G20 Economies Should Turn to Reforms to Improve Growth Amid Policy Tightening

IMF Blog, November 7, 2023

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Central banks will need to keep interest rates "higher for longer" as inflation remains persistently elevated; easing too soon could undo progress to anchor inflation expectations.
The "higher-for-longer" environment implies sustained funding pressures for governments and the need to rebuild fiscal buffers to ensure debt sustainability.
The report prepared for the G20 covers economies responsible for "about four-fifths" of global gross domestic product.

Recommended policy mix (tighter macro policy in many economies plus priority structural reforms) can boost G20 economic output by "as much as 0.7 percent" over "2025-28" relative to current projections.
IMF World Economic Outlook projections cited:
- Growth will slow from "3.5 percent" last year to "3 percent" this year and "2.9 percent" next year.
- Five-year-ahead projections are down from a peak of "4.9 percent" a decade ago to "3.1 percent for 2028", the lowest such forecast since "1990".

Most G20 economies are likely to keep monetary policy appropriately tight to bring inflation back to target.
Governments are poised to cut spending and boost revenues in the next few years; IMF staff recommend even greater fiscal effort in many cases to ensure sufficient space to respond to future shocks and new fiscal challenges.
The recommended macroeconomic adjustments would weigh on output in the G20’s advanced economies in coming years because of a "tighter-than-planned fiscal consolidation", but would substantially reduce public debt burdens and trade imbalances among G20 economies.
The pace and composition of fiscal consolidation should "protect of the most vulnerable people to ensure inclusive and equitable outcomes."

Both advanced economies and emerging market and developing countries should consider structural reforms, such as making product and labor markets more efficient, to support growth.
Recent IMF research highlights significant potential benefits of so-called "first-generation reforms" in emerging market and developing economies, which can have beneficial spillovers for advanced economies.
If fiscal consolidation is paired with the recommended structural reforms, the negative drag on output from tighter near-term macro policy would be more than offset, supporting stronger, more balanced, and more inclusive growth.

Short-term costs: tighter-than-planned fiscal consolidation may reduce output in advanced economies in the near term.
Medium-term gains: disinflation, rebuilt fiscal buffers to manage future shocks, reduced public debt burdens, reduced trade imbalances, and the prospect of stronger and more balanced growth when structural reforms accompany consolidation.
The weak growth outlook, heightened uncertainty, still-elevated global inflation, and limited fiscal space make implementation challenging but potentially rewarding.

JaeBin Ahn, Nicolas Fernandez-Arias, Neil Meads — November 7, 2023