IMF Weekend Read...

 

Dear MARIA,   In today's edition, we highlight: The Global Economy at a Turning Point Financial Stability Risks & AI Emerging Markets Face Shock to Public Finances Why the Global Economy is Stuck in a Doom Loop Macro Policy's New Currency Trade Within Asia Rare Earth Supply Disruptions GLOBAL ECONOMY Global Economy at a Turning Point Global economic growth is facing serious headwinds. Speaking at the Milken Institute, IMF Managing Director Kristalina Georgieva said the world could be on course for the “adverse scenario” outlined in the April World Economic Outlook, with oil prices expected to remain around or above $100 for much of the year.   “A mild impact [of the war in the Middle East], with a minor slowdown of growth, is no longer a valid reference scenario,” Georgieva noted. Disruptions in energy markets and supply‑chains are increasing inflationary pressures. Fertilizer prices are 30–40 percent higher, which could push global food prices up by 3–6 percent over the next 12 months.   “This is a really serious price impact that we have to be very conscious about,” Georgieva said, adding that sustained high energy prices into 2027 could trigger higher inflation expectations, leading to higher interest rates.   The current shock is affecting some countries more than others. Around 80 percent of countries are oil importers, and many—especially in sub‑Saharan Africa—lack room in their government budgets or have limited foreign-exchange reserves to cushion the blow.   Georgieva called on policymakers not to “throw gasoline on the fire” by avoiding relief measures that end up boosting demand for oil, which would make it even more difficult to rein in inflationary pressures. Watch the discussion FINANCIAL RISKS AND AI Financial Stability Risks Mount as AI Fuels Cyberattacks The IMF is calling on governments to treat cybersecurity as a core financial‑stability issue amid a sharp increase in cyber risks driven by artificial intelligence.   In a new blog, Tobias Adrian, head of the IMF’s Monetary and Capital Markets Department, argues that AI is accelerating the scale and sophistication of attacks. New AI tools sharply reduce the time and cost required to identify and exploit digital vulnerabilities.   IMF analysis shows that severe cyber incidents can trigger funding strains, raise solvency concerns, and disrupt payments and market functioning. This is because financial institutions rely on shared digital infrastructure such as cloud services, payment networks, and widely used software.   The recent, controlled release of Anthropic’s “Claude Mythos” model underscored the rising risks. Mythos can identify and exploit vulnerabilities across major operating systems and web browsers—even when used by non‑experts. This highlights how AI‑driven cyber risks could propagate rapidly through the financial system.   So, what can be done? For one, financial institutions increasingly use AI tools to detect threats, prevent fraud, and respond to incidents. This should be coupled with increased efforts to bolster resilience. It means prioritizing supervision, focusing even more on systemic transmission channels. It also means stepping up international cooperation, not least because attackers may target economies with weaker defenses, especially in the developing world. Read the IMF Blog EMERGING MARKETS Emerging Markets, Developing Economies Face Dual Shock to Public Finances Many developing countries face increasing financial strains amid shrinking natural-resource revenues and a continued decline in foreign aid. With more limited room for maneuver in their budgets, governments find it even more difficult to finance development and support vulnerable people.   New IMF analysis shows that revenue from natural resource extraction and foreign aid grants have fallen by a combined 3.8 percent of GDP since 2000. Meanwhile, gains from improved tax collection over the same period, amounting to 2.6 percent of GDP, have offset only about two‑thirds of that loss, according to the IMF’s World Revenue Longitudinal Database.   With fewer fiscal shock absorbers, governments are facing more difficult choices. Many are struggling to find the right balance between payments on their debt, spending on social services, and investing in their economies to boost growth. Check out the new data GLOBAL ECONOMY Why the Global Economy is Stuck in a Doom Loop The world is facing a negative feedback loop driven by economic pressures, political polarization, and geopolitical tensions, said Cornell University economist Eswar Prasad in a recent IMF Podcast. While globalization has been instrumental in boosting growth and lifting millions out of poverty, it is now widely seen as a zero‑sum game. Prasad argued that this shift has weakened people’s trust in institutions and made it harder for countries to cooperate on pressing global issues.   For emerging economies, this new landscape is especially challenging. India, for example, is projected to become the world’s third‑largest economy by 2030, but its per-capita income remains only a small fraction of that in advanced economies like the United States. This gap shapes disagreements over responsibility for issues such as climate change and global rules, even as economic power becomes more widely distributed. Prasad argues that restoring stability will require rebuilding strong domestic and international institutions—and finding better ways to share the gains from growth, technology, and globalization. Listen to the podcast ECONOMIC POLICY Credibility Capital: Macro Policy's New Currency “Mistakes will be made,” warned Olivier Blanchard at a recent IMF Spring Meetings seminar. This is the difficult reality facing policymakers as they confront the simultaneous impact of demographics, climate change, artificial intelligence, and geopolitical fragmentation.   Blanchard, senior fellow at the Peterson Institute and former IMF chief economist, outlined a framework to  help delineate the risks of missteps. First, complexity guarantees misjudgments. Second, what matters is that “markets and people perceive the missteps as being honest mistakes”—not, for example, fiscal dominance forcing central banks to keep rates too low. Third, “credibility is going to be even more valued in the future than today” given rising uncertainty.   That last point shaped the discussion among panelists convened by Christian Mumssen, director of the IMF’s Strategy, Policy, and Review Department: Laura Alfaro of the Inter-American Development Bank, Philip Lane of the European Central Bank, Sarah Hunter of the Reserve Bank of Australia, and Anantha Nageswaran, India’s chief economic adviser.   India’s experience shows how credibility compounds. While global debt rose ten percentage points since COVID, India’s fell seven. The government boosted capital spending; used technology to target fiscal transfers more efficiently; and all this has resonated with markets: India’s 10-year spread over US Treasuries shrank from 600 basis points a decade ago to 270 today. India has been “using fiscal consolidation as a growth tailwind,” noted Nageswaran.   Looking five years ahead, Lane predicted central banks will “lean more heavily on scenarios” to convey policy amid uncertainty. Hunter emphasized scenarios should help people “understand where policy is likely to go” as conditions evolve, while fostering internal cultures that “let teams explore, and fail” without penalty. Blanchard’s prescription was harder-edged: “you have to rebuild credibility capital regularly because you’re going to need it next time.” Mistakes are inevitable. Trust is not. Watch the seminar HIGHLIGHTS FROM THE SPRING MEETINGS  Trade Within Asia-Pacific Can Boost Growth Trade has long been a powerful engine of growth in the Asia‑Pacific region. But rising global trade barriers and uncertainty about trade policies are putting that model at risk.   What can be done? Start by reviewing your own policies. Even though countries in the region have reduced tariffs, other barriers--such as regulations, licensing requirements, and investment restrictions--remain high compared to other parts of the world.   New IMF analysis by Chikako Baba and Ashique Habib, economists in the Asia Pacific Department, shows that reducing these non-tariff barriers through deeper regional trade agreements could raise real GDP in the Asia‑Pacific region by about 2 percent in the long run.   While Asian economies trade heavily in goods among themselves, countries still export most final products outside the region. Unlocking the full potential of regional integration will be critical if countries are to preserve trade as a vital engine of growth and higher living standards. Watch the video HIGHLIGHTS FROM THE SPRING MEETINGS  Rare Earth Supply Disruptions Matter for the Global Economy Rare earth elements that are essential for electric vehicles, electronics, defense systems, and renewable energy play a far bigger role in the global economy than their market size suggests. While the global market for rare earths was worth about $31 billion in 2024, these materials underpin trillions of dollars in economic activity further along the supply chain, according to IMF analysis. This is why supply disruptions have an outsized impact on growth and inflation.   The risks stem from highly concentrated supply chains. China accounts for around 70 percent of global rare‑earth mining and more than 90 percent of refining and oxide separation (which is the most critical processing stage). IMF research by Andrea Paloschi and Christian Bogmans, economists in the Research Department, shows that in a severe scenario, such as an 80 percent persistent reduction in rare‑earth inputs, GDP losses could reach about 1.5 percent in the United States.   What can policymakers do? Short-term stockpiling can help, but longer‑term resilience depends on diversifying supply chains and reducing excessive concentration. The latest IMF research finds that the first 10–20 percent gains in self‑sufficiency deliver the largest reduction in vulnerability at moderate cost, while deeper de‑risking becomes far more expensive. Coordinated action across countries can lower these costs further, underscoring the value of cooperation in strengthening global supply‑chain resilience. Watch the video 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.  Jacqueline Deslauriers Editor | IMF Weekend Read  jdeslauriers@imf.org Stay connected with the International Monetary Fund:       This email was sent to politikimx@gmail.com on behalf of: International Monetary Fund 1900 Pennsylvania Ave NW · Washington, DC · 20431