World Economic Outlook, October 2022: Countering the Cost-of-Living Crisis

WEO Blog
Global Prospects and Policies

The slowdown in global economic activity is broad-based and sharper-than-expected, with inflation higher than seen in decades. The economic outlook depends on a successful calibration of monetary and fiscal policies, the course of the war in Ukraine, and growth prospects in China. Risks remain unusually large: monetary policy could miscalculate the right stance to reduce inflation; diverging policy paths in the largest economies could exacerbate the US dollar’s appreciation; tightening global financing could trigger emerging market debt distress; and a worsening of China’s property sector crisis could undermine growth. Policymakers should focus on restoring price stability and alleviating cost-of-living pressures. Multilateral cooperation remains necessary to fast-track the green energy transition and prevent fragmentation.

Now Hiring sign is seen at the storefront
Wage Dynamics Post–COVID-19 and Wage-Price Spiral Risks

Inflation has reached a 40-year high in some economies. Although wage growth has generally stayed below inflation so far, some observers warn that prices and wages could start feeding off each other, with wage and price inflation ratcheting up in a sustained wage-price spiral. This chapter examines past and recent wage dynamics and sheds light on prospects. Similar historical episodes were not followed by wage-price spirals on average. Analysis highlights that more backward-looking expectations require stronger and more frontloaded monetary tightening to reduce risks of inflation de-anchoring. Risks of a sustained wage-price spiral appear limited since underlying inflation shocks come from outside the labor market and monetary policy is tightening aggressively.

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Near-Term Macroeconomic Impact of Decarbonization Policies

Decades of procrastination have transformed what could have been a smooth transition to a more carbon-neutral society into what will likely be a more challenging one. By the end of the decade, the global economy needs to emit 25 percent less greenhouse gases than in 2022 to have a fighting chance to reach the goals set in Paris in 2015 and avert catastrophic climate disruptions. Using a new model developed at the IMF (GMMET), the chapter analyses the near-term macroeconomic impact of feasible decarbonization policies and potential challenges for monetary policy.

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