## World Economic Outlook: Resilience Under Strain, Urgent Choices (October 2026) — Key Findings and Policy Recommendations ## Source details **Canonical URL:** [World Economic Outlook: Resilience Under Strain, Urgent Choices (October 2026) — Key Findings and Policy Recommendations](https://www.imf.org/-/media/files/publications/weo/2026/october/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/weo/2026/october/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/weo/2026/october/english/text.pdf.json) --- ### Preface — assumptions, data, and production - Projections assume real effective exchange rates remained constant at their average levels during July 31, 2026–August 28, 2026, except for currencies in ERM II (constant in nominal terms relative to the euro). - Commodity and interest rate assumptions: - Average price of oil: $95.74 a barrel in 2026 and $87.39 a barrel in 2027. - Three-month government bond yields: - United States: 3.8 percent in 2026 and 4.3 percent in 2027. - Euro area: 2.3 percent in 2026 and 3.0 percent in 2027. - Japan: 1.0 percent in 2026 and 1.4 percent in 2027. - 10-year government bond yields: - United States: 4.5 percent in 2026 and 4.6 percent in 2027. - Euro area: 3.1 percent in 2026 and 3.5 percent in 2027. - Japan: 2.6 percent in 2026 and 3.0 percent in 2027. - Estimates and projections are based on statistical information available through September 30, 2026. - The analysis and projections were coordinated in the IMF Research Department under the general direction of Silvana Tenreyro; project directors were Petya Koeva Brooks and Deniz Igan. Primary and other contributors are listed in the publication. ### Global prospects and headline forecasts - Growth and inflation projections: - Global growth is projected at 3.1 percent in 2026 and 3.4 percent in 2027 (IMF staff projections). - Global headline inflation is projected at 4.7 percent in 2026 and 4.1 percent in 2027. - The October 2026 projections imply a cumulative upward revision of 0.7 percentage point, driven mainly by energy and food prices. - Trade and medium-term outlook: - World trade volume growth is projected to slow in 2026 and stabilize in 2027. - Global output is projected to expand at an average annual pace of 3.2 percent in 2028–31 (compared with the prepandemic 2000–19 historical average of 3.7 percent). ### Sources of resilience and limits - Factors sustaining resilience: - Rerouting of energy supplies; increased energy production outside the Gulf; inventory drawdowns; substitution to other energy sources and higher energy efficiency. - The investment boom triggered by artificial intelligence (AI), with investment rising in anticipation of higher expected returns and real incomes. - Limits and exposures: - Inventories in energy markets are dwindling; additional geopolitical shocks could transmit rapidly through prices and supply disruptions. - Technology-related investment is concentrated in a small number of firms, sectors, and economies, creating concentration risks. - Public debt is high in many economies; rising borrowing costs and elevated debt expose fiscal sustainability vulnerabilities. ### Recommended policy responses (summary) - Fiscal policy: - Implement credible fiscal adjustment plans combining revenue enhancements and spending rationalization, supported by institutional improvements. - Any support to ease higher energy and food prices should be temporary, targeted, nondistortionary, and not jeopardize fiscal sustainability goals. - Public debt levels need to be put back on a durably sustainable path. - Monetary policy: - Monetary policy should remain firmly focused on price stability and be sufficiently restrictive to return inflation to target in a timely fashion. - Where commodity price increases and technology-related investment add to persistent inflationary pressures, monetary policy will need to tighten further. - Central bank independence and clear communication are instrumental. - Supply-side resilience (three pillars): - Technological diversification, trade diversification, and stronger supply buffers in critical sectors (energy, water, food). - International cooperation: - Transparent and predictable trade rules; cooperation on energy security and critical supply chains; prudently harness and broaden gains from AI while managing risks. ### Scenario and risks - Downside risks (skewed to the downside): - Prolonged or escalated conflict in the Middle East could keep energy and food prices elevated and volatile, revive inflationary pressures, worsen fiscal and external balances, and weigh on growth. - Disruptions to energy infrastructure, cyberattacks, or extreme weather events could amplify adverse effects. - A reassessment of AI-related profitability could sharply reduce investment, trigger equity market corrections, and tighten financial conditions. - Scenario modeled in Chapter 1 (commodity-and-bond stress, G20 model) includes assumptions such as oil production in OPEC being 10 and 22 percent lower than baseline in 2026 and 2027, oil prices reaching $130 from Q4 2026 to Q1 2027, and term premiums increasing by 60 basis points (advanced economies and EMs excluding China); macro impacts reported as percentage point deviations from baseline (selected world impacts): - World GDP growth deviations: 2026 = −0.2 (Conflict), −0.1 (Term Premium), −0.2 (Total); 2027 = −0.4, −0.2, −0.5. - World headline inflation deviations: 2026 = 0.4 (Conflict), 0.0 (Term Premium), 0.4 (Total); 2027 = 1.0, 0.1, 1.1. ### Recent developments (first half of 2026) - Activity: - United States real GDP growth slowed to 2.2 percent at an annual rate in Q2 2026, after 2.5 percent in Q1 2026. - Euro area activity expanded by 2.6 percent in Q2 2026 after flat GDP in Q1 2026. - China’s Q2 2026 performance was 4.3 percent year over year. - Inflation and financial conditions: - Global headline inflation rose in August 2026 as energy prices bounced back; core inflation remained moderate. - Global financial conditions remain accommodative from a historical point of view; advanced-economy benchmark rates climbed to multidecade highs, increasing borrowing costs for emerging markets. ### Regional outlook highlights (selected) - Middle East and Central Asia: - Growth projected to drop to −0.3 percent in 2026 and rebound to 6.3 percent in 2027. - Saudi Arabia: contraction of 3.3 percent in 2026 and growth of 7.9 percent in 2027. - Sub‑Saharan Africa: - Growth expected to remain stable at 4.5 percent in 2026. - Latin America and the Caribbean: - Growth projected at 2.3 percent in 2026 and 2.5 percent in 2027. - Emerging and developing Europe: - Growth expected to slow to 1.7 percent in 2026 and recover to 2.1 percent in 2027. --- ### Commodity markets, real-time geopolitics, and the Commodity Price Tracker - Oil and gas market developments (selected facts): - Strait of Hormuz closure in March 2026 stranded oil and liquefied gas equal to about 20 percent of world consumption. - Oil prices peaked in late March at $126 a barrel; market stabilized at about $100 a barrel in early June with a supply deficit of 1.9 million barrels a day (mb/d) covered by depleting reserves. - Mid-June memorandum led to a temporary glut and collapse in prices to $68 a barrel; through September Gulf crude exports averaged 16.7 mb/d (88 percent of prewar levels) and ended the month at 13.4 mb/d. - Global reserves continued to be depleted by about 2.7 mb/d. - Commodity price indices and recent changes (March–August 2026): - Primary commodity prices decreased by 6.3 percent. - IMF metals price index declined 4.5 percent; gold −9.1 percent; silver −17 percent; base metals index increased 4.9 percent. - IMF food and beverages price index increased 0.8 percent; wheat +22.7 percent; corn +3.8 percent; soybean +5.3 percent. - IMF fertilizer index declined 10.5 percent; phosphate +22.4 percent; nitrogen-based fertilizers −31.5 percent. - Natural gas price benchmarks and futures: - TTF rose 18 percent between March and August 2026 to $20.9 a MMBtu; Henry Hub fell 9.2 percent to $2.8 a MMBtu. - Futures expectations: TTF average $19.8 a MMBtu in 2026 decreasing to $8.4 a MMBtu in 2031; Henry Hub $3.1 a MMBtu in 2026 to $3.6 a MMBtu in 2031. - Commodity Price Tracker (SVAR framework): - A four-variable SVAR decomposes oil and TTF fluctuations into current demand, forward-looking demand, current supply disruption, and forward-looking supply disruption (geopolitical supply risk). - Sample coverage: June 1, 2007 (October 4, 2013 for gas) to May 29, 2026. - Key quantitative mappings: - A 1 percent increase in front-month oil prices from shocks increases CPI by roughly 0.06 percent after one year for oil-importing advanced economies. - A 1 percent increase in TTF prices yields about 0.05 percent higher CPI after one year for forward-looking demand or supply shocks, and roughly 0.08 percent for current demand and geopolitical supply risk shocks. - A 1 percent front-month oil price increase from a negative supply shock increases unemployment by 0.04 percentage point one year after the shock. - Geopolitical supply risk tends to raise energy prices but has smaller or more short-lived macroeconomic impacts than actual supply disruptions. --- ### Artificial Intelligence (AI) investment scenarios and macroeconomic impacts - Scenario A (Strong Payoffs): - Deployment raises global total factor productivity by 0.8 percent over 10 years; global output increases by close to 1 percent in the long term and by 0.6 percent by 2029 relative to baseline. - US GDP increases by 0.4 percent in 2027 and reaches 1.3 percent by 2031 (relative to baseline); US current account deficit widens by 0.4 percentage point of baseline GDP by 2029. - Asia excluding China: activity peaks at 0.8 percent of baseline by 2029; China GDP increases by 0.7 percent by 2029. - Inflationary impact is small overall. - Scenario B (Capacity Constraints): - Global GDP increases by 0.2 percent by 2029 relative to baseline. - US inflation increases by 0.4 percentage point by 2028; US policy rates rise by about 70 basis points. - Technology good prices rise sharply, increasing import prices elsewhere; US current account deficit widens by 0.8 percent of baseline by 2029. - Scenario C (Market Correction): - AI investment unwinds; US investment falls by 5 percent and US GDP by 0.8 percent from that layer alone. - Global output is 1.1 percent lower than baseline by 2028; US output 1.8 percent lower; Asia 1.7 percent lower. - Equity prices fall by 20 percent in the United States in 2026 and 15 percent elsewhere; corporate risk premiums increase (examples: 75 basis points in the United States). --- ### Cost-of-living crises — incidence, dynamics, and policy lessons (Chapter 2) - Definitions and incidence: - Cost-of-living crises defined as quarter-over-quarter increases in prices of basic necessities two standard deviations above country-specific mean while prices of other goods and nominal wages remain below that threshold for two subsequent quarters. - Sample: disaggregated CPI data for 85 economies over 2005–25; 75 of the 85 experienced at least one crisis; 46 percent experienced at least two. - Macroeconomic dynamics around episodes: - Relative prices of basic necessities peak 1½ years after onset and remain elevated for several quarters. - Three years after onset, prices of basic necessities remain about 7 percent higher than prices of other goods and services on average. - Headline CPI cumulative increase about 13 percent by the third year. - Real wages remain about 3 percent below precrisis path three years after onset. - One-year-ahead inflation expectations rise about 2.7 percentage points in advanced economies and 5.3 percentage points in emerging market and developing economies four quarters after onset. - Distributional and poverty impacts: - Cumulative inflation gap between bottom and top income quintiles over 2021–24: 1.6 percentage points median advanced economy; 3.2 percentage points median emerging market; 4.5 percentage points median low-income developing country. - Adjusted extreme poverty rate by 2024 is, on average, about 0.8 percentage point higher when using income-specific consumption price indexes (sample), representing almost 23 million more people in extreme poverty for the sample. - Policy effectiveness and trade-offs (empirical evidence and model simulations): - Targeted transfers are the most cost-effective instrument to protect vulnerable households while preserving price signals. - Broad-based price-suppressing measures can require between 3 and 22 times the fiscal resources to achieve comparable protection, depending on country and shock. - Empirical AIPW difference-in-differences estimates (four quarters after policy introduction): - Income-supporting measures cushion aggregate consumption and do not, on average, change aggregate inflation dynamics significantly. - Price-suppressing measures reduce near-term inflation in basic necessities but have significant negative effects on fiscal balances and limited impact on aggregate consumption. - Model simulations (representative economies) show consumer and producer subsidies are often fiscally costly and can produce net welfare losses once consolidation costs are considered; targeted transfers deliver larger welfare gains for LIHHs at much lower fiscal cost. - Policy guidance: - Prioritize targeted transfers delivered via scalable social protection systems; preserve price signals; make emergency support temporary, transparent, and tightly targeted; avoid broad-based fuel subsidies, generalized tax cuts, and price controls where possible. --- ### Corporate income taxation, intangibles, and cross-border spillovers (Chapter 3) - Core findings: - Investment and profit booking have become more sensitive to tax differentials since 2017. - Anti-avoidance efforts have weakened profit-shifting links to tax differentials but increased sensitivity of real investment to tax rates. - Output in the rest of the world can fall by as much as 0.5 percent two years after a corporate income tax cut in a major economy (model and empirical evidence). - Empirical estimates (selected): - A 1 percentage point increase in a country’s statutory rate relative to other locations is associated with a decline in profits booked in that country of roughly 1 percent to 1½ percent. - A 1 percentage point increase in effective marginal tax rate differential reduces the investment rate by about 0.17 percentage point; sensitivity roughly doubled after 2017. - A 1 percentage point increase in a country’s corporate income tax rate relative to others is associated with a cumulative decline in FDI inflows of about 0.5 percent of GDP over three years. - Model simulations (spatial GE model): - A unilateral 3 percentage point CIT cut by a major advanced economy reduces its corporate tax revenues by just over 9 percent (applied to a base of about 1½ percent of GDP, implying a fiscal cost roughly 0.1–0.2 percent of GDP). - Net output effects in the simulation: −0.2 percent for the major advanced economy; about −0.1 percent for other advanced economies; negligible for emerging market economies. - When other economies reciprocate with tax cuts (tax competition), global real interest rates rise and the output gains to the initiating economy are reduced; profits booked in low-tax jurisdictions decline substantially. - Patent and intangible income evidence: - Patent transfers are 8.5 percent more likely to move to lower-tax jurisdictions; rises to 14.8 percent for intrafirm transfers. - After 2013, the bilateral patent transfer–tax differential relationship is no longer statistically significant, coinciding with international reforms. - Policy considerations: - Strengthen anti-avoidance measures and design incentives that are cost-based and linked to substance. - Recognize trade-offs between rate cuts and preservation of public investment and revenue; debt-financed rate cuts can raise global interest rates and crowd out investment abroad. - Platform for Collaboration on Tax principles and recent international rule changes (including global minimum tax and substance-based provisions) reshape tax competition toward incentives linked to real activity. --- ### Directors’ assessment and policy guidance (Executive Board, September 28, 2026) - Executive Directors broadly agreed with staff’s assessment that the global economy remains resilient but that resilience is uneven and margins of adjustment are uncertain. - Fiscal policy guidance: - Renewed focus on rebuilding fiscal space; tailor responses to country circumstances; support for vulnerable populations should be temporary, targeted, and budgeted with offsets specified upfront. - Strengthen delivery mechanisms and social protection; credible medium-term consolidation should rely on durable revenue measures and spending efficiency. - Monetary policy guidance: - Preserve price and financial stability; differentiate policy responses for energy importers, energy exporters, and economies integrated into the technology value chain. - Emphasize central bank independence and clear communication. - Financial stability and structural priorities: - Place debt on a sustainable path; strengthen bond market infrastructure and liquidity backstops; monitor leverage in AI-related exposures and nonbank financial institutions. - Advance structural reforms to enhance business dynamism and energy security; invest in human capital and infrastructure to broaden gains from AI. - International cooperation: - Common international economic rules and predictable trade policy frameworks are essential to reduce uncertainty and limit fragmentation; multilateral financing and burden sharing remain important. *World Economic Outlook: Resilience Under Strain, Urgent Choices (October 2026), International Monetary Fund.* ### Preface ### Preface ### Overview of recent global shocks and resilience - The global economy has been subjected to an exceptional sequence of events in less than seven years, including the pandemic and ensuing disruptions to global supply chains; the wars in Ukraine and the Middle East, with consequent sharp increases in the prices of energy and other commodities; and significant changes in trade barriers and trading relations. - Despite these shocks, labor markets have remained unexpectedly strong; financial systems have broadly withstood the shocks and the sharpest monetary tightening in half a century; and inflation has receded from its peaks in many economies, although it remains persistent in some cases. - The latest global growth forecast "remains broadly unchanged from April," despite a more persistent energy market disruption than anticipated. ### Key assumptions used for the WEO projections - Real effective exchange rates are assumed to have remained constant at their average levels during July 31, 2026–August 28, 2026, except for currencies participating in the European Exchange Rate Mechanism II, which are assumed to have remained constant in nominal terms relative to the euro. - It is assumed that established policies of national authorities will be maintained (with specific assumptions about fiscal and monetary policies for selected economies referenced in Box A1 in the Online Statistical Appendix). - Commodity and interest rate assumptions: - Average price of oil: $95.74 a barrel in 2026 and $87.39 a barrel in 2027. - Three-month government bond yields: - United States: 3.8 percent in 2026 and 4.3 percent in 2027. - Euro area: 2.3 percent in 2026 and 3.0 percent in 2027. - Japan: 1.0 percent in 2026 and 1.4 percent in 2027. - 10-year government bond yields: - United States: 4.5 percent in 2026 and 4.6 percent in 2027. - Euro area: 3.1 percent in 2026 and 3.5 percent in 2027. - Japan: 2.6 percent in 2026 and 3.0 percent in 2027. - The estimates and projections are based on statistical information available through September 30, 2026. ### Assumptions and conventions (technical) - "..." indicates that data are not available or not applicable. - "–" between years or months (for example, 2025–26 or January–June) indicates the years or months covered, including the beginning and ending years or months. - "/" between years or months (for example, 2025/26) 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 in the case of a few countries that use fiscal years. - For some countries, the figures for 2025 and earlier are based on estimates rather than actual outturns. - Composite data are provided for various groups of countries; unless noted otherwise, country group composites represent calculations based on 90 percent or more of the weighted group data. - Map boundaries, colors, denominations, and any other information shown on maps do not imply any IMF judgment on legal status or endorsement of boundaries. - The terms "country" and "economy" may cover territorial entities that are not states but for which statistical data are maintained separately. ### What is new in this publication - Nauru is now referred to as Naoero. - Composites for Net Debtor Economies, Net Debtor Economies with Arrears and/or Rescheduling, and Heavily Indebted Poor Countries (HIPCs) are no longer published in the Online Statistical Appendix Tables. ### Data, corrections, and dissemination - WEO historical data and projections are compiled by IMF staff and are based on information gathered by IMF country desk officers through missions and ongoing analysis. - Historical data are updated continually; structural breaks are often adjusted using splicing and other techniques; IMF staff estimates serve as proxies when complete information is unavailable. - The WEO database is published twice a year in April and October and is available on the IMF Data Portal at https://data.imf.org/en/datasets/IMF.RES:WEO. Data are available from 1980 to the present, with projections for most series for the following five years. - Corrections and revisions are incorporated into digital editions available from the IMF website and the IMF eLibrary; substantive changes are listed on the copyright page of the web PDF and on the corrections page of the IMF eLibrary. - Multiple digital editions (ePub, enhanced PDF, and HTML) are available on the IMF eLibrary. ### Production, review, and acknowledgments - The analysis and projections are integral elements of IMF surveillance and are the product of a comprehensive interdepartmental review drawing primarily on IMF staff consultations with member countries across area departments and technical departments. - The analysis in this report was coordinated in the Research Department under the general direction of Silvana Tenreyro, Economic Counsellor and Director of Research. The project was directed by Petya Koeva Brooks, Deputy Director, Research Department, and Deniz Igan, Assistant Director, Research Department. - Primary contributors include: Aqib Aslam, Hippolyte Balima, Paula Beltran Saavedra, Marijn Arend Bolhuis, Braulio Britos, Francisco Cabezon, Shan Chen, Daisuke Fujii, Patricia Gomez-Gonzalez, Bertrand Gruss, Regis Kouassi, Toh Kuan, Colombe Ladreit, Jianhong Liu, Chiara Maggi, Neil Meads, Jorge Miranda Pinto, Jean-Marc Natal, Carolina Osorio Buitron, Galip Kemal Ozhan, Andrea Paloschi, Manasa Patnam, Evgenia Weaver, and Sihwan Yang. - Other contributors include Maryam Abdou, Gavin Asdorian, Jared Bebee, Francis Cuadros Bloch, Benjamin Carton, Wenbo Chen, Alessia De Stefani, Angela Espiritu, Patrick-Nelson Essaine, Pedro de Barros Gagliardi, Sarah Garcia, Maria Gelrud, Cory Hillier, Da Hoang, Kez Hou, Kareem Ismail, Chris Jackson, Maximiliano Jerez Osses, Pedro Juarros, Camara Kidd, Gene Kindberg-Hanlon, Krzysztof Krogulski, Jungjin Lee, Weili Lin, Barry Liu, Jiayu Luo, Davide Malacrino, Moheb Malak, Andrea Manera, Joseph Moussa, Dirk Muir, Anh Dinh Minh Nguyen, Emory Oakes, Jordi Paniagua, Clarita Phillips, Rafael Portillo, Sidra Rehman, Pedro Rodriguez, Isabela Rozario, Ana Maria Santacreu, Giovanni Sciacovelli, Robert Sierhej, Ilgim Simnick, Joseph Steinberg, Chris Stumphius, Monika Sztajerowska, Nicholas Tong, Can Ugur, Riya Varghese, Sebastian Wende, Yarou Xu, Mel Zhang, Peter Zhang, Rachel Zhang, and Dian Zhi. - Editorial and production support was led by Gemma Rose Diaz from the Communications Department, with production and editorial support from Michael Harrup, Lucy Scott Morales, James Unwin, Absolute Service, Inc., Bonner Publishing Services, and MPS Limited. - The analysis benefited from comments and suggestions by IMF staff in other departments and by Executive Directors following their discussion of the report on September 28, 2026; 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. ### Inquiries and access - Inquiries about the contents should be submitted by mail or email to: - World Economic Studies Division, Research Department, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA. - Email: DataHelp@IMF.org - Print copies can be ordered from the IMF eLibrary at eLibrary.IMF.org/WEO. - A free PDF of the report and data sets for the charts is available at www.IMF.org/publications/weo. *World Economic Outlook, October 2026 (International Monetary Fund).* ### 3.1 percent in 2026 and 3.4 percent in 2027. Global ### GLOBAL PROSPECTS AND POLICIES ### Forecasts and inflation - Global growth is projected at 3.1 percent in 2026 and 3.4 percent in 2027. - Global headline inflation is projected to rise to 4.7 percent in 2026 and to fall back to 4.1 percent in 2027. - The October 2026 projections imply a cumulative upward revision of 0.7 percentage point, with the temporary increase driven mainly by energy and food prices. - World trade volume growth is projected to slow in 2026 and stabilize in 2027. ### What has sustained resilience - Two main sets of factors have helped the global economy withstand the latest shock: - Rerouting of energy supplies; increased energy production in other countries; inventory drawdowns; substitution to other sources of energy, including renewables; and higher energy efficiency. - The investment boom triggered by artificial intelligence (AI), with investment rising in anticipation of higher expected returns and real incomes (reflected in stock valuations). ### Limits to resilience and exposure - Inventories in energy markets are dwindling and additional geopolitical shocks could still transmit rapidly through prices and supply disruptions. - Other commodity markets face risks that particularly affect low-income countries and households, including: - Higher food prices from transport disruptions. - Higher fertilizer costs. - Export restrictions. - Extreme weather events. - Technology-related investment is concentrating risks: gains are clustered in a small number of firms, sectors, and economies, making global expansion heavily reliant on a narrow set of technological and financial conditions. - Resilience has been uneven, varying with economies’ exposure to the war and the AI boom and causing divergent outcomes. ### Policy constraints and vulnerabilities - Borrowing costs have risen sharply in major advanced economies, owing to both supply- and demand-driven price pressures, along with fiscal and credit risks. - Public debt is high in many economies; fiscal buffers that could otherwise have helped meet rising spending pressures have instead been used to absorb repeated shocks. - The interaction of higher financing costs with elevated debt levels exposes a key margin of vulnerability. - Fiscal policy must be restrained to help contain demand pressures at a time of heightened inflationary risks. - Primary deficits have remained elevated and are significantly larger than before the pandemic in many countries. - The increase in borrowing costs and its implications for fiscal sustainability make the need for fiscal adjustment urgent. ### Recommended policy responses - Fiscal policy: - Implement credible fiscal adjustment plans that combine enhancements on the revenue side with spending rationalization, supported by institutional improvements. - Any support to ease the impact of higher energy and food prices should be temporary, targeted, and nondistortionary, and should not jeopardize fiscal sustainability goals. - Public debt levels need to be put back on a durably sustainable path. - Monetary policy: - Monetary policy should remain firmly focused on price stability, in line with central banks’ mandates. - The policy stance should be sufficiently restrictive to return inflation to target in a timely fashion, preventing second-round effects. - Where commodity price increases and technology-related investment add to persistent inflationary pressures, monetary policy will need to tighten further. - The appropriate stance will differ across countries; starting levels of inflation, labor market tightness, and technology and commodity exposures remain key policy guideposts. - Central bank independence is instrumental in achieving price stability. - Supply-side resilience strategy (three pillars): - Technological diversification: greater investment in critical technologies and inputs for which substitutes are limited, including expanded energy sources and renewables. - Trade diversification: more diversified trade relationships to reduce exposure to individual input suppliers and buyers. - Stronger supply buffers in critical sectors, such as energy, water, food, and other essential inputs, involving both public and private sectors and structural reforms to boost entrepreneurship and business dynamism. - International cooperation: - Transparent and predictable trade rules. - Cooperation on energy security and critical supply chains. - Prudently harness and broaden the gains from AI while managing associated risks. ### Scenario and risks - Chapter 1 considers a risk scenario in which there is a loss of fiscal and monetary credibility in major economies, in addition to commodity price increases; in that scenario, global growth in 2027 would be materially lower than in the baseline projections, with inflation significantly higher and tangible spillovers for emerging market and developing economies. - Risks are skewed to the downside: - A prolonged stalemate or further escalation in the Middle East could keep energy and food prices elevated and volatile, revive inflationary pressures, worsen fiscal and external balances, and weigh on growth. - Further disruptions to energy infrastructure, cyberattacks, or extreme weather events could amplify these effects. - A reassessment of AI-related profitability and productivity prospects could sharply reduce investment, trigger equity market corrections, and tighten financial conditions, with spillovers to economies integrated into technology supply chains and with stakes in technology stocks. - Upside risks include more persistent AI-related investment, faster-than-assumed productivity gains, new trade arrangements improving predictability and resilience, and higher fossil fuel prices accelerating investment in energy security. ### Recent developments (first half of 2026) - Activity in the first half of 2026 held up better than expected despite the dragging war in the Middle East and continuing strains from trade tensions. - United States real GDP growth slowed to 2.2 percent at an annual rate in the second quarter of 2026, after reaching 2.5 percent in the first quarter of 2026. - Euro area activity expanded by 2.6 percent in the second quarter of 2026 after a flat GDP in the first quarter of 2026. - China’s second-quarter performance was 4.3 percent year over year. - Global headline inflation rose in August 2026 as energy prices bounced back following the short-lived ceasefire in the Middle East; core inflation remained moderate, with US core inflation increasing mainly driven by a rebound in travel services prices. - Global financial conditions remain accommodative from a historical point of view, reflecting strong equity valuations offsetting tightening elsewhere; advanced economy benchmark rates have climbed to multidecade highs, pushing up borrowing costs for emerging markets. *World Economic Outlook: Resilience Under Strain, Urgent Choices (October 2026), International Monetary Fund.* ### 2.5 to 5.0 ### Global prospects and policies — Resilience under strain, urgent choices ### The sources of resilience - WEO forecasts have underestimated global growth since 2023 three years in a row, with errors described as small relative to recent shocks. - Recent resilience reflects a combination of circumstantial and institutional factors: - Household and corporate cash cushions created by the pandemic fiscal response (see April 2024 WEO). - Long period of low interest rates before the pandemic that enabled shifts toward longer-maturity, fixed-rate private debt (see April 2024 WEO). - Credibility of central banks keeping inflation expectations anchored and improvements in monetary, fiscal, and financial policy frameworks (see October 2025 WEO). - In 2025: scaling back of originally announced tariff rates, private-sector adaptability to higher trade barriers, accommodative financial conditions, fiscal stimulus, and a marked pickup in AI-related technology investment (see April 2026 WEO Box 1.1). ### Supply flexibility and reduced dependence on oil - The Strait of Hormuz previously transited about 20 million barrels of oil a day, or roughly a quarter of the world’s maritime oil trade, before the war. - Supply responses to the closure and related disruptions included: - Persian Gulf producers redirecting supply to other ports. - Production outside the Gulf rising by 2 million barrels a day. - Release of global inventories supplying a further 4 million barrels. - Market balancing at higher prices implied demand compression of about 5 million barrels a day during Q2 2026. - China reduced crude oil imports by 23 percent between March and June 2026 relative to the same period a year earlier. - Longer-term trends and measures: - Energy usage per dollar of global GDP has fallen by 32 percent over the past two decades. - Since 2010, renewables accounted for 60 percent of the total increase in electricity production. - Model-based estimates of an oil supply shock in 2026: - A closure of the Strait of Hormuz without supply flexibility would have increased oil prices to an average of about $110 a barrel for the year, reducing global growth in 2026 by 0.9 percentage point. - The observed flexible supply response is estimated to have lowered the implied increase in oil prices to an average of $85 a barrel for the year, reducing the hit to global growth by 0.5 percentage point to 0.4 percentage point. - The 20 percent reduction in the oil intensity of world GDP since the mid-2010s is estimated to have reduced the impact on global growth in 2026 by an additional 0.1 percentage point, bringing the net toll to 0.3 percentage point. ### An agile private sector - Firms adapt to geopolitical risks and policy shifts by: - Engaging with policymakers and regulators. - Diversifying supply chains, regionalizing production, restructuring ownership, searching for alternative markets, and investing in operational flexibility. - Observed corporate adjustments: - Firms have redirected trade toward alternative destinations, cushioning aggregate trade impacts from bilateral tariff shocks. - US farmers shifted from high-cost nitrogen-intensive grains like corn to soybeans and reduced acreage or fertilizer application in response to rising fertilizer prices; farmers in poorer countries have limited room to maneuver. ### AI momentum: boom, concentration, and magnitude - Short-term offset to geopolitical headwinds comes from increased exports, investment, and capital deepening related to AI; longer-term productivity effects remain uncertain. - AI hardware and data-center concentration: - Taiwan Province of China and Korea source 62 percent of the net trade in computing hardware related to AI. - China and the United States are responsible for more than 75 percent of the net imports of AI-related computing hardware in 2025 and 57 percent of newly built data centers since 2024. - Trade and value effects: - Net trade in AI hardware has increased exponentially as a share of world GDP, driven by price effects rather than volumes. - A 40 percent increase in computer, electronics, and optical products exports from Korea and Taiwan Province of China is used to estimate value-added spillovers across regions (TiVA-based simulations). - Micro- and macro-evidence on productivity and labor: - Reported task-level gains from generative AI include customer support productivity increases of 14–15 percent (with gains of 30–35 percent for less experienced workers) and software development output increases of 26 percent. - Some micro-level studies find negative effects, for example experienced open-source developers becoming 19 percent slower when using AI. - Macro-level evidence shows widespread adoption but limited effects so far on wages, hours worked, employment, or measured productivity; recent US data revisions may signal an emerging AI-driven boost in macro statistics. ### An enabling push from financial conditions - Financial markets have largely remained calm despite successive large negative shocks; possible explanations include AI-related exuberance, limited market pricing of geopolitical tail risks, or beliefs in policy support cushioning adverse outcomes. - Accommodative financial conditions have supported activity in jurisdictions benefiting from the technology cycle through investment, trade, wealth effects, and capital flows. - Strong corporate earnings and relative emerging-market resilience have contributed to these conditions. ### The limits of resilience and fiscal constraints - The AI investment boom is a large, front-loaded demand shock exposing capacity constraints across multiple sectors simultaneously (semiconductors, data centers, cloud infrastructure, electricity, grid connections, cooling systems, specialized real estate). - Inflationary and financial-stability considerations: - AI-related spending raises demand before broad productivity gains materialize, contributing to inflationary pressures and financial fragility. - So far, spillovers to core inflation in major economies appear limited, but economies near capacity risk broader price increases through stronger pass-through from headline to core inflation. - Technology-stock strength has supported aggregate demand through wealth effects but has led to more stretched equity valuations and greater market concentration among AI-related firms. - Energy market risks: - Escalations in the Red Sea and the Black Sea threaten rerouting margins and non-Gulf production buffers. - Depletion of global inventories is pushing inventories closer to stress levels that could lead to nonlinear price adjustments. - Energy market disruptions could endanger the AI-led impetus given AI infrastructure’s heavy energy needs. - Trade and production efficiency: - Short-term reorientation of trade flows has mitigated damage from higher trade barriers, but duplication and higher operating costs may reduce long-term production efficiency. - Fiscal space and public debt: - Historical experience shows global public debt tends to rise after major shocks. - Primary deficits during 2020–25 in the largest advanced and emerging market economies remained, on average, substantially larger than before the pandemic. - In most of these economies, with India an exception, stabilizing debt-to-GDP ratios at 2025 levels would require greater fiscal consolidation than currently envisaged under existing policies. - Governments face more challenging refinancing conditions with real long-term interest rates rising. *Source: Chapter 1, World Economic Outlook: Resilience Under Strain, Urgent Choices; International Monetary Fund, October 2026.* ### 1. United States ### 1. United States ### Growth outlook and drivers - Growth is projected at 2.3 percent in 2026 and 2.3 percent in 2027. - The 2026 projection is unchanged from April; the 2027 projection was revised up by 0.2 percentage point. - Activity is supported by: - "robust private consumption" - "fiscal policy" - "accommodative financial conditions" - "continued technology-related business investment (net of its large import content) and productivity strength" - The United States is characterized as a "net energy exporter" and is described as having "only limited direct impact from the war." ### Quarterly projection (Q4 over Q4) and related figures - Q4/Q4 projections for the United States: 2.0 (2025), 2.5 (2026), 2.1 (2027). ### Inflation assumptions - The assumed inflation rate for the United States is 3.6 percent for 2026 and 2.8 percent for 2027. ### Policy and exposure notes relevant to the United States - Monetary policy is expected to be "less supportive than assumed in April," with policy rates in the United States projected to increase in ex ante real terms (general global assumption). - Trade policy assumption: "Both the effective US tariff rate underlying the forecast and the tariff rate imposed by the rest of the world on US imports are slightly higher than those in the April 2026 WEO," reflecting tariff changes under the US Trade Act of 1974 and additional tariffs between the United States and some trading partners. *Source: IMF staff estimates.* ### CHAPTER 1 gLOBaL PROsPECTs aND POLICIEs ### CHAPTER 1 gLOBaL PROsPECTs aND POLICIEs ### Regional Outlook: Middle East, Sub‑Saharan Africa, Latin America, and Emerging Europe - Middle East and Central Asia - Growth is projected to drop to –0.3 percent in 2026 before rebounding to 6.3 percent in 2027. - Relative to the April projection, this is a downward revision of 2.2 percentage points for 2026 and an upward revision of 1.7 percentage points for 2027. - Bahrain, Iraq, Kuwait, and Qatar are projected to experience double-digit contractions in 2026 followed by double-digit expansions in 2027. - Saudi Arabia: projected contraction of 3.3 percent in 2026 and growth of 7.9 percent in 2027. - Growth in Iran in 2026 is revised downward amid resumed military exchanges, the reimposition of the naval blockade, and enhanced sanctions. - Sub‑Saharan Africa - Growth is expected to remain stable at 4.5 percent in 2026, with substantial divergence across countries. - Growth in the rest of the region is expected to slow from 5.6 percent in 2025 to 5.5 percent in 2026 and 5.3 percent in 2027. - Nigeria is supported by improved macroeconomic stability and favorable terms-of-trade effects, though higher prices for essentials are expected to further aggravate poverty and food insecurity. - South Africa’s growth outlook is expected to remain stable in the near term and improve gradually over the medium term. - Latin America and the Caribbean - Growth is projected to edge down to 2.3 percent in 2026 and to pick up to 2.5 percent in 2027. - Brazil: growth expected to slow from 2.2 percent in 2026 to 1.9 percent in 2027. - Mexico: growth projected to accelerate from 1.5 percent in 2026 to 1.8 percent in 2027. - Emerging and developing Europe - Growth is expected to slow from 2.0 percent in 2025 to 1.7 percent in 2026 and recover to 2.1 percent in 2027. - Outlook shaped by higher energy costs, continuing security-related uncertainty, tighter financing conditions, and reorientation of trade and investment patterns. ### Inflation Forecast - Headline inflation is projected to rise from 4.1 percent in 2025 to 4.7 percent in 2026 before easing to 4.1 percent in 2027. - The forecast is unchanged for 2026 from the July WEO Update, but revised upward by 0.2 percentage point for 2027. - The revision compared with the April 2026 WEO is a cumulative 0.7 percentage point. - Core inflation is expected to return to 2 percent only gradually in several major economies: - By the end of 2027 in Japan and the United Kingdom. - By mid-2028 in the euro area and the United States. - Inflation in China is expected to rise from low levels. ### World Trade Outlook and Global Imbalances - World trade volume growth is projected to slow from 5.0 percent in 2025 to 4.6 percent in 2026 and stabilize at 4.7 percent in 2027. - Global current account balances increased further in 2025 to about 3.8 percent of world GDP. - China’s surplus increased to about 0.6 percent of world GDP (3.7 percent of China’s GDP). - The United States had a current account deficit of about 1.0 percent of world GDP. - Early 2026 trade data indicate global imbalances are expected to increase slightly in 2026 and are projected to remain elevated in 2027. - Factors shaping imbalances: - Persistent domestic saving-investment distortions in major economies. - Expansionary fiscal policy in some surplus economies expected to contribute to a projected cyclical decline in surpluses. - Surge in technology-driven business investment expected to keep attracting capital to the United States and sustain large trade surpluses in several Asian economies. - Together, the United States and China account for about 40 percent of global current account balances. ### Medium-Term Outlook and Structural Considerations - Global output is projected to expand at an average annual pace of 3.2 percent in 2028–31. - This compares with the prepandemic (2000–19) historical average of 3.7 percent. - Relative to January 2026, the medium-term outlook has become increasingly uneven, with downgrades concentrated among economies directly affected by the conflict in the Middle East and energy-importing emerging market and developing economies elsewhere, excluding India. - India shows upward revisions driven by sustained momentum and evidence of stronger growth potential. - Readiness to adopt AI and to reliably meet energy needs will be crucial for countries’ medium-term potential. - The world’s poorest countries, given gaps in AI preparedness and energy mix, are likely to see productivity and growth momentum decelerate and per capita income gaps widen. ### Risks: Downside and Upside Scenarios - Downside risks (tilted to the downside as in April): - Persistent conflicts, cyber threats, and extreme weather events could raise commodity price volatility, exacerbate inflation, and raise term premiums. - Natural gas inventories remain below seasonal norms in parts of Europe, leaving gas markets vulnerable ahead of the winter heating season. - Ongoing conflicts could increase the risk of cyberattacks on critical infrastructure and financial services, including threats facilitated by AI models. - Extreme weather events and the ongoing El Niño episode could put upward pressure on food and commodity prices and weigh on activity, especially in economies where food is a large share of consumption. - Energy-importing emerging market and developing economies with limited fiscal space and external buffers would be particularly challenged by persistently higher commodity prices, higher inflation, tighter monetary policy, wider current account deficits, and increased external financing needs. - Financial market stress and fiscal vulnerabilities: a broad repricing of financial assets could lead to flight to safety, wider sovereign spreads, exchange rate pressures, and tighter domestic financial conditions, interacting with elevated public debt and refinancing needs. - Bank holdings of government securities have increased since the early 2000s by about 25 percent in emerging market economies and 45 percent in low-income countries; greater holdings are correlated with lower lending to the private sector, particularly in high-debt emerging market economies and low-income countries. - Renewed trade tensions and protectionist measures could dampen global growth and amplify supply bottlenecks and inflationary pressures. - Upside risks: - Continued momentum in the technology cycle and faster productivity gains from AI: - A greater-than-expected AI build-out could increase world GDP by 0.6 percent by 2029 (scenario A in Box 1.2). - Faster diffusion of AI could increase global growth by as much as 0.3 percentage point in the near term and by 0.1–0.8 percentage point over the medium term (October 2025 WEO Box 1.3 estimates). - Gains would be largest in economies able to facilitate AI adoption through complementary investments in energy infrastructure, digital connectivity, workforce skills, and supply of critical intermediate inputs. - Reconfiguration of the international trading system: progress in trade arrangements could reduce trade costs, improve policy predictability, and support global activity. *Source: International Monetary Fund, World Economic Outlook: REsILIENCE UNDER sTRaIN, URgENT ChOICEs, October 2026.* ### 1. Banks’ Average Holdings of Government Securities ### 1. Banks’ Average Holdings of Government Securities ### Key quantitative indicators (figures) - Banks’ average holdings of government securities (Percent of total assets): 5, 25, 10, 15, 20 - Correlations between banks’ bond holdings and lending to private sector (Percentage points): −0.6, 0.2, −0.4, −0.2, 0 ### Regression and data note - Sources: Fitch Connect; and IMF staff calculations. - In panel 2, coefficients are from bank-level regressions of the bond-holdings-to-assets ratio on the loans-to-assets ratio. - Regressions control for a set of bank- and country-level variables, as well as country, year, and bank fixed effects. - High- and low-debt countries are defined based on whether government debt to GDP is above or below the 75th percentile of the sample distribution within each country group. - Bars denote point estimates; whiskers denote 90 percent confidence intervals. - EMMIEs = emerging market and middle-income economies; LIDCs = low-income developing countries. ### Subgroup labels (as shown) - EMMIEsLIDCs - EMMIEsLIDCs - Low debtHigh debtLow debtHigh debt ### Interpretation constraints - The figure reports correlations (regression coefficients) rather than causal estimates; regression controls and fixed effects are as specified above. ### Source attribution for figures - Sources: Fitch Connect; and IMF staff calculations. ### Fiscal policy (prescriptions and findings) - A renewed focus on rebuilding fiscal space is urgent, given elevated debt, higher borrowing costs, multiplying demands on public budgets, and heightened uncertainty. - Any new spending increases or tax cuts should be well funded to secure the necessary fiscal adjustment paths. - Credible medium-term consolidation should rest on well-specified plans, including: - durable revenue measures, - stronger tax administration, - broader tax bases, - better compliance, and - greater spending efficiency, - accompanied by meaningful up-front down payments and supported by institutional improvements. - Adjustment should be designed to protect growth- and equity-enhancing spending, such as investment in infrastructure and skills and well-targeted social protection. - In high-debt economies, the required adjustment may be larger than what has generally proved feasible in the past and may need to be complemented by deeper spending rationalization, including a rethinking of the scope of government activity and growth-enhancing structural reforms. - For countries with above-target inflation or elevated underlying inflationary pressures, fiscal consolidation can moderate demand and complement monetary policy efforts to maintain price stability. - Prudent debt management and financial regulation would help reduce intertemporal borrowing costs, contain refinancing vulnerabilities, and limit currency mismatches. - Economies benefiting from commodity windfalls or the technology upturn should resist procyclical spending pressures. - Windfall revenues should be saved, used to rebuild buffers, or redeployed toward high-return investment unless temporary support to non-oil activity or resilience-enhancing infrastructure is justified; medium-term consolidation should reinforce intergenerational equity. - Fiscal support measures should be used sparingly, designed not to complicate monetary policy, and unwound rapidly as the shock dissipates. - Broad-based fuel subsidies, generalized tax cuts, and price controls should be avoided. - If support is necessary to prevent severe hardship or social instability, it should be temporary, tightly targeted to vulnerable households, and delivered preferably through cash transfers or existing social protection systems. - Eligibility criteria, sunset clauses, and budgetary offsets should be specified up front, especially where fiscal space is constrained. - Assistance to firms should be limited to viable firms facing temporary liquidity pressures from higher energy costs or supply disruptions; support should be transparent, subject to ex post evaluation, and consistent with medium-term fiscal objectives. - Countries should invest in national registries, digital payment systems, interoperable administrative data, and delivery mechanisms that can be scaled rapidly when shocks hit. - Committing in advance to principles for emergency support—temporary duration, narrow targeting, preservation of price signals, transparent eligibility, and identified financing—can help governments withstand calls for broad-based measures. - In low-income countries and fragile states, international assistance may be needed to support well-targeted transfers and protect critical health, education, and nutrition spending, but external financing should complement rather than replace domestic efforts to improve expenditure prioritization and revenue mobilization (IMF 2026a). ### Monetary and financial policies (prescriptions and findings) - Monetary policy should remain firmly focused on central banks’ mandates, including to preserve, or where necessary restore, price stability. - The energy disruption has put upward pressure on inflation globally, while AI-related activity is putting pressure on prices in the subset of economies that are part of the technology value chain. - For energy importers, higher fuel prices present a stagflationary challenge by raising headline inflation and depressing output; monetary policy can look through direct effects only if the shock is temporary and second-round effects remain contained. - Where inflation is already above target and broader price pressures are expected to remain elevated, a bias toward tightening is justified. - For energy exporters not directly affected by the closure of the Strait of Hormuz, the terms-of-trade shock can push income and aggregate demand upward, which can make tightening appropriate. - In economies integrated into the technology value chain, the case for tightening gets stronger, independent of energy importer-versus-exporter status. - Central banks should avoid reacting too strongly to high-frequency movements in headline inflation, particularly when driven by volatile energy prices, but should respond if higher inflation feeds into expectations or wage setting. - Where confidence in the monetary policy framework may have weakened, central banks should be quicker to respond to signs of feedback from inflation to expectations or stronger pass-through. - Should adverse demand effects or materialization of financial risks dominate, scope for monetary policy to pivot toward easing could emerge; any easing should be gradual and data dependent and remain consistent with returning inflation to target. - Communication is a policy instrument: central banks should explain how incoming data alter the balance of risks and how they distinguish between first-round relative price effects and broader inflationary pressures. - Ensuring legal and operational independence of central banks and shielding monetary policy from political interference and fiscal dominance are essential. - Exchange rate flexibility should generally remain the first line of defense for countries with credible inflation targets or other domestic nominal anchors. - Temporary foreign exchange intervention, macroprudential measures, or capital flow management measures may complement the policy mix when depreciation becomes self-reinforcing, market liquidity evaporates, or currency movements threaten price stability. - Such measures should not substitute for warranted macroeconomic adjustment, should be transparent and temporary, and should be deployed with due regard to reserve adequacy, institutional capacity, and multilateral spillovers. - Supervisors should intensify monitoring of sovereign-bank links, foreign currency exposures, nonbank financial institutions, and liquidity mismatches. - Stress tests should include scenarios combining commodity price spikes, currency depreciation, higher term premiums, tighter funding conditions, and a sharp correction in asset prices. - Capital, liquidity, and reserve buffers should remain adequate in normal times and be released in a timely and well-communicated manner if financial conditions deteriorate and macrofinancial feedback loops emerge. - The concentration of market capitalization and investor expectations around AI-related firms calls for close scrutiny of leverage, crowded positions, collateral valuations, and cross-border exposures. ### Structural and international policies (prescriptions and findings) - Structural reforms should enhance business dynamism: lowering barriers to entry and exit, improving competition, reducing regulatory uncertainty and complexity, strengthening insolvency frameworks, and facilitating labor mobility across firms and sectors. - Energy security priorities include faster deployment of renewable energy, improved grids, greater energy efficiency, and better storage and interconnection infrastructure. - Gains from AI and digitalization will be larger if supported by investment in human capital and infrastructure, and robust governance for data protection, cybersecurity, competition, and responsible use. - Correcting domestic imbalances would improve global adjustment: further rebalancing in China toward domestic consumption; credible fiscal consolidation in the United States; and deeper single-market integration, reforms, and investment in the European Union. - Common international economic rules are essential for reducing uncertainty and limiting fragmentation; trade policy frameworks should be clear, transparent, predictable, and mutually beneficial. - Trade measures addressing cross-border spillovers should be carefully targeted. - Trade negotiations at bilateral, regional, and plurilateral levels should aim to reduce frictions and minimize distortive provisions to ensure durability. - Export bans and other beggar-thy-neighbor measures should be avoided; such measures can worsen shortages for trading partners, increase global price volatility, and distort domestic allocation by artificially depressing prices at home. - Cooperation to keep energy, food, fertilizer, and critical transport routes open would reduce the risk that national stockpiling and trade restrictions amplify the shock. - Conflict-driven displacement can transmit shocks beyond the conflict zone and place short-term fiscal and administrative pressures on host countries; well-managed inflows can increase labor supply, aggregate demand, and output over time if supported by policy frameworks that facilitate labor market access, financial inclusion, and investment in schooling and public services. - International burden sharing is essential because costs are often concentrated in host countries. - Multilateral financing, including emergency liquidity through IMF facilities, can provide an important backstop to countries facing liquidity strains, helping preserve essential imports and avoid abrupt compression of demand, but liquidity support is not a substitute for timely and orderly debt resolution. - Countries facing debt distress need timely and orderly restructuring, supported by continued progress under the Group of Twenty Common Framework and the Global Sovereign Debt Roundtable; more predictable creditor coordination, faster information sharing, and clearer comparability of treatment would reduce uncertainty and limit economic and social costs of delayed resolution. *Source: International Monetary Fund, World Economic Outlook: Resilience under Strain, Urgent Choices, October 2026.* ### CHAPTER 1 gLOBaL PROsPECTs aND POLICIEs ### CHAPTER 1 gLOBaL PROsPECTs aND POLICIEs ### Box 1.1 — Where Did Displaced Trade Go? Evidence on Trade Reconfiguration and Export Resilience - Authors: Hippolyte Balima and Monika Sztajerowska. - Context: Tariffs introduced by the US administration in April 2025 and subsequent Chinese retaliatory measures reshaped bilateral China–US trade. Findings on bilateral trade flows and reconfiguration - Chinese exports to the United States fell 22 percent between February 2025 and January 2026. - US exports to China fell 25 percent between February 2025 and January 2026. - These declines subtracted 3.3 and 1.7 percentage points from China’s and the United States’ total export growth, respectively. - By January 2026: - Chinese exports to third markets stood at 4.7 percentage points above trend. - US exports to third markets stood at 2.6 percentage points above trend. - These third-market gains helped keep total exports for both economies within about 1 percentage point of their pretariff trends. - By May 2026, third-market gains had widened while bilateral China–US trade recovered part of its earlier decline. Estimates of trade reconfiguration (shares of trade at risk) - For Chinese products that lost US market access in 2025: - Exports to third markets increased within a year to 52 percent of the trade at risk (China’s preshock exports of the same products to the United States). - Relative to year-earlier levels, reconfiguration attributable to the tariff shock amounts to 39 percent of trade at risk. - For US products that lost Chinese market access: - US exports of these products to third markets increased within a year by 17 percent of the corresponding trade at risk. - About 7 percent is attributable to the shock after accounting for preexisting trends. - The asymmetry reflects a larger preescalation exposure of Chinese exports to the US market (15 percent of China’s exports were to the United States versus 7 percent of US exports to China). Regional and sectoral absorbers of redirected trade - Destination regions absorbing about half of reallocated trade: - Emerging and advanced Asia together absorbed about half of the reallocated trade. - The European Union absorbed close to one-fifth. - Progressively smaller shares were absorbed by the Middle East and Central Asia, Africa, and the Western Hemisphere. - Relative to destinations’ own imports of the affected products, the redirected trade remained modest, with largest shares in: - Africa, - Association of Southeast Asian Nations (ASEAN) member countries, - Middle East and Central Asia. - By product group: - Electrical machinery accounted for the bulk of the increase to Asia. - Vehicles accounted for the bulk of the increase to the Middle East and Central Asia. - Special provisions accounted for much of the increase to Europe. Interpretation and caveats (as presented) - Trade reconfiguration helped offset bilateral losses and cushioned aggregate trade impact in the short term. - Mechanisms may include supply-chain reconfiguration and rerouting; disentangling their relative importance remains for future work. - Persistent trade frictions may entail efficiency costs that could accumulate over time. *Attributed to the World Economic Outlook box authors and IMF staff calculations.* ### Box 1.2 — Risk Assessment Surrounding the Baseline Projection Confidence bands around the WEO baseline (G20 model) - Method: The G20 model samples shocks recovered from historical data; oil price episodes of the 1970s are sampled more often to capture large negative supply-shock risk. - Distributions and key probabilities reported: - The probability of annual US growth falling below 1 percent in 2027 (consistent with a relatively mild recession starting in the fourth quarter of 2026) is assessed at about 30 percent (April estimate was 35 percent). - The probability that US headline inflation will increase above 4 percent in 2027 is about 30 percent (April estimate was 20 percent). - The probability that global growth in 2027 will fall below 2 percent is about 10 percent (April estimate was 20 percent). - The probability that 2027 global headline inflation will rise above 5 percent is about 35 percent (April estimate was 30 percent). Commodity and Bond Markets: Commodity-and-bond stress scenario (G20 model calibration) - Scenario assumptions: - The war in the Middle East persists through the end of June 2027, keeping the Straits of Hormuz and Bab el Mandeb largely closed to commercial shipping, extending damages to oil infrastructures, and delaying recovery in oil supply to the end of 2027. - Oil production in OPEC is 10 and 22 percent lower than in the baseline in 2026 and 2027, respectively, and normalizes in 2028. - Oil prices reach $130 from the fourth quarter of 2026 to the first quarter of 2027 and return to baseline by the fourth quarter of 2027. - Oil prices are 17 and 40 percent higher on average in 2026 and 2027, respectively. - Natural gas benchmarks for Asia and Europe are 17 and 26 percent higher than in the baseline in 2026 and 2027, respectively; natural gas prices in the Americas do not increase. - Term premiums increase equally in advanced economies and emerging markets excluding China by 60 basis points relative to the baseline starting in the fourth quarter of 2026; China’s term premium increases by 40 basis points. The increase is persistent. - No additional fiscal consolidation over the WEO horizon relative to the baseline; policy is assumed to adjust beyond 2031 with debt stabilizing at a permanently higher level. - Medium-term inflation expectations increase, reaching about 30 basis points in advanced economies and 20 basis points in emerging markets excluding China by 2031; no upward drift is assumed for China. Macro impacts (Table 1.2.1 reported as percentage point deviations from baseline) - Impact on GDP Growth (percentage point deviation from baseline) - World: 2026 = −0.2 (Conflict), −0.1 (Term Premium), −0.2 (Total); 2027 = −0.4 (Conflict), −0.2 (Term Premium), −0.5 (Total). - aEs (advanced economies): 2026 = −0.1, −0.1, −0.2; 2027 = −0.3, −0.2, −0.5. - EMDEs (emerging market and developing economies): 2026 = −0.2, 0.0, −0.3; 2027 = −0.5, −0.1, −0.6. - Impact on Headline Inflation (percentage point deviation from baseline) - World: 2026 = 0.4 (Conflict), 0.0 (Term Premium), 0.4 (Total); 2027 = 1.0, 0.1, 1.1. - aEs: 2026 = 0.4, 0.1, 0.5; 2027 = 1.1, 0.1, 1.2. - EMDEs: 2026 = 0.4, 0.0, 0.4; 2027 = 1.0, 0.0, 1.0. - Additional scenario outcomes and dynamics: - Advanced economies are relatively more affected by higher premiums and inflation expectations; long-term rates increase more in advanced economies (100 basis points in advanced economies in 2027 versus 90 basis points in emerging markets). - Monetary policy tightening in the scenario: policy rates increase by 50 basis points in advanced economies in 2027 and by 25 basis points in emerging markets. - By 2031, the level of GDP in advanced economies falls by 0.7 percent relative to the baseline. - Public debt in advanced economies increases by more than 3 percentage points of GDP by 2031 (2 percentage points globally). Artificial Intelligence (AI) scenarios (GIMF model) - Model features: Eight regions (including China, Japan, rest of Asia, euro area, United States); monetary policy responds endogenously; floating exchange rates in most regions; China’s currency has some limited adjustment relative to the US dollar; automatic stabilizers operate on the fiscal side. - Scenario A: Strong Payoffs - Additional AI build-out concentrated in the United States and to a lesser extent China. - Total US investment increases by 2029 by 4 percent relative to the baseline from the AI build-out component alone; China’s investment increases by 1 percent. - AI-related capital goods largely sourced from Asian economies; import intensity of US investment increases. - Deployment of AI tools increases global total factor productivity by 0.8 percent over 10 years relative to the baseline, with two-thirds of gains occurring in the first five years (based on the lower bound from Cerutti and others (2025)). - The additional AI build-out fades beyond the WEO horizon; higher productivity supports investment and consumption through wealth effects and moderately increases the share of global imports sourced from Asia and the United States. - Scenario B: Capacity Constraints - Nominal spending on AI equals Scenario A but supply in Asia is slow to respond, triggering a significant increase in the price of high-end technology goods. - Large temporary increase in terms of trade for exporters of these goods in Asia and corresponding decrease for major importers such as the United States. - Productivity gains are more back-loaded than in Scenario A; long-term gains match Scenario A but materialize only by the end of the WEO horizon. - Near-term demand remains strong; higher import prices and several years of above-target inflation in the United States steepen and shift up the US Phillips curve. - Financial conditions tighten moderately in emerging markets not involved in the AI boom; sovereign (corporate) premiums in emerging markets outside Asia increase by 25 (50) basis points for two years. - Scenario C: Market Correction - Productivity gains from AI investment fail to materialize, triggering a sharp decline in technology-sector investment concentrated in the United States. - Equity prices fall by 20 percent in the United States in 2026 and 15 percent elsewhere. - Corporate risk premiums temporarily increase by 75 basis points in the United States, 50 basis points in other advanced economies and China, and 75–100 basis points in other emerging markets. - Sovereign bond market spillovers produce moderate temporary increases in term premiums of 30–50 basis points in advanced economies and 75–100 basis points in emerging markets. - The investment and asset-price shocks are concentrated in the United States, putting downward pressure on the US dollar; shocks fade over the WEO horizon. Attribution: IMF staff estimates and World Economic Outlook analyses. ### 0.6 percent by 2029, relative to that in the baseline. ### Impact of AI Scenarios on GDP and Macroeconomic Variables ### Scenario A: AI build-out with large productivity gains - Global output increases in the long term by close to 1 percent. - Global output increases by 0.6 percent by 2029, relative to that in the baseline. - The impact is largest for the United States and Asia. - US GDP: - Increases by 0.4 percent in 2027 and keeps growing over the WEO horizon, reaching 1.3 percent by 2031. - The direct impact of the AI build-out on the US economy is modest because a large part of the investment impulse goes to imports, but productivity gains are larger and more immediately visible than those in other countries. - Results in a widening of the US current account deficit of 0.4 percentage point of baseline GDP by 2029 and a small real depreciation of the US dollar. - US policy rate does not increase relative to that in the baseline. - Asia excluding China: - Activity peaks at 0.8 percent of baseline by 2029, with most of the GDP gains occurring in high-end technology exporters. - Current account balance increases, peaking at 0.7 percentage point of baseline GDP. - Experiences an appreciation of its currencies (especially in technology-oriented economies) and a small increase in export prices. - China: - GDP increases by 0.7 percent by 2029, benefiting from increased domestic investment, its central position in Asian supply chains, and the renminbi depreciation in real effective terms in the short term. - Inflation: - The impact on global inflation in this scenario is small, since increases in productivity largely keep pace with increases in demand. - Inflationary impact is modest in Asia as a whole but concentrated in high-end technology exporters. ### Scenario B: Capacity constraints and slower productivity realization - Global GDP increases by just 0.2 percent by 2029, relative to that in the baseline. - Near-term GDP increases are smaller than in scenario A; in some economies, near-term GDP is below that in the baseline. - Inflation and monetary policy: - AI-driven investment surge is more inflationary than in scenario A, especially in the United States, where inflation increases by 0.4 percentage point by 2028. - US policy rates increase by about 70 basis points, further slowing activity in the near term. - Prices and terms of trade: - The steep rise in the price of technology goods increases export prices for Asia excluding China by 10 percent relative to those in the baseline (40 percent for high-end technology exporters), increasing imported inflation elsewhere and weighing on demand. - Current account and exchange rate effects: - US current account deficit widens by 0.8 percent of baseline by 2029. - Aggregate current account surplus in Asia excluding China increases by 2.5 percent of baseline GDP. - Appreciation of Asian currencies is larger than in scenario A; the US dollar also appreciates in response to the tightening of US monetary policy. - Regional effects: - Asia excluding China experiences an increase in activity similar to scenario A because domestic demand benefits from a large, positive terms-of-trade shock despite supply constraints. ### Scenario C: Market correction and unwind of AI investment - Direct effects of the investment unwind: - AI-related investment unwinds, reducing US investment by 5 percent and US GDP by 0.8 percent from this layer alone. - Spillovers reduce Asia’s GDP by about half a percent by 2029, relative to that in the baseline, with GDP losses concentrated in high-end technology exporters. - Asian technology exporters experience a 20 percent decline in export prices; others in the Asia region see a 4 percent decline. - The unwinding of AI-related investment directly reduces global GDP by as much as 0.4 percent and investment by as much as 1.3 percent by 2028. - Amplification via financial channels: - Correction in asset prices and tightening in financial conditions produce negative wealth effects and a large contraction in consumption, particularly in the United States. - Global consumption falls by 0.6 percent by 2028. - Together these effects reduce global output by 0.6 percent and investment by 1 percent, relative to those in the baseline. - Spillovers to sovereign bond markets and demand for US assets subtract a further 0.3 percent from global output. - Net outcome by 2028: - Global activity is 1.1 percent lower than that in the baseline by 2028. - Larger losses occur in the United States (1.8 percent lower) and Asia (1.7 percent lower). - Global and US inflation and policy rates are lower than those in the baseline—with US policy rates lower despite the depreciation of the US dollar—and global imbalances narrow. ### Additional notes on figures and horizons - "Long-term" is at least 50 years ahead. - Figures and panels referenced are IMF staff estimates and show percent deviations from baseline across regions and variables (GDP level, inflation, policy rate, real effective exchange rate, current account balance). *Source: IMF staff estimates.* ### Commodity Market Developments and Real-Time Geopolitics on Energy Prices ### Oil and refined products - Between March 2026 and August 2026, primary commodity prices decreased by 6.3 percent. - Oil market disruptions and volatility: - Shipments through the Strait of Hormuz nearly halted, disrupting about 20 percent of global oil supply; oil prices peaked in late March at $126 a barrel. - The Dubai-Brent spread widened to $54 at the peak. - Market adjustments included increased production outside the Persian Gulf (notably in Brazil, Kazakhstan, the United States, and Venezuela); a drawdown of oil inventories (especially via the IEA emergency stocks release and China’s stocks); and compression of crude oil demand, especially from China. - In early June, the market stabilized at about $100 a barrel with a supply deficit of 1.9 million barrels a day (mb/d) being covered by rapidly depleting reserves. - Mid-June memorandum of understanding between Iran and the United States led to a brief reopening of the Strait and the release of about 90 million barrels of oil accumulated in the Gulf, creating a temporary glut and a collapse in prices to $68 a barrel. - Refined petroleum product markets: - Prices remain between 70 percent and 95 percent above prewar levels. - Refinery outages and damage in the Gulf and Russia removed about 20 percent of the international supply of refined products. - Price pressures initially centered on jet fuel but became most pronounced for diesel and gasoline. ### Natural gas - TTF trading hub prices increased by 18 percent between March 2026 and August 2026 to $20.9 a million British thermal units (MMBtu). - Henry Hub prices fell by 9.2 percent to $2.8 a MMBtu amid robust domestic supplies and strong underground storage inventories. - Futures expectations: - TTF prices will average $19.8 a MMBtu in 2026, steadily decreasing to $8.4 a MMBtu in 2031. - Henry Hub prices are expected to increase from $3.1 a MMBtu in 2026 to $3.6 a MMBtu in 2031. ### Metals, food, beverages, and fertilizers - Metals: - IMF’s metals price index declined 4.5 percent between March and August 2026. - Gold price lost 9.1 percent and silver price decreased 17 percent. - Base metals price index increased 4.9 percent due to supply constraints from the Strait closure; futures markets suggest a modest increase of 2.3 percent in 2027. - Food and beverages: - IMF food and beverages price index increased by 0.8 percent between March and August 2026. - Wheat and corn prices increased 22.7 percent and 3.8 percent, respectively. - Soybean prices increased 5.3 percent. - Seafood prices fell sharply; salmon prices declined 16.0 percent. - Beverage prices increased 19.2 percent, led by an 83.6 percent increase in cocoa prices; coffee prices increased 8.0 percent. - Food prices are projected to increase 5.0 percent in 2026 and 2.4 percent in 2027; beverage prices are expected to fall 21.5 percent in 2026 (further projections not included in the supplied excerpt). - Fertilizers: - IMF fertilizer index declined 10.5 percent since March. - Price of phosphate increased 22.4 percent. - Prices of nitrogen-based fertilizers dropped 31.5 percent. ### Oil market outlook and reserves - Futures exhibit a steep backwardation, consistent with a gradual resumption of flows from early 2027. - Brent futures indicate a return to preconflict prices of $79 a barrel by the end of 2027. - Through September, Gulf crude exports reached an average of 16.7 mb/d or 88 percent of prewar levels, and ended the month at 13.4 mb/d. - Global reserves continue to be depleted by about 2.7 mb/d and are rapidly reaching stress levels that could lead to nonlinear price adjustments. *Source: IMF staff estimates.* ### 3.2 percent in 2027 due to El Niño. Upside risks stem ### Pricing Geopolitical Risk: Real-Time Evidence from Oil and Gas Markets ### Motivation - In March 2026, the war in the Middle East effectively closed the Strait of Hormuz, stranding in the Persian Gulf oil and liquefied gas equal to about 20 percent of world consumption. - Oil prices increased by about 10 percent in January and February 2026 amid rumors of an impending US attack on Iran. - Energy prices are important drivers of inflation and business cycles; policy responses depend on whether price increases are demand-driven, actual supply disruptions, or geopolitical supply risk. - The Commodity Special Feature develops a framework to separately identify geopolitical risk shocks and supply shocks and provides the Commodity Price Tracker as a real-time tool for policymakers. ### Determining the Drivers: A New Analytical Framework - A high-frequency four-variable structural vector autoregression (SVAR) model—the Commodity Price Tracker—decomposes oil and European gas (TTF) price fluctuations into four shocks: current demand, forward-looking demand, current supply disruption, and forward-looking supply disruption (geopolitical supply risk). - Sample coverage: June 1, 2007 (October 4, 2013, for gas), to May 29, 2026. - Estimation method: Bayesian methods with the European Central Bank’s BEAR toolbox. - Daily SVAR variables: - adjusted front-month energy price, - 13-month futures price, - returns from an equity index (a world index for oil and a European index for gas), - the newspaper-based Geopolitical Risk Threats (GPRT) index from Caldara and Iacoviello (2022). - Identification innovations: - Distinguishes realized supply disruptions from geopolitical supply risk in real time. - Extends framework to natural gas markets and adapts identification to gas market specifics (including use of daily forecast temperature anomalies as an instrument for current demand in gas). - Instruments and restrictions: - Uses stock and oil market volatility indices (VIX, OVX), gold prices, and front-month oil prices with parsimonious sign and relative magnitude restrictions. - For gas, uses a narrower European equity index and temperature-anomaly instruments. ### Transmission of Shocks to Financial Markets and the Macroeconomy - Impulse-response evidence (shocks normalized to one standard deviation) shows: - Forward-looking and current demand shocks increase front-month and futures energy prices and equities. - Current demand produces backwardation (larger front-month than 13-month futures response); forward-looking demand shifts the whole futures curve upward. - Current supply shocks promote backwardation and cause equities to fall. - Gas-specific differences: - Current demand shocks do not affect European equities (current demand driven by weather). - The impact of future demand shocks on front-month TTF prices is not statistically significant. - Gas price responses to current demand are more persistent than for oil, reflecting inventories. - Geopolitical supply risk versus actual supply disruption: - For both gas and oil, a supply shock decreases equity prices; the response of equities to geopolitical supply risk is not different from zero. - Geopolitical supply risk raises energy prices but has a small effect on the real economy relative to actual supply disruptions. - Macroeconomic effects (daily shocks aggregated to monthly; panel of oil-importing advanced economies; gas focus: largest European economies): - Oil shocks: forward-looking demand, current demand, and actual supply shocks that increase front-month monthly oil prices by 1 percent all increase the CPI by roughly 0.06 percent after one year. - The geopolitical supply risk shock on inflation is short-lived, with prices back to preshock levels within six months to a year. - For oil importers, demand-driven oil shocks—especially forward-looking demand—decrease the unemployment rate persistently (unemployment below preshock levels almost two years after the shock). - Negative supply shocks that increase front-month oil prices by 1 percent increase the unemployment rate by 0.04 percentage point one year after the shock. - The geopolitical supply risk shock has no statistically significant impact on the unemployment rate. - Gas shocks in Europe: - A shock normalized so that the TTF price increases by 1 percent increases the price level by about 0.05 percent after one year when driven by forward-looking demand or supply shocks. - The same 1 percent TTF shock increases the price level by roughly 0.08 percent after one year when driven by current demand and geopolitical supply risk shocks. - Gas shocks—particularly geopolitical supply risk—have more persistent inflationary effects than oil shocks. - Responses of the unemployment rate to gas shocks are relatively muted. ### Revisiting Historical Energy Price Shocks: Case Studies - Conflicts analyzed: Russia’s invasion of Ukraine (starting February 24, 2022) and the 2026 war in the Middle East (starting February 27, 2026). - Decomposition findings: - Geopolitical supply risk exerted upward pressure on oil and gas prices before the wars began, reflecting rising expectations of military escalation. - During the war in Ukraine, the contribution of geopolitical supply risk to oil prices was more than twice as large as that of actual supply; for gas, supply was a key driver (TTF prices quadrupled in six months). - During the 2026 Middle East war, geopolitical supply risk and actual supply contributed roughly equally to oil price increases; for gas, geopolitical supply risk exerted substantial upward pressure followed by supply. - Demand contributed similarly across oil and gas during the 2026 war: upward pressure at the beginning of the war (competition for scarce crude and liquefied natural gas), then lower demand contribution as the war continued (demand compression). - Key takeaway: Realized energy shortages do not eliminate the influence of geopolitical risk—heightened geopolitical supply risk continues to exert upward pressure on energy prices during crises, so part of price increases reflects elevated risk premiums rather than physical scarcity. ### Key Quantitative Points - Strait of Hormuz closure in March 2026 stranded oil and liquefied gas equal to about 20 percent of world consumption. - Oil price increases of about 10 percent occurred in January and February 2026 amid rumors of conflict. - SVAR sample coverage: June 1, 2007, (October 4, 2013, for gas) to May 29, 2026. - A 1 percent increase in front-month oil prices from various shocks leads to roughly 0.06 percent higher CPI after one year for oil-importing advanced economies. - A 1 percent increase in TTF prices yields about 0.05 percent higher CPI after one year for forward-looking demand or supply shocks, and roughly 0.08 percent for current demand and geopolitical supply risk shocks. - A 1 percent front-month oil price increase from a negative supply shock increases unemployment by 0.04 percentage point one year after the shock. *International Monetary Fund, World Economic Outlook: RESILIENCE UNDER STRAIN, URGENT CHOICES, Commodity Special Feature (October 2026).* ### Conclusion ### Conclusion ### Key findings on energy-related shocks - Effective policy responses to energy-related shocks require identifying the source of energy price movements in real time. - Policymakers should be able to distinguish between price increases driven by demand shocks and those driven by supply shocks and, among the latter, between price increases as a result of geopolitical tensions and those caused by actual supply disruptions. - Oil-related geopolitical supply risk typically has only short-lived effects on prices and no measurable effect on unemployment. - Supply disruptions and forward-looking demand shocks generate larger and more persistent macroeconomic effects. - Shocks usually arise simultaneously; recent events in the Middle East show that energy prices often increase in anticipation of supply disruptions and that geopolitical risk continues to influence prices even when shortages have already occurred. - Interpreting higher energy prices solely as evidence of physical scarcity can lead to inappropriate policy responses. ### Policy implication and tool - The Commodity Price Tracker offers a real-time framework for distinguishing among commodity price shocks, thereby supporting more timely and effective policy responses. - The focus of the Commodity Special Feature is on oil and gas, and the framework is flexible enough to be extended to other commodities of interest in the future. ### Empirical note on price decompositions (figure and data) - The figure shows variance decompositions of front-month energy prices using four-variable structural vector autoregression models. Front-month price refers to the price of futures contracts for the nearest available maturity. - Data used to estimate the models for oil are from June 2007 to May 29, 2026; those used to estimate the models for natural gas are from October 4, 2013, to May 29, 2026 (daily frequency). - Sources: Bloomberg Finance L.P.; Caldara and Iacoviello 2022; and IMF staff calculations. *Commodity Special Feature, World Economic Outlook — International Monetary Fund* ### Annex Table 1.1.6. Summary of World Real per Capita Output ### Annex Table 1.1.6. Summary of World Real per Capita Output ### World and Aggregate Projections - World (Average 2008–17; 2018; 2019; 2020; 2021; 2022; 2023; 2024; 2025; 2026; 2027): 1.8; 2.5; 1.8; –3.9; 5.7; 2.8; 2.3; 2.5; 2.6; 2.1; 2.5 ### Advanced Economies and Selected Members - Advanced Economies: 0.8; 1.9; 1.5; –4.4; 6.0; 2.5; 0.9; 1.4; 1.7; 1.9; 1.7 - United states: 0.8; 2.4; 2.1; –2.9; 5.9; 1.9; 2.1; 2.0; 1.8; 2.0; 2.0 - Euro area (calculated as sum of individual euro area countries): 0.4; 1.6; 1.5; –6.3; 6.5; 3.4; –0.1; 0.8; 1.0; 1.0; 1.1 - germany: 1.2; 1.1; 1.0; –3.9; 4.1; 1.2; –1.9; –0.3; 0.2; 1.6; 1.3 - France: 0.3; 1.3; 1.7; –7.9; 6.4; 2.3; 1.3; 1.1; 0.6; 0.1; 0.5 - Italy: –0.8; 1.0; 0.6; –8.6; 9.7; 5.2; 1.0; 0.8; 0.6; 0.9; 0.7 - spain: 0.1; 1.8; 1.1; –11.1; 6.5; 5.0; 1.2; 2.6; 1.9; 1.5; 0.8 - Japan: 0.6; 1.0; –0.1; –4.0; 3.9; 1.6; 1.4; 0.5; 1.7; 1.3; 1.2 - United Kingdom: 0.6; 1.1; 0.9; –10.2; 8.1; 4.0; –0.9; 0.0; 0.9; 0.7; 0.9 - Canada: 0.5; 1.3; 0.4; –6.1; 5.3; 2.9; –0.8; –0.9; 0.7; 1.5; 1.7 - Other advanced Economies (excludes the group of seven and euro area countries): 1.7; 2.1; 1.3; –2.2; 6.0; 2.0; 0.6; 1.9; 2.8; 3.6; 2.3 ### Emerging Market and Developing Economies - Emerging Market and Developing Economies: 3.3; 3.3; 2.5; –3.2; 5.9; 3.2; 3.4; 3.4; 3.5; 2.6; 3.4 - Emerging and Developing asia: 6.1; 5.6; 4.5; –1.3; 7.1; 4.1; 5.1; 4.9; 5.1; 4.6; 4.4 - China: 7.7; 6.4; 5.7; 2.2; 8.5; 3.2; 5.5; 5.1; 5.2; 4.7; 4.2 - India: 5.3; 5.3; 2.8; –6.7; 8.8; 6.8; 6.4; 6.2; 6.9; 6.1; 6.1 - Emerging and Developing Europe: 1.8; 3.4; 2.4; –1.9; 7.6; 1.7; 3.8; 4.3; 2.4; 1.9; 2.0 - Russia: 1.0; 2.6; 2.1; –2.5; 6.3; –1.3; 4.2; 5.4; 1.6; 1.3; 1.2 - Latin america and the Caribbean: 0.8; 0.0; –1.0; –8.0; 6.7; 3.6; 1.5; 1.6; 1.7; 1.6; 1.8 - Brazil: 0.8; 1.1; 0.6; –3.9; 4.3; 2.6; 2.8; 3.0; 1.9; 1.8; 1.5 - Mexico: 0.3; 1.0; –1.3; –9.1; 5.4; 2.9; 2.2; 0.6; –0.3; 0.7; 1.0 - Middle East and Central asia: 1.1; 0.8; 0.3; –4.5; 3.0; 4.2; 0.5; 1.0; 1.9; –2.4; 4.3 - saudi arabia: 0.5; 5.9; 2.1; –8.3; 9.2; 7.2; –4.0; –2.0; 2.5; –5.2; 5.8 - sub-saharan africa: 1.5; 0.6; 0.3; –5.7; 1.4; 1.9; 1.3; 1.5; 2.0; 2.0; 2.0 - Nigeria: 2.1; –0.4; 0.0; –8.3; –1.0; 2.2; 1.2; 1.9; 1.9; 2.1; 2.2 - south africa: 0.2; 0.0; –1.3; –7.5; 3.8; 0.9; –0.5; –0.8; 1.0; –0.2; 0.1 ### Memorandum Groups - European Union: 0.7; 2.1; 1.9; –5.7; 6.7; 3.5; 0.0; 1.1; 1.3; 1.3; 1.3 - asEaN-5 (Indonesia, Malaysia, the Philippines, singapore, and Thailand): 3.5; 3.8; 3.2; –5.5; 3.4; 4.6; 3.1; 3.9; 3.6; 3.5; 3.5 - Middle East and North africa: 0.7; 0.2; –0.1; –4.7; 3.1; 4.5; 0.4; 0.7; 1.6; –4.1; 5.0 - Emerging Market and Middle-Income Economies: 3.6; 3.6; 2.7; –2.9; 6.6; 3.5; 3.8; 3.8; 3.8; 2.9; 3.7 - Low-Income Developing Countries: 2.7; 2.2; 2.2; –3.8; 1.4; 2.6; 1.8; 1.9; 2.5; 2.6; 2.6 ### Notes and Metadata - Units: Annual percent change; in constant 2021 international dollars at purchasing power parity. - source: IMF staff estimates. - Additional notes preserved from the table: - Data for some countries are based on fiscal years. Please refer to Online Table F in the Online statistical appendix for a list of economies with exceptional reporting periods. - 1 Data are calculated as the sum of data for individual euro area countries. - 2 Excludes the group of seven (Canada, France, germany, Italy, Japan, United Kingdom, United states) and euro area countries. - 3 see the country-specific notes for India and Nigeria in the “Country Notes” section of the Online statistical appendix. - 4 Indonesia, Malaysia, the Philippines, singapore, and Thailand. *source: IMF staff estimates.* ### 1. Inflation of Basic Necessities and Commodity Prices ### Inflation of Basic Necessities and Commodity Prices ### Main findings (Chapter 2, World Economic Outlook) - Cost-of-living crises are infrequent but can severely affect households and threaten macroeconomic stability; they are typically triggered by shocks that disrupt global commodity markets and are characterized by sustained increases in the relative prices of basic necessities and declines in real wages, with inflation expectations, even at medium-term horizons, increasing persistently, creating difficult policy trade-offs. - The burden of cost-of-living crises falls disproportionately on lower-income households because low-income households devote a larger share of spending to basic necessities; accounting for the inflation experienced by poorer households suggests that substantially more people fell below the poverty line in emerging market and developing economies during 2021–24 than implied by measures based on aggregate inflation. - Fiscal policy can help cushion the impact on the most vulnerable households, but the design of support measures requires careful consideration; during past episodes, countries—particularly emerging market economies and low-income developing countries—relied heavily on broad-based price-suppressing interventions (including reductions in consumption taxes, price subsidies, and price controls), and when income-supporting measures were deployed they often relied on broad rather than targeted instruments. - Targeted transfers are the most cost-effective way of supporting vulnerable households: they preserve price signals, facilitate necessary adjustment in demand, and safeguard critical fiscal space. - Achieving a comparable degree of protection through price-suppressing measures can require between 3 and 22 times the fiscal resources, depending on country characteristics and the source of the shock. - Subsidies can provide near-term support, but their benefits for low-income households are generally outweighed by subsequent fiscal consolidation costs; moreover, subsidy effectiveness declines when fiscal space is limited and can become counterproductive when many countries deploy them simultaneously. - Emerging market and developing economies face starker policy trade-offs than advanced economies because food and other basic necessities account for a larger share of household spending, making broad-based support particularly costly and underscoring the importance of targeted interventions; these economies—particularly low-income developing countries—have relied extensively on broad-based interventions, likely reflecting limitations in social protection infrastructure. *Information on policies in 2026 is updated until June 2026.* ### Definitions and measurement - Cost-of-living crises are defined as episodes in which the quarter-over-quarter increase in the prices of basic necessities is two standard deviations above its country-specific mean, while the increase in the prices of other goods and services and the quarter-over-quarter growth rate of nominal wages are below that threshold and remain below it for two subsequent quarters (operational identification uses disaggregated consumer price indexes for 85 countries over 2005–25). - Basic necessities comprise COICOP divisions: Food and non-alcoholic beverages (COICOP 1), Housing, water, electricity, gas, and other fuels (COICOP 4), and Transport (COICOP 7). - An alternative identification approach combines global commodity prices with country-specific CPI weights to construct a counterfactual price index of basic necessities; the chapter reports that dynamics of macro aggregates are robust to this alternative. ### Anatomy and drivers of episodes - Sample coverage: disaggregated CPI data for 85 advanced and emerging market and developing economies over 2005–25. - Incidence: - 75 out of the 85 studied economies experienced at least one cost-of-living crisis between 2005 and 2025. - 46 percent experienced at least two episodes. - 13 percent experienced more than two episodes. - Timing clusters: significant clustering occurred around 2007–08, in 2022–23, and to a lesser extent in 2010–11. - Role of global versus country-specific factors: - For the median advanced economy, a global factor accounts for about 70 percent of the inflation in the prices of basic necessities during cost-of-living crises. - For the median emerging market and developing economy, the global factor accounts for slightly less than 40 percent of the inflation in the prices of basic necessities during these episodes. - A composite commodity price index explains roughly half of the variation in the estimated global factor. ### Macroeconomic dynamics around crises - Evolution of relative prices and headline inflation: - Relative prices of basic necessities continue to increase for several quarters and peak 1½ years after crisis onset. - Three years after the start of a cost-of-living crisis, prices of basic necessities remain, on average, about 7 percent higher than the prices of other goods and services. - Headline consumer price index (CPI) reaches an average cumulative increase across countries and episodes of about 13 percent by the third year. - Real wages: - By definition nominal wages lag prices at onset; three years after crisis onset, real wages remain about 3 percent below their precrisis path. - Inflation expectations: - One-year-ahead expectations remain about 2.7 percentage points higher in advanced economies four quarters after onset and 5.3 percentage points higher in emerging market and developing economies. - Five-year-ahead inflation expectations are, on average, about 0.3 percentage point higher in advanced economies and about 1.1 percentage points higher in emerging market and developing economies three years after onset. - Real and external variables: - Final domestic demand falls in the year following crisis onset by about 6 percent in emerging market and developing economies and by 8 percent in net energy importers, while remaining broadly resilient in advanced economies and net energy exporters. - The current account balance strengthens for net energy exporters by about 1.5 percentage points of GDP over the same period while remaining broadly unchanged in other country groups. - The chapter notes that the estimates describe conditional moments around episodes rather than causal effects; identified episodes could reflect both demand and supply shocks, and dynamics are broadly comparable when episodes are detected using global commodity prices or when exogenous oil supply shocks are considered. ### Policy implications and recommendations - Monetary policy: the textbook prescription is to look through temporary spikes in headline inflation caused by supply shocks while remaining ready to tighten policy if inflation expectations drift upward or second-round effects emerge. - Fiscal policy and social protection: - Automatic stabilizers and social safety nets are the first line of defense for shocks within historical experience; however, social protection systems may be underdeveloped or not equipped to absorb exceptionally severe shocks. - When discretionary fiscal measures are warranted, targeted transfers are preferred because they are the most cost-effective in protecting vulnerable households and preserve incentives for necessary demand adjustments. - Broad-based price-suppressing measures (reductions in consumption taxes, price subsidies, price controls) can require between 3 and 22 times the fiscal resources to achieve the same protection as targeted transfers, depending on country characteristics and shock sources. - Subsidies may be useful short term but can be outweighed by later fiscal consolidation costs and lose effectiveness when fiscal space is limited or when many countries deploy them simultaneously. - Emerging market and developing economies should prioritize building targeted social protection mechanisms because food and other basic necessities consume a larger share of household budgets and fiscal constraints make broad subsidies especially costly. *Source: Chapter 2, World Economic Outlook: Navigating a Shock‑Prone World: Lessons from Cost‑of‑Living Crises (International Monetary Fund).* ### 1. Prices and Wages ### 1. Prices and Wages ### Key findings on prices, wages, and macro dynamics - The analysis uses difference-in-differences local-projection estimates from a quarterly panel of countries over 2005–25 with country fixed effects; quarter 0 denotes the onset of a cost-of-living crisis. (Shaded areas and whiskers indicate 90 percent confidence intervals based on country-clustered standard errors.) - The relative prices of basic necessities are measured as the CPI for food, transport, and housing-related expenses including utilities relative to the CPI for all other items; real wages are nominal wages deflated by headline CPI. - Panel 2 reports cumulative responses of inflation forecasts after 4, 8, and 12 quarters; panel 3 reports cumulative response of domestic demand (percent change) and current account balance over GDP (percentage points) four quarters after the onset of a crisis for the full sample, by income group and by net energy-trading position. - The evidence suggests the identified episodes largely capture global supply shocks, although other types of shocks are not ruled out. ### Distributional implications - The analysis combines household budget survey data with disaggregated price indexes to construct income-specific consumption price indexes. - The cumulative inflation gap between the bottom and top income quintiles over 2021–24 reached: - 1.6 percentage points in the median advanced economy; - 3.2 percentage points in the median emerging market economy; - 4.5 percentage points in the median low-income developing country. - Local-projection estimates using the full sample show: - Households in the bottom income quintile experienced nearly 2 percentage points more cumulative inflation than households in the top quintile about 1½ years after the onset of a cost-of-living crisis. - The inflation gap remained above 1 percentage point even three years later. - Well-identified oil supply shocks generate persistent increases in the inflation gap between lower- and higher-income households; demand-driven inflationary shocks, proxied by monetary policy surprises, do not produce a similar widening in income-specific consumer price indexes. ### Poverty implications - Adjusted poverty rates were constructed using income-specific consumption price indexes for a sample of 37 emerging markets and 25 low-income developing countries over 2015–24. - By 2024, the extreme poverty rate (the share of people living on less than $2.15 a day in 2017 purchasing-power-parity terms) is, on average across countries, about 0.8 percentage point higher when adjusted poverty thresholds are used than when poverty is measured using aggregate CPI. - For the sample considered, the 0.8 percentage point difference represents almost 23 million more people living in extreme poverty. ### Real and external variable dynamics - The chapter reports cumulative percent-change responses for real and external variables over horizons including 4 quarters, 8 quarters, 12 quarters, one year, and five years (right scale), disaggregated for All, AEs, EMDEs, importers, and exporters. ### Sources for empirical panels and estimates - Sources include: Consensus Economics; Haver Analytics; IMF, Balance of Payments statistics; IMF, Consumer Price Index dataset; IMF, World Economic Outlook; Eurostat, Household Budget Surveys; Luxembourg Income Study Database; World Bank; national sources; and IMF staff calculations. - See Online Annex 2.1 and Online Annex 2.2.3 for details on sample composition and identification (as referenced in the chapter). --- ### 2. Policy Responses in Past Cost-of-Living Crises ### Overview of policy interventions - A novel narrative database of policy interventions was constructed using text analysis of quarterly Economist Intelligence Unit reports for 76 countries between 1996 and 2025 (26 advanced economies, 36 emerging markets, and 14 low-income developing countries). - The introduction of policy measures spiked in 2007–08 and 2022–23; at the peak following Russia’s invasion of Ukraine, nearly half of the countries in the sample introduced at least one new measure to mitigate rising prices. - Countries relied extensively on price interventions; characteristics of past responses differ markedly across country groups. ### Composition of policy measures (across country groups) - Advanced economies: - Relied somewhat more on income-supporting measures, which accounted for roughly 60 percent of interventions during crisis periods. - Price-suppressing measures mainly took the form of value-added tax and excise tax reductions. - Among income-supporting measures, changes to income taxes and transfers predominated, with half targeted to specific groups. - Emerging market and developing economies: - Made greater use of price-suppressing measures such as producer subsidies, price controls, and reductions in customs duties. - Relied more heavily on adjustments to minimum wages, public sector wages, and pensions among income-supporting measures. - Low-income developing countries: - Made greater use of price-suppressing measures, reflecting more limited social protection infrastructure. ### Rationale and constraints - The mix of price-suppressing and income-supporting measures often reflects the need to deliver rapid temporary support within the constraints of a country’s social safety net infrastructure. - Assessing policy duration in the narrative database is difficult; evidence from political economy suggests fuel price interventions often prove persistent. --- ### 3. Macroeconomic Effectiveness of Policy Interventions ### Empirical approach - The analysis estimates augmented inverse propensity weighted (AIPW) difference-in-differences regressions from a quarterly panel of 75 countries between 1995 and 2025 to trace effects of new policy measures. Results refer to four quarters after policy introduction; whiskers indicate 90 percent confidence intervals based on country-clustered standard errors. ### Average effects (four quarters after policy introduction) - Income-supporting measures: - Appear effective at cushioning aggregate consumption. - Do not lead, on average, to statistically significant changes in aggregate inflation dynamics or inflation expectations. - Their impact on a country’s fiscal balance is not statistically significant (noting potential offsetting factors and targeting). - Price-suppressing measures: - Have, on average, a statistically significant effect on inflation in prices of basic necessities. - Reduce near-term inflation expectations slightly but do not have a significant effect on longer horizons. - Do not have a significant effect on aggregate consumption. - Have a significant negative effect on fiscal balances. - Fiscal costs of price-suppressing measures may be larger than estimated due to contingent liabilities, arrears, and losses in state-owned enterprises that materialize with a lag. --- ### 4. Distributional Effectiveness of Policy Interventions ### Analytical framework and sample - A theoretical framework captures heterogeneity in households’ exposure to crisis episodes by consumption baskets, income, and asset and liability holdings; the framework uses detailed policy-intervention information to evaluate welfare effects across household groups and policy instruments. - Counterfactual price and income series without policies are constructed from the intervention-level database in Sgaravatti and others (2023). - Results reported for a sample of 18 European countries during 2021–23. ### Welfare impacts, 2021–23 (sample of 18 European countries) - Absent policy support, households across all income quintiles would have experienced welfare losses between 5 and 6 percent of their income over the three years. - After fiscal interventions: - Welfare losses for the bottom quintile amounted to less than 2 percent of income in 2021–23. - Welfare losses for higher-income households remained more than 4 percent of income. - Decomposition by policy instrument: - Low-income households benefited roughly equally from income-supporting and price-suppressing measures. - Most of the gains accruing to higher-income households stemmed from price-suppressing interventions. - Fiscal interventions can be costly, and in some environments price-suppressing measures may produce fiscal consequences that materialize with a lag. ### Cross-country distribution and allocation - Panel-level results display cross-country distribution of welfare changes as a share of three-year income and the allocation across income quintiles of fiscal spending on transfers and measures suppressing prices of electricity, natural gas, and gasoline (as described for the sample). --- *International Monetary Fund, World Economic Outlook: Resilience Under Strain, October 2026.* ### 3. Allocation of Fiscal Spending by Fiscal Measure and Income Quintile, 2021–23 ### 3. Allocation of Fiscal Spending by Fiscal Measure and Income Quintile, 2021–23 ### Key findings on past measures and distributional outcomes - Targeted transfers delivered the full amount of benefits to lower-income households (as reported in the analysis). - For each euro spent on price-suppressing measures for electricity, gasoline, and natural gas, lower-income households received less than 20 cents. - For measures on gasoline, the top income quintile received about 40 cents per euro spent. - Broad-based price interventions and untargeted transfers provided some support to vulnerable households but at a substantially higher fiscal cost than well-targeted income transfers. ### Model features used to assess policy trade-offs (described in the chapter) - Heterogeneous households: low-income households (LIHHs) and high-income households (HIHHs) differ in exposure to the shock and access to financial markets; LIHHs devote a larger share of expenditure to basic necessities and lack access to financial markets. - Production network: 12 production sectors per region, with sectoral linkages within and across countries and heterogeneous price stickiness across sectors. - Cost-of-living crises: triggered by transitory shocks to global supply of energy or food; shocks calibrated to increase relevant global commodity prices by about two standard deviations (close to 70 percent for energy prices; about 45 percent for food prices) with a half-life of two quarters (about 80 percent of the initial price increase is reversed one year after the shock). - Country coverage: separate calibrations for a representative advanced economy, a representative emerging market economy, and a representative low-income developing country; all three are net energy importers, and low-income developing countries are assumed to be net food exporters. - Monetary policy: follows a Taylor rule focused on headline CPI with a positive weight on projected inflation. - Fiscal policy within the model: includes targeted transfers to LIHHs, untargeted transfers distributed evenly across households, consumer subsidies (akin to VAT or excise cuts), and producer subsidies (reducing input costs for exposed firms). Fiscal measures are financed over the medium term by lump-sum tax increases so debt reverts to the preshock level with a half-life of four to five years. ### Simulated impacts of global supply shocks (no-policy baseline and policy responses) - Global energy shock (calibrated close to 70 percent increase in energy prices): - Domestic consumer prices of energy-related products rise by about 10 percent in energy-importing advanced economies. - Annual consumer price inflation peaks at 1½ percentage points above target. - Private consumption falls by close to 2 percent. - The fall in consumption among LIHHs is almost 60 percent larger than among HIHHs in advanced economies. - Global food shock (calibrated about 45 percent increase in food prices): - Domestic food bundle price rises by about 20 percent in low-income developing countries. - Household consumption declines about 7½ percent in low-income developing countries, about 3.2 percent in emerging markets, and about 2.6 percent in advanced economies. - LIHHs in low-income developing countries experience losses about 80 percent larger than those of HIHHs. ### Comparative effects of fiscal instruments in model simulations (policy objective: contain consumer price impact by half) - Consumer subsidies (contain pass-through to domestic retail prices to one-half of no-intervention level): - Contain the impact on headline inflation and reduce the need for monetary tightening. - Attenuate the drop in output and consumption, especially among LIHHs. - Increase public debt by about ½ percentage point of GDP in the advanced-economy simulation. - Welfare gains from consumer subsidies accrue mainly to HIHHs; LIHHs remain worse off relative to the no-intervention baseline when inflation expectations remain anchored. - Producer subsidies: - Produce similar peak responses for inflation, output, and household consumption as consumer subsidies but lead to a strong expansion of exports in downstream sectors. - Require a much larger intervention intensity to achieve a given pass-through, increasing public debt by an amount more than three times larger than consumer subsidies (close to 1½ percentage points of GDP). - In a scenario where only 40 percent of the initial price spike is reversed by the end of the first year (rather than 80 percent), producer subsidies would push debt upward by close to 3½ percentage points of GDP. - Once lifetime welfare and future consolidation costs are taken into account, all households face larger welfare losses under producer subsidies than in the no-intervention baseline. - Targeted transfers: - Protect the most vulnerable more effectively while preserving fiscal space, relative to broad-based price interventions and untargeted transfers. - In the welfare comparisons using the same fiscal envelope across instruments, targeted transfers provide larger welfare gains to low-income households than untargeted transfers or price-suppressing measures. ### Additional considerations and risks highlighted - De-anchored inflation expectations: - An illustrative exercise assumes surging retail energy prices raise inflation expectations, leading inflation in nonenergy sectors to increase by about 0.85 percentage point more than when expectations remain anchored. - In this extreme case, consumer subsidies can yield welfare gains among LIHHs roughly comparable to targeted transfers, because they reduce the need for monetary tightening and lower persistence of inflation. - Empirical evidence presented earlier in the chapter indicates that, on average, past price-suppressing interventions did not have a significant impact on medium-term inflation expectations despite some near-term price relief. - Global spillovers: - If many countries simultaneously introduce consumer subsidies that contain pass-through to retail prices to one-half, global oil prices increase by about 3 percentage points more, reducing the effectiveness of subsidies when adopted widely. - Fiscal cost and consolidation: - Subsidies can significantly increase public debt, particularly if shocks are more persistent or recurrent; consolidation needs and the choice of consolidation instruments matter for household welfare, and the model’s assumption of lump-sum fiscal consolidation implies the welfare costs reported are a lower bound relative to distortionary consolidation in practice. *Source: IMF staff calculations, World Economic Outlook: Resilience under Strain, October 2026.* ### Annex Figure 2.2.1. ### Annex Figure 2.2.1 — CHAPTER 2: Navigating a Shock-Prone World: Lessons from Cost-of-Living Crises ### Cost-effectiveness of fiscal instruments (model simulations) - Targeted transfers preserve price signals, support household consumption, and are the most cost-effective fiscal intervention (IMF staff calculations). - Untargeted transfers: - Support consumption of LIHHs relative to no-policy baseline but have little impact on HIHHs’ consumption. - Impact on public debt is comparable to that of consumer subsidies when uniformly distributed. - Targeted transfers versus untargeted transfers: - Comparable impact on households’ consumption. - Peak increase in public debt is about one-fifth of the increase under untargeted transfers or consumer subsidies and about one-sixteenth of that under producer subsidies. - Achieving similar protection for vulnerable households through subsidies requires between 5 and 16 times the fiscal resources. - LIHHs face higher taxes over the medium term to restore debt to preshock levels, but the burden of consolidation falls on all households; LIHHs are better off with transfers than without fiscal intervention. - Holding the fiscal envelope constant (equal to cost of untargeted transfers): - Channeling support only to LIHHs leverages their larger marginal propensity to consume, supporting aggregate demand and attenuating output declines with little effect on inflation (Online Annex Figure 2.5.6). - Targeted transfers deliver the largest welfare gains for LIHHs, financed in part through redistribution from HIHHs. - Consumer subsidies, under the same fiscal envelope, generate similar increases in LIHHs’ consumption but fail to improve welfare and can produce net welfare losses. - The advantage of targeted transfers increases when shocks are more persistent (Online Annex Figure 2.5.3). ### Policy trade-offs across country groups and shock scenarios - Producer subsidies: - Particularly costly and inefficient, especially in low-income developing countries (LIDCs). - In LIDCs, containing pass-through from global to domestic energy prices via producer subsidies at one-half of what it would otherwise be would increase public debt by roughly 22 times as much as under targeted transfers (Online Annex Figure 2.5.8). - Comparable ratios: about 16 times in advanced economies and 14 times in emerging markets (Online Annex Figure 2.5.9; Figure 2.9). - Consumer subsidies (short-lived global food shock example): - Reduce surge in inflation by close to 4 percentage points and limit decline in LIHHs’ consumption by 5.5 percentage points in LIDCs (Figure 2.10, panel 1). - Fiscal cost: debt increases by about 7½ percentage points of GDP in LIDCs. - Corresponding increases in debt: close to 4 percentage points of GDP in emerging markets and about 1½ percentage points in advanced economies (Online Annex Figures 2.5.7 and 2.5.10). - Targeted transfers deliver similar improvements in LIHHs’ consumption at roughly one-sixth of the fiscal cost, implying consumer subsidies are about six times as expensive for comparable protection. - Once future costs of debt consolidation are included, targeted transfers are far more cost-effective for supporting low-income households in emerging markets and LIDCs (Figure 2.10, panel 2; Online Annex Figures 2.5.8, 2.5.9, 2.5.10). - Limited fiscal space scenario (LIDCs cannot increase deficits and must finance support via higher taxes): - Targeted transfers remain effective; vulnerable households remain better off overall despite higher tax burdens shared by all households (markers in Figure 2.10, panel 2). - Consumer subsidies cease to generate welfare gains for LIHHs when financed contemporaneously through higher taxes rather than borrowing. - International spillovers: - If all other countries use consumer subsidies in response to a global food supply shock while LIDCs do not, global food prices would rise by an additional 25 percentage points, and domestic food prices in LIDCs would increase by almost 5 percentage points more, relative to no-country-subsidies scenario (Figure 2.11). - The decline in LIHHs’ consumption in LIDCs would be 2.2 percentage points larger than without spillovers. - Simultaneous deployment of subsidies by many countries can worsen outcomes for vulnerable households in countries that lack fiscal space to respond. ### Quantitative summary from Table 2.1 (Model simulations: Relative performance of policy instruments) - Table reports effects relative to no-policy baseline on LIHHs’ welfare (percentage points of lifetime consumption) and peak debt-to-GDP ratio deviation over first three years after shock. Each instrument is calibrated to contain by half the impact on households from higher consumer prices. - Energy Shock (AEs, EMs, LIDCs) - Targeted Transfers: Welfare 0.04 0.09 0.01; Debt 0.17 0.02 0.09 - Untargeted Transfers: Welfare 0.01 0.49 0.00; Debt 0.65 0.02 0.40 - Consumer subsidies: Welfare −0.01 0.41 −0.02; Debt 0.53 −0.01 0.31 - Producer subsidies: Welfare −0.05 1.35 −0.07; Debt 2.35 −0.11 2.09 - Food Shock (AEs, EMs, LIDCs) - Targeted Transfers: Welfare 0.09 0.02 0.09; Debt 0.09 0.21 0.06 - Untargeted Transfers: Welfare 0.12 0.01 0.28; Debt 0.01 2.74 0.23 - Consumer subsidies: Welfare −0.01 1.40 −0.06; Debt 3.85 0.32 7.55 - Producer subsidies: Not considered for the food shock (Note: AEs = advanced economies; EMs = emerging markets; LIDCs = low-income developing countries. Source: IMF staff calculations.) ### Summary conclusions and policy implications - Targeted income-support measures that preserve price signals provide adequate protection for vulnerable households at significantly lower fiscal cost than broad-based price interventions. - Depending on instrument, shock, and economy, achieving comparable protection through price-suppressing measures can require between 3 and 22 times the fiscal resources as targeted transfers. - For low-income households, short-term welfare gains from lower prices often fail to offset medium-term costs from higher public debt and subsequent fiscal consolidation; subsidies can reduce welfare despite near-term consumption cushioning. - Efficiency of price-suppressing measures declines if many countries deploy them simultaneously, as they can raise global commodity prices and worsen outcomes for fiscally constrained countries. - When intervention is necessary: - Preserve price signals to encourage demand adjustment. - Deliver assistance temporarily and primarily through income-support measures targeted at the most vulnerable, ideally via scalable existing social protection systems. - Reserve broad-based measures for exceptional circumstances, keep them as narrowly focused as possible, calibrate to temporary components of price increases, and accompany them with well-communicated sunset clauses. - Investing in fiscal infrastructure and stronger social protection systems increases crisis-response effectiveness and reduces reliance on costly emergency measures. *Source: CHAPTER 2, “NaVIgaTINg a shOCK-PRONE WORLD: LEssONs FROM COsT-OF-LIVINg CRIsEs,” IMF staff calculations.* ### CHAPTER 2 NaVIgaTINg a shOCK-PRONE WORLD: LEssONs FROM COsT-OF-LIVINg CRIsEs ### CHAPTER 2 NaVIgaTINg a shOCK-PRONE WORLD: LEssONs FROM COsT-OF-LIVINg CRIsEs ### Box 2.1 — Cost-of-Living Crises, Rents, and Monetary Policy - Authors: Alessia De Stefani and Giovanni Sciacovelli. - Focus: behavior of rents during cost-of-living crises, interaction of rents with monetary policy, and distributional implications across households. - Methodological note: cumulative responses eight quarters after the onset of a cost-of-living crisis are estimated using a local-projection framework estimated over 2001–22; cost-of-living crises are identified from the change in food, transportation, and fuel costs and exclude housing costs. The monetary policy (MP) response is a dummy taking value 1 if policy rates increase in the quarter following the onset of a crisis and 0 otherwise. ### Response of rents during cost-of-living crises - During cost-of-living crises, rents increase on average by 1 percentage point. - The increase in rents is 1.5 percentage points less than the overall consumer price index (CPI) basket. - The increase in rents occurs only when crisis episodes are accompanied by an increase in policy rates. - Controls in the estimation include three lags of changes in the dependent variable, house prices and GDP, and country fixed effects. Whiskers in the reported figures represent 90 percent confidence intervals based on standard errors clustered at the quarter level. ### Interaction with monetary policy and mechanisms - Higher interest rates can hinder transitions into first-time homeownership, generating a rental demand shock that can push rent prices upward in the short term (Dias and Duarte 2019, 2022; Abramson, De Llanos, and Han 2025; De Stefani 2025). - In countries where rents and owner-equivalent imputed rents are a large component of the CPI basket, this channel can work against the disinflationary effects of monetary tightening following the onset of cost-of-living crises. ### Distributional implications - Renters tend to fall into the lower income quintiles. - Homeowners—particularly in countries where fixed-rate mortgages prevail—are largely shielded from rising shelter costs induced by monetary tightening. - Renters face the pass-through of rental costs, exacerbated by the large weight of rents in their consumption basket. - During 2021–24, renters experienced higher total inflation relative to homeowners in the same income bracket. - Figures reported use 2026 PPP GDP weights and the sample for distributional analysis includes Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Germany, Greece, Finland, France, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania, the Slovak Republic, Slovenia, and Spain. Owner-equivalent imputed rents are excluded from the calculation of the inflation differential between renters and homeowners over 2021–24. ### Key implications highlighted - The dynamics of rents during cost-of-living crises—and the dependence of rents on central banks’ responses—have regressive distributional implications. - These distributional implications remain outside the mandate of an inflation-targeting central bank, whose primary objective is to anchor aggregate price stability and expectations. *International Monetary Fund, World Economic Outlook: REsILIENCE UNDER sTRaIN, URgENT ChOICEs, October 2026.* ### 1. MNCs’ Footprint ### 1. MNCs’ Footprint ### Key findings - Investment has become considerably more sensitive to tax differentials since 2017. - Anti-avoidance efforts have weakened the link between tax differentials and profit shifting, while increasing the sensitivity of real investment decisions to tax rates. - Lower corporate income tax rates can stimulate investment, innovation, and productive capacity but may also reduce revenue. - The domestic and spillover effects of corporate income tax changes depend on how revenue losses are financed and on the strength of anti-avoidance frameworks. - Debt-financed tax cuts can generate negative spillovers in the short term by raising global interest rates and crowding out investment elsewhere. - Tax cuts that come at the cost of public investment can adversely impact output in the long term. - Implementing stronger anti-avoidance measures can ease some trade-offs, particularly for emerging market and developing economies. _Chapter structure (as presented in the chapter)_ - Primer on spillover channels from tax competition and evolution of corporate income tax policies and MNC adjustments. - Short-term spillovers associated with domestic tax policy changes using empirical and model-based approaches. - Strategic interactions among governments and the effect of tax differentials on cross-border investment. - MNC decisions on profit booking, location of new investment, and investment scale, and the effects of anti-avoidance measures and the shift toward intangible assets. - Model-based simulations of long-term spillovers from tax competition and stronger anti-avoidance policies, with attention to trade-offs for emerging market and developing economies. ### Channels and mechanisms - Tax competition and base shifting can reduce global efficiency by moving capital and profits toward low-tax jurisdictions rather than toward locations with the highest returns. - Governments deploy statutory rate cuts, profit-based incentives (tax holidays, patent box regimes), and base-narrowing measures (investment tax credits, accelerated depreciation, enhanced R&D allowances) to compete for profits and investment. - Profit-based incentives and targeted investment incentives have grown more prevalent; emerging market and developing economies and low-income countries rely more heavily on such instruments than advanced economies. - Reforms since 2013 (starting with the 15-point Action Plan from the OECD/G20 BEPS initiative and 2015 guidance) have included controlled foreign corporation rules, strengthened transfer pricing regulations, and interest limitation rules. - The United States enacted the Tax Cuts and Jobs Act (TCJA) in 2017, lowering the statutory rate, moving toward a more territorial system, and introducing minimum taxation of foreign income through GILTI, BEAT, and FDII, contributing to a compression of the global distribution of effective tax rates. ### Evidence on MNC behavior and intangibles - MNCs exploit cross-country tax differentials when choosing where to book profits, locate investment (extensive margin), and expand investment (intensive margin). - Common strategies include transferring ownership of intangible assets to a low-tax subsidiary and paying royalties (location of intangibles), adjusting intrafirm prices when intangible assets are hard to value (transfer pricing), and intra-group borrowing for tax-deductible interest payments (debt shifting). - The increasing importance of intangible capital amplifies the ability to decouple profit location from underlying economic activity because intangible assets are highly mobile and nonrival. - When profit-shifting opportunities are curtailed, tangible investment decisions become more sensitive to tax differentials, suggesting an increasing realignment between profit booking and economic activity. - Decompositions of backward-looking effective tax rates for MNCs attribute changes to tax policy shifts and profit-shifting responses; estimates indicate profit shifting has weakened since 2017, exerting somewhat less downward pressure on MNCs’ effective tax rates. ### Quantitative findings and model-based estimates - Output in the rest of the world falls by as much as 0.5 percent two years after a corporate income tax cut in a major economy. - Personal income tax cuts, by contrast, tend to generate positive external effects, with output elsewhere rising by about (text truncates here in the source; preserve source wording). - Lower corporate income tax rates raise after-tax returns and can stimulate private investment and expand productive capacity domestically, but effects depend on fiscal financing and public investment responses. - Short-term demand spillovers from tax cuts operate through stronger imports and external demand; debt-financed tax cuts can raise global interest rates, partially offsetting positive demand effects on trading partners. - Long-term net impacts depend on whether global capital accumulation and knowledge diffusion gains outweigh adverse effects from relocation of investment and tax bases to the tax-cutting economy. ### Policy trade-offs and considerations - Statutory rate cuts can encourage investment but reduce revenue; the net domestic and spillover outcomes hinge on financing choices and anti-avoidance strength. - Base-narrowing incentives and targeted provisions can attract investment but may narrow the tax base and lower effective tax burdens. - Strengthened anti-avoidance rules can reduce profit shifting and partially realign profits with real activity, altering the sensitivity of investment to tax differentials. - Policymakers face trade-offs between stimulating private investment and preserving public investment and revenue; revenue-neutral reforms that improve cost recovery while preserving taxation of economic rents can achieve investment gains without broad rate cuts. *Source: Chapter 3, "INTaNgIBLE YET REaL: sPILLOVERs FROM CORPORaTE INCOME TaXaTION," World Economic Outlook, International Monetary Fund | October 2026.* ### 0.5 percent within a year and continuing to increase ### Spillovers from Domestic Tax Cuts and Tax Competition ### Empirical estimates of tax-cut spillovers - "0.5 percent within a year and continuing to increase thereafter," although the response is not statistically significant (Figure 3.6, panels 1 and 2). - Personal income tax (PIT) and corporate income tax (CIT) shocks are orthogonalized following Mertens and Ravn (2014) and analyzed for Germany, the United Kingdom, and the United States; results are largely driven by corporate income tax changes in the United States, with Germany and the United Kingdom showing qualitatively similar but not statistically significant effects. - Panel estimates report the impact of a 1 percentage point (ppt) decrease in PIT or CIT rates in an average large advanced economy on rest-of-world (ROW) real GDP and real investment (instrumented by narrative shocks); shaded bands denote 90 percent confidence intervals. - Corporate income tax cuts can draw investment toward the implementing jurisdiction and, by raising after-tax returns, trigger a domestic investment response that can push up real interest rates and crowd out investment abroad (Figure 3.6, panel 3). ### Model-based illustration of short-term channels (Global Integrated Monetary and Fiscal model) - Simulations consider a 3 percentage point permanent fall in the corporate income tax rate of a major advanced economy. - A 3 percentage point CIT cut raises after-tax returns to capital; firms expand capital and investment, lifting domestic demand and exerting upward pressure on the real interest rate (Figure 3.7, panel 1). - When the corporate income tax cut is debt financed: - Public borrowing rises and adds upward pressure on real interest rates. - Both public and private demand for funds increases, raising real interest rates to equilibrate saving and investment. - Spillovers are amplified because higher global real interest rates crowd out investment abroad (Figure 3.7, panels 2 and 3). - When the tax cut is deficit neutral (financed by lower government spending or higher taxes elsewhere), spillovers are more muted: public borrowing rises less, capacity constraints are less binding, and interest rate hikes are suppressed at home and abroad (Figure 3.7, panel 2). ### Strategic tax competition and base shifting - Strategic complementarity: a 1 percentage point reduction in the average peer country’s statutory corporate income tax rate is associated with a 0.4 percentage point cut in the implementing jurisdiction’s statutory tax rate (Figure 3.8, panel 1). - The strategic response is strongest among countries comparable in size and level of development or viewed as close substitutes by international investors (Figure 3.8, panel 3). - The intensity of strategic tax competition has eased following 2013–17 reform efforts to address tax avoidance, primarily in statutory rates (Figure 3.8, panel 2), though changes in effective tax rates are not statistically significant. - Nature of competition has shifted toward other provisions (for example, profit-based incentives to promote innovation). ### FDI responses to tax differentials and channels of base shifting - A 1 percentage point increase in a country’s corporate income tax rate relative to other countries is associated with a cumulative decline in FDI inflows of about 0.5 percent of GDP over three years (Figure 3.9). - Sectoral and margin-specific findings: - When the effective average tax rate in one country increases to 1 percentage point above neighbors, the country has 1.5 fewer new greenfield projects than its neighbors in the short term. - Over the medium term, the elasticity can be as high as 4 for firms in low-intangibles-intensive sectors (Figure 3.10, panel 1). - Responses are more prominent for greenfield investments than for acquisitions. - Intensive-margin results (FDI flows) are qualitatively consistent with extensive-margin results (new projects) (Figure 3.10, panel 2). ### Tax competition in model simulations: reciprocity and global effects - Using an estimated response elasticity, the model assumes ROW lowers the effective CIT rate by 1.2 percentage points in response to a 3 percentage point cut by a major economy. - When all tax cuts are debt financed and reciprocated: - Real interest rates increase in all countries, reducing the GDP increase in the major rate-cutting economy relative to the unilateral case (Figure 3.11, solid versus dashed blue line). - Tax competition reduces the investment and output benefits to the original tax-cutting economy and leaves all economies facing higher interest rates. - For the ROW, original negative spillovers from investment reallocation are partly offset by the ROW’s own tax cuts (Figure 3.11, solid and dashed red lines). ### Profit-shifting and firm-level responses - Firm-level estimates relate affiliates’ pretax profitability to tax rates faced relative to other affiliates in the same MNC group. - A 1 percentage point increase in a country’s statutory rate relative to other locations where an MNC operates is associated with a decline in profits booked in that country of roughly 1 percent to 1½ percent (Figure 3.12, panel 1). - Heterogeneity by intangibles intensity: - Sensitivity of reported profits to tax differentials is 2.5 times higher for high-intangibles-intensive firms before 2017. - Over time, sensitivity has fallen only for low-intangibles-intensive firms, with no evidence of change for high-intangibles-intensive firms. - Anti-avoidance measures: - The responsiveness of reported profits to tax differentials is lower for MNCs headquartered in countries that have adopted transfer pricing documentation requirements, consistent with documentation requirements raising the cost of transfer pricing strategies (Figure 3.12, panel 2). - Anti-avoidance measures can thus dampen profit-shifting activity. *International Monetary Fund, World Economic Outlook: RESILIENCE UNDER STRAIN, URGENT CHOICES, October 2026* ### 1. Changes in Sensitivity of Reported Income, by Intangibles Intensiveness ### Changes in Sensitivity of Reported Income, by Intangibles Intensiveness ### Sensitivity of Reported Income and Intangibles Intensiveness - Figure data show changes in sensitivity of reported income with categories: Average, Low intangibles intensiveness, High intangibles intensiveness, and periods Pre-2017 and Post-2017 (visual scale includes −4, −3, −2, −1, 0, 1, 2). - Sample: foreign affiliates of multinational corporations over the 2010–20 period, with headquarters in over 40 countries and subsidiaries in over 100 countries. - Profits measure: earnings before interest and taxes. - Increase in tax differential: measured relative to the asset-weighted average of corporate income tax rates within the multinational corporation group. - Definition: An affiliate is “high-intangibles intensive” when the ratio of intangible fixed assets to total fixed assets of its global ultimate owner exceeds 50 percent on average. - Whiskers in figures denote 90 percent confidence intervals. - MNC = multinational corporation; TPDR = transfer pricing documentation requirements. ### Transfer Pricing Documentation Requirements (TPDR) and Reported Income Sensitivity - Figure contrasts "No regulation" and "TPDR" regimes across Low intangibles intensiveness and High intangibles intensiveness (visual scale includes −4, −3, −2, −1, 0, 1, 2). - Sources: Orbis; and IMF staff calculations. *IMF staff calculations.* ### Real Investment Decisions: Extensive Margin (Where to Locate Tangible Investment) - Empirical approach: project-level greenfield FDI data; conditional multinomial logit regression with 25 potential location choices. - Key numerical findings: - Average tax elasticity is approximately −1.4, such that a 10 percent increase in a country’s tax rate reduces the likelihood of its being chosen as a destination for FDI by about 14 percent. - The increase in sensitivity following 2017 rose from about ½ before 2017 to about 2 thereafter. - Heterogeneity by intangibles intensiveness: - Before 2017, high-intangibles firms were less sensitive to effective average tax rate differentials. - After 2017, both high- and low-intangibles-intensive firms became more tax-sensitive, and the gap between them largely disappeared. - Note: The differential is interacted with a post–Tax Cuts and Jobs Act dummy and firm-level intangible intensiveness to capture heterogeneity in profit-shifting capacity. ### Real Investment Decisions: Intensive Margin (How Much to Invest) - Dependent variable: investment rate across existing affiliates; explanatory variable: sector-specific effective marginal tax rate (EMTR) differential between home and host countries. - Key numerical findings: - A 1 percentage point increase in the effective marginal tax rate differential reduces the investment rate in that country by about 0.17 percentage point. - The sensitivity roughly doubles after 2017. - Sensitivity increases are larger for MNCs headquartered in countries that introduced anti-avoidance measures, especially transfer pricing documentation requirements and earnings stripping rules. - Sample and definitions: same sample as above; an affiliate is “high-intangibles intensive” when intangible fixed assets exceed 50 percent of total fixed assets on average. Whiskers denote 90 percent confidence intervals. TPDR = transfer pricing documentation requirements. ### Profits, Investment, and Anti-Avoidance: Aggregate Implications - Policies curbing profit shifting may strengthen the link between profits and real investment and make real investment more responsive to tax differentials. - Domestic tax reforms produce both revenue and investment-location effects, creating trade-offs: - Tax cuts mechanically reduce domestic revenues if they do not sufficiently attract profits or boost domestic activity. - Anti-avoidance measures raise the costs of shifting profits and can increase the taxable base without undermining revenues. ### Spatial General Equilibrium Model of Multinational Production and Intangible Capital - Model structure: six regions (a major advanced economy, other advanced economies, a major emerging market economy, other G20 emerging market economies, “productive” low-tax jurisdictions, and “unproductive” low-tax jurisdictions). - Channels through which a corporate income tax cut affects output: 1. Narrows tax differentials, reducing incentives to waste resources on profit shifting and freeing resources for R&D (efficiency gains). 2. Attracts FDI and profits from MNCs headquartered in other jurisdictions and can encourage domestic MNCs to reshore production (base shifting). 3. Raises after-tax returns, stimulating intangible investment and knowledge transfers within MNC groups. 4. Reduces government revenues that finance productive public capital, potentially lowering long-term productivity and output (lower public capital). - Calibration and robustness: model calibrated to bilateral trade flows, FDI positions, MNC size, and regional estimates of profits shifted to low-tax jurisdictions; see Online Annex 3.8 for details. ### Simulated Tax Competition Scenario and Quantitative Results - Simulation assumptions: - Major advanced economy cuts corporate income tax rate by 3 percentage points. - Other advanced economies cut by 1.2 percentage points in response. - Emerging market economies (a major EM and other EMs) lower rates by 1.2 percentage points. - Revenue and profit-shifting outcomes: - Direct corporate income tax revenue effects are sizable and broadly proportional to the magnitude of the cut. - In the major advanced economy, the overall effect on corporate income tax revenues entails a decline of just over 9 percent. - Applied to a corporate income tax base of about 1½ percent of GDP, this implies a fiscal cost of roughly 0.1 percent to 0.2 percent of GDP. - In other advanced economies, collections fall by about 4 percent. - Corporate income tax revenues in emerging market economies decline by about 4 percent. - Profits booked in low-tax jurisdictions decline by over 20 percent for the major advanced economy and by about 10 percent for other advanced economies. - When other emerging market economies engage in tax competition, shifted profits decline by less than 10 percent. - Output effects (deviation from baseline): - Net output effects are negative across the major economies: - 0.2 percent decline in the major advanced economy. - About 0.1 percent decline in other advanced economies. - Among emerging market economies, the overall output effect is negligible. - If only advanced economies engage in tax competition (emerging markets do not), the output effect for emerging markets is positive but modest, amounting to 1 basis point. - Interpretation within the model: - Lower tax rates reduce government revenues and the stock of public capital (adverse for long-term productivity), but also stimulate R&D and intangible investment (positive). - The net outcome reflects the balance of these forces and knowledge-transfer spillovers versus base erosion and investment shifting. ### Anti-Avoidance Measures and Emerging Market Economies - Strengthening anti-avoidance measures can expand tax bases in emerging market economies even if statutory rates remain unchanged. - Historical note: Many emerging market economies have strengthened anti-avoidance measures since the early 2010s (examples cited in the chapter). - Model implications: anti-avoidance measures limit profit shifting to low-tax jurisdictions and can reduce the trade-off between rate cuts and base erosion. *Sources: Orbis; and IMF staff calculations.* ### 2. Profits Shifted to Low-Tax Jurisdictions ### 2. Profits Shifted to Low-Tax Jurisdictions ### Macroeconomic effects of tax competition and enhanced enforcement - IMF staff calculations simulate an “AE tax competition” scenario that assumes a reduction in a major AE’s corporate income tax rate of 3 percentage points and a reduction in the corporate income tax rate of “Other AEs” of 1.2 percentage points. - “EM anti-avoidance” assumes profit-shifting costs increase by approximately 10 percent. - Under strategic corporate income tax rate cutting by advanced economies: - Revenues fall for advanced economies (black squares in Figure 3.16, panel 1). - Revenues increase by about 0.3 percentage point for emerging market economies, because their corporate income tax rates remain unchanged and their tax bases are better protected. - Profits shifted to low-tax jurisdictions fall by an estimated 10 percent for emerging market economies. - The net output effects for emerging market economies are about 0.04 percent, driven largely by knowledge transfers within MNC groups and small but positive effects of stronger enforcement (black squares in Figure 3.16, panel 3). - Model-based simulations emphasize a balance among investment gains, fiscal effects, and policy responses in other countries: - Debt-financed tax cuts in large economies can produce negative short-term spillovers through crowding out of investment, particularly if tax competition induces similar tax cuts elsewhere. - In the long term, tax cuts can generate positive spillovers through cross-border knowledge transfers, but domestic outcomes may weaken if public investment is curtailed or if other economies respond with tax rate cuts of their own. - Stronger anti-avoidance measures can help reduce profit shifting, preserve revenues lost through profit shifting, and hence support output, particularly in emerging market and developing economies. ### Conclusions on tax competition and spillovers - Strategic tax competition remains strongest among economies at similar stages of development, although tax competition appears to have moderated in regard to headline corporate income tax rates following major reforms in the 2010s. - The channels through which tax differentials affect MNCs are evolving: - Anti-avoidance reforms have reduced the sensitivity of profit shifting to tax differentials, while increasing the tax sensitivity of real investment decisions. - As a result, profits and real economic activity are potentially becoming more closely aligned. - Policy trade-offs have become increasingly important: - Lower corporate income taxation can support investment in productive capacity, but it can also reduce revenues, reshape the location of economic activity elsewhere, and influence the tax policies of other governments. ### Tax incentives, international rules, and shifts in tax competition - The Platform for Collaboration on Tax (2025) outlines six guiding principles for the use of tax incentives: - Justification: An incentive may be justified only if net social benefits can reasonably be expected, for reasons that are publicly articulated. - Design: Ensure effective targeting of the source of social benefits, while minimizing distortions and fiscal costs, including through cost-based incentives, which are generally more effective and efficient at increasing investment than profit-based incentives (IMF and others 2015). - Legislation: Embed corresponding provisions into law in a transparent and robust manner, including by minimizing discretion and with the necessary governance safeguards. - Implementation: Ensure (voluntary) compliance and effective monitoring of outcomes. - Evaluation: Regularly assess whether the benefits generated by the measure offset the cost; publish tax expenditures periodically. - International considerations: Recognize interactions with international initiatives and spillovers through strategic tax competition. - Changes in international rules have reshaped tax competition toward incentives linked to economic substance: - Ring-fencing constrained (2000s): The OECD’s harmful-tax-practices initiative (1998) identified ring-fencing as potentially harmful; restricting ring-fencing can prompt shifts toward lower economy-wide corporate income tax rates (Keen 2001). - Substance required (2010s): Action 5 of the BEPS Action Plan requires preferential regimes, including patent boxes, to be linked to substantial activity. - Incentives reshaped (early 2020s): The global minimum tax can trigger top-up taxes if the effective tax rate of an MNC group in that jurisdiction falls below 15 percent; this makes rate cuts and tax holidays less effective and may prompt greater use of cost-based incentives such as qualifying refundable tax credits. The “substance-based income exclusion” linked to payroll and tangible assets further strengthens the link to real activity by reducing the top-up tax base. - Substance-based incentives strengthened (mid-2020s): The January 2026 Side-by-Side Package introduced a more favorable treatment of substance-based incentives through the Substance-Based Tax Incentive Safe Harbour, further shifting tax competition from paper profits toward real economic activity. - The trade-off: while substance-linked incentives may curb profit shifting through shell or “mailbox” companies, they may intensify competition for real investment, employment, and production. ### Historical and institutional progress on BEPS implementation - As of 2026, the OECD/G20 Inclusive Framework consists of 148 members. - From 2025 to 2026, progress implementing the four BEPS minimum standards is reported as: - action 5: The OECD Forum on Harmful Tax Practices has reviewed almost 350 preferential regimes. - action 6: More than 95 percent of tax treaties entered into by IF members are expected to comply with the minimum standard. - action 13: 120 IF members have adopted CbC legislation. - action 14: More than 500 tax treaties have been modified to include Mutual Agreement Procedure provisions. - Progress on selected nonminimum standards is reported as: - action 3: 57 jurisdictions have adopted CFC rules. - action 4: 89 IF members have adopted ILRs. - actions 8–10: 117 IF members have incorporated the arm’s length principle into law; 102 use the OECD’s Transfer Pricing guidelines; and 38 (47) have been working to adopt or have adopted the approach for hard-to-value intangibles (low-value-adding intragroup services). ### Evidence on intellectual property and profit shifting - A new data set on cross-border patent ownership changes from 1995 to 2020 reveals that patents transferred to low-tax jurisdictions rose sharply during the 2000s, even though these destinations account for a small share of global production and innovation activity. - The share of global royalty income reported in low-tax jurisdictions has increased since the 2000s. - A gravity model of cross-border patent ownership transfers indicates that larger tax differentials are associated with more patent transfers from higher-tax to lower-tax jurisdictions, especially within MNCs; the highest sensitivity is estimated during 2007–12. *CHAPTER 3 INTaNgIBLE YET REaL: sPILLOVERs FROM CORPORaTE INCOME TaXaTION, World Economic Outlook: Resilience Under Strain, Urgent Choices, October 2026, International Monetary Fund.* ### 8.5 percent more patent transfers to lower-tax juris- ### The Geography of Innovation Income ### Patent transfers and tax differentials: core findings - Patent transfers are 8.5 percent more likely to move to lower-tax jurisdictions. - The estimate increases to 14.8 percent for intrafirm transfers. - After 2013, the relationship between bilateral patent transfers and tax differentials is no longer statistically significant. - The attenuation after 2013 coincides with major international tax reforms aimed at limiting profit shifting, though it may also reflect a shift toward less transparent arrangements—including cost-sharing arrangements, multistep ownership structures, and intellectual property–related service contracts—that are more difficult to observe in patent transaction data. - Model-based counterfactuals highlight that if tax differentials narrow, the incentives to reallocate patent ownership for tax purposes weaken, leaving the domestic royalty tax base relatively intact. ### Evidence from the data and figures - For 2007–12, each point summarizes bilateral intrafirm patent transfers for an origin-destination pair, plotted against the tax differential between the two economies; positive values on the horizontal axis indicate that the destination has a lower tax rate than the origin economy. - The upward-sloping fitted line in the figure shows that intrafirm patent transfers are larger when the destination offers a greater tax advantage. - Economies are grouped into unproductive LTJs (ULTJs), productive LTJs (PLTJs), and non-LTJs, following Tørsløv, Wier, and Zucman (2023). - PLTJs in the royalty-income analysis comprise Belgium, Ireland, Luxembourg, Singapore, Switzerland, and The Netherlands. ULTJs include offshore financial centers such as Bermuda and the Cayman Islands. Non-LTJs are the remaining economies in the sample. ### Implications for R&D, innovation, and policy - "Tax planning through patent ownership changes is evident, but the implications for R&D and innovation are more nuanced." - Tax rates primarily affect where innovation income is reported rather than where innovation is created. - Santacreu (2026) shows how differences in corporate income taxation shape cross-border royalty payments and technology flows. - Reducing profit shifting can raise the effective tax burden on mobile intangible income, thus discouraging R&D investments. - Income booked in low-tax jurisdictions is not necessarily reinvested where it is reported nor in further innovation. - Stronger base protection can help realign MNCs’ profit and innovation activity location choices, but the net effect on innovation will depend on whether MNCs use shifted profits to finance productive R&D or simply to reduce their tax liabilities. *Box 3.3, World Economic Outlook: Resilience Under Strain, International Monetary Fund, October 2026.* ### CHAPTER 3 INTaNgIBLE YET REaL: sPILLOVERs FROM CORPORaTE INCOME TaXaTION ### Intangible Yet Real: Spillovers from Corporate Income Taxation ### Chapter focus and related WEO placement - Chapter title: Intangible Yet Real: Spillovers from Corporate Income Taxation October 2026, Chapter 3. - Placed within the World Economic Outlook: Resilience Under Strain, Urgent Choices October 2026. - Related WEO boxes and references in the chapter: - The Interplay between Tax Incentives and International Tax Rules October 2026, Box 3.1 - Key Developments in International Corporate Income Taxation October 2026, Box 3.2 ### Scholarly and policy literature cited - LaBelle, Jesse, Fernando M. Martin, and Ana Maria Santacreu. 2026. “Taxation and the Global Allocation of Intangibles.” Federal Reserve Bank of St. Louis Working Paper 2025-025. - Maebayashi, Noritaka, and Keiichi Morimoto. 2024. “Global Corporate Income Tax Competition, Knowledge Spillover, and Growth.” European Economic Review 164: 104723. - Manski, Charles F. 1993. “Identification Problems in the Social Sciences.” Sociological Methodology 23: 1–56. - Mertens, Karel, and Morten O. Ravn. 2014. “A Reconciliation of SVAR and Narrative Estimates of Tax Multipliers.” Journal of Monetary Economics 68: S1–S19. - Naitram, Simon. 2022. “How Big Are Strategic Spillovers from Corporate Tax Competition?” Economic Inquiry 60 (2): 847–69. - Platform for Collaboration on Tax (PCT). 2025. “Tax Incentives Principles (TIPS).” PCT, Washington, DC. - Santacreu, Ana Maria. 2026. “International Technology Licensing, Intellectual Property Rights, and Tax Havens.” Review of Economics and Statistics 108 (1): 210–24. - Schneider, Todd, Sandhya Garimella, Li Liu, Simon Naitram, Can Sever, Felix Simione, Irena Jankulov Suljagic, and Qianqian Zhang. 2025. “Tax Expenditures in Sub-Saharan Africa.” IMF Departmental Paper 2025/006, Washington, DC. - Tørsløv, Thomas, Ludvig S. Wier, and Gabriel Zucman. 2023. “The Missing Profits of Nations.” Review of Economic Studies 90 (3): 1499–534. - Wier, Ludvig S., and Gabriel Zucman. 2022. “Global Profit Shifting, 1975–2019.” Working Paper 30673, National Bureau of Economic Research, Cambridge, MA. - Wilson, John D. 1986. “A Theory of Interregional Tax Competition.” Journal of Urban Economics 19 (3): 296–315. ### Thematic emphasis reflected in WEO Selected Topics - The chapter is cataloged under V. Fiscal Policy in the World Economic Outlook Selected Topics listing. - The WEO Selected Topics index highlights a broader set of fiscal and cross-border policy entries that frame the chapter’s themes, including: - Cross-Border Impacts of Fiscal Policy: Still Relevant October 2017, Chapter 4 - Macroeconomic Impact of Corporate Tax Policy Changes April 2018, Box 1.5 - Place-Based Policies: Rethinking Fiscal Policies to Tackle Inequalities within Countries October 2019, Box 2.4 - The Interplay between Tax Incentives and International Tax Rules October 2026, Box 3.1 - Key Developments in International Corporate Income Taxation October 2026, Box 3.2 ### Structural and contextual pointers from the WEO volume - The World Economic Outlook: Resilience Under Strain, Urgent Choices October 2026 contains extensive thematic sections and prior WEO historical archives (select entries shown from October 2016 through April 2026). - The Selected Topics index situates the chapter among treatments of fiscal policy, spillovers, tax incentives, profit shifting, and international tax developments spanning multiple years and prior WEO chapters and boxes. *International Monetary Fund | October 2026 — CHAPTER 3 INTaNgIBLE YET REaL: sPILLOVERs FROM CORPORaTE INCOME TaXaTION* ### Annex 1.SF.1 ### Annex 1.SF.1 ### Directors’ assessment of the global outlook and resilience - Executive Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities. - Directors concurred that the global economy is again proving resilient despite repeated shocks, even as the interaction of geopolitics and technology has produced a split global economy. - Favorable terms of trade and technology‑related exports and investment provide a cushion to energy exporters outside the conflict region and economies with strong participation in the technology upturn. - Energy‑importing economies with limited exposure to the technology value chain, including many low‑income and vulnerable countries, face stronger headwinds, underscoring the importance of continued Fund support. - Looking ahead, uncertainties surrounding the sustainability of the margins of adjustment that have supported resilience underscore the need to address underlying vulnerabilities and rebuild buffers. ### Risks to the outlook - Directors broadly concurred that risks to the outlook remain skewed to the downside. - Specific downside risks cited: - Prolongation of wars could revive inflationary pressures, worsen fiscal and external balances, and weigh on growth. - Additional disruptions to infrastructure, cyberattacks, or extreme weather events could potentially amplify the energy shock. - Any renewed trade tensions could add to inflationary pressures. - A reassessment of AI‑related prospects could sharply reduce investment, trigger equity market corrections, and tighten financial conditions, with global spillovers. - Resurgent inflation or fiscal concerns could trigger a sharp rise in sovereign bond yields and spark broader market turmoil given the foundational importance of sovereign bonds. - Cyber threats constitute a growing systemic risk as financial services become more digital and interconnected. - Structural vulnerabilities in the financial sector—including elevated leverage and growing liquidity mismatches, especially among nonbank financial institutions—could amplify downside risks, leading to systemic risks. - Directors generally acknowledged upside risks, including continued momentum in the technology cycle, faster‑than‑assumed productivity gains from AI, more predictable trade policies, and more resilient energy sources and supply chains. ### Fiscal policy guidance and rebuilding buffers - Directors called for a renewed focus on rebuilding fiscal space amid more limited room to maneuver due to elevated debt levels, rising borrowing costs, and mounting demands on public budgets. - Emphasis on tailoring policy responses to country circumstances. - Key fiscal policy recommendations: - Fiscal policy should be designed in a way not to complicate the task of monetary policy. - Where support for the most vulnerable is necessary, it should be transparent, temporary, and targeted, with budgetary offsets specified upfront, especially where fiscal space is constrained. - Strengthen delivery mechanisms that can be scaled rapidly when shocks hit, supported as needed by Fund technical assistance. - Credible medium‑term consolidation should rest on well‑specified plans, including durable revenue measures, greater spending efficiency, and prudent debt management, supported by institutional improvements. - Better tax design can support growth; encouraged reforms to reduce distortions in the cost of capital and to recalibrate marginal rates on labor income, so as to lift investment and employment while safeguarding revenue. ### Monetary policy stance and price stability - Directors reaffirmed the importance of preserving price and financial stability. - Directors generally stressed that central banks should remain agile and firmly focused on their mandates, with a few Directors cautioning that monetary policy should not overreact to inflationary pressures from fiscal policies or energy shocks. - Monetary policy differentiation guidance: - For energy importers, higher energy prices present a stagflationary challenge; monetary policy can look through the shock only if it is temporary and second‑round effects remain contained. These conditions are less likely to hold when inflation is already above target and broader price pressures are expected to remain elevated, warranting a bias toward tightening. - For energy exporters outside the conflict region, the positive terms‑of‑trade shock pushes income and aggregate demand up, potentially making a tightening appropriate. - In economies integrated into the technology value chain, the case for tightening gets stronger, especially if inflation is already above target and broader price pressures are expected to remain elevated. - Directors emphasized that clear communication and strong central bank independence are crucial for credibility. ### Financial stability and policy priorities - Directors stressed the importance of maintaining orderly adjustment and financial stability in the face of large shocks, with exchange rate flexibility as the first line of defense, complemented where warranted with measures consistent with the Integrated Policy Framework. - Policy priorities to mitigate financial stability risks include: - Placing debt on a sustainable path. - Strengthening bond market infrastructure and liquidity backstops. - Containing leverage in AI‑related exposures. - Ensuring cyber resilience, with a focus on the continuity of critical services. - To mitigate structural vulnerabilities in the financial sector, authorities should ensure timely and consistent implementation of internationally‑agreed standards, and closely monitor vulnerabilities arising from the increasingly important role of nonbank financial institutions. - Directors welcomed analysis of hedge funds and tokenization highlighting the importance of balancing innovation and market efficiency with financial resilience. ### Structural reforms, technology, and energy security - Directors highlighted the importance of reigniting structural reforms to ease macroeconomic trade‑offs and lift medium‑term growth potential. - Priorities include measures to enhance business dynamism and foster energy security through diversified energy sources, with some Directors highlighting the importance of investment across all energy sources. - A number of Directors called for further strengthening the Fund’s climate‑related work. - Directors stressed that the gains from AI and digitalization will be larger if supported by investment in human capital and infrastructure, as well as robust governance for data protection, cybersecurity, competition, and responsible use. ### International cooperation and global adjustment - Directors reaffirmed the importance of correcting domestic imbalances to support global adjustment. - A few Directors called for deeper analysis of non‑market policies and practices, while a few others emphasized the importance of distinguishing between policies that distort markets, including sanctions and trade restrictions, and those intended to address market failures. - Directors concurred that commonly agreed international economic rules—with clear, transparent, predictable, and mutually beneficial trade policy frameworks—are essential to reduce uncertainty and limit fragmentation. - Directors emphasized that international cooperation is essential in a shock‑prone world, including to manage spillovers from commodity market pressures, refugee flows, and debt vulnerabilities. --- _Source: https://www.imf.org/-/media/files/publications/weo/2026/october/english/text.pdf_