IMF,WEEKEND READ

 

Dear maria, In today's edition, we highlight: The global outlook Financial conditions Corporate debt and distress Globalization Gold reserves

GLOBAL OUTLOOK Global Economy to Slow Further Amid Signs of Resilience (Credit: IMF) Growth remains weak by historical standards, but the global economy may be at a turning point, according to the latest update to the IMF’s World Economic Outlook. Pierre-Olivier Gourinchas, the IMF’s chief economist, said in a blog that economic growth proved surprisingly resilient in the third quarter of last year, with better-than-expected adaptation to the energy crisis in Europe, and China’s sudden re-opening paved the way for a rapid rebound in activity. The IMF increased its 2022 and 2023 growth forecasts, with global growth slowing from 3.4 percent in 2022 to 2.9 percent in 2023, then rebounding to 3.1 percent in 2024. Gourinchas said inflation showed improvement, too, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many places. “This time around, the global economic outlook hasn’t worsened. That’s good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.” Read the outlook

CHIEF ECONOMIST World economy to escape recession

The global economy will slow but is likely to skirt recession this year, says Pierre-Olivier Gourinchas. Watch the IMF’s chief economist explain the most important factors shaping the outlook.

MONETARY POLICY Looser Financial Conditions Pose Conundrum for Central Banks (Credit: IMF and Adobe Stock) Central banks must be resolute in their fight against inflation and ensure policy remains appropriately tight long enough to bring inflation back to target, the director of the IMF's Monetary and Capital Markets Department said in a blog. Falling energy prices are reducing headline inflation and fueling optimism that monetary policy may be eased later this year, resulting in a sharp decline in global longer-term interest rates and boosting financial markets in advanced economies and emerging markets alike. But, as Tobias Adrian and co-authors write, investors may be too sanguine about progress on disinflation. “While headline inflation has indeed fallen, and core inflation has receded slightly in some countries, both remain far too high.” “Central banks should communicate the likely need to keep interest rates higher for longer until there is evidence that inflation—including wages and prices of services—has sustainably returned to the target.” Read the blog

Sharp rises in interest rates could spark corporate distress and pose wider problems for many economies and their financial systems. A new machine-learning model developed by IMF staff predicts the probability of spillovers from corporate debt defaults and other forms of company distress, based on lessons from previous crises in 55 advanced and emerging economies since 1995. As the Chart of the Week shows, the number of countries at medium or high risk of spillovers increased sharply last year due to tighter global financial conditions and a doubling of funding costs for even the safest issuers. View the interactive chart

FINANCE & DEVELOPMENT In Defense of Globalization (Credit: iStock/PotPro) As much as globalization has come under attack lately, history suggests that it may offer an antidote to inflationary spirals, writes IMF historian and Princeton professor Harold James in a new article for F&D. The hunger crises of the mid-19th century and the oil shocks of the 1970s at first ignited explosive rounds of worldwide inflation. In both cases, new technologies dramatically altered global supply systems, expanding globalization and leading to lengthy periods of disinflation. Thus, rampant inflation eventually drove the world to more rather than less globalization, with broad benefits. The same forces are likely to come into play today, writes James. “Today’s globalization dynamic has the potential to create a revolution of system optimization, making the result of prior technical change cheaper and more accessible. In that sense, it is globalization that constitutes the real Inflation Reduction Act.”

Weekly Roundup ASIA Support for Bangladesh Bangladesh has become Asia's first country to access the newly created Resilience and Sustainability Facility. As well as receiving about $1.4 billion through the RSF, Bangladesh will also benefit from about $3.3 billion through its newly approved Extended Credit Facility and an Extended Fund Facility. The 42-month program will help preserve macroeconomic stability, protect the vulnerable, and foster inclusive and green growth. CLIMATE Climate Finance Climate change is likely to be one of the foremost macroeconomic, financial and debt policy challenges that countries face over the coming decades, IMF financial counselor Tobias Adrian told a climate seminar attended by financial secretaries and debt officials from Caribbean nations. He emphasized greening the tourism sector and investing in climate adaptation while maintaining debt sustainability, and for commodity-exporting countries to decarbonize the energy sector. STAFF PAPER Gold Reserves After slowly sinking for almost four decades, central bank gold holdings have risen since the global financial crisis, led by emerging markets, a new staff paper finds. While gold is attractive as a safe haven in volatile times, the paper sees an association between the imposition of financial sanctions by the main reserve-issuing economies and an increase in the share of central bank reserves held as gold. Furthermore, multilateral sanctions have a larger impact than unilateral sanctions on the share of reserves held in gold. STAFF PAPER Migration to the United States What drives undocumented migration to the United States from Central America? A new staff paper finds that economic labor market conditions—including real wages and unemployment rates—play a major role but there are also other factors. These include natural disasters, coffee production, higher temperatures, and homicide rates in countries from which immigrants emigrate. Tighter border enforcement acts as a deterrent, and perceptions regarding changes to these measures could also drive up undocumented migration.

MARK YOUR CALENDAR

FEB 7 8 AM ET | 1 PM UTC Africa Perspectives The IMF African Department’s Abebe Aemro Selassie will discuss climate-resilient development with Lee White, Gabon’s minister of water, forest, the sea and environment, and Mavis Owusu-Gyamfi of the African Center for Economic Transformation. Watch here

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.

Nick Owen Editor IMF Weekend Read nowen@IMF.org

China China’s Economy is Rebounding, But Reforms Are Still Needed Photo Credit: Nikada/Getty Images China’s economy is set to rebound this year as mobility and activity pick up after the lifting of pandemic restrictions, providing a boost to the global economy. The economy will expand 5.2 percent this year, according to our latest projections, versus 3 percent last year. That’s good news for China and the world as the Chinese economy is now expected to contribute a quarter of global growth this year. Even so, China still faces significant economic challenges. The contraction in real estate remains a major headwind, and there is still some uncertainty around the evolution of the virus. Longer-term, headwinds to growth include a shrinking population and slowing productivity growth. Accordingly, as we note in our annual report for China, the economy needs comprehensive macroeconomic policies and structural reforms to secure the recovery and promote balanced, green, and inclusive growth. We recommend keeping fiscal policy neutral this year, with additional monetary policy accommodation helping secure the recovery amid muted inflation pressures and growth below its potential. Orderly restructuring of troubled property developers will also help reduce risks. With a shrinking labor force and diminishing returns to capital investment, growth in coming years will depend on boosting declining productivity growth. Without reforms, we currently estimate growth to fall below 4 percent over the next five years. An ambitious but feasible set of reforms can improve these prospects—importantly, in a way that is inclusive by raising the role of household consumption in demand. Reforms such as gradually lifting the retirement age to increase labor supply, strengthening unemployment and health insurance benefits, and reforming state-owned enterprises to close their productivity gap with private firms would significantly help to boost growth in coming years. Undertaking such reforms would enable China’s income level to rise by around 2.5 percent in five years. Much is at stake. When China’s growth rate rises by 1 percentage point, growth in other countries increases by around 0.3 percentage points, according to recent IMF staff analysis. That underscores how domestic reforms could boost China’s economy and that of others too. Diego A. Cerdeiro is a Senior Economist in the IMF's Asia and Pacific Department. Sonali Jain-Chandra is the IMF Mission Chief for China. RELATED LINKS China and the IMF Press Briefing Country Report