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Mr. Taimur Baig, Mr. Jörg Decressin, Mr. Tarhan Feyzioglu, Mr. Manmohan S. Kumar, and Mr. Chris Faulkner-MacDonagh

1 ). The proportion has continued to increase in the most recent period for both the industrial and emerging market economies. Although less dramatic, the incidence of PPI deflation has increased noticeably, particularly in emerging markets, in the last five years ( Table 2 ). The background to the increased incidence of deflation is the decline in inflation rates over the past decade (see Appendix Figures A1 – A5 ). Among industrial countries, CPI inflation has declined to an average of below 2 percent, a rate not seen since the 1950s (see Figure 2 ). Even

International Monetary Fund. Asia and Pacific Dept
This 2016 Article IV Consultation highlights China’s continued transition to sustainable growth, with progress on many fronts. Growth slowed to 6.9 percent in 2015 and is projected to moderate to 6.6 percent in 2016 owing to slower private investment and weak external demand. The economy is advancing on many dimensions of rebalancing, particularly switching from industry to services and from investment to consumption. But other aspects are lagging, such as strengthening state-owned enterprises and financial governance and containing rapid credit growth. The current account surplus is projected to decline to 2.5 percent of GDP in 2016 as imports increase and the services deficit widens with continued outbound tourism.
International Monetary Fund. Asia and Pacific Dept

insolvency (only by interest coverage), and excessively high loss ratio assumption (higher than Basel III). Furthermore, even at 7 percent of GDP, the potential losses would be adequately absorbed by the strong capital base, sufficient provisioning, and profit margins of the banking system; and, in the worst scenario, would not challenge fiscal debt sustainability. The authorities are confident that the corporate debt issue can be properly tackled, and the deflation-debt spiral would be curtailed. The 52-month PPI deflation that worsened corporate profitability, raised

Mr. Yasser Abdih, Mr. Ravi Balakrishnan, Baoping Shang, and Mr. Stephan Danninger

. These scenarios should be viewed as indicative and just to give a flavor of how different aggregate PCE dynamics could be. They include: Foreign PPIs . In the benchmark scenario, we assume that the foreign PPI deflation stays constant at the level of 2015Q4 (P1). In the upside risks scenario, we assume that PPI inflation gradually returns to its mean level during the 2000s by 2017 (1.6 percent) and remains at that level thereafter (P2). Dollar . Given the recent sharp appreciation and subsequent depreciation of the dollar, we use three scenarios for the nominal

Mr. Taimur Baig, Mr. Jörg Decressin, Mr. Tarhan Feyzioglu, Mr. Manmohan S. Kumar, and Mr. Chris Faulkner-MacDonagh

1994, CPI inflation declined steadily as macroeconomic policies were tightened to cool the overheated economy. Prices began to fall in 1998 as the economy slowed further in the wake of the Asian crisis, and this lasted until 2000 (see the Figure). Deflation resurfaced during late 2001–end-2002, peaking in April 2002 at 1.3 percent. Falling goods prices more than accounted for this decline, as most service prices continued to increase moderately. During the same period, PPI declined also, with PPI deflation exceeding 4 percent in early 2002, but this decline ended by

Mr. Yasser Abdih, Mr. Ravi Balakrishnan, and Baoping Shang
Over the past two decades, U.S. core PCE goods and services inflation have evolved differently. Against the backdrop of global concerns of low inflation, we use this trend as motivation to develop a bottom-up model of U.S. inflation. We find that domestic forces play a larger role relative to foreign factors in influencing core services inflation, while foreign factors predominantly drive core goods price changes. When comparing forecasting performance, we find that both the aggregate Phillips curve and the bottom up approach give low root mean square errors. The latter, however, is more informative in tracing the effects of shocks and understanding the exact channels through which they affect aggregate inflation. Using scenario analysis—and given a relatively low sensitivity of core inflation to changes in slack, both at the aggregate Phillips curve and sub-components levels—we find that global pressures will likely keep core PCE inflation below 2 percent for the foreseeable future unless the dollar starts to depreciate markedly and the unemployment rate goes well below the natural rate. These results support the accommodative stance of monetary policy pursued thus far and, going forward, underscore the need for proceeding cautiously and very gradually in raising the federal funds rate.
International Monetary Fund. Monetary and Capital Markets Department

confidence reduces private consumption. Inflation expectations drift lower, and the region enters a prolonged period of anemic growth and low inflation. • China: In the near term, further escalation in trade tensions not only reduce external demand, disrupt supply chains, and depresses confidence and investment, but potentially also trigger tighter financial conditions, a sharp downturn in the property market, renewed PPI deflation, and a drop in commodity prices. In the medium term, weaker external demand, the potential reversal of globalization, and the increasing role

International Monetary Fund. Asia and Pacific Dept

asset quality of financial institutions, especially among small and mid-size banks, and funding stress facing banks and non-bank financial institutions amid greater concerns about counterparty risk, a sharp downturn in the property market, and a return to PPI deflation, which could generate a self-reinforcing downward cycle, affecting weaker private corporates in particular. Over the longer term, weaker external demand, or the potential reversal of globalization and resulting weaker trade outlook and reduced access to markets and technology could weigh on China

International Monetary Fund. Monetary and Capital Markets Department

the near term, further escalation in trade tensions not only reduce external demand, disrupt supply chains, and depresses confidence and investment, but potentially also trigger tighter financial conditions, a sharp downturn in the property market, renewed PPI deflation, and a drop in commodity prices. In the medium term, weaker external demand, the potential reversal of globalization, and the increasing role of the state could weigh on growth prospects. Moreover, excessive policy easing—reversing progress in deleveraging and rebalancing—increases risks over time of

International Monetary Fund. Monetary and Capital Markets Department
This paper presents Austria’s 2019 Financial System Stability Assessment. The Austrian authorities have proactively strengthened the financial stability framework since the previous Financial Sector Assessment Program (FSAP). The FSAP analysis suggests that banks are, in aggregate, resilient to severe macrofinancial shocks, although most banks would make use of capital conservation buffers. Mutual financial cooperation arrangements among banks act as a shock absorber for idiosyncratic shocks, but high financial interlinkages may fuel loss propagation in a systemic event. While a robust regulatory framework and prudential policy actions have lowered financial stability risks, challenges include data and regulatory gaps, resource constraints, high interconnectedness, and exposure to cross-border and money-laundering risks. Authorities should enhance monitoring and oversight related to contagion/spill over risks. This would include enhancing the stress testing framework to consider second round effects and contagion, improving data collection on foreign exposures, nonfinancial corporates and real estate, and strengthening supervision of related party, group-wide, and money-laundering risks. Supervisors should be able to take timely action and correct unsustainable risk taking, including unsustainable lending and business models.