IMF update

 

The latest IMF analysis of global economics, finance, development and policy issues shaping the world.

Dear maria, In today's edition, we highlight the challenges facing the world's central banks amid soaring inflation, global trade imbalances and disruptive capital flows, Europe's energy-price shock, offline digital currencies, the pandemic and property prices, natural resources and educational attainment, and much more. Global Inflation Central Banks Must Remain Resolute Why Countries Must Cooperate on Carbon Prices (PHOTO: LECHATNOIR/ISTOCK BY GETTY IMAGES) With inflation climbing to multi-decade highs, central banks must learn the lessons of the past and be resolute to avoid potentially more painful adjustments later, the IMF’s Tobias Adrian, Christopher Erceg and Fabio Natalucci write in a blog. It is possible that inflation comes down faster than central banks envision. Even so, the authors say that inflation risks appear strongly tilted to the upside. There is a substantial risk that high inflation becomes entrenched, and inflation expectations de-anchor. “In that event, central banks will have to be more resolute and tighten more aggressively to cool the economy, and unemployment will likely have to rise significantly.” --Price Stability: Amid signs of already poor liquidity, faster policy rate tightening may result in a further sharp decline in risk asset prices—affecting equities, credit, and emerging market assets. Yet restoring price stability is of paramount importance and a necessary condition for sustained economic growth. “A key lesson of the high inflation in the 1960s and 1970s was that moving too slowly to restrain it entails a much more costly subsequent tightening to re-anchor inflation expectations and restore policy credibility.” Read about the IMF's latest forecasts for inflation in July's update to the World Economic Outlook.   Global Trade World's Trade Imbalances Widen (PHOTO: LARI BAT/ISTOCK BY GETTY IMAGES) Russia’s invasion of Ukraine and the resulting increase in commodity prices are expected to contribute to a further widening of global current account balances this year that could fuel disruptive currency and capital flow movements, according to the IMF’s Giovanni Ganelli, Pau Rabanal and Niamh Sheridan. Writing in a blog based on the IMF’s latest External Sector Report, the authors say that global current account balances—the overall size of deficits and surpluses across countries—are widening for a second straight year. After years of narrowing, balances widened to 3 percent of global gross domestic product in 2020, grew further to 3.5 percent last year, and are expected to expand again this year. --Trade Tensions: Larger current account balances aren’t necessarily negative on their own. But the authors say that global excess balances—the portion not justified by differences in countries’ economic fundamentals, such as demographics, income level and growth potential, and desirable policy settings—could fuel trade tensions and protectionist measures. “That would be a setback for the push for greater international economic cooperation and could also increase the risk of disruptive currency and capital flow movements.” Read the IMF's latest External Sector Report for more analysis of global external developments. (AXELRATH GETTY IMAGES/PRISMA)   Europe's Energy Shock Soaring energy prices have sharply increased living costs for Europeans. In a blog, the IMF’s Oya Celasun, Dora Iakova and Ian Parry say governments should allow the full increase in fuels costs to pass to end-users to encourage energy saving and switching out of fossil fuels. Policy should shift from broad-based support such as price controls to targeted transfers to poorer households who suffer the most from higher energy bills, they add. (URBAN COW GETTY IMAGES)   Offline Digital Currencies As central banks rush to develop digital currencies, almost all the research and trials focus on internet-based technology. What will happen when the web goes down in a war or a natural disaster? In an article for F&D Magazine, John Kiff says offline digital payment systems could verify availability of funds and validate transactions without the need to check an online ledger. They could use old-tech, non-internet mobile phones. "The future of offline CBDCs may lie in the technological past." (IMF)   Factsheets: Surveillance A core responsibility of the IMF is monitoring the economic and financial policies of member countries, an activity known as surveillance. As part of this process, which also takes place at the global and regional levels, the IMF identifies potential risks and recommends policy adjustments to sustain economic growth and promote financial stability. Check out our latest factsheets to learn more about the IMF and its activities. WEEKLY ROUND-UP 01. The Pandemic and Property Prices After dropping sharply in the early phases of the COVID-19 pandemic, commercial real estate prices are on the mend—but trends vary widely across regions and market segments. A new global financial stability note—by IMF economists Andrea Deghi, Fabio Natalucci and Mahvash Qureshi—analyzes the factors that explain this divergence. The authors conclude that pandemic-specific factors such as the stringency of containment measures and the spread of the virus are strongly associated with a decline in prices, while fiscal support and easy financial conditions maintained by central banks have helped to cushion the shock. 02. Economies Slow After Debt Surges Debt levels were already at record highs before the COVID-19 pandemic and surged further in 2020—and high indebtedness raises the prospect of undermining future growth prospects. A new IMF staff paper by Joao Tovar Jalles and Paulo Medas examines what happens to economic growth after debt surges. They find that debt surges tend to be followed by weaker economic growth and persistently lower output. Debt surges also tend to be followed by weaker economic growth if the initial debt levels are high, especially for private debt surges. 03. Gender Equality Still Elusive A new IMF staff paper by Can Sever examines how the legal environment across the world is still far from providing a level playing field for women, despite progress over the last five decades. Based on a global sample since the 1970s, the paper finds that greater gender equality in the law facilitates cross-country income convergence over time. The results imply that legal reforms supportive of gender equality, which could be actionable in the shorter term, help poorer countries catch up with living standards in advanced economies. 04. Education and Natural Resources In a new IMF staff paper, Jean-Marc Atsebi, Rasmane Ouedraogo and Regina Seri explore the effects of mineral discoveries and productions on intergenerational educational mobility. They find that mineral discoveries and productions positively affect intergenerational educational mobility for primary education in Africa for individuals exposed to the mineral sites and living in districts with discoveries. These positive effects increase for individuals born later after discoveries and productions, for males, and individuals living in urban areas. However, no significant effects are found for secondary and tertiary intergenerational educational mobility. MARK YOUR CALENDAR 01. IMF's Governance Framework We are inviting civil society organizations to participate in an online consultation on the IMF’s review of the Framework for Enhanced Engagement on Governance. Share your views by September 28. Nick Owen Editor IMF Weekend Read nowen@IMF.org   Thank you again very much for your interest in the Weekend Read! Be sure to let us know what issues and trends we should have on our radar.