Dear MARIA, welcome to a special edition of the Weekend Read
Ahead of the Marrakech meetings, we spotlight the threat to global growth from deepening economic divergence, the importance of inflation expectations in managing slowing global growth, risks to commodity markets from fragmentation, policy challenges of balancing climate action with fiscal and political considerations, private finance and the climate transition in emerging economies, and we look forward to next week’s highlights.
Learn more about who attends the IMF's annual meetings, what happens, what events take place, and how to follow them in this factsheet.
FULL SCHEDULE
(Credit: IMF Photo)
Diverging Fortunes And Fragmentation Threaten Global Growth
Fragmentation of the world economy and diverging fortunes threaten to undermine growth prospects, especially for Africa, IMF Managing Director Kristalina Georgieva said on Thursday in a curtain-raising speech ahead of the annual meetings—the first to be held on the continent for 50 years.
Speaking in Côte d’Ivoire alongside President Alassane Ouattara, Georgieva said connecting Africa’s abundant human resources with advanced economies’ investment capital would inject much-needed dynamism into the global economy.
“A prosperous world in the 21st century requires a prosperous Africa,” the managing director said.
Deepening divergence
In a wide-ranging speech that covered the global economic outlook and policies for stronger growth, Georgieva warned of a deepening divergence in economic fortunes between different country groups and within them.
With the current pace of projected global growth well below that of the two decades before the pandemic, Georgieva stressed the importance of maintaining international cooperation amid rising trade and investment barriers.
Compared with other regions, the African continent stands to suffer the biggest economic losses from severe fragmentation, but the right policies can build a bridge to a more prosperous and peaceful world, she said.
“We can lay the groundwork for a half century even more impressive than the last.”
CHART OF THE DAY
Africa's demographic dividend
Africa is home to the world’s youngest and fastest-growing population. Connecting Africa’s human resources with the investment capital of rapidly ageing advanced economies would help revive the global economy.
(Credit: Adobe Stock and IMF)
Managing Inflation Expectations Can Help Economies Achieve a Softer Landing
Expectations about future inflation play a key role in driving inflation, as those views influence decisions about consumption and investment which can affect price and wages today.
How best to inform people’s views on inflation became a crucial consideration as price growth around the world reached multi-decade highs last year and fueled concern that inflation could become entrenched, according to IMF economists.
In a blog based on an analytical chapter of our latest World Economic Outlook, Silvia Albrizio and John Bluedorn examine how expectations affect inflation and the scope for monetary policy to influence these expectations to achieve a “soft landing”—a scenario where a central bank guides inflation back to its target without causing a deep downturn in growth and employment.
“Improvements in monetary policy frameworks can better inform people’s inflation expectations and thereby help reduce inflation at lower output cost,” they say.
Want to learn more about inflation expectations? Read F&D magazine’s Back to Basics explainer on how today’s inflation expectations can become tomorrow’s inflation reality.
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NUMBER OF THE DAY
Since 2020, the global output loss from successive shocks amounts to $3.7 trillion, deepening economic divergence between groups of countries and within them.
$3.7trillion
(Credit: Adobe Stock and IMF)
Fragmentation Imperils Food Security and Clean Energy Transition
Russia’s invasion of Ukraine fragmented major commodity markets. Since then, countries have restricted commodities trade with a more than twofold increase in policy measures relative to 2021.
In a blog based on a chapter of our World Economic Outlook, IMF economists say further fragmentation could lead to turmoil in commodity markets, causing large price swings.
Low-income and vulnerable countries would bear the brunt of the long-term economic losses, Jorge Alvarez, Mehdi Benatiya Andaloussi and Martin Stuermer write. Disruptions to agricultural imports mean these countries face gross domestic product losses of 1.2 percent, they say.
“Providing corridors for food staples and critical minerals could avert food crises and help keep the green transition on track.”
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(Credit: IMF)
Emerging Economies Need Much More Private Financing for Climate Transition
Achieving the transition to net-zero emissions by 2050 requires substantial climate mitigation investment in emerging market and developing economies, which currently emit around two-thirds of greenhouse gases.
These countries will need about $2 trillion annually by 2030 to reach that ambitious goal, according to the International Energy Agency, a fivefold increase from the current $400 billion of climate investments planned over the next seven years.
In a blog based on an analytical chapter of our latest Global Financial Stability Report, IMF economists say the private sector must supply about 80 percent of the large climate investment needs for emerging market and developing economies. This share rises to 90 percent when China is excluded, they add.
“A broad mix of policies is needed to unlock the necessary private capital in emerging market and developing economies and ensure a positive climate impact.”
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Morocco And The IMF: Partnership For Progress
The partnership between the IMF and Morocco has helped strengthen Morocco’s economy, with a focus on economic growth that is more inclusive, better distributed, and benefits more people. Learn more in this video.
Countries Must Contain Global Warming While Keeping Debt in Check
Climate action presents countries with difficult tradeoffs. In a blog based on our latest Fiscal Monitor, IMF economists say governments face a policy trilemma between achieving climate goals, fiscal sustainability and political feasibility.
Relying mostly on spending measures and scaling them up to deliver on climate ambitions will become increasingly costly, possibly raising debt by 45 percent to 50 percent of gross domestic product by midcentury, the authors say.
Prolonging “business-as-usual” leaves the world vulnerable to warming. Countries have the option to generate revenue to decrease their debt burden through carbon pricing, but relying on carbon pricing alone may cross a political red line.
Pursuing any two of these objectives comes at the cost of partially sacrificing the third, the authors say.
“Governments must take bold, swift, and coordinated action, and find the optimal mix of both revenue- and spending-based mitigation measures.”
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Next Week's Highlights
MONDAY, OCTOBER 9
12:30 PM - 1:30 PM DST
Africa Inspired
TUESDAY, OCTOBER 10
9:00 AM - 9:45 AM DST
IMF Press Briefing: World Economic Outlook
10:30 AM - 11:15 AM DST
IMF Press Briefing: Global Financial Stability Report
12:00 PM - 12:25 PM DST
High-Level Capacity Development Talk: Building Capacity for Africa’s Economic Empowerment amidst Compound Shocks
2:00 PM - 3:30 PM DST
Strengthening International Cooperation in a Fragmenting Global Economy
WEDNESDAY, OCTOBER 11
9:30 AM - 11:15 AM DST
IMF Press Briefing: Fiscal Monitor
1:30 PM - 2:15 PM DST
Joint Seminar: Delivery On the Ground: Country Action for A Livable Planet
4:00 PM - 4:45 PM DST
IMF Seminar: Financing Resilience, Growth and Shared Prosperity
THURSDAY, OCTOBER 12
8:45 AM - 9:30 AM DST
IMF Managing Director Press Briefing on the Global Policy Agenda
12:00 PM - 12:45 PM DST
IMF Seminar: Boosting Growth with Domestic Resources: How to Pay for It All
2:00 PM - 2:45 PM DST
IMF Seminar: Reviving Growth and Shaping Transformations in Emerging Market and Developing Economies
3:45 PM - 4:45 PM DST
Joint Seminar: Reform Priorities for Tackling Debt
FRIDAY, OCTOBER 13
8:45 AM - 10:15 AM DST
Annual Meetings Plenary
2:00 PM - 2:45 PM DST
IMF Seminar: Debate on the Global Economy
FULL SCHEDULE
(Photo: IMF)
International cooperation is weakening. The bridges that connect countries are corroding as trade and investment barriers are rising, and Africa stands to suffer the biggest economic losses from severe fragmentation. IMF Managing Director Kristalina Georgieva kicked off the 2023 Annual Meetings in Marrakech with her customary curtain raiser speech from Côte d’Ivoire. It’s the first time since 1973 that the Annual Meetings are held in Africa and Georgieva says it’s an opportunity to pave the way to the next 50 years.
Go to IMF.org to follow the Annual Meetings and find all the IMF flagship reports, including the World Economic Outlook, the Global Financial Stability Report, and the Fiscal Monitor.
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Dear MARIA,
We just published a new blog—please find the full text below.
How Managing Inflation Expectations Can Help Economies Achieve a Softer Landing
By Silvia Albrizio and John Bluedorn
Inflation around the world reached multi-decade highs last year. While headline inflation is coming down steadily, core measures―which exclude food and energy―are proving stickier in many economies and wage growth has picked up.
Expectations about future inflation play a key role in driving inflation, as those views influence decisions about consumption and investment which can affect price and wages today. How best to inform people’s views on inflation became an even more crucial consideration as the surge in prices fueled concern that inflation could become entrenched.
In an analytical chapter of the latest World Economic Outlook, we examine how expectations affect inflation and the scope for monetary policy to influence these expectations to achieve a ‘soft landing,’ that is, a scenario where a central bank guides inflation back to its target without causing a deep downturn in growth and employment.
Larger role for inflation expectations
Surveys of professional forecasters have shown that that expectations for inflation over the next 12 months—near-term expectations—started a steady rise in 2021 in advanced and emerging market economies alike, then accelerated last year as actual price increases gained momentum. Expectations for inflation five years into the future, however, remained stable, with average levels broadly anchored around central bank targets.
More recently, near-term inflation expectations appear to have turned the corner and begun to shift onto a gradual downward path. Beyond the world of professional forecasters, we see similar patterns of inflation expectations by companies, individuals, and financial-market investors, on average.
Movements in near-term expectations are economically important for inflation dynamics. According to our new statistical analysis, after the inflationary shocks in 2021 and early 2022 started unwinding late last year, inflation has been increasingly explained by near-term expectations.
For the average advanced economy, they now represent the primary driver of inflation dynamics. For the average emerging market economy, expectations have grown in importance, but past inflation remains more relevant, suggesting that people may be more backward-looking in these economies. This could reflect in part the historically higher and more volatile inflationary experience in many of these economies.
In fact, we find that inflation in advanced economies typically rises by about 0.8 percentage points for each 1 percentage point rise in near-term expectations while the pass-though is only 0.4 percentage points in emerging market economies.
One factor that could account for this difference is the share of backward-looking versus forward-looking learners across economy groups. When information on inflation prospects is scarce and central bank communications are unclear or lack credibility, people tend to form their views about future price changes based on their current or past inflation experiences—they are more backward-looking learners. By contrast, those who are more forward-looking form their expectations from a broader array of information that could be relevant to future economic conditions, including central bank actions and communications—they are more forward-looking learners.
Policy implications of differences in learning
These differences have important consequences for central banks. As shown in simulations from a new model that allows for differences in learning and expectations formation, policy tightening has less of a dampening effect on near-term inflation expectations and inflation when a greater share of people in the economy are backward-looking learners.
That’s because people more focused on the past do not internalize the fact that interest rate increases today will slow inflation as they weigh on demand in the economy. Therefore, a higher share of backward-looking learners means that the central bank must tighten more to get the same decrease in inflation. In other words, reductions in inflation expectations and inflation come at a higher cost to output when there is a higher share of backward-looking learners.
Enhancing policy effectiveness
Central banks can encourage expectations to be more forward-looking through improvements in the independence, transparency, and credibility of monetary policy and by communicating more clearly and effectively. Such changes help people understand the central bank’s policy actions and their economic effects, boosting the share of forward-looking learners in the economy.
Simulations from the new model show how improvements in monetary policy frameworks and communications can help lower the output costs needed to reduce inflation and inflation expectations, making it more likely the central bank can achieve a soft landing.
One way central banks can improve their communications is by simple and repeated messaging about their objectives and actions that is tailored to the relevant audiences.
However, improving monetary policy frameworks and crafting new tailored communication strategies to help improve inflation dynamics can take time or be difficult to implement. Such interventions are complementary to more traditional monetary policy tightening actions, which will remain key to bringing inflation back to target in a timely manner.
Jeff Kearns
Managing Editor
IMF Blog
jkearns@IMF.org
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