G-20 Surveillance Note: G-20 Finance Ministers and Central Bank Governors’ Meetings, Gandhinagar, India

July 2023

Prepared by IMF Staff 
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Executive Summary

The global economy is navigating a challenging period. 2023Q1 surprised on the upside relative to the April 2023 WEO. Since then, high frequency indicators paint a mixed picture of activity, with persistent pockets of resilience alongside signals of slowing momentum. The pace of China’s recovery is moderating after a sharp rebound in 2023Q1. Elsewhere, early signs that tighter monetary policy is transmitting to financial conditions are appearing. Inflation has eased somewhat but remains high, and disinflation efforts are likely to take time. The bout of financial turmoil in March has subsided, and declines in energy prices and some easing of external financial conditions have given emerging market and developing economies some respite from external pressures. However, both financial and external vulnerabilities remain elevated. Fiscal balances improved in 2022, but fiscal space remains limited and public debt burdens are expected to increase.

Risks are mostly tilted towards the downside. On the upside, a softer-than-projected landing for output and labor markets is possible, with activity remaining resilient, inflation falling faster than anticipated, and labor markets cooling through fewer vacancies rather than more unemployment. However, there are significant downside risks. Russia’s war in Ukraine could intensify, disrupting trade and investment flows, and reigniting the cost-of-living crisis. Disinflation may take longer than expected, requiring moderately tighter policies. Systemic financial sector stress in advanced economies could lead to a sharp tightening of global financial conditions, resulting in significant output losses and adverse external spillovers. An abrupt deterioration of investor sentiment could set off debt distress in and capital outflows from emerging market and developing economies. Geoeconomic fragmentation could undermine growth and cooperation on common challenges.

G-20 policymakers will need to continue the inflation fight while remaining considerate of risks. Where inflation is high, central banks should prioritize bringing it down to target. Financial policy tools can be deployed to contain stresses, allowing monetary policy to remain focused on fighting inflation. At the same time, financial sector supervisors will need to be vigilant in monitoring and addressing heightened risks (e.g., interest rate risk). Fiscal policy should rebuild buffers, and tighter policy will help the fight against inflation. However, with food prices still elevated, fiscal support may be needed to protect the vulnerable, but such support should be well-targeted and temporary. Structural reforms can boost growth, help to fight inflation, aid sovereign debt sustainability, and enable a cost-efficient green transition. Industrial policy can have significant costs and risks, and if used, should be carefully designed to limit distortions and adverse spillovers.

Multilateral efforts by G-20 policymakers are needed to tackle global challenges. G-20 leadership can help ensure the global financial safety net is available to help developing economies navigate multiple shocks and ensure that unsustainable debt burdens are promptly addressed. Governments should take steps to limit fragmentation, including resisting discriminatory policies and industrial policies with (potentially) protectionist provisions. Such steps will preserve important engines of global growth and support cooperation on common challenges, including climate change.

Prepared under the guidance of Hélène Poirson by a team led by Ashique Habib, comprising Nicolas Fernandez-Arias, Chanpheng Fizzarotti, Kyu Ho Lee, and Chao Wang. Andrea Presbitero also provided guidance in the early stages. Ilse Peirtsegaele and Nicole Jales provided administrative support.

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