## As Inflation Recedes, Global Economy Needs Policy Triple Pivot

_IMF Blog, October 22, 2024_

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## Bibliographic details
- Authors: Pierre-Olivier Gourinchas
- Published: October 22, 2024

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### Global outlook and inflation dynamics
- Headline inflation peaked at 9.4 percent year-on-year in the third quarter of 2022 and is projected to fall to 3.5 percent by the end of next year.
- Global growth is projected to hold steady at 3.2 percent in 2024 and 2025.
- Growth in the United States is 2.8 percent this year, but expected to revert toward its potential in 2025.
- Emerging markets and developing economies: growth around 4.2 percent in 2024 and 2025, with continued robust performance from emerging Asia.
- Five-year-ahead growth prospects remain lackluster at 3.1 percent.
- The surge and subsequent decline in inflation reflected a combination of shocks: broad supply disruptions after the pandemic and sharp commodity price spikes caused by the war in Ukraine.
- Supply disruptions and tight monetary policy led to a normalization in labor markets that allowed inflation to decline rapidly without a major slowdown in activity.
- Much disinflation came from the unwinding of shocks and improvements in labor supply, often linked to increased immigration; monetary policy also kept inflation expectations anchored.

### Downside risks and structural challenges
- Downside risks increasingly dominate the outlook, including:
  - An escalation in regional conflicts, especially in the Middle East, posing serious risks for commodity markets.
  - Shifts toward undesirable trade and industrial policies that can significantly lower output relative to the baseline.
  - Monetary policy remaining too tight for too long, and the potential for abrupt tightening of global financial conditions.
- Inflation in services remains too elevated, almost double pre-pandemic levels.
- A few emerging market economies face a resurgence of inflationary pressures and have started to raise policy rates again.
- The world is now dominated by supply disruptions—from climate, health, and geopolitical tensions—which make it harder for monetary policy to contain inflation while preserving output.
- Inflation expectations were well-anchored this episode, but may be harder to anchor next time as workers and firms become more vigilant about protecting pay and profits.

### Policy triple pivot (overview)
- With inflation near central bank targets, policymakers should pursue a coordinated "triple pivot":
  1. Monetary policy: move toward neutral and allow for easing where appropriate.
  2. Fiscal policy: stabilize debt dynamics and rebuild fiscal buffers.
  3. Growth-enhancing reforms: boost productivity, technology, competition, and private investment.

### First pivot — Monetary policy
- Major central banks in advanced economies have started cutting policy rates since June, moving toward a neutral stance.
- Lower interest rates in major economies will ease pressure on emerging market economies by strengthening their currencies against the US dollar and improving financial conditions, thereby reducing imported inflation.
- Labor markets in many advanced economies are showing signs of cooling, with rising unemployment rates; the rise in unemployment has been gradual so far and does not point to an imminent slowdown.
- Vigilance required because:
  - Services inflation remains elevated.
  - Some emerging markets are re-tightening policy.
  - Supply shocks complicate monetary responses.

### Second pivot — Fiscal policy
- Fiscal space is a cornerstone of macroeconomic and financial stability; after years of loose fiscal policy, it is time to stabilize debt dynamics and rebuild fiscal buffers.
- Declining policy rates provide some fiscal relief by lowering funding costs, but this is not sufficient while long-term real interest rates remain far above pre-pandemic levels.
- Primary balances need to improve in many countries.
- For some countries, including the United States and China, current fiscal plans do not stabilize debt dynamics.
- Early post-pandemic fiscal plans showed promise in many countries, but there are increasing signs of slippage.
- The policy trade-off is narrow:
  - Delaying consolidation increases the risk of disorderly market-imposed adjustments.
  - An excessively abrupt fiscal tightening could be self-defeating and hurt economic activity.
- Success requires sustained and credible multi-year adjustments without delay where consolidation is necessary; credible fiscal adjustment enables monetary policy to support activity while keeping inflation in check.
- The willingness or ability to deliver disciplined and credible fiscal adjustments has been lacking.

### Third pivot — Growth-enhancing reforms
- The hardest pivot is toward ambitious domestic reforms to improve growth prospects and lift productivity; needed to:
  - Rebuild fiscal buffers.
  - Cope with aging and shrinking populations.
  - Tackle the climate transition.
  - Increase resilience and improve lives of the most vulnerable.
- Many countries’ five-year growth prospects are weak; China’s weaker outlook contributes significantly, but medium-term prospects in other regions (including Latin America and the European Union) have also deteriorated.
- Some countries are implementing industrial and trade policies to protect domestic workers and industries; such measures:
  - Can sometimes boost short-run investment and activity, especially if debt-financed.
  - Often lead to retaliation and fail to deliver sustained improvements in living standards.
  - Should be avoided unless they carefully address well-identified market failures or narrowly defined national security concerns.
- Sustainable growth must come from reforms that boost technology and innovation, improve competition and resource allocation, further economic integration, and stimulate productive private investment.
- Reforms face significant social resistance; Chapter 3 shows that information strategies help but are insufficient. Building trust between government and citizens and including proper compensation to offset potential harms are essential for reform success.

### Policy recommendations and strategic priorities
- Coordinate the three pivots to create macroeconomic breathing room:
  - Continue cautious monetary easing toward neutral where appropriate, while monitoring services inflation and emerging-market pressures.
  - Implement sustained, credible multi-year fiscal adjustments to stabilize debt dynamics and rebuild buffers; avoid both undue delay and excessively abrupt tightening.
  - Prioritize growth-enhancing structural reforms that raise productivity, with policies to build trust, ensure inclusion, and provide compensation where reforms impose short-term costs.
- Resist protectionist industrial and trade measures except when narrowly justified by market failures or national security concerns.
- Strengthen international cooperation and multilateral efforts to address shared challenges, building on trust and engagement.

*This blog is based on the October 2024 World Economic Outlook.*

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## References

- [Chapter 2](https://www.imf.org/en/Blogs/Articles/2024/10/16/global-inflationary-episode-offers-lessons-for-monetary-policy)
- [debt dynamics](https://www.imf.org/en/Blogs/Articles/2024/10/15/global-public-debt-is-probably-worse-than-it-looks)
- [setting the macro dials appropriately](https://www.imf.org/en/Blogs/Articles/2024/09/12/trade-balances-in-china-and-the-us-are-largely-driven-by-domestic-macro-forces)
- [Chapter 3](https://www.imf.org/en/Blogs/Articles/2024/10/16/support-for-economic-reforms-hinges-on-communication-engagement-and-trust)
- [World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2024/10/22/world-economic-outlook-october-2024?cid=bl-com-AM2024-WEOEA2024002)

_Source: https://www.imf.org/en/blogs/articles/2024/10/22/as-inflation-recedes-global-economy-needs-policy-triple-pivot_