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View as a webpage Gita Gopinath on Latest Outlook: Recovery Gaps Persist October 12, 2021 While the World Economic Outlook shows output in advanced economies set to exceed pre-pandemic levels next year, prospects for low-income countries and emerging markets have darkened considerably due to vaccine shortages and limited support. Overall, the outlook's global growth projection for 2021 has been revised down marginally to 5.9 percent and is unchanged for 2022 at 4.9 percent. The downgrade also reflects continuing supply disruptions and the impact on advanced economies. IMF Chief Economist, Gita Gopinath heads the WEO. In this podcast, she says universal vaccine access remains key for an equitable global recovery.  Read the Blog Read the Transcript   ***** Thanks for listening to the podcast. We're always looking to improve your experience so let us know if you have any suggestions! Send your comments to me at bedwards2@imf.org. Bruce Edwards Producer, IMF Podcasts   Fabio Natalucci: Financial Stability through a Rocky Recovery October 12, 2021 The latest Global Financial Stability Report takes a close look at how recent supply chain disruptions, wage pressures and inflation might compromise the stability of the global financial system. Fabio Natalucci is Deputy Director of the Monetary and Capital Markets Department and heads the GFSR. In this podcast, he says while risks have been contained so far, vulnerabilities remain in a number of sectors including the housing market, where house prices have unexpectedly surged during the pandemic. Read the Blog Read the Transcript   ***** Thanks for listening to the podcast. We're always looking to improve your experience so let us know if you have any suggestions! Send your comments to me at bedwards2@imf.org. Bruce Edwards Producer, IMF Podcasts

Dear maria, We just published a new blog—please find the full text below. Translations coming soon.  Watch the Global Financial Stability Report press briefing, starting today at 10:30 a.m. ET. Uncertainty Grips Markets as Optimism Wanes   By Tobias Adrian Market sentiment has deteriorated since earlier this year amid still elevated financial vulnerabilities and mounting concerns about risks to inflation. Amid the prolonged and painful pandemic, risks to global financial stability have remained contained—so far. But with economic optimism fading, and with financial vulnerabilities intensifying, this is a time for careful policy calibration. To an unprecedented degree, the world’s central banks, finance ministries, and international financial institutions have asserted—for a year and a half—policy support for economic growth. Now they must craft strategies that safely approach the next stage of monetary and fiscal policy action. The world’s systemically important central banks know that any unintended consequences of their actions could put growth at risk—and could, conceivably, lead to abrupt adjustments in the world’s financial markets. Uncertainty is especially intense because of the persistent pandemic-stricken atmosphere where society confronts the challenges inherent in “the three Cs”: COVID-19, crypto, and climate change, as discussed in our latest Global Financial Stability Report. Fading optimism Massive monetary and fiscal policy support for the economy in 2020 and 2021 helped limit the economic contraction that began at the start of the pandemic and that—for much of this year—supported a strong economic rebound. In many advanced economies, financial conditions have eased since the initial months of the pandemic. Nonetheless, the sense of optimism that had propelled markets in the first half of the year is at risk of fading. Investors have become increasingly worried about the economic outlook, amid ever-greater uncertainty about the strength of the recovery. Uneven vaccine access, along with the mutations of the COVID-19 virus, have led to a resurgence of infections—fueling concerns about more divergent economic prospects across countries. Inflation readings have been above expectations in many countries. And new uncertainties in some major economies have put markets on alert. Those uncertainties are triggered by financial vulnerabilities that could increase downside risks, surging commodity prices, and policy uncertainty. The deterioration in market sentiment since the April 2021 Global Financial Stability Report resulted in a significant decline in global long-term nominal yields in the summer, driven by falling real rates, reflecting concerns about long-term-growth prospects. In late September, however, investor anxiety about inflationary pressures pushed yields higher as price pressures then started to be seen as potentially more persistent than initially anticipated in some countries—entirely reversing the earlier declines. If investors, at some point, reassess abruptly the economic and policy outlook, financial markets could endure a sudden repricing of risk—and that repricing, if sustained, could interact with underlying vulnerabilities, leading to a tightening of financial conditions. This could put economic growth at risk. Risks also bear close monitoring in other key areas. Crypto asset markets are growing rapidly and crypto asset prices remain highly volatile. Financial stability risks are not yet systemic in the crypto ecosystem, but risks should be closely monitored, given the global monetary implications and the inadequate operational and regulatory frameworks in most jurisdictions—especially in emerging market and developing economies. Likewise, as the world continues to seek ways to speed up the transition to a low-greenhouse-gas economy in order to avoid the negative economic and financial stability outcomes associated with climate change, a promising opportunity is emerging in the financial sector. While assets under management in climate-themed investment funds remain relatively small, inflows have surged, and there is a promise of cheaper funding costs for climate-friendly firms, as well as greater climate stewardship by funds. A not-so-easy trade-off Amid still easy financial conditions overall, our analysis finds that financial vulnerabilities continue to be elevated in several sectors—but are masked, in part, by the massive policy stimulus. Policymakers are now confronted with a challenging trade-off: They must continue to provide near-term support to the global economy, even as they must simultaneously try to avoid the buildup of medium-term financial-stability risks. Managing this trade-off is a key challenge confronting policymakers. A prolonged period of extremely easy financial conditions during the pandemic—which certainly has been needed to sustain the economic recovery—has allowed overly stretched asset valuations to persist. If that overstretch continues, it may, in turn, intensify financial vulnerabilities. Some warning signs—for example, increased financial risk-taking, as well as rising fragilities in the nonbank financial institutions sector—point to a deterioration in the underlying foundations of financial stability. If left unchecked, such vulnerabilities may persist into the longer term and become structural issues. Policy action Policymakers will need action plans that guard against unintended consequences. Monetary and fiscal policy support should be more targeted and tailored to country-specific circumstances, given the varying pace of the recovery across countries. Central banks will need to provide clear guidance about their future approach to monetary policy, aiming to avoid an unwarranted or abrupt tightening of financial conditions. Monetary authorities should remain vigilant, and if price pressures turn out to be more persistent than anticipated, act decisively to avoid an unmooring of inflation expectations. Fiscal support can appropriately shift toward more targeted measures and be tailored to country-specific characteristics. Policymakers should take early action and tighten selected macroprudential tools to target pockets of elevated vulnerabilities. This is critical for addressing the potential unintended consequences of their unprecedented measures, given the possible need for prolonged policy support to ensure a sustainable recovery. Policymakers in emerging and frontier markets should, where possible, begin to rebuild fiscal buffers and implement structural reforms. While facing several domestic challenges (higher inflation and fiscal concerns), some of those economies remain exposed to the risk of a sudden tightening in external financial conditions. In a context of higher price pressures, investors are now pricing in a rapid and fairly sharp tightening cycle for many emerging markets, although the increase in inflation is expected to be temporary. Rebuilding buffers and implementing enduring reforms to boost economic growth prospects will be pivotal to protect against the risk of capital-flow reversals and an abrupt increase in financing costs. Glenn Gottselig Managing Editor IMF Blog ggottselig@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!

A Hobbled Recovery Along Entrenched Fault Lines   By Gita Gopinath The global recovery continues amid increasing uncertainty, more complex policy trade-offs. The global recovery continues but momentum has weakened, hobbled by the pandemic. Fueled by the highly transmissible Delta variant, the recorded global COVID-19 death toll has risen close to 5 million and health risks abound, holding back a full return to normalcy. Pandemic outbreaks in critical links of global supply chains have resulted in longer than expected supply disruptions, feeding inflation in many countries. Overall, risks to economic prospects have increased and policy trade-offs have become more complex. Compared to our July forecast, the global growth projection for 2021 has been revised down marginally to 5.9 percent and is unchanged for 2022 at 4.9 percent. However, this modest headline revision masks large downgrades for some countries. The outlook for the low-income developing country group has darkened considerably due to worsening pandemic dynamics. The downgrade also reflects more difficult near-term prospects for the advanced economy group, in part due to supply disruptions. Partially offsetting these changes, projections for some commodity exporters have been upgraded on the back of rising commodity prices. Pandemic-related disruptions to contact-intensive sectors have caused the labor market recovery to significantly lag the output recovery in most countries. The dangerous divergence in economic prospects across countries remains a major concern. Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 percent in 2024. By contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 percent below the pre-pandemic forecast in 2024, resulting in a larger setback to improvements in their living standards. These divergences are a consequence of the ‘great vaccine divide’ and large disparities in policy support. While over 60 percent of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96 percent of the population in low-income countries remain unvaccinated. Furthermore, many emerging market and developing economies, faced with tighter financing conditions and a greater risk of de-anchoring inflation expectations, are withdrawing policy support more quickly despite larger shortfalls in output. Supply disruptions pose another policy challenge. On the one hand, pandemic outbreaks and climate disruptions have resulted in shortages of key inputs and lowered manufacturing activity in several countries. On the other hand, these supply shortages, alongside the release of pent-up demand and the rebound in commodity prices, have caused consumer price inflation to increase rapidly in, for example, the United States (US), Germany, and many emerging market and developing economies. Food prices have increased the most in low-income countries where food insecurity is most acute, adding to the burdens of poorer households and raising the risk of social unrest. The October 2021 Global Financial Stability Report highlights another challenge to monetary policy from increased risk-taking in financial markets and rising fragilities in the nonbank financial institutions sector. Policy priorities A principal common factor behind these complex challenges is the continued grip of the pandemic on global society. The foremost policy priority is therefore to vaccinate at least 40 percent of the population in every country by end-2021 and 70 percent by mid-2022. This will require high-income countries to fulfill existing vaccine dose donation pledges, coordinate with manufacturers to prioritize deliveries to COVAX in the near-term and remove trade restrictions on the flow of vaccines and their inputs. At the same time, closing the $20 billion residual grant funding gap for testing, therapeutics and genomic surveillance will save lives now and keep vaccines fit for purpose. Looking ahead, vaccine manufacturers and high-income countries should support the expansion of regional production of COVID-19 vaccines in developing countries through financing and technology transfers. Another urgent global priority is the need to slow the rise in global temperatures and contain the growing adverse effects of climate change. This will require more ambitious commitments to reduce greenhouse gas emissions at the upcoming United Nations Climate Change Conference (COP26). A policy strategy that includes an international carbon price floor adjusted to country circumstances, a green public investment and research subsidy push, and compensatory, targeted transfers to households can help advance the energy transition in an equitable way. Just as importantly, advanced countries need to deliver on their earlier promises of mobilizing $100 billion of annual climate financing for developing countries. In addition, concerted multilateral efforts to ensure adequate international liquidity for constrained economies, and faster implementation of the G20 common framework to restructure unsustainable debt, would help limit divergences across countries. Building on the historic $650 billion Special Drawing Right (SDR) allocation, the IMF is calling on countries with strong external positions to voluntarily channel their SDRs into the Poverty Reduction and Growth Trust. Furthermore, it is exploring the establishment of a Resilience and Sustainability Trust, which would provide long-term funding to support countries’ investment in sustainable growth. At the national level, the overall policy mix should be calibrated to local pandemic and economic conditions, aiming for maximum sustainable employment while protecting the credibility of policy frameworks. With fiscal space becoming more limited in many economies, health care spending should continue to be prioritized, while lifelines and transfers will need to become increasingly targeted, reinforced by retraining and support for reallocation. As health outcomes improve, policy emphasis should increasingly focus on long-term structural goals. With public debt levels at record highs, all initiatives should be rooted in credible medium-term frameworks, backed by feasible revenue and spending measures. The October 2021 Fiscal Monitor  demonstrates that such credibility can lower financing costs for countries and increase fiscal space in the near-term.  Monetary policy will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery. We project, amidst high uncertainty, that headline inflation will likely return to pre-pandemic levels by mid-2022 for the group of advanced economies and emerging and developing economies. There is, however, considerable heterogeneity across countries with upside risks for some, like the US, United Kingdom, and some emerging market and developing economies. While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery. Central banks should chart contingent actions, announce clear triggers, and act in line with that communication. More generally, clarity and consistent actions can go a long way toward avoiding unnecessary policy accidents that roil financial markets and set back the global recovery—ranging from a failure to lift the US debt ceiling in a timely fashion to disorderly debt restructurings in China’s property sector to escalating cross-border trade and technology tensions. Recent developments have made it abundantly clear that we are all in this together and the pandemic is not over anywhere until it is over everywhere. If COVID-19 were to have a prolonged impact—into the medium-term—it could reduce global GDP by a cumulative $5.3 trillion over the next five years relative to our current projection. It does not have to be this way. The global community must step up efforts to ensure equitable vaccine access for every country, overcome vaccine hesitancy where there is adequate supply, and secure better economic prospects for all. *****

Glenn Gottselig Managing Editor IMF Blog ggottselig@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!