IMF update

 

Dear MARIA, We just published a new blog—please find the full text below.  G20 Economies Should Turn to Reforms to Improve Growth Amid Policy Tightening (Credit: Donatas Dabravolskas/Adobe Stock) By JaeBin Ahn, Nicolas Fernandez-Arias, and Neil Meads Most Group of Twenty economies are likely to keep monetary policy appropriately tight to bring inflation back to target. Central banks will need to keep interest rates higher for longer as inflation remains persistently elevated—and easing too soon could undo hard-won progress to anchor inflation expectations. This higher-for-longer environment for borrowing costs, however, portends sustained funding pressures for governments. That means governments will need to consolidate their finances to rebuild buffers and ensure that their debt is sustainable. Most G20 economies are poised to cut spending and boost revenues in the next few years, but in many cases IMF staff recommend even greater fiscal effort to ensure sufficient space to respond to future shocks and new fiscal challenges. Amid the likely drag of both monetary and fiscal tightening, both advanced economies and emerging market and developing countries should consider structural reforms, such as those to make product and labor markets more efficient, to support economic growth. While the exact prescriptions will differ by country, recent IMF research shows significant potential benefits of so-called first-generation reforms in emerging market and developing economies that, in turn, can have beneficial spillovers for advanced economies. As the Chart of the Week shows, pairing macroeconomic policy that’s tighter than currently planned in many economies—particularly advanced economies—with priority structural reforms can boost G20 economic output by as much as 0.7 percent over 2025-28 relative to current projections. That’s according to our latest report prepared for the group, whose members are responsible for about four-fifths of global gross domestic product. While the recommended macroeconomic adjustments would weigh on output in the G20’s advanced economies in coming years—because of a tighter-than-planned fiscal consolidation—they would substantially reduce public debt burdens and trade imbalances among G20 economies. And the burden on output would be more than offset should the changes be accompanied by recommended structural reforms. The pace and composition of fiscal consolidation should protect of the most vulnerable people to ensure inclusive and equitable outcomes. Our G20 report follows the latest IMF World Economic Outlook, which forecast growth will slow from 3.5 percent last year to 3 percent this year and 2.9 percent next year—a slight downgrade from July. Five-year-ahead projections are down from a peak of 4.9 percent a decade ago to 3.1 percent for 2028, the lowest such forecast since 1990. The weak growth outlook amid heightened uncertainty, still-elevated global inflation, and limited fiscal space provides many challenges for policymakers. And while some IMF recommendations might, therefore, seem difficult at such a time, our report does highlight more upbeat consequences: disinflation, rebuilt buffers to help manage future shocks, and the prospect of stronger and more balanced growth. Europe’s Wage Rises Are Aiding Recovery but Economies Face Risks (Credit: IGphotography/iStock by Getty Images) By Chikako Baba, Ben Park, Ippei Shibata, and Sebastian Weber Europe’s economic recovery is getting a much-needed boost from rising wages and higher incomes. But in countries where population aging is shrinking the workforce, policymakers may soon face new challenges. Short-term wage pressures could combine with longer-term tightness in labor markets to stoke inflationary pressures. After two years of falling purchasing power, it’s not surprising that Europe’s workers are pushing for more pay. Nominal wages rose by 4.5 percent in the euro area and more than 10 percent in other parts of Europe in the first half of this year. Higher wages help alleviate cost-of-living pressures and support economic expansion. But improved productivity, coupled with tight macroeconomic policies which limit companies from passing on higher costs to consumers, are essential if economies are to afford much higher wages without fanning inflation, as discussed in our latest Regional Economic Outlook. Wage growth has differed across countries. Across much of Europe’s advanced economies, wages have further to rise before they catch up with prices, meaning that pressure for pay rises is likely to persist. In Central, Eastern and Southeastern Europe, wage growth has been more rapid and kept up with prices. This region has seen high wage growth in the past, but back then productivity growth was strong as well. Today it is weak. That means further high pay rises would chip away at competitiveness. Wage pressures are unlikely to subside any time soon. As the Chart of the Week shows, longer-term trends are already squeezing labor supply (total hours worked). Demographics and shorter working weeks mean employers face fierce competition to find qualified workers and must pay more to retain them. Over the past decade, Europe’s labor force participation grew relatively rapidly. Even if this trend continues, the labor supply could decline by 0.1 percent annually over the next five years as the population ages, population growth slows, and the shortening of working weeks continues. By contrast, the US labor supply is expected to grow by 0.2 percent as immigration and longer working hours more than compensate for a deterioration in demographics. The scope to offset these labor market trends in Europe is limited. Proposals to increase retirement ages further may run into political opposition. There is also little scope to increase average working hours because shorter work weeks are gaining popularity. What must policymakers do? There is a fine line between aiding economic recovery and banishing stubbornly high inflation. Central banks must watch for upside risks to inflation and closely monitor wage settlements and their consistency with productivity trends. A marked divergence would be worrisome. The mix of monetary and fiscal policy should remain appropriately tight to bring inflation back to target. At the same time, structural reforms to increase productivity are becoming critical. Doing so would both lower inflationary labor-market pressures and raise longer-term economic growth potential. Boosting the labor supply by allowing workers to work more hours, making it simpler to transition between jobs, equipping new generations for future jobs, reskilling workers, and facilitating the integration of migrant workers all have an important role to play. —See the European Department’s recent blog outlining its latest economic outlook for the region: Europe Must Succeed in Restoring Price Stability. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. 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