IMF update

 

Dear maria, We just published a new blog—please find the full text below.  Asia and the World Face Growing Risks From Economic Fragmentation (Photo: Asia Images Group; Md Jawadur Rahman/Pexels; Travel Coffee Book; samxmeg/Getty Images) By Diego Cerdeiro, Siddharth Kothari and Chris Redl Geopolitical tensions have raised the prospect that strategic competition and national security concerns may trump the shared economic benefits of global trade. Interdependencies between economies mean that such a prospect would be very costly, especially for Asia. For example, about half of the imports in the United States and a third in Europe come from Asia. And, in turn, Asian countries account for almost half of global demand for key commodities. In our latest Regional Economic Outlook for Asia and the Pacific, we document worrying early signs of fragmentation and provide evidence of the potential consequences of dissolving global trade links. One such sign of fragmentation pressures comes from measures of trade-policy uncertainty. This measure spiked in 2018 amid tensions between the United States and China, which have increased again amid Russia’s invasion of Ukraine as sanctions on Russia created uncertainty around future trade relations. Even without actual restrictions, policy uncertainty related to trade can worsen economic activity as firms pause hiring and investment, and new firms may decide to postpone entry into a market. Our analysis shows that a typical shock to trade policy uncertainty, like the 2018 buildup of US-China tensions, reduces investment by about 3.5 percent after two years. It also decreases gross domestic product by 0.4 percent and raises the unemployment rate by 1 percentage point. Not everyone is equally vulnerable, however. The effects on investment are even larger for emerging markets and more open economies, and for firms with high debt. Corporate debt has increased significantly in Asia since the global financial crisis—spiking further in the wake of the pandemic—suggesting that higher trade policy uncertainty could prove to be especially damaging for the region. As bad as these effects are, losses would be even greater under actual fragmentation. Against the backdrop of tepid productivity growth around the world, and given the importance of trade in particular for Asia, we estimate the output losses from trade fragmentation due to lower productivity. Admittedly these losses represent a lower bound, as they don’t account for channels such as the effects of a lower capital stock due to diminished investment and the potential disruption to knowledge flows. The fragmentation scenario we model is one where trade is cut off between trading blocs in sectors that have recently seen an increase in restrictions, like energy and technology, and where non-tariff barriers in other sectors are raised to Cold War-era levels. To do this, and for purely illustrative purposes, we divide blocs along the lines of the March 2022 United Nations General Assembly vote demanding Russia end its invasion of Ukraine. If only Russia is isolated from countries which voted in favor, output losses for the world economy are small. However, losses become significantly larger under more adverse scenarios such as where the world divides into two blocs, with trade restricted between countries in favor and those against or abstaining. Permanent global annual losses are estimated at 1.5 percent of GDP, with larger losses in Asia and Pacific countries at over 3 percent of GDP, reflecting the key role trade plays in the region. Losses are larger in countries where trade with the other bloc is significant, due to a loss of export markets and splintering of complex production networks. As trade unravels and specialization is unwound, there would be severe implications for labor markets. In those sectors forced to contract due to higher trade restrictions in this illustrative scenario, average employment losses in Asian countries are estimated to be as high as 7 percent. These results focus on trade and ignore any effects from the potential unravelling of financial ties, which, as we document in the chapter, are also very deep. Financial fragmentation may lead to short-term costs from a rapid unwinding of financial positions, and long-term costs from lower diversification and slower productivity growth because of reduced foreign direct investment. Our work shows that the stakes are high. Policymakers from Asia and beyond need to act to avoid the adverse effects from greater fragmentation and to ensure that trade remains an engine of growth. Rolling back damaging trade restrictions and reducing uncertainty via clear communication of policy objectives should be a priority. Complementing regional agreements with reforms at the multilateral level, while also restoring a fully functional World Trade Organization dispute settlement system, can not only mitigate potential negative impacts of discriminatory policies on other trading partners but also help resolve some of the underlying sources of tensions. Above all, however, engagement and dialogue between countries will be vital to avoid the most harmful fragmentation scenarios.   Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org

Dear maria, In today’s edition, we focus on Europe's economic outlook amid a toxic mix of high inflation and flagging growth, trade tensions in Asia and the Pacific, the search for energy security, Ukraine’s reconstruction needs, Malawi’s access to emergency food financing, financial-market conditions, and much more.

Europe Outlook Europe Must Address a Toxic Mix of High Inflation and Flagging Growth Why Countries Must Cooperate on Carbon Prices (IMF PHOTOS) As Russia’s war in Ukraine takes a rising toll on Europe’s economies, growth is flagging across the continent, while inflation shows little sign of abating. Europe’s advanced economies will grow by just 0.6 percent next year, while emerging economies (excluding Türkiye and conflict countries Belarus, Russia, Ukraine) will expand by 1.7 percent, according to projections in the IMF’s latest World Economic Outlook. In a new blog, the director of the IMF’s European Department says authorities must tighten macroeconomic policies to bring down inflation, while helping vulnerable households and viable businesses cope with the energy crisis. “Strength, coordination and solidarity pulled Europe out of the COVID-19 crisis,” Alfred Kammer says. “Once again, the task ahead is immense, but if European policymakers muster the spirit of the pandemic response, it can be accomplished.”  Watch a video of IMF Managing Director Kristalina Georgieva speaking at the European Commission on how markets can be made to work for people.   Asia Outlook Asia Faces Growing Risks From Economic Fragmentation Most Urgent Challenges (ASIA IMAGES GROUP; MD JAWADUR RAHMAN/PEXELS; TRAVEL COFFEE BOOK; SAMXMEG/GETTY IMAGES) Geopolitical tensions have raised the prospect that strategic competition and national security concerns may trump the shared economic benefits of global trade. Interdependencies between economies mean that such a prospect would be very costly, especially for Asia. About half of the imports in the United States and a third in Europe come from Asia. And, in turn, Asian countries account for almost half of global demand for key commodities. Policymakers must act decisively to avoid the harm from fraying ties, and ensure trade remains an engine of growth, the IMF Asia and Pacific Department’s Diego A. Cerdeiro, Siddharth Kothari and Chris Redl write in a new blog. “Rolling back damaging trade restrictions and reducing uncertainty via clear communication of policy objectives should be a priority,” the authors say. “Above all…engagement and dialogue between countries will be vital to avoid the most harmful fragmentation scenarios.” Read more about worrying early signs of fragmentation and their consequences in our Asia regional outlook.     F&D In Search of Energy Security The energy crisis should drive—not derail—the transition to clean energy, says Samantha Gross, the director of the Brookings Institute's Energy Security and Climate Initiative, in an interview with the IMF’s Marjorie Henriquez. The interview, part of Finance and Development Magazine’s Café Economics series, examines how the crisis started, the implications for developing economies, and the risks of a fragmented energy market. “If we create an energy system that is based on renewables and other forms of zero-carbon electricity, we create a system that is by nature more local and less involved in geopolitics,” Gross says. Read the full article   The latest edition of F&D Magazine (September 2022) focused on Cryptocurrencies, Central Bank Digital Currencies, and the future of finance. Other topics included inflation, the food crisis, the economics of fertility, and much more. Authors included Eswar Prasad, Augustin Carstens, Ravi Menon, Tobias Adrian, Fabian Schar, Aditya Narain, Carlo Pizzinelli, Michele Tertilt and many more.

IMF Support for Ukraine Ukraine requires financing of around $3 billion to $4 billion per month this year, reflecting the harsh reality of the large fiscal deficit in the context of a devastating war, IMF Managing Director Kristalina Georgieva said at an international conference on reconstruction. She outlined how the Fund plans to build on assistance provided so far by supporting the country’s recovery, reconstruction and modernization in the period ahead.

Malawi Financing Malawi has become the first low-income country to reach a staff-level agreement to receive up to about $88 million in emergency financing through the IMF’s new Food Shock Window under the Rapid Credit Facility. This will help Malawi address urgent balance of payments needs related to the global food crisis.

Podcast: Allure of Crypto Cryptocurrencies have grabbed news headlines with their dramatic highs and lows. In a podcast, Hilary Allen, a professor of law at American University, discusses the risks associated with cryptocurrencies and why she thinks that they simply cannot deliver their claimed benefits.

Why is Inflation Surging? The average global cost of living has risen more in the 18 months since the start of 2021 than it did during the preceding five years combined. What’s causing this surge in prices? Find out in our Charts in Motion video. Charts in Motion provides short, quick, animated snapshots that highlight key data from our latest charts and blogs.

Liquidity is a key measure of how well financial markets are working. It refers to how easily assets can be bought or sold—and when it dries up, it can be disruptive. After more than a decade of abundant liquidity and relative calm in markets, central bank interest-rate increases to contain inflation have been accompanied by elevated market volatility. As the Chart of the Week shows, measures of market liquidity have worsened across asset classes, especially in recent weeks, as heightened uncertainty about the economic outlook and monetary policy left investors with much less risk appetite.

WEEKLY ROUND-UP 01. Local Capacity Development "There cannot be lasting economic development without institutions that are working well and are staffed with qualified personnel”, IMF Managing Director Kristalina Georgieva said at a retreat of directors from regional capacity development centers. Reflecting on 30 years of work by these centers, she added that “the IMF’s global network of 17 regional capacity development centers is at the forefront of our efforts to meet the technical assistance and training needs of our membership”. 02. Taxing Times in Asia "Simultaneous economic, geopolitical, and ecological shocks have driven the global economy into turbulent waters again," said IMF Deputy Managing Director Kenji Okamura at a tax conference for Asian Countries. Appropriate policies will vary across the region, but with many countries needing to increase domestic revenue mobilization, the role of those responsible for tax policy formulation and administration is getting more important, he remarked. 03. Staff Statement on Ghana “The Ghanaian delegation and IMF staff had very fruitful discussions on the authorities’ post-COVID program for economic growth and associated policies and reforms that could be supported by a new IMF arrangement,” said the IMF’s Stéphane Roudet. “The IMF team and the Ghanaian authorities remain fully committed to reaching agreement on a framework and policies for an IMF-supported program as soon as feasible. Discussions will continue in the weeks ahead, with a follow-up mission to take place expeditiously.” Read the FAQs. 04. Armenia's Climate-Related Fiscal Risks Armenia is facing considerable fiscal risks from climate change due to increasing and highly variable temperatures. A new IMF Technical Assistance Report provides guidance on how to quantify those risks over the long term, using an empirical approach to identify the potential impact of a range of temperature scenarios on GDP and the public finances. It finds that an extreme unmitigated temperature scenario that incorporates higher year to year variability could reduce GDP by 18 percent relative to baseline, and lead to unsustainable public debt trajectory by 2070.

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.