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Dear MARIA, Welcome back to the Weekend Read. In today's edition, we highlight: To restore global growth, ease barriers for entrepreneurs: Georgieva IMF’s economic counsellor warns on diverging growth prospects Côte d’Ivoire's economic and climate challenges Enrique Martinez Garcia on how to spot housing bubbles Chart of the Week, Elizabeth Johnson on São Paulo's housing deficit, and much more

ECONOMIC GROWTH To Restore Global Growth, Ease Barriers for Entrepreneurs: Georgieva (Credit: IMF Photo) If there is one economic challenge that cuts across most of the globe, it is growth. Or rather the shortage of it, writes IMF Managing Director Kristalina Georgieva in an article in the Washington Post. “With the ups and downs of the global economy over the past three decades, our five-years-ahead projection for world growth has dropped to its lowest level since the early 1990s, at a modest annual average rate of roughly 3 percent,” says Georgieva, noting most of this slowdown is because of slowing productivity growth. “This is a huge concern. Growth fuels economic life—it gives people their jobs and incomes, societies their vibrancy, and governments their financial strength. In a tightly interconnected world, slow growth in one place can easily turn into a problem elsewhere,” she continues. “The challenge requires us to double down on economic policies that we know can durably enhance growth prospects.” To help combat these challenges, the IMF is setting up a new IMF Advisory Council on Entrepreneurship and Growth, with representatives from global business, policymaking and academia, she says. The council will help by contributing ideas on how to ease regulatory barriers to entrepreneurship, incentivize and channel long-term savings to productivity-enhancing innovation, adapt tax systems and bankruptcy codes to support a dynamic business environment, and more. “Better productivity growth will mean better prospects for people and ultimately a more stable, peaceful world. This is why the IMF was created—and why we resolutely confront the jobs-and-growth challenge the world faces today,” Georgieva concludes. Read the Article

WORLD OUTLOOK Divergences in Global Economy May Widen Amid Policy Shifts (Credit: George Clerckistock/Getty Images) Global growth will remain steady at 3.3 percent this year and next, broadly aligned with potential growth that has substantially weakened since before the pandemic, according to Pierre-Olivier Gourinchas, the IMF’s economic counsellor and director of research. In a blog on the IMF’s latest global economic projections, Gourinchas said inflation would decline, to 4.2 percent this year and 3.5 percent next year, in a return to central bank targets that will allow further normalization of monetary policy. “This will help draw to a close the global disruptions of recent years, including the pandemic and Russia’s invasion of Ukraine, which precipitated the largest inflation surge in four decades.” But Gourinchas pointed to risks from the diverging prospects of some of the world’s largest economies, notably between the United States’ fast-growing economy on one hand and Europe and China on the other. “In the near term, a constellation of risks could further exacerbate these divergences,” he warned, pointing to contrasting policy responses in different countries. Read the Blog

COUNTRY FOCUS Côte d’Ivoire: Fostering Economic Transformation and Adapting to Climate Change (Credit: IMF Photo & Leamus/iStock by Getty Images) Côte d’Ivoire has become a pillar of growth and stability for the region, thanks to its impressive economic resilience and commitment to reform. The Ivoirien economy has performed strongly over the past decade, with GDP growth averaging 6.4 percent, inflation hovering around 2.2 percent, and a declining proportion of the population living below the national poverty line. The country has maintained macroeconomic stability despite the major shocks that have buffeted the world in recent years. Nonetheless, structural obstacles persist, including the informal nature of employment, which has diminished but remains pervasive, thereby complicating the country’s mission to achieve stronger and more inclusive growth, broaden the tax base, and deepen the ongoing economic transformation. At the same time, the relative predominance of the cocoa sector and the concentration of industry and services in coastal zones make Côte d’Ivoire vulnerable to the effects of climate change.  As the country continues to make progress toward joining the ranks of upper middle-income countries and in tackling climate change, the IMF Country Focus editorial team spoke with Côte d’Ivoire’s Minister of Finance and Budget, Adama Coulibaly, and IMF Mission Chief Olaf Unteroberdoerster. Read the Article

As urbanization continues to grow worldwide, affordable housing is a rare commodity in many cities. São Paulo­, South America’s biggest city, has gained over 2 million new residents in the past decade alone. Elizabeth Johnson heads Brazil research at TS Lombard and has been studying São Paulo’s latest attempt at strengthening its housing strategy. In this podcast, Johnson says the city looked to its largely abandoned downtown core to address its housing woes.

F&D MAGAZINE How to Spot Housing Bubbles (Credit: Michael Morgenstern) The global financial crisis of 2008–09 came amid the collapse of a housing bubble that few saw coming. Today, housing bubbles remain poorly understood, even though they have drawn increased attention for their effects on financial stability and monetary policy transmission. But with real-time monitoring tools policymakers can help mitigate unsustainable booms, the Federal Reserve Bank of Dallas’s Enrique Martinez Garcia writes in F&D. “Recent advances in time series and panel techniques—designed to analyze data over time and across groups or locations—make it possible to detect bubbles in real time by focusing on statistical patterns that indicate bubbles,” he says.

Asia-Pacific’s economies are likely to experience labor market shifts because of artificial intelligence, with advanced economies being affected more. About half of all jobs in the region’s advanced economies are exposed to AI, compared to only about a quarter in emerging market and developing economies. However, as shown in the Fund’s latest Asia-Pacific Regional Economic Outlook, there are also more jobs in the region’s advanced economies that can be complemented by AI, meaning that the technology will likely enhance productivity rather than replace these roles altogether. The concentration of such jobs in Asia’s advanced economies could worsen inequality between countries over time. AI could also increase inequality within countries.  As the Chart of the Week shows, IMF research also finds that women are more likely to be at risk of disruption from AI because they are more often in service, sales, and clerical roles. Men, by contrast, are more represented in occupations that are unlikely to be impacted by AI at this stage, like farm workers, machine operators, and low-skill elementary workers. Read More

Weekly Roundup STAFF PAPER Effects of Residence and Citizenship by Investment This new IMF staff paper discusses under what circumstances residence and citizenship by investment (RBI or CBI) schemes could be used by individuals engaging in tax avoidance or evasion. It describes the market for CBI and RBI and how features of the offered programs might reveal the underlying motivations of governments offering them. The authors then present empirical evidence on the conditions under which such schemes are offered. Finally, the authors estimate the impact of such schemes on investment, house prices, and public revenues. STAFF PAPER Drivers of Inflation in the Caucasus and Central Asia In parallel with global developments, inflation in the Central Asia and Caucasus (CCA) has exhibited large swings in recent years. A new IMF staff paper investigates inflation dynamics in the CCA and its main drivers. The authors also assess the role of monetary policy in steering inflation outcomes. They find that external factors play a major role in determining CCA inflation dynamics, although domestic factors (e.g., demand conditions, expectations) also contribute. Monetary policy is found to have a statistically significant effect on inflation, including by moderating the impact of external drivers. The findings point to the need to continue strengthening policy frameworks to steer expectations and improve the effectiveness of monetary policy, while establishing adequate social safety nets to cushion the impact from global shocks. DEPARTMENTAL PAPER Corporate Vulnerabilities and Interest Rates A new IMF departmental paper provides a comprehensive overview of corporate sector vulnerabilities that have emerged post-pandemic, with a focus on the financial stability implications from corporate sector vulnerabilities in a new environment of high interest rates. Although several central banks have recently started cutting interest rates, the expectation is that high interest rates, above pre-pandemic levels, are here to stay. It is then especially important to design and deploy appropriate policies that may prevent and mitigate risks from the corporate sector.

Thank you 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.

Miriam Van Dyck Editor IMF Weekend Read mvandyck@IMF.org

Dear MARIA, We just published a new blog—please find the full text below.  As One Cycle Ends, Another Begins Amid Growing Divergence (Credit: George Clerck/iStock by Getty Images) By Pierre-Olivier Gourinchas We project global growth will remain steady at 3.3 percent this year and next, broadly aligned with potential growth that has substantially weakened since before the pandemic. Inflation is declining, to 4.2 percent this year and 3.5 percent next year, in a return to central bank targets that will allow further normalization of monetary policy. This will help draw to a close the global disruptions of recent years, including the pandemic and Russia’s invasion of Ukraine, which precipitated the largest inflation surge in four decades. Though the global growth outlook is broadly unchanged from October, divergences across countries are widening. Among advanced economies, the United States is stronger than previously projected on continued strength in domestic demand. We have raised our growth projection for the US this year by 0.5 percentage point, to 2.7 percent. Growth in the euro area, by contrast, is likely to increase only modestly, to 1 percent from 0.8 percent in 2024. Headwinds include weak momentum, especially in manufacturing, low consumer confidence, and the persistence of a negative energy price shock. European gas prices remain about five times as high as in the United States, versus twice as high before the pandemic. In emerging market economies, growth projections are broadly unchanged, at 4.2 percent and 4.3 percent this year and next. Elevated trade and policy uncertainty is contributing to anemic demand in many countries, but economic activity is likely to pick up as this uncertainty recedes. This includes China, where we now project 4.5 percent growth next year, up 0.4 percentage point from our prior forecast. Some divergence between large economies has been cyclical, with the US economy operating above its potential while Europe and China are below. Under current policies, this cyclical divergence will dissipate. But the divergence between the US and Europe is more due to structural factors, and the disconnect will linger if these are left unaddressed. It reflects persistently stronger US productivity growth, particularly but not exclusively in the technology sector, linked to a more favorable business environment and deeper capital markets. Over time, this translates into higher returns on US investment, increased inbound capital flows, a stronger dollar and US living standards pulling away from those of other advanced economies. For China, it is notable that potential growth is now more like that of other emerging market economies. Economic policy uncertainty is elevated, with many governments newly elected in 2024. Our projections incorporate recent market developments and the impact of heightened trade policy uncertainty, assumed to be temporary, but refrain from making assumptions about potential policy changes that are currently under public debate. In the near term, a constellation of risks could further exacerbate these divergences. European economies could slow more than anticipated, especially if investors grow more concerned about public debt sustainability in more vulnerable countries. The main risk is that euro area monetary and fiscal policy could simultaneously run out of room if weaker economic activity pushes interest rates back toward the effective lower bound just as insufficient fiscal consolidation raises risk premia, in turn further constraining fiscal policy. In China, should fiscal and monetary measures prove insufficient to address domestic weakness, the economy is at risk of a debt-deflation stagnation trap, where falling prices raise the real value of debt, undermining activity further. The sharp decline in Chinese government bond yields, seen as haven for local investors, shows rising investor concern. Both in China and Europe, these factors could lower inflation and economic growth. By contrast, while many of the policy shifts under the incoming US administration are hard to quantify precisely, they are likely to push inflation higher in the near term relative to our baseline. Some indicated policies, such as looser fiscal policy or deregulation efforts, would stimulate aggregate demand and increase inflation in the near term, as spending and investment increase immediately. Other policies, such as higher tariffs or immigration curbs, will play out like negative supply shocks, reducing output and adding to price pressures. A combination of surging demand and shrinking supply would likely reignite US price pressures, though the effect on economic output in the near term would be ambiguous. Higher inflation would prevent the Federal Reserve from cutting interest rates and could even require rate hikes that would in turn strengthen the dollar and widen US external deficits. The combination of tighter US monetary policy and a stronger dollar would tighten financial conditions, especially for emerging markets and developing economies. Investors already anticipate such an outcome, with the US dollar gaining around 4 percent since the November election. Overall, these near-term risks could lead to further divergence across economies. In the medium term, about five years, the positive effects of the US fiscal shock may dissipate and could even reverse if fiscal vulnerabilities increase. Deregulation efforts can boost potential growth in the medium term if they remove red tape and stimulate innovation. However, there is a risk that excessive deregulation could also weaken financial safeguards and increase financial vulnerabilities, putting the US economy on a dangerous boom-bust path. Medium-term risks to economic output would be heightened by restrictive trade policies and stricter migration limits. Renewed inflation pressures, should they arise so soon after the recent surge, could well de-anchor inflation expectations this time around, as people and businesses are now much more vigilant about protecting their real income and profitability. Inflation expectations are further away from central bank targets than in 2017–21, which suggests increased risks of higher inflation. In this environment, monetary policy may need to be more agile and proactive to prevent expectations from de-anchoring, while macro-financial policies will need to remain vigilant to avoid a buildup of financial risks. The issue is likely to be exacerbated for emerging market economies, given the passthrough of dollar exchange rates to domestic prices and the effects of weaker domestic growth in China. In most cases, the appropriate policy response in emerging market economies will be to let currencies depreciate as needed while adjusting monetary policy to achieve price stability. However, in cases where inflation dynamics have become clearly unanchored or where there are financial stability risks, capital flow management and foreign exchange interventions could help, as long as these are not a substitute for necessary macroeconomic adjustments, in line with the IMF’s Integrated Policy Framework. For several countries, fiscal policy efforts have been delayed or insufficient to stabilize debt dynamics. It is now urgent to restore fiscal sustainability before it is too late and to build sufficient buffers to address future shocks that could be sizable and recurrent. Additional delays could trigger a worrying spiral where borrowing costs keep rising as markets lose confidence, further increasing adjustment needs. Recent strains in Brazil’s financial markets, like the reaction to the UK’s September 2022 mini-budget, underscore how funding conditions can deteriorate suddenly. While any sizable fiscal consolidation is bound to weigh on economic activity, countries should take special care to preserve growth as much as possible along the consolidation path, for instance by focusing the adjustment on reducing untargeted transfers or subsidies rather than government investment spending. To achieve this—and help overcome persistent structural differences driving growth divergences—there should be renewed focus on ambitious structural reforms to directly boost growth. These include targeted reforms to better allocate resources, increase government revenues, attract more capital, and foster innovation and competition. Finally, additional efforts should be made to strengthen and improve our multilateral institutions to help unlock a richer, more resilient, and sustainable global economy. Unilateral policies that distort competition—such as tariffs, nontariff barriers, or subsidies—rarely improve domestic prospects durably. They are unlikely to ameliorate external imbalances and may instead hurt trading partners, spur retaliation, and leave every country worse off. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org