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INTERNATIONAL MONETARY FUND
WORLD ECONOMIC OUTLOOK
Countering the Cost-of-Living Crisis
2022
OCT
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©2022 International Monetary Fund
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Joint Bank-Fund Library
Names: International Monetary Fund.
Title: World economic outlook (International Monetary Fund)
Other titles: WEO | Occasional paper (International Monetary Fund) | World economic and financial surveys.
Description: Washington, DC : International Monetary Fund, 1980- | Semiannual | Some issues also have thematic titles. | Began with issue for May 1980. | 1981–1984: Occasional paper / International Monetary Fund, 0251–6365 | 1986-: World economic and financial surveys, 0256–6877.
Identifiers: ISSN 0256–6877 (print) | ISSN 1564–5215 (online)
Subjects: LCSH: Economic development—Periodicals. | International economic relations— Periodicals. | Debts, External—Periodicals. | Balance of payments—Periodicals. | International finance—Periodicals. | Economic forecasting—Periodicals.
Classification: LCC HC10.W79
HC10.80
ISBN 979–8-40021–843-9 (English Paper)
979–8-40022–121-7 (English ePub)
979–8-40022–128-6 (English Web PDF)
The World Economic Outlook (WEO) is a survey by the IMF staff published twice a year, in the spring and fall. The WEO is prepared by the IMF staff and has benefited from comments and suggestions by Executive Directors following their discussion of the report on September 29, 2022. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.
Recommended citation: International Monetary Fund. 2022. World Economic Outlook: Countering the Cost-of-Living Crisis. Washington, DC. October.
Errata
October 17, 2022
At publication on October 11, certain tables in this report failed to incorporate the gross domestic product data for Italy that was available before the report’s deadline for data submission. As a result, the data row for Italy has been corrected where appropriate in the following tables:
| Table 1.1. (pages 9–10) | Statistical Appendix Table A2. (page 126) |
| Annex Table 1.1.1. (page 42) | Statistical Appendix Table A3. (page 128) |
| Annex Table 1.1.6. (page 47) | Statistical Appendix Table B1. (page 2) |
| Table 1.1. (pages 9–10) | Statistical Appendix Table A2. (page 126) |
| Annex Table 1.1.1. (page 42) | Statistical Appendix Table A3. (page 128) |
| Annex Table 1.1.6. (page 47) | Statistical Appendix Table B1. (page 2) |
Additionally, certain tables in this report included incorrect projections for gross domestic product in US dollars for China and the world, and current account balance in percent of GDP for China. These projections have been corrected in the following tables:
Annex Table 1.1.2. (page 43)
Statistical Appendix Table A1. (page 125)
Statistical Appendix Table A12. (page 144)
This PDF version of the report now contains the proper data in the above tables.
Publication orders may be placed online, by fax, or through the mail:
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Contents
Assumptions and Conventions
Further Information
Data
Preface
Foreword
Executive Summary
Chapter 1. Global Prospects and Policies
Inflation and Uncertainty
Central Banks Tackle Stubbornly High Inflation
War in Ukraine Causes More Human Suffering and Economic Damage
COVID-19 Continues to Hold Back Economic Progress
The Forecast: Output Lower Still, but Inflation Peaking
Risks to the Outlook: The Downside Still Dominates
Policy Actions: From Inflation to Growth
Box 1.1. Dissecting Recent WEO Inflation Forecast Errors
Box 1.2. Market Power and Inflation during COVID-19
Box 1.3. Risk Assessment around the World Economic Outlook Baseline Projection
Special Feature: Commodity Market Developments and Food Inflation Drivers
References
Chapter 2. Wage Dynamics Post–COVID-19 and Wage-Price Spiral Risks
Introduction
Historical Episodes Similar to Today
Wage Drivers during the COVID-19 Shock and Recovery
Inflation De-anchoring: Expectations and Policy Responses
Conclusions
Box 2.1. Pass-Trough from Wages to Prices: Estimates from the United States
References
Chapter 3. Near-Term Macroeconomic Impact of Decarbonization Policies
Introduction
Decarbonizing the Economy: Now Is the Time to Become Credible
Climate Policies to Keep Paris within Reach
Credible Policies: Key for a Successful Transition
Transition Costs under Further Delays
Conclusions and Policy Implications
Box 3.1. Near-Term Implications of Carbon Pricing: A Review of the Literature
Box 3.2. Political Economy of Carbon Pricing: Experiences from South Africa, Sweden, and Uruguay
Box 3.3. Decarbonizing the Power Sector while Managing Renewables’ Intermittence
References
Statistical Appendix
Assumptions
What’s New
Data and Conventions
Country Notes
Classification of Countries
General Features and Composition of Groups in the World Economic Outlook Classification
Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2021
Table B. Advanced Economies by Subgroup
Table C. European Union
Table D. Emerging Market and Developing Economies by Region and Main Source of Export Earnings
Table E. Emerging Market and Developing Economies by Region, Net External Position, Heavily Indebted Poor Countries, and per Capita Income Classification
Table F. Economies with Exceptional Reporting Periods
Table G. Key Data Documentation
Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies
List of Tables
Output (Tables A1–A4)
Inflation (Tables A5–A7)
Financial Policies (Table A8)
Foreign Trade (Table A9)
Current Account Transactions (Tables A10–A12)
Balance of Payments and External Financing (Table A13)
Flow of Funds (Table A14)
Medium-Term Baseline Scenario (Table A15)
World Economic Outlook Selected Topics
IMF Executive Board Discussion of the Outlook, September 2022
Tables
Table 1.1. Overview of the World Economic Outlook Projections
Table 1.2. Overview of the World Economic Outlook Projections at Market Exchange Rate Weights
Table 1.SF.1. Oil, Cereal, and Food Price Boom Phases
Table 1.SF.2. Oil-Cereal Price Correlation
Annex Table 1.1.1. European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.2. Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.4. Middle East and Central Asia Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.5. Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.6. Summary of World Real per Capita Output
Table 3.1. Tree Policy Packages Reducing Emissions by 25 Percent in 2030
Table 3.1.1. Cross-Model Comparison of Changes in GDP
Online Tables—Statistical Appendix
Table B1. Advanced Economies: Unemployment, Employment, and Real GDP per Capita
Table B2. Emerging Market and Developing Economies: Real GDP
Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing
Table B4. Emerging Market and Developing Economies: Consumer Prices
Table B5. Summary of Fiscal and Financial Indicators
Table B6. Advanced Economies: General and Central Government Net Lending/Borrowing and General Government Net Lending/Borrowing Excluding Social Security Schemes
Table B7. Advanced Economies: General Government Structural Balances
Table B8. Emerging Market and Developing Economies: General Government Net Lending/Borrowing and Overall Fiscal Balance
Table B9. Emerging Market and Developing Economies: General Government Net Lending/Borrowing
Table B10. Selected Advanced Economies: Exchange Rates
Table B11. Emerging Market and Developing Economies: Broad Money Aggregates
Table B12. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade in Goods and Services
Table B13. Emerging Market and Developing Economies by Region: Total Trade in Goods
Table B14. Emerging Market and Developing Economies by Source of Export Earnings: Total Trade in Goods
Table B15. Summary of Current Account Transactions
Table B16. Emerging Market and Developing Economies: Summary of External Debt and Debt Service
Table B17. Emerging Market and Developing Economies by Region: External Debt by Maturity
Table B18. Emerging Market and Developing Economies by Analytical Criteria: External Debt by Maturity
Table B19. Emerging Market and Developing Economies: Ratio of External Debt to GDP
Table B20. Emerging Market and Developing Economies: Debt-Service Ratios
Table B21. Emerging Market and Developing Economies, Medium-Term Baseline Scenario: Selected Economic Indicators
Figures
Figure 1.1. Leading Indicators Show Signs of Slowdown
Figure 1.2. Change in Monetary Policy Cycle among G20 Economies
Figure 1.3. EMDE Sovereign Spreads
Figure 1.4. Wholesale Food and Fuel Prices Expected to Moderate
Figure 1.5. Mean Land Temperature
Figure 1.6. Core Inflation and Its Distribution across Countries
Figure 1.7. Inflation Hits the Poorest Hardest
Figure 1.8. Rebalancing of Demand: Goods versus Services
Figure 1.9. Inflation Driven by Food and Fuel
Figure 1.10. Real Short-Term Rates Are Rising
Figure 1.11. A Transatlantic Divergence
Figure 1.12. Russian Pipeline Gas Supplies to EU by Route
Figure 1.13. New Confirmed COVID-19 Deaths
Figure 1.14. Countries in Contraction as a Share of Global GDP, 2022–23
Figure 1.15. Global Growth and Inflation Forecasts
Figure 1.16. The Shocks of 2022: Persistent Output Losses
Figure 1.17. Scarring from the Pandemic
Figure 1.18. Inflation Likely to Decline Next Year
Figure 1.19. Current Account and International Investment Positions
Figure 1.20. Corporate Talk of Key Macroeconomic Risks
Figure 1.21. Long-Term Inflation Expectations
Figure 1.22. Africa Least Vaccinated against COVID-19
Figure 1.23. Slowdown in China
Figure 1.24. Natural Rate of Interest, United States
Figure 1.25. Broad-Based Dollar Appreciation
Figure 1.26. Change in Cyclically Adjusted Primary Balance
Figure 1.27. Debt in Distress in Emerging Market and Developing Economies
Figure 1.1.1. Headline Inflation Forecasts
Figure 1.1.2. WEO Annual Headline Forecast Errors with Respect to Preceding January WEO Updates
Figure 1.1.3. Core Inflation and Output Forecast Errors
Figure 1.1.4. Impacts on Core Inflation Forecast Errors
Figure 1.2.1. Decomposition of GDP Deflator Growth by Income Components
Figure 1.2.2. Sales-Weighted Markups and CPI for Selected Advanced Economies
Figure 1.2.3. Coefficient of Production Costs Pass-Trough to Prices
Figure 1.3.1. Distribution of World GDP Growth Forecast
Figure 1.3.2. Impact of Downside Scenario on GDP and Inflation
Figure 1.SF.1. Commodity Market Developments
Figure 1.SF.2. Russian Gas Exports and Prices
Figure 1.SF.3. Selected Commodity Price Indices
Figure 1.SF.4. Response of Cereal Prices to Major Drivers
Figure 1.SF.5. Response of Food CPI to International Food Price Shock
Figure 1.SF.6. Conditional Forecast Domestic Food Price Inflation
Figure 2.1. Recent Wage, Price, and Unemployment Dynamics
Figure 2.2. Changes in Wages, Prices, and Unemployment after Similar Past Episodes
Figure 2.3. Changes in Wages, Prices, and Unemployment after Past Episodes with Accelerating Prices and Wages
Figure 2.4. A Look at Nominal Wage Growth through the Lens of the Wage Phillips Curve
Figure 2.5. The Role of Structural Characteristics in Wage Dynamics
Figure 2.6. Drivers of Changes in Wages, Prices, and Employment during the COVID-19 Pandemic and Recovery
Figure 2.7. Cumulative Effects of Supply Chain Pressures and Monetary Tightening on Wages and Prices
Figure 2.8. Cumulative Effects of Supply Chain Pressures on Inflation Expectations
Figure 2.9. Near-Term Scenarios with Set Interest Rate Path under Different Expectations
Figure 2.10. Optimal Policy Scenario under Adaptive Learning Expectations
Figure 2.1.1. Pass-Trough from Wages to Prices
Figure 3.1. Historical and Projected Global Emissions
Figure 3.2. Macroeconomic Impact in 2030 of a GHG Tax under Different Calibrations of Elasticities
Figure 3.3. Macroeconomic Impact of Different Recycling Options in the United States
Figure 3.4. Macroeconomic Impact of the Tree Policy Packages in Regions in the Simulation
Figure 3.5. Impact in 2030 of Fully and Partially Credible Mitigation Policies
Figure 3.6. Macroeconomic Impact of Different Monetary Policy Targets in the United States
Figure 3.7. Macroeconomic Impact of Different Monetary Policy Targets under Wage Indexation
Figure 3.8. Gradual and Delayed GHG Mitigation Policies in the United States
Figure 3.1.1. Carbon Pricing in 2022 for Selected Economies
Figure 3.2.1. Carbon Price in Sweden
Figure 3.2.2. Carbon Price and Emissions Coverage, 2022
Figure 3.3.1. Monthly Wholesale Electricity Prices in Selected European Economies
Figure 3.3.2. Daily Electricity Prices in Selected European Countries as a Function o Share of Renewables in Power Production
Assumptions and Conventions
A number of assumptions have been adopted for the projections presented in the World Economic Outlook (WEO). It has been assumed that real effective exchange rates remained constant at their average levels during July 22, 2022, to August 19, 2022, except for those for the currencies participating in the European exchange rate mechanism II, which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $98.19 a barrel in 2022 and $85.52 a barrel in 2023; that the three-month government bond yield for the United States will average 1.8 percent in 2022 and 4.0 percent in 2023, for the euro area will average –0.2 percent in 2022 and 0.8 percent in 2023, and for Japan will average –0.1 percent in 2022 and 0.0 percent in 2023; and that the 10-year government bond yield for the United States will average 3.2 percent in 2022 and 4.4 percent in 2023, that for the euro area will average 0.9 percent in 2022 and 1.3 percent in 2023, and that for Japan will average 0.2 percent in 2022 and 0.3 percent in 2023. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would, in any event, be involved in the projections. The estimates and projections are based on statistical information available through September 26, 2022.
The following conventions are used throughout the WEO:
… to indicate that data are not available or not applicable;
– between years or months (for example, 2021–22 or January–June) to indicate the years or months covered, including the beginning and ending years or months; and
/ between years or months (for example, 2021/22) to indicate 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. Please refer to Table F in the Statistical Appendix, which lists the economies with exceptional reporting periods for national accounts and government finance data for each country.
For some countries, the figures for 2021 and earlier are based on estimates rather than actual outturns. Please refer to Table G in the Statistical Appendix, which lists the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments for each country.
What is new in this publication:
For Algeria, starting with the October 2022 WEO, total government expenditure and net lending/borrowing include net lending by the government, which mostly reflects support to the pension system and other public sector entities.
Ecuador’s fiscal sector projections, which were previously omitted because of ongoing program review discussions, are now included.
Tunisia’s forecast data, which were previously omitted because of ongoing technical discussions pending potential program negotiations, are now included.
Turkey is now referred to as Türkiye.
For Sri Lanka, certain projections for 2023–27 are excluded from publication owing to ongoing discussions on sovereign debt restructuring, following the recently reached staff-level agreement on an IMF-supported program.
For Venezuela, following methodological upgrades, historical data have been revised from 2012 onward. Nominal variables that were omitted from publication in the April 2022 WEO are now included.
In the tables and figures, the following conventions apply:
Tables and figures in this report that list their source as “IMF staff calculations” or “IMF staff estimates” draw on data from the WEO database.
When countries are not listed alphabetically, they are ordered on the basis of economic size.
Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
Composite data are provided for various groups of countries organized according to economic characteristics or region. Unless noted otherwise, country group composites represent calculations based on 90 percent or more of the weighted group data.
The boundaries, colors, denominations, and any other information shown on maps do not imply, on the part of the IMF, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Further Information
Corrections and Revisions
The data and analysis appearing in the World Economic Outlook (WEO) are compiled by the IMF staff at the time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary (see below). All substantive changes are listed in the online table of contents.
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Data
This version of the World Economic Outlook (WEO) is available in full through the IMF eLibrary (www.elibrary.imf.org) and the IMF website (www.imf.org). Accompanying the publication on the IMF website is a larger compilation of data from the WEO database than is included in the report itself, including files containing the series most frequently requested by readers. These files may be downloaded for use in a variety of software packages.
The data appearing in the WEO are compiled by the IMF staff at the time of the WEO exercises. The historical data and projections are based on the information gathered by the IMF country desk officers in the context of their missions to IMF member countries and through their ongoing analysis of the evolving situation in each country. Historical data are updated on a continual basis as more information becomes available, and structural breaks in data are often adjusted to produce smooth series with the use of splicing and other techniques. IMF staff estimates continue to serve as proxies for historical series when complete information is unavailable. As a result, WEO data can differ from those in other sources with official data, including the IMF’s International Financial Statistics.
The WEO data and metadata provided are “as is” and “as available,” and every effort is made to ensure their timeliness, accuracy, and completeness, but these cannot be guaranteed. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.
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Preface
The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments—namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department— together with the Strategy, Policy, and Review Department; the Monetary and Capital Markets Department; and the Fiscal Affairs Department.
The analysis in this report was coordinated in the Research Department under the general direction of Pierre-Olivier Gourinchas, Economic Counsellor and Director of Research. The project was directed by Petya Koeva Brooks, Deputy Director, Research Department, and Daniel Leigh, Division Chief, Research Department.
The primary contributors to this report are Silvia Albrizio, Jorge Alvarez, Philip Barrett, Mehdi Benatiya Andaloussi, John Bluedorn, Christian Bogmans, Benjamin Carton, Christopher Evans, Allan Dizioli, Niels-Jakob Hansen, Florence Jaumotte, Christofer Koch, Toh Kuan, Dirk Muir, Jean-Marc Natal, Diaa Noureldin, Augustus J. Panton, Andrea Pescatori, Ervin Prifti, Alexandre Sollaci, Martin Stuermer, Nico Valckx, Simon Voigts, and Philippe Wingender.
Other contributors include Michael Andrle, Gavin Asdorian, Jared Bebee, Rachel Brasier, Moya Chin, Yaniv Cohen, Federico Díez, Wenchuan Dong, Angela Espiritu, Rebecca Eyassu, Ziyan Han, Jinjin He, Youyou Huang, Eduard Laurito, Jungjin Lee, Li Lin, Li Longj, Yousef F. Nazer, Cynthia Nyanchama Nyakeri, Emory Oakes, Myrto Oikonomou, Clarita Phillips, Carlo Pizzinelli, Rafael Portillo, Evgenia Pugacheva, Tianchu Qi, Yiyuan Qi, Aneta Radzikowski, Max Rozycki, Muhammad Ahsan Shafque, Nicholas Tong, Yarou Xu, Jiaqi Zhao, and Canran Zheng.
Joseph Procopio from the Communications Department led the editorial team for the report, with production and editorial support from Michael Harrup, and additional assistance from Lucy Scott Morales, James Unwin, Harold Medina (and team), The Grauel Group, and TalentMEDIA Services.
The analysis has benefited from comments and suggestions by staff members from other IMF departments as well as by Executive Directors following their discussion of the report on September 29, 2022. 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.
Foreword
As storm clouds gather, policymakers need to keep a steady hand.
The global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.
Our latest forecasts project global growth to remain unchanged in 2022 at 3.2 percent and to slow to 2.7 percent in 2023—0.2 percentage points lower than the July forecast—with a 25 percent probability that it could fall below 2 percent. More than a third of the global economy will contract this year or next, while the three largest economies—the United States, the European Union, and China—will continue to stall. In short, the worst is yet to come, and for many people 2023 will feel like a recession.
Russia’s invasion of Ukraine continues to powerfully destabilize the global economy. Beyond the escalating and senseless destruction of lives and livelihoods, it has led to a severe energy crisis in Europe that is sharply increasing costs of living and hampering economic activity. Gas prices in Europe have increased more than four-fold since 2021, with Russia cutting deliveries to less than 20 percent of their 2021 levels, raising the prospect of energy shortages over the next winter and beyond. More broadly, the conflict has also pushed up food prices on world markets, despite the recent easing after the Black Sea grain deal, causing serious hardship for low-income households worldwide, and especially so in low-income countries.
Persistent and broadening inflation pressures have triggered a rapid and synchronized tightening of monetary conditions, alongside a powerful appreciation of the US dollar against most other currencies. Tighter global monetary and financial conditions will work their way through the economy, weighing demand down and helping to gradually subjugate inflation. So far, however, price pressures are proving quite stubborn and a major source of concern for policymakers. We expect global inflation to peak in late 2022 but to remain elevated for longer than previously expected, decreasing to 4.1 percent by 2024.
In China, the frequent lockdowns under its zero COVID policy have taken a toll on the economy, especially in the second quarter of 2022. Furthermore, the property sector, representing about one-ffth of economic activity in China, is rapidly weakening. Given the size of China’s economy and its importance for global supply chains, this will weigh heavily on global trade and activity.
The external environment is already very challenging for many emerging market and developing economies. The sharp appreciation of the US dollar adds significantly to domestic price pressures and to the cost-of-living crisis for these countries. Capital flows have not recovered, and many low-income and developing economies remain in debt distress. The 2022 shocks will re-open economic wounds that were only partially healed following the pandemic.
Downside risks to the outlook remain elevated, while policy trade-ofs to address the cost-of-living crisis have become acutely challenging. The risk of monetary, fiscal, or financial policy miscalibration has risen sharply at a time when the world economy remains historically fragile and financial markets are showing signs of stress.
Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability. Central banks around the world are now laser-focused on restoring price stability, and the pace of tightening has accelerated sharply. There are risks of both under-and over-tightening. Under-tightening would entrench further the inflation process, erode the credibility of central banks, and de-anchor inflation expectations. As history repeatedly teaches us, this would only increase the eventual cost of bringing inflation under control. Over-tightening risks pushing the global economy into an unnecessarily harsh recession. As several prominent voices have argued recently, over-tightening is more likely when central banks act in an uncoordinated fashion. Financial markets may also struggle to cope with an overly rapid pace of tightening. Yet, the costs of these policy mistakes are not symmetric. Misjudging yet again the stubborn persistence of inflation could prove much more detrimental to future macroeconomic stability by gravely undermining the hard-won credibility of central banks. As economies start slowing down, and financial fragilities emerge, calls for a pivot toward looser monetary conditions will inevitably become louder. Where necessary, financial policy should ensure that markets remain stable, but central banks around the world need to keep a steady hand with monetary policy firmly focused on taming inflation.
These challenges do not imply that a large downturn is inevitable. In many countries, including the United States, the United Kingdom, and the euro area, labor markets remain tight, with historically low unemployment rates and high levels of vacancies. Chapter 2 of this report documents how the current environment—despite rapidly rising prices and wages—may still avert a wage-price spiral, unless inflation expectations become de-anchored.
Formulating the appropriate fiscal policy given the juxtaposed cost-of-living, energy, and food crises has become an acute challenge for many countries. I shall mention a few important principles. First, for countries where the pandemic is now firmly receding, it is time to rebuild fiscal buffers. As the pandemic vividly illustrated, fiscal space is essential for dealing with crises. Countries with more fiscal room were better able to protect households and businesses. Second, fiscal policy should not work at cross-purposes with monetary authorities’ efforts to quell inflation. Doing otherwise will only prolong the fight to bring inflation down, risk de-anchoring inflation expectations, increase funding costs, and stoke further financial instability, complicating the task of fiscal as well as monetary and financial authorities, as recent events illustrated. Third, the energy crisis, especially in Europe, is not a transitory shock. The geopolitical re-alignment of energy supplies in the wake of Russia’s war against Ukraine is broad and permanent. Winter 2022 will be challenging for Europe, but winter 2023 will likely be worse. Fiscal authorities in the region need to plan and coordinate accordingly. Fourth, price signals are essential to help curb demand and stimulate supply. Price controls, untargeted subsidies, or export bans are fiscally costly and lead to excess demand, undersupply, misallocation, rationing, and black-market premiums. History teaches us they rarely work. Fiscal policy should instead aim to protect the most vulnerable through targeted and temporary transfers. If some aggregate fiscal support cannot be avoided, especially in countries hardest hit by the energy crisis, it is important to embed policy in a credible medium-term fiscal framework. Fifth, fiscal policy can help economies adapt to a more volatile environment and bounce back from adversity by investing in expanding productive capacity: human capital, digitalization, green energy, and supply chain diversification can make economies more resilient when the next crisis comes. Unfortunately, these simple principles are not uniformly guiding current policy, and the risk of outsized, poorly targeted, and broadly stimulative fiscal packages in many countries is not negligible.
For many emerging markets, the strength of the dollar is causing acute challenges, tightening financial conditions, and increasing the cost of imported goods. The dollar is now at its highest level since the early 2000s. So far, this appreciation appears mostly driven by fundamental forces, such as the tightening of monetary policy in the United States and the energy crisis. The appropriate response in most countries is to calibrate monetary policy to maintain price stability, while letting exchange rates adjust, conserving valuable foreign exchange reserves for when financial conditions really worsen.
As the global economy is headed for stormy waters, financial turmoil may well erupt, prompting investors to seek the protection of safe-haven investments, such as US Treasuries, and pushing the dollar even higher. Now is the time for emerging market policymakers to batten down the hatches. Eligible countries with sound policies should urgently consider improving their liquidity buffers by requesting access to precautionary instruments from the Fund. Looking ahead, countries should also aim to minimize the impact of future financial turmoil through a combination of preemptive macroprudential and capital flow measures, where appropriate, in line with our Integrated Policy Framework. Too many low-income countries are in or close to debt distress. Progress toward orderly debt restructurings through the Group of Twenty’s Common Framework for the most affected is urgently needed to avert a wave of sovereign debt crisis. Time may soon be running out.
Finally, the energy and food crises, coupled with extreme summer temperatures, starkly remind us of what an uncontrolled climate transition would look like. Much action is needed to implement climate policies that will ward of catastrophic climate change. As discussed in Chapter 3, these policies may have some modest adverse implications for activity and inflation in the near term that pale in comparison to the catastrophic costs of doing nothing. Importantly, these costs rise sharply the more we delay the green transition. The message is clear: a timely and credible transition, in addition to being critical for our planet’s future, also helps macroeconomic stability.
Progress on climate policies, as well as on debt resolution and other targeted multilateral issues, will prove that a focused multilateralism can, indeed, achieve progress for all and succeed in overcoming geo-economic fragmentation pressures.
Pierre-Olivier Gourinchas
Economic Counsellor
Executive Summary
The global economy is experiencing a number of turbulent challenges. Inflation higher than seen in several decades, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Normalization of monetary and fiscal policies that delivered unprecedented support during the pandemic is cooling demand as policymakers aim to lower inflation back to target. But a growing share of economies are in a growth slowdown or outright contraction. The global economy’s future health rests critically on the successful calibration of monetary policy, the course of the war in Ukraine, and the possibility of further pandemic-related supply-side disruptions, for example, in China.
Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic and reflects significant slowdowns for the largest economies: a US GDP contraction in the first half of 2022, a euro area contraction in the second half of 2022, and prolonged COVID-19 outbreaks and lockdowns in China with a growing property sector crisis. About a third of the world economy faces two consecutive quarters of negative growth. Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Upside inflation surprises have been most widespread among advanced economies, with greater variability in emerging market and developing economies.
Risks to the outlook remain unusually large and to the downside. Monetary policy could miscalculate the right stance to reduce inflation. Policy paths in the largest economies could continue to diverge, leading to further US dollar appreciation and cross-border tensions. More energy and food price shocks might cause inflation to persist for longer. Global tightening in financing conditions could trigger widespread emerging market debt distress. Halting gas supplies by Russia could depress output in Europe. A resurgence of COVID-19 or new global health scares might further stunt growth. A worsening of China’s property sector crisis could spill over to the domestic banking sector and weigh heavily on the country’s growth, with negative cross-border effects. And geopolitical fragmentation could impede trade and capital flows, further hindering climate policy cooperation. The balance of risks is tilted firmly to the downside, with about a 25 percent chance of one-year-ahead global growth falling below 2.0 percent—in the 10th percentile of global growth outturns since 1970.
Warding of these risks starts with monetary policy staying the course to restore price stability. As demonstrated in Chapter 2, front-loaded and aggressive monetary tightening is critical to avoid inflation de-anchoring as a result of households and businesses basing their wage and price expectations on their recent inflation experience. Fiscal policy’s priority is the protection of vulnerable groups through targeted near-term support to alleviate the burden of the cost-of-living crisis felt across the globe. But its overall stance should remain sufficiently tight to keep monetary policy on target. Addressing growing government debt distress caused by lower growth and higher borrowing costs requires a meaningful improvement in debt resolution frameworks. With tightening financial conditions, macroprudential policies should remain on guard against systemic risks. Intensifying structural reforms to improve productivity and economic capacity would ease supply constraints and in doing so support monetary policy in fighting inflation. Policies to fast-track the green energy transition will yield long-term payofs for energy security and the costs of ongoing climate change. As Chapter 3 shows, phasing in the right measures over the coming eight years will keep the macroeconomic costs manageable. And last, successful multilateral cooperation will prevent fragmentation that could reverse the gains in economic well-being from 30 years of economic integration.