World Economic Outlook, October 2018: Challenges to Steady Growth

World Economic Outlook, October 2018

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The steady expansion under way since mid-2016 continues.
Global growth for 2018–19 is projected to remain at its 2017 level.
Global growth is projected at 3.7 percent for 2018–19—0.2 percentage point lower for both years than forecast in April.
The expansion has become less balanced and may have peaked in some major economies.
Downside risks to global growth have risen in the past six months and the potential for upside surprises has receded.
Downward revisions reflect:
- surprises that suppressed activity in early 2018 in some major advanced economies,
- negative effects of the trade measures implemented or approved between April and mid-September,
- a weaker outlook for some key emerging market and developing economies arising from country-specific factors, tighter financial conditions, geopolitical tensions, and higher oil import bills.

Output losses after the crisis appear to be persistent, irrespective of whether a country suffered a banking crisis in 2007–08.
Sluggish investment was a key channel through which these losses registered.
Long-lasting capital and total factor productivity shortfalls occurred relative to precrisis trends.
Policy choices preceding the crisis and in its immediate aftermath influenced postcrisis variation in output.
Countries with greater financial vulnerabilities in the precrisis years suffered larger output losses after the crisis.
Countries with stronger precrisis fiscal positions and those with more flexible exchange rate regimes experienced smaller losses.
Unprecedented and exceptional policy actions taken after the crisis helped mitigate countries’ postcrisis output losses.

Inflation in emerging market and developing economies since the mid-2000s has, on average, been low and stable.
Key findings:
- Despite overall stability, sizable heterogeneity in inflation performance and in variability of longer-term inflation expectations remains among emerging markets.
- Changes in longer-term inflation expectations are the main determinant of inflation, while external conditions play a more limited role.
- Domestic, not global, factors are the main contributor to the recent gains in inflation performance.
- Further improvements in the extent of anchoring of inflation expectations can significantly improve economic resilience to adverse external shocks in emerging markets.
- Anchoring reduces inflation persistence and limits the pass-through of currency depreciations to domestic prices, allowing monetary policy to focus more on smoothing fluctuations in output.

Strengthen macroprudential policies and effective supervision to reduce financial vulnerabilities that amplify postcrisis output losses.
Maintain or build stronger fiscal positions and consider exchange rate flexibility to reduce potential output losses in adverse shocks.
Enhance credibility and anchoring of longer-term inflation expectations in emerging markets to reduce inflation persistence and improve resilience to external shocks.
Recognize the role of exceptional policy actions in mitigating postcrisis losses while assessing longer-term trade-offs.

World Economic Outlook, October 2018: Challenges to Steady Growth