The world economy is still in a “state of instability”.A comprehensive analysis written by a team led by Ayhan Kose is here.
After growing 3.1% last year, the global economy will slow sharply to 2.1% in 2023 as monetary policy continues to tighten to curb high inflation, before recovering modestly to 2.4% in 2024. Tighter global financial conditions and subdued external demand are expected to weigh on growth in emerging market and developing economies (EMDEs). Inflation has persisted, but is expected to decline gradually as demand weakens and commodity prices moderate, provided long-term inflation expectations remain stable. Global growth could be weaker than expected if the banking sector comes under broader stress, or if more persistent inflationary pressures prompt monetary policy to tighten more than expected. Weaker growth prospects and heightened risks in the near term exacerbate the longer-term slowdown in underlying growth. This difficult backdrop highlights numerous policy challenges. Recent bank failures have called for renewed focus on global financial regulatory reform. Global cooperation is also necessary to accelerate the transition to clean energy, mitigate climate change, and provide debt relief to a growing number of countries in debt distress. At the national level, credible policies must be implemented to contain inflation, ensure macroeconomic and financial stability, and implement reforms that lay the foundations for a sound, sustainable, and inclusive development path.
A particularly interesting chapter examines the spillover effects of US monetary policy and interest rates on the rest of the world (by Carlos Arteta, Steve Kamin, and Franz Ulrich Ruch).
The rapid rise in US interest rates poses a significant challenge to emerging market and developing economies (EMDEs). Much of the sharp rise in U.S. interest rates since early 2022 has been driven by shocks that reflect changes in perceptions of the Fed’s response function as the Fed shifts to a more hawkish stance to keep inflation in check. These reaction shocks are associated with particularly adverse financial market effects in EMDEs, including a higher likelihood of experiencing a financial crisis. Their effects also appear to be more pronounced in EMDEs with greater economic vulnerability. These findings suggest that major central banks can mitigate adverse spillovers through appropriate communications that clarify their response functions. They also emphasized the need for macroeconomic and financial policy adjustments in emerging market and developing economies to mitigate the negative impact of rising global and U.S. interest rates.
A key figure showing how different shocks affect EMDE differently is shown below.
The whole report is here.
