that lowers consumption. - Higher NAVAS tends to dilute factor price changes through intermediate input prices, requiring smaller wage increases for a given rise in marginal costs; low-NAVAS economies see larger direct pass-through to factor costs and larger aggregate price increases. - Low-NAVAS countries therefore tend to experience larger increases in aggregate prices, lower real net foreign assets, and smaller wealth effects. ### Implications for monetary policy in small open economies - Core point: - While higher commodity prices typically exert upward pressure on inflation, their effect on consumption varies with the commodity sector’s NAVAS—amplifying or dampening transmission depending on the economy’s production-network structure. - Policy guidance (theoretical benchmark and nuance): - Standard theory suggests monetary policy should respond only to inflation occurring in sticky-price sectors and should ignore fluctuations in sectors with flexible prices. - The NAVAS-driven heterogeneity in how commodity price shocks affect inflation, consumption, and wealth implies monetary authorities should account for production-network structure when assessing the macroeconomic implications of commodity shocks and when designing policy responses. *Sources: Bloomberg Finance L.P.; Haver Analytics; IMF, Primary Commodity Price System; International Energy Agency; IMF staff calculations; Commodity Special Feature: Market Developments and Commodity-Driven Macroeconomic Fluctuations, World Economic Outlook: Global Economy in Flux, Prospects Remain Dim (October 2025).* ### 1. Aggregate Price and Wage Reaction to a 1 Percent ### 1. Aggregate Price and Wage Reaction to a 1 Percent Terms-of-Trade Shock ### Incomplete pass-through and price stickiness - Global commodity prices are flexible and highly responsive to shocks, but pass-through to domestic commodity sectors is incomplete and domestic commodity prices are stickier. - Literature examples cited: Choi and others (2018) for oil; Miranda-Pinto and others (2024) for metals; Hyun and Lee (2023) for agricultural products. ### Network-adjusted weight (NAW) versus Domar (size) weights - Relying on Domar weights (sectoral size) to design monetary policy in small open economies, instead of the network-adjusted weight (NAW), leads to welfare losses that are inversely proportional to the NAVAS (Qiu and others 2025). - When the commodity sector’s NAVAS is low (meaning it relies more on foreign than on domestic factors of production, directly and indirectly), responses to commodity price fluctuations are less necessary because they do not lead to commensurate output gap fluctuations. - Monetary policy mistake (PM) is defined as: - PM = k(1 – NAVAS) + export intensity – expenditure switching ### Distribution and magnitude of policy mistakes - Using the data presented in Figure 1.SF.2, Figure 1.SF.6 reports the distribution of the “policy mistake” made by relying on size instead of the NAW. - The figure shows that both groups of economies would make monetary policy mistakes by over-weighting the commodity sector by roughly a third. - Specific illustrative examples: - Advanced economies: average size of the commodity sector is 13 percent; average monetary policy mistake is 34 percent; implied actual weight should be 8.6 percent. - Emerging market and developing economies: average size of the commodity sector is 39 percent; average monetary policy mistake is 24 percent; implied actual weight should be 30 percent. - Comparative averages: - Advanced economies tend to overestimate the importance of the commodity sector in monetary policy design by 32 percent, on average. - Emerging market and developing economies overestimate by 27 percent, on average. ### Figure note (Figure 1.SF.6) - Kernel density estimate of the monetary policy mistake in the commodity sector (2018). - Horizontal axis: percent deviation of optimal weight (difference between the Domar weight and network-adjusted weight as a proportion of the Domar weight). - Data sources: Organisation for Economic Co-operation and Development; and IMF staff calculations. ### Conclusion and policy implications - The macroeconomic impact of commodity price shocks depends less on the size of the commodity sector than on how interconnected it is with the rest of the economy. - The network-adjusted value-added share (NAVAS) captures this interconnectedness and explains cross-country differences in how consumption responds to commodity price fluctuations. - Policy recommendation for central banks and macroeconomic frameworks: - Adapt macroeconomic frameworks to account for the structure of domestic production networks. - Account for production network structures when calibrating responses to commodity price movements to reduce the risk of policy miscalibration and enhance macroeconomic stability across both advanced and emerging market economies, regardless of net commodity trade position. *Source: IMF staff (World Economic Outlook: Global Economy in Flux, October 2025) — text unit "1. Aggregate Price and Wage Reaction to a 1 Percent Terms-of-Trade Shock."* ### CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ### CHAPTER 1 GLOBAL PROSPECTS AND POLICIES ### Annex Table 1.1.6 — Summary of World Real per Capita Output (selected series) - Unit: Annual percent change; in constant 2021 international dollars at purchasing power parity. - Average / Projections (columns correspond to periods/years in source): 2007–16 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 - World: 2.0 | 2.5 | 2.5 | 1.8 | –3.9 | 5.7 | 2.8 | 2.4 | 2.3 | 2.7 | 2.2 - Advanced Economies: 0.8 | 2.2 | 1.9 | 1.5 | –4.4 | 5.9 | 2.4 | 0.9 | 1.2 | 1.2 | 1.4 - United States: 0.7 | 1.8 | 2.4 | 2.1 | –2.9 | 5.8 | 2.0 | 2.1 | 1.9 | 1.5 | 1.8 - Euro Area (calculated as sum of individual euro area countries): 0.4 | 2.5 | 1.6 | 1.4 | –6.3 | 6.5 | 3.3 | –0.1 | 0.6 | 0.8 | 0.9 - Germany: 1.2 | 2.6 | 1.0 | 0.9 | –4.0 | 4.1 | 1.1 | –1.8 | –0.8 | 0.0 | 0.8 - France: 0.3 | 2.0 | 1.3 | 1.7 | –7.9 | 6.4 | 2.3 | 1.3 | 0.8 | 0.4 | 0.6 - Italy: –0.9 | 1.8 | 1.0 | 0.6 | –8.6 | 9.7 | 5.2 | 0.8 | 0.8 | 0.6 | 0.9 - Spain: 0.0 | 2.6 | 1.8 | 1.1 | –11.1 | 6.5 | 5.0 | 1.3 | 2.5 | 1.6 | 0.8 - Japan: 0.5 | 1.8 | 0.8 | –0.2 | –3.9 | 3.0 | 1.3 | 1.7 | 0.6 | 1.6 | 1.2 - United Kingdom: 0.4 | 2.0 | 0.8 | 1.1 | –10.7 | 8.7 | 4.0 | –0.6 | –0.3 | 0.4 | 0.5 - Canada: 0.4 | 1.8 | 1.3 | 0.4 | –6.1 | 5.3 | 2.5 | –1.3 | –1.3 | 0.1 | 1.6 - Other Advanced Economies (excludes G7 and euro area countries): 1.9 | 2.5 | 2.1 | 1.3 | –2.1 | 5.9 | 1.9 | 0.6 | 1.7 | 1.3 | 1.5 - Emerging Market and Developing Economies: 3.6 | 3.2 | 3.3 | 2.5 | –3.2 | 5.9 | 3.2 | 3.6 | 3.2 | 3.7 | 3.0 - Emerging and Developing Asia: 6.5 | 5.6 | 5.6 | 4.5 | –1.4 | 7.1 | 4.1 | 5.5 | 4.7 | 4.7 | 4.2 - China: 8.4 | 6.3 | 6.4 | 5.7 | 2.2 | 8.5 | 3.2 | 5.5 | 5.1 | 5.0 | 4.4 - India: 5.3 | 5.6 | 5.3 | 2.8 | –6.7 | 8.8 | 6.8 | 8.2 | 5.6 | 5.7 | 5.2 - Emerging and Developing Europe: 2.1 | 3.7 | 3.5 | 2.4 | –1.9 | 7.6 | 1.9 | 3.8 | 3.8 | 2.1 | 2.2 - Russia: 1.5 | 1.6 | 2.7 | 2.1 | –2.5 | 6.2 | –1.1 | 4.4 | 4.5 | 1.0 | 1.3 - Latin America and the Caribbean: 1.2 | 0.3 | 0.2 | –0.9 | –8.0 | 6.6 | 3.6 | 1.6 | 1.6 | 1.7 | 1.6 - Brazil: 1.2 | 0.7 | 1.1 | 0.6 | –3.9 | 4.3 | 2.6 | 2.8 | 3.0 | 2.0 | 1.6 - Mexico: 0.2 | 0.9 | 1.0 | –1.3 | –9.1 | 5.4 | 2.9 | 2.4 | 0.6 | 0.2 | 0.8 - Middle East and Central Asia: 1.5 | 0.0 | 0.7 | 0.3 | –4.5 | 2.9 | 4.1 | 0.4 | 0.5 | 6.0 | 2.0 - Saudi Arabia: 0.4 | 1.1 | 5.9 | 2.1 | –8.3 | 9.2 | 7.2 | –4.0 | –2.6 | 2.0 | 1.9 - Sub-Saharan Africa: 1.8 | 0.0 | 0.5 | 0.4 | –5.7 | 1.2 | 1.9 | 1.2 | 1.5 | 1.6 | 1.8 - Nigeria: 2.7 | –1.6 | –0.4 | 0.0 | –8.3 | –1.0 | 2.2 | 1.2 | 1.9 | 1.8 | 2.1 - South Africa: 0.6 | –0.3 | 0.0 | –1.3 | –7.5 | 3.8 | 0.9 | –0.5 | –0.8 | –0.3 | –0.3 Memoranda - European Union: 0.7 | 2.9 | 2.1 | 1.8 | –5.7 | 6.7 | 3.5 | 0.0 | 0.8 | 1.2 | 1.3 - ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand): 3.6 | 4.0 | 3.8 | 3.2 | –5.5 | 3.3 | 4.6 | 3.1 | 3.6 | 3.2 | 3.2 - Middle East and North Africa: 1.2 | –0.6 | 0.2 | –0.1 | –4.7 | 3.0 | 4.4 | 0.4 | –0.1 | 1.4 | 1.9 - Emerging Market and Middle-Income Economies: 3.9 | 3.6 | 3.7 | 2.7 | –2.9 | 6.6 | 3.5 | 4.0 | 3.6 | 3.5 | 3.3 - Low-Income Developing Countries: 2.8 | 1.7 | 2.0 | 2.3 | –3.9 | 1.2 | 2.6 | 1.8 | 1.7 | 3.9 | 2.7 - Source: IMF staff estimates. - Note: Data for some countries are based on fiscal years. See Table F in the Statistical Appendix for economies with exceptional reporting periods. ### Emerging Market Resilience: overview and drivers - Recent narrative: Emerging markets historically vulnerable to "risk-off" episodes; recent experience shows greater resilience in financial and economic conditions. - Two complementary hypotheses for improved resilience: - "Good luck": Favorable external conditions, including steady growth in advanced economies, favorable terms of trade, easier postpandemic financial conditions, sustained growth and integration of China, and a relatively strong US recovery after the pandemic. - "Good policies": Improvements in monetary, macroprudential, and fiscal frameworks including: - Adoption of inflation targeting and greater exchange rate flexibility, which enhanced capacity to absorb external shocks. - Better-anchored long-term inflation expectations, reducing pass-through from currency depreciation to domestic inflation. - Tighter macroprudential policies that reduced foreign exchange mismatches and facilitated countercyclical monetary responses. - Enhanced fiscal credibility (for example, fiscal rules) leading to trend toward de-dollarization of debt and containing sovereign risk premiums. - Stronger frameworks improved access to IMF precautionary instruments, helping contain capital outflows and limit rise in borrowing costs. ### Empirical findings and implications (selected) - Improved monetary policy implementation and credibility: - Central banks became less sensitive to fiscal pressures and relied less on foreign exchange interventions. - Central banks maintain influence over domestic borrowing conditions; U.S. monetary policy spillovers remain influential. - Fiscal frameworks: - Countercyclicality and responsiveness to sustainability concerns have increased. - Borrowing costs remain elevated in high-debt environments. - Policy trade-offs and heterogeneity: - Emerging markets with strong frameworks face easier policy trade-offs and lower risk and severity of capital flow reversals. - Countries with weak frameworks should avoid delaying monetary tightening when sustained price pressures emerge; delays typically lead to de-anchoring of inflation expectations and larger output losses. - Foreign exchange interventions: - Provide temporary relief but are costly. - Strong frameworks lessen reliance on—and the need for—such interventions. - Governance and institutions: - Improvements in governance and debt management capacity have supported domestic borrowing at longer maturities and deeper local currency bond markets. - Increased share of local currency debt and domestic investor participation reduced risks from currency mismatches and nonresident outflows. ### Policy recommendations and priorities - Strengthen policy frameworks across monetary, macroprudential, and fiscal domains to preserve resilience. - Safeguard central bank independence to reinforce credibility and anchor inflation expectations. - Rebuild fiscal space where buffers have eroded to reduce vulnerability to deteriorations in the external environment. - Use IMF precautionary instruments where appropriate to contain capital outflows and limit rises in borrowing costs. - Limit reliance on costly foreign exchange interventions; prioritize policies that reduce the need for such interventions (for example, de-dollarization of debt, stronger macroprudential settings). *Source: IMF staff estimates; CHAPTER 1 GLOBAL PROSPECTS AND POLICIES (text - CHAPTER 1 GLOBAL PROSPECTS AND POLICIES).* ### Chapter 3 of the April 2025 Global Financial Stability Report. Sim- ### CHAPTER 2 EMERGING MaRKET REsILIENCE: GOOD LUCK OR GOOD POLICIEs? ### Key findings - Emerging markets have historically been vulnerable to global risk-off events, but recent evidence points to increased resilience. - The magnitude and duration of risk-off shocks have not meaningfully changed, yet most emerging markets have displayed smaller output contractions and negligible inflationary pressures since the global financial crisis. - Improved policy frameworks accounted for 0.5 percentage point higher growth and 0.6 percentage point lower inflation when comparing typical risk-off episodes after the global financial crisis with those before. - Favorable external conditions contributed another 0.5 percentage point to faster growth but did not ease inflationary pressures. - The postcrisis period shows output losses six months after the start of a risk-off episode of 1 percent of GDP versus 1.8 percent of GDP in the precrisis period; the precrisis 0.9 percent price increase disappeared after the crisis. - The exchange rate pass-through has become muted postcrisis, and the increase in sovereign spreads is about one-fifth of what it used to be before the global financial crisis. ### Evolution of policy frameworks and implementation - Monetary policy: - Many central banks in emerging markets responded to postpandemic inflation with swifter and more forceful monetary tightening than in previous cycles and, in many cases, earlier than advanced economy counterparts, indicating increased monetary policy autonomy. - Central banks increasingly focused on output stabilization rather than exchange rate management, reflecting better-anchored inflation expectations. - Financial markets’ expectations align more closely with actual policy decisions, signaling improved credibility. - Emerging markets with better-anchored inflation expectations intervene less in foreign exchange markets in response to risk-off episodes. - Domestic monetary policy shocks transmit effectively to short-term yields; US monetary policy still influences longer-term yields and riskier asset classes. - Macroprudential and FX-related measures: - Advances in foreign exchange hedging instruments have improved the currency composition of sovereign balance sheets and enhanced monetary policy transmission. - More stringent macroprudential regulation limits the share of foreign currency debt, mitigating financial stability concerns and reducing the need for foreign exchange interventions. - The FX-related macroprudential regulation metric is calculated as the cross-country average of the cumulative net tightening actions related to capital requirements for banks; limits on foreign currency lending and rules or recommendations on foreign currency loans; and limits on net or gross open FX positions, FX exposures and funding, and currency mismatch regulations. - Fiscal policy: - The fiscal stance in emerging markets—measured as the primary-balance-to-GDP ratio—has been relatively restrained compared with past crises. - The presence of fiscal rules did not guarantee improvements in policy implementation, as unwarranted deviations from fiscal rules are common, leading to buildup of debt vulnerabilities in some regions. - Stronger fiscal frameworks have allowed fiscal policy to react more to slack and debt sustainability pressures, improving countries’ ability to stabilize debt, although sovereign spreads remain sensitive to debt burdens. - FX interventions and reserves: - Foreign exchange reserves were deployed in some cases to counter excessive currency pressures, yet reserve buffers have remained at historically robust levels. - Emerging markets with weak frameworks use foreign exchange interventions to contain depreciation and reduce the need for rate hikes; in such cases interventions lower output losses by 0.9 percentage point two years after the shock compared with a no-intervention scenario. - In countries with strong policy frameworks, the benefits of foreign exchange interventions are marginal. ### Risk-off episodes: dating, features, and measured impacts - The chapter extends the Risk-On Risk-Off (RORO) Index from 1997 up to the end of 2024 and uses an algorithm-based approach to date risk-off episodes; 16 risk-off episodes are identified and are evenly split between the period before and after the global financial crisis. - On average, episodes before and after the global financial crisis registered an increase of about one standard deviation and lasted about five months in both periods. - The largest episodes were the global financial crisis and the pandemic; the longest were the subprime crisis starting in June 2007 and the global growth scare starting in May 2015 (both lasted 10 months). - Contributions to the RORO Index’s variation during risk-off episodes: - About 45 percent explained by credit spreads. - Just above 40 percent by equity volatility. - About 10 percent by liquidity risks. - The remainder by currency risks. - Since the global financial crisis: - Risk-off episodes have not been accompanied by outsized portfolio outflows. - Exchange rate pass-through has become muted. - Increase in sovereign spreads is about one-fifth of the precrisis increase. - Six months after the start of a risk-off episode, output losses are 1 percent of GDP (postcrisis) versus 1.8 percent of GDP (precrisis); the precrisis 0.9 percent price increase disappeared after the crisis. ### Quantitative estimates and model simulations - Using a quantitative version of the IMF’s Integrated Policy Framework (IPF), improvements in policy frameworks are shown to translate into better policy trade-offs. - Model-simulation outcomes: - In response to a 10 percent nominal exchange rate depreciation triggered by a risk-off shock, economies with strong policy frameworks (as in the period after the global financial crisis) experience 85 percent smaller output contractions in the following year than economies with weak policy frameworks (as in the period before the crisis). - Improved balance sheets cut in half the risk of sudden stops and reduce their severity. - Emerging markets with weak frameworks that delay monetary tightening face steeper costs later: in response to a 10 percent nominal exchange rate depreciation and a 0.5 percentage point increase in inflation, policy rates need to rise by as much as 1.4 percentage points more than in comparable emerging markets that follow a standard Taylor rule, resulting in output contractions that are 0.7 percentage point larger five quarters after the shocks. - Foreign exchange interventions in weak-framework countries reduce output losses by 0.9 percentage point two years after the shock compared with no intervention; benefits are marginal in strong-framework countries. ### Policy recommendations - Sustain efforts to strengthen policy frameworks, as these enhance emerging markets’ ability to withstand risk-off shocks by easing policy trade-offs and reducing the likelihood of sudden stops. - Emerging markets with weak policy frameworks should avoid delaying monetary tightening during risk-off and persistent cost-push shocks. - Foreign exchange interventions are a useful policy tool for countries with weak frameworks but are not a substitute for improved policy frameworks. - Safeguard central bank independence, especially when inflation is low and fiscal pressures mount, to preserve credibility and policy traction. - Maintain and build on gains in frameworks because external conditions can quickly deteriorate, fiscal space is limited by high debt following recent global shocks, and policy backsliding can undermine credibility. *International Monetary Fund | April 2025 Global Financial Stability Report, Chapter 2 (text supplied).* ### 1. Dates of Risk-Off Episodes ### 1. Dates of Risk-Off Episodes ### Major findings on risk-off episodes and their effects - Risk-off episodes are identified using an extended version of the RORO Index of Chari, Dilts Stedman, and Lundblad (2023); the analysis uses the standardized three-month sum of the RORO Index. - The pre-GFC period is 1997–2009; the post-GFC period is 2010–24. - The analysis compares the mean of the RORO Index (in standard deviations) during risk-off episodes and episode lengths (in months) across the pre-GFC and post-GFC periods; whiskers denote minimum to maximum. - Changes in variables are measured six months after the start of risk-off episodes compared with similar windows with no risk-off episodes; specifications control for past real GDP growth, consumer price inflation, and country fixed effects; whiskers denote 90 percent confidence intervals. ### Responses of capital flows, exchange rates, borrowing costs, output, and prices - Portfolio outflows are measured as percent of initial GDP (plotted in figure panels). - Exchange rate pass-through is reported in percent (right scale in figures). - EMBI spread is reported in percent (right scale in figures). - Real GDP and consumer prices responses are shown in percent six months after the start of risk-off episodes. ### Evolution of policy frameworks and link to resilience - Increased resilience of emerging markets to risk-off shocks after the global financial crisis corresponds with a substantially larger number of countries adopting inflation-targeting regimes, fiscal rules, and tightened macroprudential regulations. - De jure changes in frameworks may be misleading; de facto implementations vary substantially across countries. ### Monetary policy: reaction functions, credibility, and independence - Taylor rule coefficients are estimated from monthly regressions including deviation of one-year-ahead expected inflation from the inflation target, the real-time output gap, and NEER depreciation to capture fear of floating. - Postcrisis period findings: - Policymakers are less concerned about exchange rate fluctuations, consistent with smaller pass-through to prices and a shift toward inflation as the nominal anchor. - The weight on deviations of inflation expectations from the target declined, consistent with improved central bank credibility and more strongly anchored long-term inflation expectations. - Long-term inflation expectations became better anchored; the sensitivity of three-year-ahead inflation forecasts to changes in one-year-ahead expected inflation declined substantially. - Central banks shifted attention toward curbing output fluctuations; the postcrisis reaction function displays a desirable countercyclical bias and is close to that of advanced economies. - Perceived reaction function (survey-based) shows a progressive decline in the Taylor coefficient on expected inflation and a marginal increase in the output gap coefficient, indicating gains in monetary policy credibility. - Central bank independence: - Prior to the global financial crisis, unexpected increases in military spending tended to be followed by monetary easing and higher expected inflation, suggestive of fiscal dominance. - Since the global financial crisis, central banks no longer accommodate fiscal spending in the same way; long-term inflation expectations remain close to target, similar to advanced economies. ### Autonomy with respect to US monetary policy and shock transmission - Domestic monetary policy shocks (one-standard-deviation) effects one day after announcements: - Raises the three-month yield by about 10 basis points. - Appreciates the currency by 7 basis points. - Lowers stock prices by 9 basis points. - US monetary policy shocks (one-standard-deviation) effects one day after announcements: - Lead to a 24 basis point decline in stock prices. - Lead to a 15 basis point exchange rate depreciation. - Lead to a 57 basis point widening of credit spreads. - Effects on 10-year yields from domestic and US shocks are broadly comparable; US shocks have larger effects on riskier asset classes (stock prices, exchange rates, credit spreads). ### Foreign exchange interventions and conditions for their use - Emerging markets historically exhibit fear of floating due to balance sheet mismatches, pass-through to inflation, and financial instability concerns. - Even within inflation-targeting regimes, foreign exchange interventions can be warranted when financial market imperfections exist, but benefits diminish as policy frameworks mature and financial frictions ease. - Cross-country variation results: - Emerging markets with well-anchored inflation expectations intervene less in foreign exchange markets in response to uncovered interest parity (UIP) deviations triggered by risk-off episodes, as exchange rate pass-through tends to be lower. - When macroprudential regulation effectively limits the share of foreign currency debt, financial stability concerns are reduced and the need for foreign exchange intervention is diminished. - The cumulative foreign exchange interventions (measured as net purchases) are estimated in response to a 1 percentage point increase in the UIP deviation instrumented with the RORO Index, conditional on inflation expectation anchoring or stringency of macroprudential regulation; percentiles 10 and 90 are used for plotting; regressions control for lagged inflation, exchange rate, UIP deviation, foreign exchange interventions, capital flow management measures, and country and time fixed effects. ### Fiscal policy frameworks and countercyclicality - IMF’s Fiscal Rule Strength Index shows continued improvement in the legal basis, monitoring, enforcement, and flexibility of fiscal rules in emerging markets; emerging markets on average still lag advanced economies. - The fiscal rules index is constructed from four institutional criteria: (1) legal basis, (2) presence of a monitoring mechanism, (3) enforcement and correction mechanism in place, and (4) flexibility and resilience against shocks. - Professional forecasters have increasingly aligned their expectations of budget deficits with official projections; weights of private sector forecasts for budget deficits in official forecasts are obtained as regression coefficients of private sector forecasts on official forecasts, controlling for country fixed effects (current year forecasts and planned adjustment measures clarified in methodology). - Degree of countercyclicality: - Emerging markets historically implemented procyclical fiscal policy but since the global financial crisis some have graduated to countercyclical fiscal policy. - On average, the degree of countercyclicality has moved closer to that of advanced economies. - Improvements in countercyclicality are most pronounced in years following downturns in the global business cycle. - Online Annex 2.5 confirms the change in primary expenditures has become more negatively correlated with the change in output gaps, controlling for initial debt burdens and country fixed effects. - Commodity exporters show more countercyclical behavior than before, but fiscal policy in commodity exporters is still less countercyclical than in commodity importers. *Source: Chapter/section content from the IMF PDF "text - 1. Dates of Risk-Off Episodes" (October 2025).* ### 1. Strength of Fiscal Rules ### 1. Strength of Fiscal Rules ### Fiscal reaction function and debt sustainability - The sensitivity of the primary balance to debt levels and interest expenditure in emerging markets has increased since the global financial crisis. - The sensitivity of the primary balance to the interest bill has become close to 1 and exceeds that of advanced economies. - The greater sensitivity of the primary balance to debt sustainability pressures is particularly pronounced in countries with fiscal rules in place. - Panel notes and regression setup: - Elasticities are expressed in percent of GDP. - Regressions of the primary balance on lagged interest bill and public debt use country and year fixed effects, estimated jointly for the pre-GFC period (1997–2009) and the post-GFC period (2010–24) with period dummies and interactions, controlling for the output gap and unemployment rate. - Whiskers denote 90 percent confidence intervals. ### Fiscal frameworks, sovereign spreads, and speed of adjustment - Sovereign spreads remain sensitive to debt burdens, particularly during periods of financial stress. - Panel results on sovereign spreads: - Elasticities of sovereign EMBI spreads are estimated with the logarithm of the sovereign spread regressed on public debt (percent of GDP) and external debt (percent of exports), with country fixed effects and period interactions for pre-GFC and post-GFC; whiskers denote 90 percent confidence intervals. - Illustrative simulation of debt reduction dynamics: - The simulation assumes a stable initial public-debt-to-GDP ratio, a shock that raises debt in a single year, and two interest-growth differentials: - Low r − g = 0 - High r − g = 2 percent - Even with a more aggressive fiscal response, the time required to reduce an increase in public debt by half remains relatively slow. ### Contribution of policy frameworks to macroeconomic stabilization - Two-stage empirical approach: - Stage 1: Proxies for policy quality (monetary, macroprudential, fiscal) predict growth and inflation in the 12 months following the start of risk-off episodes, using episode-specific fixed effects to hold external conditions constant. - Stage 2: Leverages Stage 1 estimates and observed changes in policy frameworks and external conditions to quantify overall contributions to growth and inflation in the aftermath of risk-off shocks, comparing post-GFC (2010–24) with pre-GFC (1997–2009). - Key quantified impacts: - An emerging market that enters a risk-off episode at the 75th percentile of lower foreign exchange mismatches is expected to experience 1.3 percentage point higher growth than one at the 25th percentile. - An emerging market at the 75th percentile in anchoring of long-term inflation expectations tends to experience 1.3 percentage point lower inflation than one at the 25th percentile. - Improved policy frameworks contributed to resilience in the post-GFC period compared with pre-GFC: - Raised growth by 0.5 percentage point. - Lowered inflation by 0.6 percentage point. - Improvements in monetary, macroprudential, and fiscal frameworks contributed roughly equally to growth performance since the crisis. - Lower inflation is largely explained by improvements in monetary frameworks, especially better-anchored inflation expectations. - More benign external conditions contributed an additional 0.5 percentage point to growth after the global financial crisis but did not ease inflationary pressures. - Variables used to proxy contributions: - Monetary: anchoring of inflation expectations, reserve adequacy. - Macroprudential: FX mismatches, macroprudential policy measures. - Fiscal: external debt burden, cyclically adjusted balance. - External conditions: real GDP growth in advanced economies, commodity terms-of-trade shocks, US FCI-G index. ### Model simulations: policy trade-offs and sudden stops (Q-IPF) - Q-IPF model features and calibration: - Four key frictions: (1) limited risk-bearing capacity in FX market causing uncovered interest parity risk premium fluctuations; (2) occasionally binding external debt limit triggering sudden stops; (3) weakly anchored inflation expectations with high exchange rate pass-through; (4) balance sheet FX mismatches amplifying contractionary effects. - Model augmented with endogenous inflation indexation mechanism. - Calibrated to two types of small open emerging markets with flexible exchange rates: - Pre-GFC average EM subject to all four frictions (weak policy frameworks). - Post-GFC average EM with more strongly anchored inflation expectations and smaller balance sheet mismatches (strong policy frameworks). - Foreign economy calibrated to the US. - Policy trade-off illustration (risk-off shock causing 10 percent depreciation): - EM with strong policy frameworks (postcrisis): - Exchange rate depreciation raises import prices, fueling price and wage inflation. - Strongly anchored inflation expectations allow monetary policy not to tighten aggressively, prioritizing output stabilization with output supported by higher net exports. - Model outcomes for strong-framework EM: output declines by 0.1 percentage point and inflation rises by 0.2 percentage point. - EM with weak policy frameworks (pre-GFC): - Greater exchange rate pass-through raises inflation substantially, forcing aggressive central bank tightening and depressing domestic demand. - Model outcomes for weak-framework EM: output contracts by 0.3 percentage point and inflation increases by 1 percentage point. ### Balance sheet improvements and sudden-stop dynamics - Post-GFC balance sheet changes and implications: - Average net foreign asset position increased by 13 percent of GDP relative to the period before the crisis. - Share of external liabilities denominated in domestic currency rose by 12.5 percentage points. - These improvements lower the economy’s proximity to the external debt limit and reduce sudden-stop risk: - Probability of experiencing a sudden stop halved to 1.5 percent. - Conditional on sudden stop, average credit spread during sudden stops fell from 6.2 percent to 5.2 percent. - Simulation notes: - Probability and severity of sudden stops are reported from stochastic simulations; average severity measured as credit spread (borrowing rate minus policy rate). ### Costs of delaying monetary tightening (evidence from simulations) - Postpandemic environment scenario: - Combined shock: 10 percent nominal exchange rate depreciation and 0.5 percentage point increase in inflation. - Two monetary regimes for EMs with weak frameworks: - Timely, aggressive response following a standard Taylor rule that addresses inflation promptly. - Delayed and subdued response that initially looks through inflation and later tightens more forcefully. - Outcomes of delayed tightening: - Both regimes return inflation to target by the end of the third year following the shock. - Late tightening requires a substantially larger cumulative rate hike of 1.4 percentage points and results in a more pronounced output contraction (relative magnitude described qualitatively in the source). *Italic: Source — text - 1. Strength of Fiscal Rules, World Economic Outlook: Global Economy in Flux, Prospects Remain Dim (October 2025), International Monetary Fund* ### 0.7 percent of GDP—five quarters after the shock. ### 0.7 percent of GDP—five quarters after the shock. ### The Role of Foreign Exchange Interventions - Model setup and shock: - A risk-off shock induces a 10 percent depreciation of the nominal exchange rate in the absence of intervention. - Central bank intervention considered: running down reserves by 3 percent of GDP. - Key model outcomes: - Intervention limits capital outflows, reduces the rise in the uncovered interest parity risk premium, and halves the magnitude of the exchange rate depreciation (relative to no intervention). - For emerging markets with weak policy frameworks: - Residual exchange rate depreciation still fuels inflation because of relatively high exchange rate pass-through. - Two years after the shock, cumulative CPI increase is 0.7 percentage point lower than in the no-intervention scenario. - The need for monetary tightening is moderated and the associated output loss is reduced by 0.9 percentage point. - For emerging markets with strong policy frameworks: - Benefits of intervention are more modest due to better-anchored inflation expectations. - Inflation is only 0.1 percentage point lower when the central bank intervenes. - Output is marginally higher despite monetary tightening, as the nominal depreciation boosts net exports. - Model assumptions and caveats: - The effectiveness of foreign exchange interventions in offsetting nominal depreciation depends on the depth of foreign exchange markets; depth is assumed the same across EMs with weak and strong frameworks, so the resulting depreciation when intervening is the same. - Comparability with capital flow measures: similar advantages suggested in comparable model setups (Adrian and others (2021)); conclusions can be extended to capital flow measures. ### Costs of Delaying Monetary Tightening (Summary of model simulations) - Scenario: "late tightening" vs. "standard Taylor rule" in an EM with weak policy frameworks calibrated to the pre-GFC average. - Mechanism: - Prices and wages rise faster when inflation is far from the target, creating inflation persistence and worsening the trade-off from delayed tightening. - Illustrated outcomes (from figure simulations): - Nominal exchange rate depreciation peak: 10 percent initial shock (no-intervention baseline). - CPI inflation, nominal policy rate, and output growth diverge significantly more under late tightening than under timely tightening, amplifying output losses and inflation persistence over subsequent quarters. ### Conclusions and Policy Implications - Aggregate assessment of improvements: - Since the global financial crisis, many emerging markets have improved policy frameworks, aiding resilience to risk-off shocks (including post-COVID-19 and post-inflation surge). - De facto improvements (beyond de jure adoption of inflation targeting and fiscal rules) enhanced implementation and credibility of monetary and fiscal policies and led to more restrained use of foreign exchange interventions. - Comparing typical risk-off episodes: improved frameworks accounted for 0.5 percentage point higher growth and 0.6 percentage point lower inflation; favorable external conditions contributed 0.5 percentage point higher growth but did not ease inflationary pressures. - Policy recommendations (key insights for policymakers): - Monetary policy: - Clear communication of policy objectives and the central bank’s reaction function helps anchor inflation expectations and enhance credibility, easing policy trade-offs and allowing focus on output stabilization. - Reinforce and safeguard central bank independence to insulate policy decisions from political pressures and mitigate fiscal dominance risks. - Foreign exchange interventions: - Can stabilize less-resilient emerging markets temporarily, but benefits diminish as policy frameworks strengthen. - Given costs, prioritize anchoring inflation expectations and reducing balance sheet mismatches (including via macroprudential frameworks) to lessen the need for FX interventions. - FX interventions should not substitute for necessary macroeconomic policy adjustments or hinder warranted exchange rate adjustment. - Fiscal policy: - Strengthen fiscal guardrails to foster discipline amid high uncertainty and spending pressures. - Invest in a credible medium-term fiscal framework combining flexible rules with strong, independent fiscal institutions to enable countercyclical policy while signaling fiscal commitment. - Improve compliance with fiscal rules via a risk-based fiscal anchor tailored to debt-carrying capacity and robust correction mechanisms. - Sound public debt management can mitigate negative shock effects on borrowing costs; deepen local currency bond markets and increase resident investor participation to improve resilience. - Trilemma framing: - Evidence points toward a gradual shift from the Rey (2015) dilemma toward the classic Mundell-Fleming trilemma for countries with stronger frameworks, reflecting reduced marginal benefits of FX interventions and greater domestic monetary policy autonomy. - Forward-looking cautions: - External conditions may deteriorate quickly; rising global interest rates and geopolitical tensions can increase risks for EMs with elevated debt. - Higher public-debt-to-GDP ratios after COVID-19 and the energy shock may limit fiscal policy response capacity; rebuilding fiscal buffers is essential. - Risks of policy backsliding: central bank independence and fiscal rules may come under political pressure, risking fiscal dominance, loss of credibility, and inflation surges. ### IMF Precautionary Instruments and Evidence on Market Confidence (Box 2.1) - Instruments: - The Flexible Credit Line (FCL), Precautionary and Liquidity Line (PLL), and Short-Term Liquidity Line (SLL) provide qualifying members with up-front access to IMF resources with no or limited conditionality to bolster market confidence and offer insurance against external shocks. - Eligibility: - Available to members with very strong (or sound, for PLL) economic fundamentals and policy frameworks, a sustained history of implementing very strong policies, and a commitment to maintain them. - Empirical findings: - Event study around approvals of new FCL and SLL arrangements shows a significant and increasingly pronounced decline in sovereign spreads in the days following announcements. - Local projections with inverse propensity score weighting show EMs with precautionary arrangements experienced significantly smaller increases in spreads and capital outflows during the two most recent risk-off episodes, compared with peers with similar fundamentals. - On average, spreads remain more than 20 basis points lower than their synthetic counterparts in the 60 trading days following the announcement (consistent with earlier work and robust to synthetic control). - Examples considered in analysis: - FCLs approved in 2009 for Colombia, Mexico, and Poland; FCLs for Chile and Peru in 2020; 2023 Morocco FCL; and SLL approved for Chile in May 2022. - Interpretation: - The value of precautionary instruments may increase in a shock-prone environment with recurring stress episodes that challenge EMs integrated into global trade and finance. ### Milestones in Monetary Policy Framework Strengthening - Core requirement: - A clear nominal anchor and a strong, credible commitment to price stability are central to effective monetary policy frameworks. - Complementary reforms and milestones: - Limiting political interference and reinforcing central bank independence to mitigate fiscal dominance concerns. - Fiscal reforms and government endorsement of price stability objectives can complement monetary credibility. - Clarifying the role of the exchange rate and building adequate foreign exchange reserves where appropriate; for IT frameworks, greater exchange rate flexibility and minimal FX interventions help avoid confusion about the nominal anchor. - Developing operational capacity for liquidity management and steering short-term interest rates, and promoting development of interbank, securities, and other markets important for monetary transmission. - Enhancing communications frameworks (press conferences, policy statements, monetary policy reports) to improve accountability and public understanding of objectives and reaction functions. *Source: IMF staff calculations.* ### Box 2.2. Milestones in Developing Monetary Policy Frameworks ### Box 2.2. Milestones in Developing Monetary Policy Frameworks ### Importance of central bank independence - Implementing monetary policy without political interference is essential for central bank independence because it helps anchor inflation expectations and ensure price stability (Blinder 2000; Bernanke 2010; Fischer 2015; Ioannidou and others 2025). - The box examines macroeconomic effects of diminished central bank independence by leveraging politically motivated governor transitions, defined as appointments or removals that do not follow clear, rule-based procedures; do not prioritize professional qualifications; and do not preserve the central bank’s operational independence. ### Data and classification - Sample: 134 governor transitions in 11 advanced economies and 16 emerging markets since 2000. - Classification: Transitions were classified by whether news reports at the time mentioned political interference and political motive. - The classification relies on subjective assessments based on information published for each transition on the website https://centralbanking.com, supplemented with news reported by Bloomberg and the Financial Times. - Distribution: - Emerging markets: 50 politically motivated transitions (about half of all transitions). - Advanced economies: 5 politically motivated transitions (8 percent of all transitions). ### Inflation expectations and de jure independence - Countries with more frequent politically motivated transitions have less well-anchored inflation expectations: - Inflation expectations exceed targets by about 1 percent where such transitions are the majority. - Inflation expectations exceed targets by over 2 percent where such transitions are the norm. - Expectations remain close to target in countries without political transitions. - This correlation holds within both advanced and emerging market economies. - No such relationship is found with de jure measures of central bank independence (Romelli 2024). ### Causal identification and empirical effects (difference-in-differences local projections) - Method: Difference-in-differences local projections (Dube and others 2023), controlling for past changes in macroeconomic variables, as well as country and time fixed effects; specifications control for pre-trends in outcome variables and a fixed set of macroeconomic control variables. - Six months after politically motivated transitions (average changes relative to countries with similar fundamentals that did not experience a governor transition): - Real rates: fall by 1.6 percentage points. - Nominal exchange rate: depreciates by 3.1 percent. - Realized inflation: rises by 1.7 percentage points. - Inflation expectations: rise by 1.7 percentage points. - Note: The exchange rate also tends to depreciate, but the effect is not statistically significant in some specifications. - Heterogeneity: - Results for emerging market economies are very close to those for the overall sample. - Results for advanced economies are either smaller in magnitude (for expected inflation and exchange rate depreciation) or not significant, reflecting the limited number of politically motivated transitions in advanced economies and the difficulty of obtaining robust evidence of differential effects across country groups. ### Key methodological definitions and notes - Real interest rate defined as the difference between the 3-month deposit rate (or equivalent) and 12-month-ahead inflation expectations. - A positive change in the nominal exchange rate indicates a depreciation. - Bars and confidence intervals in the referenced figure show mean deviations and 90 percent confidence intervals; sample includes all transitions that can be used to isolate the causal effect of the transition. *Authors of this box: Marijn A. Bolhuis, Rui Mano, and Hedda Thorell. Source: Box 2.2, World Economic Outlook, October 2025.* ### Introduction ### Introduction ### Overview and scope - Industrial policy (IP) is defined as state action directed at changing the structure of the domestic economy, focused on targeting individual businesses or sectors through public support such as subsidies and other preferences. - IP aims to spur structural transformation by addressing market failures that constrain development of production capacity, and is used to pursue objectives including boosting productivity growth, protecting manufacturing jobs, building resilience via local supply chains, establishing self-reliance in key sectors (including energy), and diversifying the economy by developing infant industries. - The chapter centers on domestic macroeconomic benefits, risks, and trade-offs associated with IP, with a sustained focus on the energy sector as an illustrative and policy-relevant case. ### Recent trends and instruments - Since 2009, the number of new IP interventions has increased significantly, with a notable acceleration following the onset of the COVID-19 pandemic (2009–22). - A third of all IPs implemented between 2009 and 2022 targeted at least one energy sector product, of which about 80 percent were rolled out in energy-dependent countries (2009–22). - Subsidy-based measures predominate: subsidized financing (including loan guarantees and interest payment subsidies) and direct support (including transfers such as financial grants and state aid) together accounted for over 80 percent of interventions in both advanced economies (AEs) and emerging market and developing economies (EMDEs) (2009–22). - Other forms of IP (tariff and nontariff trade barriers) have grown faster recently in advanced economies but remain a marginal share overall (2009–22). - Available estimates indicate fiscal costs of industrial policy are sizable, amounting to a few percentage points of GDP per year. China data refer to 2023 and include land subsidies. OECD data indicate US fiscal spending on green industrial policies adopted as part of COVID-19 recovery packages amounted to about 3.2 percent of one year’s GDP. ### Analytical focus and main questions - The chapter addresses four main questions: - How have industrial policies evolved recently? What types of industrial policy instruments have been deployed? What are their main stated objectives? - What are the main economic justifications for the use of IP? What types of market failures are IPs meant to address? What kinds of trade-offs do they present, both in theory and in practice? And what are the opportunity costs, in terms of fiscal resources with alternative uses? - Empirically, what are the effects of IP on targeted sectors? How do they differ along key sector and firm characteristics? Do the impacts of policies targeted at the energy sector differ from those rolled out in other sectors? - What are the general equilibrium effects of IP? Does the impact in a given sector spill over to other sectors as resources are reallocated? Can IP distort allocative efficiency and increase misallocation across sectors? Do policies specific to the energy sector deliver better macroeconomic outcomes than policies targeted at other sectors? - Methods used include empirical analyses, model-based simulations (stylized infant-industry model and a dynamic macroeconomic model with a granular energy sector), and case studies (for example, Korea and Brazil). ### Economic rationale and motivations - The economic justification for IP is typically grounded in correcting market failures that prevent efficient resource allocation, with a focus in this chapter on infant industries that are at an early stage domestically and lag the global technology frontier. - If production costs decline with expanded production at the sector level (learning-by-doing, economies of scale, or other positive externalities), targeted public support can be warranted to facilitate expansion. - Motivations vary across countries and measures; enhancing competitiveness in strategic sectors emerges as a primary driver in both AEs and EMDEs (2009–22). In AEs, climate mitigation and global value chain resilience also feature prominently. ### Energy security and rising electricity demand - Industrial policies in the past 15 years have targeted energy products to spur structural transformation of the energy sector, reduce greenhouse gas emissions in some countries, boost or diversify energy production in net exporting countries, and promote energy independence. - Fossil fuel imports meet more than 80 percent of energy needs in Japan, close to 50 percent in the EU, and about 20 percent in China. - Policymakers have encouraged substituting key fossil fuel uses with electricity, contributing to a growing share of electricity in final energy consumption. Electricity production has become less dependent on fossil fuels—particularly in advanced economies—due to adoption of renewables. - Industrial policy has often been used to develop domestic manufacturing of clean technologies, frequently at the infant industry stage. - By 2030, global electricity demand from data centers and electric vehicles will surpass the current electricity consumption of most countries. ### Main findings - Industrial policies are making a strong comeback and are being used to pursue an array of domestic objectives; recent IPs often take the form of substantial subsidies and aim to achieve multiple domestic objectives, including productivity gains, technological catch-up, job protection, and self-sufficiency in key sectors such as energy. - IP effectiveness is not guaranteed and depends on design, implementation, and broader macroeconomic conditions; efficacy is sensitive to sector-specific characteristics that are hard to determine ex ante, such as the rate of learning by doing and potential market size. - Case studies (Korea and Brazil) underline that appropriate targeting, careful implementation, complementary policies, and macroeconomic stability are keys to success. - IPs typically involve trade-offs between competing objectives: onshoring production in a strategic sector can lead to higher consumer prices for a prolonged period, and delivering certain IP objectives may require substantial fiscal outlays that represent important opportunity costs relative to alternative uses (for example, high-return structural reforms). - While IPs can deliver sector-level gains, translating these into broader economic benefits may be challenging: positive sector-level outcomes can coincide with negative cross-sector spillovers as resources are drawn away from untargeted sectors, and if those sectors are highly productive or have economies of scale, aggregate productivity could fall. - Quantitative trade-model analysis shows IP creates spillovers to untargeted sectors and can cause misallocation that reduces aggregate effects. *Source: Introduction, CHAPTER 3 — INDUSTRIAL POLICY: MANAGING TRADE-OFFS TO PROMOTE GROWTH AND RESILIENCE, World Economic Outlook, International Monetary Fund, October 2025.* ### 1. Fossil Fuel Imports as a Share of Energy Demand in 2022 ### 1. Fossil Fuel Imports as a Share of Energy Demand in 2022 ### Fossil fuel imports and energy demand (2022) - Panel 1 (figure): plots energy imports over energy demand for 2022 using percent scale from −100 to 100. - Energy demand definition preserved from note: "Energy demand = production + imports − exports − international marine bunkers − international aviation bunkers +/− stock changes." - Fossil fuel definition preserved: "Fossil fuel includes coal, peat, and oil share; crude, natural gas liquids, and feedstocks; natural gas; and oil products." - Measurement detail preserved: "Fossil fuel imports are measured as net imports, with positive values indicating net importers and negative values indicating net exporters." ### Electricity share of final energy consumption (panel 2) - Sample composition: "The sample includes 34 AEs and 27 EMDEs." - Lines shown: "The lines represent the simple average across countries within each group." - Data labeling: "Data labels in the figure use International Organization for Standardization (ISO) country codes." - Axis/time labeling preserved: year-series from 2000 through 2022 shown on x-axis: "20000204060810121416182022." - Country labels visible in figure: "CANIDNZAFBRAUSACHNGBREUFRADEUITAJPN" (data labels use ISO codes as shown). ### Sources and notes related to the figures - Sources: "Eurostat; International Energy Agency; U.S. Energy Information Administration; and IMF staff calculations." - Abbreviations retained: "AEs = advanced economies; EMDEs = emerging market and developing economies; EU = European Union." ### Model and scenario context linked to energy/industrial policy analysis - Stylized model key parameters used in related infant-industry exercises: - Home country initial cost disadvantage: "30 percent cost disadvantage relative to the leader." - Foreign leader experience: "foreign leader is assumed to have accumulated five times more experience than the home country." - Baseline learning rate in infant industry: "19 percent" (learning-by-doing parameter). - Example policy in stylized simulations: "10 percent tariff and a 12 percent production subsidy" financed through lump-sum taxation (applies to the industrial policy illustration where noted). - Alternative scenario parameter variations described: - "Farther from the frontier" scenario: foreign country has a "40 percent cost advantage." - "Slow learning rate" scenario: home learning rate "half as large" as baseline. - "Smaller market size" scenario: home country assumed to have "no access to exports." - Outcomes summarized from stylized model: - Under IP (industrial policy) in baseline experiment: "domestic production ramps up more than tenfold" relative to no-IP baseline. - If home learning is only half as fast as foreign learning: domestic costs remain "80 percent higher over the long term" and domestic production volumes do not ramp up. - If market size is constrained (no export access): production increases by "only about one-third of the increase in the baseline scenario." ### Clean technology / EU reshoring simulations (2024–2035) - Models and calibration: - Extended infant-industry model calibrated to clean technology data is "augmented with the Global Macroeconomic Model for the Energy Transition (GMMET)" to simulate 2024–2035. - Policy scenarios run: - Baseline: "continuation of industrial policy settings observed in 2024." - No-IP: "removal of all existing tariffs and subsidies in the clean tech sector." - Reshoring: "major advanced economies increase production subsidies to onshore manufacturing." - EV price decomposition and policy parameterization notes: - Decomposition figure (Figure 3.7) shows percent change in EU electric vehicle price between 2024 and 2035 under three scenarios. - In that four-country infant-industry calibration, the reshoring scenario is described in notes as introducing "a 15 percent production subsidy in addition to status quo trade protections." - Earlier stylized IP example used "12 percent production subsidy and 10 percent tariff" (different illustrative calibration). - Clean technology price and uptake effects: - Both the no-IP and reshoring scenarios result in "sharper price declines" than the baseline. - Price declines under the no-IP scenario are driven by "removal of existing tariffs" and higher low-cost imports. - Reshoring amplifies domestic production-volume-driven price declines via larger subsidies and cumulative learning. - Across scenarios, price declines drive technology uptake; uptake is particularly strong under the no-IP and reshoring scenarios where price declines are steepest. - Onshoring and market-share effects: - Under the baseline, "Europe loses domestic market share" because of limited market size for catch-up learning. - No-IP: "removal of tariffs leads to domestic producers being outcompeted by lower-cost imports." - Reshoring: "Europe achieves substantial self-reliance through a combination of subsidies and cumulative learning effects." - Energy security and macroeconomic effects (comparative outcomes): - Both no-IP and reshoring "lead to a substantial reduction in fossil fuel use in power production and transportation relative to the baseline." - By 2035, "oil use in passenger transportation declines by 20 to 30 percent relative to the baseline scenario, and coal use in power generation also falls. However, gas use increases because electricity demand is higher and a firming up of capacity is needed to support renewables." - Labor market impacts: - No-IP: reduction of employment in clean technology manufacturing of "more than 0.5 percent of the labor force" as imports dominate. - Reshoring: reallocation of labor toward clean technology manufacturing equivalent to "more than 1 percent of the labor force"; offsetting declines occur in other manufacturing sectors. - Fiscal cost of reshoring: "estimated at 0.4 percent of EU GDP annually." ### Key statistics and parameter values (preserved verbatim) - Learning rate (baseline): "19 percent" - Home country initial cost disadvantage: "30 percent" - Foreign leader accumulated experience: "five times more experience" - Stylized IP example: "10 percent tariff and a 12 percent production subsidy" - Reshoring EV calibration note: "15 percent production subsidy" - Fiscal cost of reshoring in EU: "0.4 percent of EU GDP annually" - Labor effects: - No-IP employment change in clean tech manufacturing: "more than 0.5 percent of the labor force" - Reshoring employment change in clean tech manufacturing: "more than 1 percent of the labor force" - Energy-use change by 2035: "oil use in passenger transportation declines by 20 to 30 percent relative to the baseline scenario" *Source: IMF staff calculations; Eurostat; International Energy Agency; U.S. Energy Information Administration (figures and notes excerpted from the PDF chapter).* ### 1. European EV Shares ### 1. European EV Shares ### Scenarios and modeling setup - Three modeled scenarios: - Baseline: the EU continues to impose status quo industrial policies. - No-IP: all industrial policies are removed starting in 2025. - Reshoring: 15 percent electric vehicle and 30 percent renewable production subsidies are introduced starting in 2025. - Model sources: Global Macroeconomic Model for the Energy Transition; IMF staff calculations. - Note references: See Online Annex 3.4 for details. EV = electric vehicle; IP = industrial policy. ### Fiscal cost and labor implications of reshoring - European reshoring scenario implies large fiscal costs: - Approximately €80 billion in annual subsidies, on average, from 2025 to 2035. - Equivalent to about €30,000 per job created in the sector. - These would amount to close to half of today’s EU budget and exceed current agricultural subsidies. - The model assumes Europe achieves learning rates comparable to those observed in China over the past decade; slower learning rates would worsen trade-offs. ### Historical case studies: Brazil and Korea — lessons for policy design and implementation - Distinct approaches and outcomes: - Brazil (1970s): import-substituting industrialization, implementation largely via state-owned enterprises, limited private-sector engagement, confined to domestic market. - Korea (1970s): export-oriented model using large private conglomerates (chaebols), emphasis on learning-by-doing, salaried engineers, access to global markets and scale economies. - Key design and implementation lessons drawn: - Foster domestic learning by doing and target sufficiently large markets to reach efficient scale. - Direct support toward areas with high potential returns or positive externalities. - Encourage competition, competent implementing agencies, objective benchmarks, and safeguards (for example, sunset clauses). - Institutionalized governance (Korea): monthly export promotion meetings for oversight; export targets functioning as de facto sunset clauses. - Complementary policies matter: structural reforms, macroeconomic stability, anti-corruption measures, investment in industrial parks, facilitation of essential imports, and education/skills development. ### Empirical estimates of industrial policy (IP) effects (local projection estimates) - Sample and methodology: - Covers 58 countries (including 31 advanced economies) and 732 NACE Revision 2 (4-digit) sectors from 2009 to 2021. - Key regressors: change in the stock of subsidized financing and direct support IPs, identified using the Juhász and others (2022, 2025) algorithm applied to the Global Trade Alert database. - Outcome variables include sectoral value added, sectoral productivity (TFP), and within-sector allocative efficiency. - Results presented as associations due to challenges from endogenous implementation of IPs. See Online Annex 3.6 for methodology details. - Impact of an additional direct support measure (three years after implementation): - About 0.5 percent higher value added in the targeted sector. - About 0.3 percent higher total factor productivity (TFP) in the targeted sector. - Contextual magnitudes in the sample: - Industry value added grows on average 6.5 percent per year. - TFP grows about 4 percent per year. - Heterogeneity by country income level: - Direct support is associated with medium-term improvements in value added, productivity, and allocative efficiency in advanced economies, but not in emerging market and developing economies. - One additional direct support measure is associated with a 0.3 percent increase in allocative efficiency in advanced economies. - One additional subsidized financing measure is associated with a 0.5 percent decrease in allocative efficiency in emerging market and developing economies (noted as not significant in some estimates). - Infant versus mature industries (three years after shock): - Subsidized financing appears to benefit infant industries: one additional financial subsidy is linked to a 0.5 percent increase in value added of infant industries. - The same subsidized financing is linked to a 1.2 percent decrease in value added for mature industries. ### Industrial policy in energy sectors and downstream spillovers - Direct support to energy sectors: - One additional direct support measure is associated with 0.7 percent higher TFP in the targeted energy sector within a year of policy implementation. - One additional direct support measure to energy sectors is linked to a 2.5 percent increase in value added for downstream sectors one to three years after the shock. - The same measure is linked to a temporary 1.7 percent decrease in allocative efficiency in downstream sectors. - Cross-sector general equilibrium effects from energy-sector IP: - Implementing externality-correcting subsidies in the energy sector leads output in the sector to rise by more than 50 percent as employment ramps up. - Sectoral TFP in energy rises by almost 3 percent. - Labor reallocation to the energy sector draws workers from non-energy sectors, reducing TFP in some non-energy sectors with increasing returns to scale. - In aggregate, higher TFP in the energy sector and lower TFP in non-energy sectors result in a small drop in economy-wide TFP, because the energy sector does not have the highest returns to scale in the calibration. ### Aggregate trade-offs and sensitivity - IP can allow Europe to achieve greater self-reliance in clean technology manufacturing and protect sectoral jobs, but at the cost of large fiscal outlays and potential economy-wide trade-offs. - Results are sensitive to assumptions about learning rates and market dynamics; deviations from optimistic learning assumptions (for example, slower learning) would worsen trade-offs. - Complementary policies, competition, governance, and macroeconomic stability are critical to enhance the likelihood of positive outcomes and to limit costs of policy failures. *Source: IMF staff analysis and figures in chapter "INDUSTRIAL POLICY: MANAGING TRADE-OFFS TO PROMOTE GROWTH AND RESILIENCE" (World Economic Outlook: October 2025).* ### CHAPTER 3 INDUsTRIaL POLICy: MaNaGING TRaDE-OFFs TO PROMOTE GROWTH aND REsILIENCE ### CHAPTER 3 INDUsTRIaL POLICy: MaNaGING TRaDE-OFFs TO PROMOTE GROWTH aND REsILIENCE ### Scenarios and Quantitative Findings on Industrial Policy (IP) - Energy-sector IP scenario (optimal subsidies in energy sector): - Fiscal cost in the new long-run steady state: 1.8 percent of GDP (annual expenditure). - Energy imports as a share of energy consumption fall by 5.1 percentage points. - Trade-off: greater energy self-reliance versus falling aggregate efficiency and larger public expenditure. - Well-targeted IP across sectors (subsidies rolled out for every sector with increasing returns to scale; “optimal” IP in AEs): - Output and employment rise sizably in targeted sectors. - Aggregate TFP gains due to expansion in sectors with increasing returns to scale. - Required fiscal resources: close to 5.5 percent of GDP (annual). - Implementation caveat: achieving these results requires highly precise targeting to correct scale externalities across all sectors. - Mistargeted IP (uniform subsidies across all sectors; same aggregate fiscal envelope as the well-targeted scenario): - Aggregate fiscal cost: 5.5 percent of GDP. - Aggregate productivity declines slightly despite large fiscal cost. - Rationale: productivity improves in some sectors with increasing returns to scale but declines in other sectors, producing a net negative effect. - Model and calibration notes: - Fiscal multipliers are higher than 1 in the simulations for the large-targeting scenario. - Size of needed subsidies depends on calibration of returns-to-scale parameters. - The quantitative trade model uses a simplified fiscal sector: tariff revenue lump-sum rebates to households; subsidies financed via lump-sum taxation (abstracts from distortionary taxation and other fiscal dynamics). - Example cost illustration: - A clean technology subsidy in the EU sufficient to onshore a significant share of production could cost about 0.4 percent of annual GDP (close to half of the EU budget). ### Cross-country and Cross-sector Evidence: Costs, Spillovers, and Misallocation - China: quantification and impacts (Garcia-Macia, Kothari, and Tao 2025) - Equivalent fiscal cost of industrial policy in China: about 4 percent of GDP between 2011 and 2023. - Most costly instruments: cash subsidies (largest), followed by tax benefits, land subsidies, and subsidized credit. - Sector focus: most support directed to manufacturing; semiconductors, high-tech manufacturing, and automobiles received especially large cash subsidies and tax benefits. - Implementation structure: strategic direction set centrally in five-year plans; implementation highly decentralized through local governments (can cause duplication, excess investment, capacity cuts, but also policy experimentation). - Estimated distortions: - Factor misallocation induced by industrial policies reduced China’s aggregate TFP by 1.2 percent. - GDP reduced by as much as 2 percent due to misallocation. - EU: national state aid and cross-border spillovers (Brandão-Marques and Toprak 2024) - State aid in EU peaked at almost 1.5 percent of GDP in 2022. - Firm-level causal effects (1 percent state aid shock = 1 percent excess equity return on announcement day): - Recipient firm after one year: employment increases by 0.3 percent; revenue increases by 0.6 percent. - Effects largely dissipate by the second year. - Stronger effects for smaller, younger, highly leveraged firms with low cash buffers. - Cross-border spillovers to nonrecipient competing firms: - After one year: employment falls by 0.13 percent; revenues fall by 0.24 percent. - After two years: employment falls by 0.21 percent; revenues fall by 0.46 percent. - Effects larger in more concentrated sectors. - Policy implication: national state aid can fragment the single market; where state aid is justified to address market failures, doing it at the EU level could mitigate adverse spillovers and ensure more efficient pooling of resources. - Comparative evidence: structural reforms versus IPs - Governance improvement example: - A significant improvement in governance can boost industry value added in high-distortion sectors (high markups) relative to low-markup sectors by 2.1 percent. - By contrast, IPs targeting sectors with those distortions may be associated with only a 0.2 percent increase in industry value added. - Improvements in financial development and private sector access to credit are more effective than IPs at supporting sectors highly dependent on external financing. - Structural reforms often entail lower fiscal costs and can sometimes raise fiscal revenues (for example, via improved tax collection). ### Mechanisms, Trade-offs, and Limits - Key trade-offs highlighted: - Sectoral gains versus aggregate productivity: targeted sectoral expansion can coexist with negative cross-sectoral spillovers that reduce aggregate productivity. - Resilience versus efficiency: policies that enhance resilience (for example, onshoring) may raise value added in downstream industries and energy security but can reduce allocative efficiency and raise consumer prices during the transition. - Domestic gains versus international spillovers: adverse cross-country spillovers and retaliatory cycles (not modeled in the quantitative exercise) can further reduce net benefits from domestic IP. - Implementation constraints and risks: - Effectiveness of IP is highly sensitive to parameters difficult to assess ex ante: learning by doing, proximity to technological frontier, market size. - Political-economy risks: capture by special interests, lack of accurate information on returns to scale, decentralized implementation leading to duplication. - Fiscal constraints: limited fiscal space and high debt amplify risks of wasteful spending. - Institutional prerequisites: strong governance, robust business environment, and human capital strengthen IP effectiveness and reduce rent-seeking. ### Policy Recommendations and Best Practices - Evaluate whether IP is warranted: - Ground IP in clear diagnostics of market failures and evidence of increasing returns to scale or other production-side frictions. - Prefer targeted interventions where accurate identification of sectors with increasing returns to scale is feasible. - Prioritize structural reforms: - Strengthen economy-wide fundamentals—governance, financial development, business environment, human capital—before or alongside sector-specific IP. - Recognize that structural reforms often deliver more cost-effective and lower-fiscal-cost gains than IPs and can improve targeting and implementation of any subsequent IP. - Design and implementation principles for IP: - Ensure precise targeting to correct scale externalities; avoid uniform subsidies across sectors. - Include mechanisms for regular evaluation, recalibration, and sunset clauses to limit persistent fiscal burdens and rent-seeking. - Embed IP within a strong institutional and macroeconomic framework; maintain market discipline via domestic and international competition. - Where state aid is used across countries (for example, in the EU), consider pooling at the supranational level to limit cross-border spillovers and improve efficiency of resource use. - Fiscal and macroprudential cautions: - Weigh the opportunity cost of IP against horizontal and structural policies—especially where fiscal space is limited. - Explicitly manage trade-offs between resilience and efficiency, and monitor consumer price and welfare effects during transitions. *Source: https://www.imf.org/-/media/files/publications/weo/2025/october/english/text.pdf, CHAPTER 3* ### Box 3.3. A Comparison between Industrial and Structural Policies ### Box 3.3. A Comparison between Industrial and Structural Policies ### References - Aghion, Philippe, Ufuk Akcigit, and Peter Howitt. 2015. “The Schumpeterian Growth Paradigm.” Annual Review of Economics 7 (1): 557–75. - Aiyar, S., J. Chen, C. Ebeke, G. Garcia-Saltos, T. Gudmundsson, A. Ilyina, A. Kangur, S. Rodriguez, M. Ruta, T. Schulze, G. Soderberg and J. Trevino. 2023. “Geoeconomic Fragmentation and the Future of Multilateralism.” IMF Staff Discussion Note 23/01, International Monetary Fund, Washington, DC. - Akerman, Ariel, Jacob Moscona, Heitor Pellegrina, and Karthik Sastry. 2025. Public R&D Meets Economic Development: Embrapa and Brazil’s Agricultural Revolution. NBER Working Paper 34213. - Aligishiev, Zamid, Gabriela Cugat, Romain A. Duval, Davide Furceri, João Tovar Jalles, Margaux MacDonald, Giovanni Melina, and others. 2023. “Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies.” IMF Staff Discussion Note 23/005, International Monetary Fund, Washington, DC. - Alvarez, J., M. Benatiya Andaloussi, C. Maggi, A. Sollaci, M. Stuermer, and P. Topalova. 2025. “Geoeconomic Fragmentation and Commodity Markets.” CEPR Discussion Paper 20451, Centre for Economic Policy Research, Paris. https://doi.org/10.1787/91e20a26-en. - Aterido, Reyes, Mariana Iootty, and Martin Melecky. 2025. “Energy Prices, Energy Intensity, and Firm Performance.” Policy Research Working Paper 11069, World Bank Group, Washington, DC. - Ayres, Joao, Garcia Marcio, Guillén Diogo, and Kehoe Patrick. 2019. “The Monetary and Fiscal History of Brazil, 1960–2016.” NBER Working Paper 25421, National Bureau of Economic Research, Cambridge, MA. - Bai, Jie, Panle Jia Barwick, Shengmao Cao, and Shanjun Li. 2020. “Quid Pro Quo, Knowledge Spillover, and Industrial Quality Upgrading: Evidence from the Chinese Auto Industry.” NBER Working Paper 27644, National Bureau of Economic Research, Cambridge, MA. - Baquie, Sandra, Yueling Huang, Florence Jaumotte, Jaden Kim, Rafael Machado Parente, and Samuel Pienknagura. 2025. “Industrial Policies: Handle with Care.” IMF Staff Discussion Note 25/002, International Monetary Fund, Washington, DC. - Bartelme, Dominick, Arnaud Costinot, Dave Donaldson, and Andres Rodriguez-Clare. 2025. “The Textbook Case for Industrial Policy: Theory Meets Data.” Journal of Political Economy 133 (5): 1527–73. - Barwick, Panle Jia, Hyuk-Soo Kwon, Shanjun Li, and Nahim B. Zahur. 2025. “Drive Down the Cost: Learning by Doing and Government Policies in the Global EV Battery Industry.” NBER Working Paper 33378, National Bureau of Economic Research, Cambridge, MA. - Bloomberg New Energy Finance (BNEF). 2024. Lithium-Ion Battery Price Survey. Retrieved on 10/12/2024. https://www.bnef.com/login?r=%2Finsights%2F35513 - Bogmans, Christian, Patricia Gomez-Gonzalez, Ganchimeg Ganpurev, Giovanni Melina, Andrea Pescatori, and Sneha D. Thube. 2025. “Power Hungry: How AI Will Drive Energy Demand.” IMF Working Paper 25/081, International Monetary Fund, Washington, DC. https://doi.org/10.5089/9798229007207.001. - Brandão-Marques, Luis, and Hasan H. Toprak. “A Bitter Aftertaste: How State Aid Affects Recipient Firms and Their Competitors in Europe”, IMF Working Papers 2024, 250 (2024), https://doi.org/10.5089/9798400295706.001 - Branstetter, Lee G., and Guangwei Li. 2023. “The Challenges of Chinese Industrial Policy.” In Entrepreneurship and Innovation Policy and the Economy, vol. 3, edited by Benjamin Jones and Josh Lerner. Chicago: University of Chicago Press. - Brezis, Elise S., Paul R. Krugman, and Daniel Tsiddon. 1991. “Leapfrogging: A Theory of Cycles in National Technological Leadership.” NBER Working Paper 3886, National Bureau of Economic Research, Cambridge, MA. - Budina, Nina, Christian H. Ebeke, Florence Jaumotte, Andrea Medici, Augustus J. Panton, Marina M. Tavares, Bella Yao, and others. 2023. “Structural Reforms to Accelerate Growth, Ease Policy Trade-offs, and Support the Green Transition in Emerging Market and Developing Economies.” IMF Staff Discussion Note 23/007, International Monetary Fund, Washington, DC. - Carton, Benjamin, Geoffroy Dolphin, Romain Duval, Andrew Hodge, Amit Kara, Simon Voigts, and Sebastian Wende. Forthcoming. “The Investment Impacts of Europe’s Green Transition.” International Monetary Fund, Washington, DC. - Cherif, Reda, and Fuad Hasanov. 2019. “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy.” IMF Working Paper 19/074, International Monetary Fund, Washington, DC. (References continue in the source; the above are reproduced exactly as they appear in the provided content.) ### Statistical Appendix — Key assumptions and projections (excerpt) - Data in these tables have been compiled based on information available through September 30, 2025. - Real effective exchange rates for the advanced economies are assumed to remain constant at their average levels measured during August 1, 2025–August 29, 2025. - For 2025 and 2026, assumptions imply average US dollar–special drawing right conversion rates of 1.351 and 1.373. - US dollar–euro conversion rates for 2025 and 2026 are 1.130 and 1.167. - Yen–US dollar conversion rates for 2025 and 2026 are 147.7 and 145.3. - It is assumed that the price of oil will average $68.92 a barrel in 2025 and $65.84 a barrel in 2026. - National authorities’ established policies are assumed to be maintained. - Interest rate assumptions: - Three-month government bond yield for the United States: 4.3 percent in 2025 and 3.7 percent in 2026. - Three-month government bond yield for the euro area: 2.0 percent in 2025 and 2.1 percent in 2026. - Three-month government bond yield for Japan: 0.4 percent in 2025 and 0.8 percent in 2026. - 10-year government bond yield for the United States: 4.3 percent in 2025 and 4.1 percent in 2026. - 10-year government bond yield for the euro area: 2.5 percent in 2025 and 2.6 percent in 2026. - 10-year government bond yield for Japan: 1.5 percent in 2025 and 1.7 percent in 2026. - The Statistical Appendix comprises eight sections: Assumptions, What’s New, Data and Conventions, Country Notes, Classification of Economies, General Features and Composition of Groups in the World Economic Outlook Classification, Key Data Documentation, and Statistical Tables. - Data and projections for 197 economies form the statistical basis of the WEO database. - Composite data conventions: - Country group composites for exchange rates, interest rates, and growth rates of monetary aggregates are weighted by GDP converted to US dollars at market exchange rates (averaged over the preceding three years) as a share of group GDP. - Composites for other domestic economy data are weighted by GDP valued at purchasing power parity as a share of total world or group GDP. - For aggregation of inflation in advanced economies (and subgroups), annual rates are simple percent changes from the previous years; for world inflation and inflation in emerging market and developing economies (and subgroups), annual rates are based on logarithmic differences. - Composites for real GDP per capita in purchasing-power-parity terms are sums of individual country data after conversion to international dollars in the years indicated. *International Monetary Fund | October 2025 — content as provided in the source PDF excerpt.* ### Appendix 1.1 of the April 2008 WEO, Box A2 of the April ### Appendix 1.1 of the April 2008 WEO, Box A2 of the April 2004 WEO, Box A1 of the May 2000 WEO, and Annex IV of the May 1993 WEO ### Data compilation and aggregation methods - GDP data are used for the euro area and for the majority of individual countries, except Cyprus, Ireland, Portugal, and Spain, which report calendar-adjusted data. - For data prior to 1999, data aggregations apply 1995 European currency unit exchange rates. - Composites for fiscal data are sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated. - Composite unemployment rates and employment growth are weighted by labor force as a share of group labor force. - Composites relating to external sector statistics are sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated for balance of payments data and at end-of-year market exchange rates for debt denominated in currencies other than US dollars. - Composites of changes in foreign trade volumes and prices are arithmetic averages of percent changes for individual countries weighted by the US dollar value of exports or imports as a share of total world or group exports or imports (in the preceding year). - Unless noted otherwise, group composites are computed if 90 percent or more of the share of group weights is represented. - Data refer to calendar years, except in the case of a few countries that use fiscal years; Table F lists the economies with exceptional reporting periods for national accounts and government finance data. - For some countries, the figures for 2024 and earlier are based on estimates rather than actual outturns; Table G lists the date of the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments for each country. ### Country-specific data notes, estimates, and omissions - Afghanistan: - Data for 2021–24 are reported for selected indicators, with estimates for fiscal data. - GDP growth for 2024 is an estimate. - Projections for 2025–30 are omitted because of an unusually high degree of uncertainty, given that the IMF has paused its engagement with Afghanistan owing to a lack of clarity within the international community regarding the recognition of a government in the country. - Data reported in the WEO contain a structural break in 2021 as a result of the change from calendar year to solar year reporting; the actual reported GDP growth rate for solar year 2021 is –20.7 percent. - Algeria: Total government expenditure and net lending/borrowing include net lending by the government, which mostly reflects support to the pension system and other public sector entities. - Argentina: - The official national consumer price index (CPI) starts in December 2016. - For earlier periods, CPI data reflect the Greater Buenos Aires Area CPI (prior to December 2013); the national CPI (IPCNu, December 2013 to October 2015); the City of Buenos Aires CPI (November 2015 to April 2016); and the Greater Buenos Aires Area CPI (May 2016 to December 2016). - Given limited comparability of these series, the WEO does not report average CPI inflation for 2014–16 and end-of-period inflation for 2015–16. - Argentina discontinued the publication of labor market data starting in the fourth quarter of 2015, and new series became available starting in the second quarter of 2016. - Bolivia: Projections for 2026–30 have been omitted owing to significant uncertainty regarding the economic outlook. - Costa Rica: The central government definition was expanded as of January 1, 2021, to include 51 public entities in accordance with Law 9524. Data back to 2019 are adjusted for comparability. - Dominican Republic: Fiscal series coverage: - Public debt, debt service, and the cyclically adjusted/structural balances are for the consolidated public sector (central government, the rest of the nonfinancial public sector, and the central bank). - The remaining fiscal series are for the central government. - Ecuador: Fiscal projections for 2025–30 are excluded from publication because of ongoing program discussions. - Eritrea: Data and projections for 2020–30 are excluded from the database because of constraints in data reporting. - India: Real GDP growth rates are calculated in accordance with national accounts with base year 2011/12. - Iran: - Historical figures for nominal GDP in US dollars are computed using the official exchange rate up to 2017. - From 2018 onward, the NIMA exchange rate is used to convert nominal rial GDP figures to US dollars; the IMF staff assesses that the NIMA rate better reflects the transaction-value-weighted exchange rate in the economy over that period of time. - Israel: Projections are subject to heightened uncertainty owing to the conflict in the region and thus may undergo revisions. - Lebanon: - Fiscal and national accounts data for 2022–24, as well as debt data for 2023–24, are IMF staff estimates and not provided by the national authorities. - Estimates and projections for 2025–30 are omitted owing to an unusually high degree of uncertainty. - Libya: - Actual data and projections are subject to high uncertainty due to frequent data revisions by the authorities. - Fiscal and debt data for 2024 are IMF staff estimates based on information from the Central Bank of Libya. - National accounts data for 2020–24 are IMF staff estimates. - Nigeria: - National accounts data have been revised and rebased, with 2019 as the new base year, replacing the 2010 benchmark. - The rebasing aligns national accounts statistics with updated international standards, including the 2008 SNA, BPM6, and GFSM 2014. - The rebasing entailed broader sectoral and data coverage capturing previously unrecorded activities such as the digital economy, parts of the informal economy (particularly in the agriculture sector), pension and health insurance schemes, social insurance trust funds, household firms, quarrying and other minerals, and modular oil refining. - The rebasing drew on more comprehensive data coverage including the National Business Sample Census and the Survey of Establishments, the National Agricultural Sample Census and Survey, and the 2019 and 2023 Nigeria Living Standards Surveys. - The rebasing exercise resulted in an upward revision of the nominal GDP by 40.8 percent in 2019. - Pakistan: Projections do not yet reflect the impact of flooding in summer 2025, whose impact is still being assessed. - Sierra Leone: Although the currency was redenominated on July 1, 2022, local currency data are expressed in the old leone for the October 2025 WEO. - Sri Lanka: Data and projections for 2025–30 are excluded from publication owing to ongoing discussions on restructuring of sovereign debt. - Sudan: - Projections reflect the IMF staff’s analysis based on the assumption that the ongoing conflict will terminate by the end of 2025 and that reengagement and reconstruction will commence shortly thereafter. - Data for 2011 exclude South Sudan after July 9; data for 2012 and onward pertain to the current Sudan. - Syria: Data are excluded from 2011 onward because of the uncertain political situation. - Timor-Leste: Published data for real GDP refer to non-oil real GDP, while published data for nominal GDP refer to total nominal GDP. - Turkmenistan: - Real GDP data are IMF staff estimates compiled in line with international methodologies (SNA), using official estimates and sources as well as United Nations and World Bank databases. - Estimates of and projections for the fiscal balance exclude receipts from domestic bond issuances as well as privatization operations, in line with the GFSM 2014. - The authorities’ official estimates for fiscal accounts, compiled using domestic statistical methodologies, include bond issuance and privatization proceeds as part of government revenues. - Ukraine: Revised data for national accounts are available for 2000 onward and exclude Crimea and Sevastopol from 2010 onward. - Uruguay: - In December 2020, the authorities began reporting national accounts data according to the SNA 2008, with base year 2016; the new series begin in 2016. - Data prior to 2016 reflect the IMF staff’s best effort to preserve previously reported data and avoid structural breaks. - Starting in October 2018, Uruguay’s public pension system received transfers in the context of Law 19,590 of 2017; these funds are recorded as revenues consistent with the IMF’s methodology. Therefore, data for 2018–22 are affected by these transfers. ### Key procedural details and caveats - Several countries have omitted projections or data for certain years owing to high uncertainty, ongoing program discussions, or constraints in data reporting (examples: Afghanistan, Bolivia, Ecuador, Eritrea, Lebanon, Sri Lanka). - Revisions and rebasing (e.g., Nigeria) can produce large revisions to nominal GDP levels (explicit example: 40.8 percent upward revision in 2019). - Use of alternative exchange rates for dollar conversions is applied in specific country cases (example: Iran uses NIMA from 2018 onward). - Data presentation choices (calendar vs. fiscal years, reporting base years, inclusion/exclusion of specific territories) produce structural breaks or exclusions that are documented for affected series (examples: Afghanistan solar year 2021, Ukraine excluding Crimea and Sevastopol from 2010 onward). *Source: Appendix 1.1 of the April 2008 WEO, Box A2 of the April 2004 WEO, Box A1 of the May 2000 WEO, and Annex IV of the May 1993 WEO (statistical appendix text).* ### 1.2 percent of GDP in 2018, 1.0 percent of GDP ### text - 1.2 percent of GDP in 2018, 1.0 percent of GDP ### Uruguay — fiscal coverage change and implications - Fiscal coverage changed from consolidated public sector to nonfinancial public sector with the October 2019 WEO. - Nonfinancial public sector coverage includes the central government, local government, social security funds, nonfinancial public corporations, and Banco de Seguros del Estado. - Under the narrower fiscal perimeter (which excludes the central bank): - Assets and liabilities held by the nonfinancial public sector, for which the counterpart is the central bank, are not netted out in debt figures. - Capitalization bonds issued in the past by the government to the central bank are now part of the nonfinancial public sector debt. - Historical data were revised accordingly. - Reference: Uruguay: Staff Report for the 2018 Article IV Consultation, Country Report 19/64. ### Uruguay — specific fiscal series and disclaimer - Series values stated: "1.2 percent of GDP in 2018, 1.0 percent of GDP in 2019, 0.6 percent of GDP in 2020, 0.3 percent of GDP in 2021, 0.1 percent of GDP in 2022, and 0 thereafter." - The disclaimer about the public pension system applies only to the revenues and net lending/borrowing series. - See IMF Country Report 19/64 for further details. ### Venezuela — data limitations and treatment - Projecting the economic outlook is difficult because: - Lack of discussions with the authorities (most recent Article IV consultation took place in 2004). - Incomplete metadata for limited reported statistics. - Difficulties in reconciling reported indicators with economic developments. - Fiscal accounts include the budgetary central government; social security; FOGADE; and a reduced set of public enterprises, including Petróleos de Venezuela, S.A. - Following methodological upgrades to achieve a more robust nominal GDP: - Historical data and indicators expressed as a percentage of GDP have been revised from 2012 onward. - For most indicators, data for 2018–24 are IMF staff estimates. - The effects of hyperinflation, the paucity of reported data, and uncertainty mean that IMF staff’s estimated and projected macroeconomic indicators should be interpreted with caution. - Venezuela’s consumer prices are excluded from all WEO group composites. ### West Bank and Gaza; Zimbabwe — reporting notes - West Bank and Gaza: - Estimates and projections for 2025–30 are excluded from publication owing to the unusually high degree of uncertainty. - Annual data for the unemployment rate are available up to 2022. - Zimbabwe: - Authorities redenominated national accounts statistics following the introduction on April 5, 2024, of a new national currency, the Zimbabwe gold, replacing the Zimbabwe dollar. - The use of the Zimbabwe dollar ceased on April 30, 2024. ### Classification of economies in the WEO - The WEO divides the world into two major groups: advanced economies and emerging market and developing economies. - The classification is not based on strict criteria and has evolved over time; objective is to facilitate analysis by organizing data. - Some economies remain outside the classification (examples: Cuba and the Democratic People’s Republic of Korea). ### Advanced economies — composition and subgroups - Table B lists the 42 advanced economies. - The seven largest by GDP based on market exchange rates: the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada (the Group of Seven). - Euro area members are distinguished as a subgroup; composite data for the euro area cover the current members for all years. ### Emerging market and developing economies — composition and analytical classifications - The group comprises 155 economies. - Regional breakdowns: emerging and developing Asia; emerging and developing Europe; Latin America and the Caribbean; Middle East and Central Asia; and sub-Saharan Africa. - Analytical classifications: - By source of export earnings: fuel (SITC 3) and nonfuel; focus on nonfuel primary products (SITCs 0, 1, 2, 4, and 68). - Economies categorized if main source of export earnings exceeded 50 percent of total exports on average between 2020 and 2024. - Financial and income criteria: net creditor economies, net debtor economies, heavily indebted poor countries (HIPCs), low-income developing countries (LIDCs), and emerging market and middle-income economies (EMMIEs). - Economies are categorized as net debtors when latest net international investment position < zero or current account balance accumulations from 1972 (or earliest available data) to 2024 were negative. - During 2020–24, 41 economies incurred external payments arrears or entered into official or commercial bank debt-rescheduling agreements (referred to as economies with arrears and/or rescheduling during 2020–24). - LIDC threshold is based on "$2,700 in 2017 as measured by the World Bank’s Atlas method" and updated following new information in early 2024. ### Key aggregate shares and counts (from Table A) - Advanced Economies: Number of Economies 42; GDP share 100.0 (advanced economies column), World share 39.6; Exports of Goods and services 100.0 (advanced economies column), World share 61.0; Population 100.0 (advanced economies column), World share 13.8. - United States: GDP 37.3 (advanced economies column); World 14.8; Exports 16.5; World 10.0; Population 30.8; World 4.3. - Euro area: GDP 29.0; World 11.5; Exports 41.3; World 25.2; Population 31.8; World 4.4. - Emerging Market and Developing Economies: Number of Economies 155; GDP 100.0 (group); World 60.4; Exports 100.0 (group); World 39.0; Population 100.0 (group); World 86.2. - Emerging and Developing Asia: Number of Economies 30; GDP 57.1; World 34.4; Exports 50.3; World 19.6; Population 55.0; World 47.4. - China: GDP 32.0; World 19.3; Exports 30.2; World 11.8; Population 20.4; World 17.6. - India: GDP 13.6; World 8.2; Exports 6.6; World 2.6; Population 21.1; World 18.2. - Emerging and Developing Europe: Number of Economies 15; GDP 12.9; World 7.8; Exports 15.1; World 5.9; Population 15.1; World 3.4. - Latin America and the Caribbean: Number of Economies 33; GDP 11.9; World 7.2; Exports 14.0; World 5.4; Population 9.4; World 8.1. - Middle East and Central Asia: Number of Economies 32; GDP 12.3; World 7.4; Exports 16.6; World 6.5; Population 13.3; World 11.4. - Sub-Saharan Africa: Number of Economies 45; GDP 5.8; World 3.5; Exports 4.1; World 1.6; Population 17.1; World 14.7. - Analytical groups by source of export earnings: - Fuel: Number of Economies 26; GDP 10.4; World 6.3; Exports 15.8; World 6.2; Population 9.9; World 8.6. - Nonfuel: Number of Economies 127; GDP 89.6; World 54.1; Exports 84.2; World 32.8; Population 90.0; World 77.6. - Of which, Primary Products: Number of Economies 35; GDP 3.6; World 2.2; Exports 4.3; World 1.7; Population 8.7; World 7.5. - By external financing source: - Net Debtor Economies: Number of Economies 117; GDP 48.4; World 29.2; Exports 41.6; World 16.2; Population 66.2; World 57.7. - Of which, Economies with arrears and/or Rescheduling during 2020–24: Number of Economies 43; GDP 5.5; World 3.3; Exports 3.8; World 1.5; Population 13.4; World 11.5. - Other groups: - Emerging Market and Middle-Income Economies: Number of Economies 96; GDP 92.6; World 55.9; Exports 95.9; World 37.4; Population 76.8; World 66.2. - Low-Income Developing Countries: Number of Economies 58; GDP 7.4; World 4.5; Exports 4.1; World 1.6; Population 23.2; World 20.0. - Heavily Indebted Poor Countries: Number of Economies 39; GDP 2.8; World 1.7; Exports 2.3; World 0.9; Population 13.0; World 11.2. ### Exceptional reporting periods and data documentation (high-level) - Table F lists economies with exceptional reporting periods for national accounts and government finance (examples include Afghanistan apr/Mar national accounts; The Bahamas Jul/Jun national accounts; India apr/Mar national accounts and government finance). - Table G documents key data sources, latest actual annual database years, systems of national accounts, use of chain-weighted methodology, government finance subsectors coverage, accounting practice, and balance of payments data sources and manuals for individual countries (extensive country-by-country entries provided). ### Fiscal policy assumptions underlying WEO projections (Box A1) - Short-term fiscal policy assumptions are normally based on officially announced budgets, adjusted for differences between national authorities and IMF staff regarding macroeconomic assumptions and projected fiscal outturns. - When no official budget is announced, projections incorporate policy measures judged likely to be implemented. - Medium-term fiscal projections are based on a judgment about policies’ most likely path; where insufficient information exists, an unchanged structural primary balance is assumed unless indicated otherwise. - Selected country-specific assumptions (excerpted): - Argentina: Projections based on available budget outturn, budget plans, and IMF-supported program targets for the federal government; interest bill excludes interest payments of zero-coupon bonds issued prior to September 2025, which are recorded below the line. - Australia: Projections based on Australian Bureau of Statistics data, FY2025/26 Commonwealth Government budgets, FY2024/25 state/territory budgets, and IMF staff estimates/projections. - Austria: Based on authorities’ latest medium-term plans, adjusted for IMF staff macroeconomic assumptions and assuming moderate expenditure restraint. - Belgium: Based on Budgetary Plan 2025 and Belgian Monitoring Committee reports, with IMF staff adjustments. - Brazil: Fiscal projections reflect current and expected policies. - Canada: Uses baseline forecasts from Government of Canada’s 2024 Fall Economic Statement and provincial budget updates, with IMF staff adjustments. - China: Incorporates the 2025 budget and estimates of off-budget financing. - India: Based on available information on authorities’ fiscal plans, with IMF staff adjustments; notes on coverage differences and recording conventions; starting with FY2020/21, expenditure includes off-budget component of food subsidies. - Russia: Fiscal rule suspended in March 2022; 2023–25 budget based on a modified rule with Rub 8 trillion benchmark oil and gas revenues; in late September 2023 Ministry proposed reverting to earlier rule with benchmark oil price at $60 a barrel effective in the 2025 budget, allowing higher oil and gas revenues to be spent while targeting a smaller primary structural deficit. - Saudi Arabia: Baseline fiscal projections based on 2025 budget and official announcements; export oil revenues based on WEO baseline oil price assumptions and IMF staff understanding of OPEC+ production adjustments. - Israel: Projections subject to significant risks given the unpredictability of the current conflict; fiscal projections for general government take the 2025 budget into account. - The output gap and structural balances are defined and computed using IMF staff estimates of potential GDP and revenue/expenditure elasticities; computations are subject to significant margins of uncertainty. - Net debt is calculated as gross debt minus financial assets corresponding to debt instruments. *Source: World Economic Outlook Statistical Appendix and Box A1 — October 2025 IMF publication (excerpts from the supplied text).* ### 2024. FY2025 projections are based on the initial ### text - 2024. FY2025 projections are based on the initial ### Fiscal assumptions (country notes and methodological points) - FY2025 projections are based on the initial budget of February 18, 2025. - South Africa: - Fiscal assumptions informed by the 2025 budget. - Nontax revenue excludes transactions in financial assets and liabilities (these involve primarily revenues associated with the realized exchange rate valuation gains from the holding of foreign currency deposits, sale of assets, and conceptually similar items). - Eskom debt relief is treated as a capital transfer above-the-line item. - Spain: - Figures for 2021–28 reflect disbursements of grants and loans under the EU Recovery and Resilience Facility. - Sweden: - Fiscal estimates for 2024 are based on the authorities’ budget bill and have been updated with the authorities’ latest interim forecast. - The impact of cyclical developments on the fiscal accounts is calculated using the 2014 OECD study to take into account output gaps. - Switzerland: - Projections assume fiscal policy is adjusted as necessary to keep fiscal balances in line with the requirements of Switzerland’s fiscal rules. - Türkiye: - The basis for the projections is the IMF-defined fiscal balance, which excludes some revenue and expenditure items that are included in the authorities’ headline balance. - United Kingdom: - Fiscal projections are based on the March 2025 forecast of the Office for Budget Responsibility and the January 2025 release on public sector finances from the Office for National Statistics. - IMF staff projections take the Office for Budget Responsibility forecast as a reference and overlay adjustments for differences in assumptions. - Data are presented on a calendar year basis. - United States: - Fiscal projections are based on the January 2025 Congressional Budget Office baseline, adjusted for the IMF staff’s policy and macroeconomic assumptions. - Projections incorporate the effects of the One Big Beautiful Bill Act signed on July 4, 2025. ### Monetary policy assumptions (framework and country-specific bases) - General framework: - Assumptions are based on the established policy framework in each economy. - In most cases implies a nonaccommodative stance over the business cycle: official interest rates will increase when indicators suggest inflation will rise above its acceptable rate or range; they will decrease when indicators suggest inflation will not exceed the acceptable rate or range, that output growth is below its potential rate, and that the margin of slack in the economy is significant. - Readers are referred to the “Assumptions” section at the beginning of the Statistical Appendix for interest-rate detail. - Country-specific formulations and bases (verbatim statements preserved): - Argentina: Monetary projections are consistent with the overall macroeconomic framework, the fiscal and financing plans, and the monetary and foreign exchange policies. - Australia: Monetary policy assumptions are based on the IMF staff’s analysis and the expected inflation path. - Brazil: Monetary policy assumptions are consistent with the convergence of inflation to target. - Canada: Projections reflect the gradual unwinding of monetary policy tightening by the Bank of Canada as inflation slowly returns to its midrange target of 2 percent by the end of 2026. - Chile: Monetary policy assumptions are consistent with attaining the inflation target. - China: Monetary policy assumptions are consistent with inflation gradually rising and the output gap closing over the medium term. - Denmark: Monetary policy is to maintain the peg to the euro. - Euro area: Monetary policy assumptions for euro area member countries are drawn from a suite of models (semi-structural, DSGE [dynamic stochastic general equilibrium], Taylor rule), market expectations, and European Central Bank Governing Council communications. - Hong Kong Special Administrative Region: The IMF staff assumes that the currency board system will remain intact. - Hungary: The IMF staff’s estimates and projections are informed by expert judgment based on recent developments. - India: Monetary policy projections are consistent with achieving the Reserve Bank of India’s inflation target over the medium term. - Indonesia: Monetary policy assumptions are in line with inflation within the central bank’s target band over the medium term. - Israel: Monetary policy assumptions are based on the gradual normalization of monetary policy. - Japan: Monetary policy assumptions are based on the IMF staff’s assessment of the most likely path for interest rates, considering the broader macroeconomic outlook, the Bank of Japan’s communications, and market expectations. - Korea: Projections assume that the policy rate will evolve in line with the Bank of Korea’s forward guidance. - Mexico: Monetary policy assumptions are consistent with inflation converging to the central bank’s target over the projection period. - New Zealand: Monetary projections are based on the IMF staff’s analysis and expected inflation path. - Russia: Monetary policy projections assume that the Central Bank of the Russian Federation is adopting a tight monetary policy stance. - Saudi Arabia: Monetary policy projections are based on the continuation of the exchange rate peg to the US dollar. - Singapore: Broad money is projected to grow in line with the projected growth in nominal GDP. - South Africa: Monetary policy assumptions are consistent with maintaining inflation within the 3–6 percent target band over the medium term. - Sweden: Monetary policy assumptions are based on the IMF staff’s estimates. - Switzerland: Monetary policy assumptions are based on the IMF staff’s assessment of the most likely path for interest rates, considering the broader macroeconomic outlook, the Swiss National Bank’s inflation forecasts, and market expectations. - Türkiye: The baseline assumes that the monetary policy stance will remain contractionary in line with announced and observed policies. - United Kingdom: Monetary policy assumptions are based on the IMF staff’s assessment of the most likely path for interest rates, considering the broader macroeconomic outlook, model results, the Bank of England’s inflation forecasts and communications, and market expectations. - United States: The IMF staff expects the Federal Open Market Committee to continue to adjust the federal funds target rate in line with the broader macroeconomic outlook. ### Statistical appendix and key datasets (structure and content highlights) - The Statistical Appendix contains comprehensive country notes and tables covering: - World and country real GDP (Table A1, Table A2, Table A4). - Components of real GDP for advanced economies (Table A3). - Inflation summaries and country consumer price series (Table A5, Table A6, Table A7). - Fiscal balances and debt for major advanced economies (Table A8). - World trade volumes and prices, incl. oil and commodity price deflators (Table A9). - Current account balances in levels and percent of GDP (Table A10, Table A11, Table A12). - Financial account balances and flow-of-funds aggregates (Table A13). - Net lending and borrowing, savings and investment (Table A14). - Medium-term baseline scenario and summary projections (Table A15). - The Statistical Appendix explicitly notes methodological items, country-specific caveats, and where country-specific notes are located (the “Country Notes” section of the statistical appendix). *Italic line: Source — IMF, World Economic Outlook: Global Economy in Flux, Prospects Remain Dim (Statistical Appendix and Box A1 excerpts).* ### Annex 1.SF.1 ### Annex 1.SF.1 ### Executive Board assessment of the global outlook - Executive Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities. - Directors welcomed recent economic resilience despite repeated shocks and noted the importance of stronger economic fundamentals and policy frameworks in EMDEs. - Some Directors viewed staff’s overall characterization of the global economic environment as overly pessimistic. - Directors cautioned that protectionism and significant cuts to foreign aid disproportionately affect the outlook for the world’s poorest economies and undermine their convergence prospects. ### Downside risks highlighted by Directors - Risks to the outlook are tilted to the downside, including: - prolonged policy uncertainty; - any escalation in trade tensions; - rising fiscal vulnerabilities and increased fragilities in financial markets and their potentially adverse interactions. - With high debt service obligations and rollover needs, a continued rise in government borrowing costs would reduce fiscal space and make bond market functioning more fragile. - Stretched risk asset valuations and higher interconnectedness between banks and nonbank financial institutions (NBFIs) keep financial stability risks elevated. - Additional risks cited: eroding good governance and the independence of key economic institutions; labor supply shocks; regional conflicts, including Russia’s war in Ukraine; commodity price volatility. ### Multilateral cooperation and trade - Directors broadly underscored the need to reinvigorate multilateral cooperation to meaningfully reduce trade policy uncertainty by re-anchoring trade in an open, rules-based and transparent system. - They acknowledged the need to modernize trade rules and lower barriers, including through regional agreements that remain open to and do not discriminate against third parties. - Trade diplomacy should work together with coordinated domestic macroeconomic adjustments to address distortions behind internal and external imbalances. - Directors emphasized the role of the global financial safety net and the importance of continued progress on Fund concessional resources and a strong, quota-based, and adequately resourced IMF at its center. ### Fiscal policy guidance - Need for tailored fiscal advice that takes country-specific circumstances into account. - Emphasized rebuilding fiscal buffers while creating space for new spending demands and safeguarding debt sustainability. - Called for fiscal consolidation with realistic and credible plans anchored in robust medium term fiscal frameworks that combine spending rationalization and revenue generation, while protecting the vulnerable. - When new discretionary support is warranted, it should be transparent, targeted, and temporary. - Potential reform areas to create fiscal room: pensions, health care, wage bills, and tax expenditures. - In countries where debt is unsustainable, emphasized cooperation through the G20 Common Framework and the Global Sovereign Debt Roundtable for timely and orderly debt restructuring. ### Monetary policy and financial stability guidance - Emphasized the importance of central bank independence and insulation from political pressures to anchor inflation expectations and pursue price stability in line with mandates. - Monetary policy should be data-driven, calibrated to country-specific circumstances—with careful assessment of the nature of shocks and the output gap—and clearly communicated. - Policy stance recommendations: - In economies experiencing supply shocks, consider gradual easing provided disinflation is clearly established. - Where weaker demand dominates, cautious consideration can be given to a reduction in policy rates. - A prudent approach to monetary policy easing can help contain asset valuation pressures. - For countries experiencing excessive exchange rate volatility and with shallow foreign exchange markets, temporary foreign exchange interventions and capital flow measures may be appropriate, consistent with the advice of the Integrated Policy Framework, alongside deepening local bond markets while managing bank-sovereign nexus risks. - Directors called on authorities to continue using macroprudential tools and generally supported consistent and timely implementation of internationally-agreed regulatory frameworks, like Basel III. - Importance of addressing data gaps and strengthening regulation of NBFIs and digital assets, including stablecoins. ### Structural reforms and industrial policy - Directors acknowledged the importance of boosting productivity and re-igniting growth over the medium term. - Called for comprehensive and carefully sequenced structural reform packages that consider country-specific circumstances, including social and political economy considerations. - Priority reforms include: - encouraging labor mobility and participation; - increasing digitalization and AI readiness; - improving the business climate and competition to reallocate labor and capital to the most productive firms. - Directors generally welcomed the Fund’s analysis on industrial policies and many called for further work, including expanding scope to discuss spillover risks and related policy advice. - Cautions on industrial policy: - Expanding use involves opportunity costs and tradeoffs, including fiscal costs, higher consumer prices, and resource misallocation. - Where pursued, industrial policies should be transparent, focus on addressing market failures, target areas with highest potential for positive spillovers and impact on supply-side capacity and job creation, and be supported by complementary structural reforms. - Strong governance is key; governments should monitor impact and scale back or discontinue ineffective measures. - A few Directors stressed the importance of leveraging historical experiences in conducting industrial policies. *The following remarks were made by the Chair at the conclusion of the Executive Board’s discussion of the Fiscal Monitor, Global Financial Stability Report, and World Economic Outlook on September 29, 2025.* --- _Source: https://www.imf.org/-/media/files/publications/weo/2025/october/english/text.pdf_