FOREWORD

Global Economy Remains Resilient despite Resilient growth and faster disinflation point
Uneven Growth; Challenges Lie Ahead toward favorable supply developments, including
The global economy remains remarkably resil- the fading of earlier energy price shocks, the striking
ient, with growth holding steady as inflation returns rebound in labor supply supported by strong immi-
to target. The journey has been eventful, starting gration flows in many advanced economies. Decisive
with supply-chain disruptions in the aftermath of monetary policy actions, as well as improved mone-
the pandemic, a Russian-initiated war on Ukraine tary policy frameworks, especially in emerging market
that triggered a global energy and food crisis, and a economies, have helped anchor inflation expecta-
considerable surge in inflation, followed by a globally tions. As Chapter 2 of this report argues, however,
synchronized monetary policy tightening. the transmission of monetary policy may have been
Yet, despite many gloomy predictions, the world more muted this time around in countries such as the
avoided a recession, the banking system proved largely United States, where an increased share of fixed-rate
resilient, and major emerging market economies mortgages and lower household debt levels since the
did not suffer sudden stops. Moreover, the inflation global financial crisis may have limited the drag on
surge—despite its severity and the associated cost-of- aggregate demand up to now.
living crisis—did not trigger uncontrolled wage-price Despite these welcome developments, numerous
spirals (see October 2022 World Economic Outlook). challenges remain, and decisive actions are needed.
Instead, almost as quickly as global inflation went up, First, while inflation trends are encouraging, we
it has been coming down. are not there yet. Somewhat worryingly, the most
On a year-over-year basis, global growth bottomed recent median headline and core inflation numbers are
out at the end of 2022, at 2.3 percent, shortly after pushing upward. This could be temporary, but there
median headline inflation peaked at 9.4 percent. are reasons to remain vigilant. Most of the progress on
According to our latest projections, growth for 2024 inflation came from the decline in energy prices and
and 2025 will hold steady around 3.2 percent, with goods inflation below its historical average. The latter
median headline inflation declining from 2.8 percent has been helped by easing supply-chain frictions, as
at the end of 2024 to 2.4 percent at the end of 2025. well as by the decline in Chinese export prices. But
Most indicators point to a soft landing. services inflation remains high—sometimes stubbornly
Markets reacted exuberantly to the prospect of cen- so—and could derail the disinflation path. Bringing
tral banks exiting from tight monetary policy. Financial inflation down to target remains the priority.
conditions eased, equity valuations soared, capital flows Second, the global view can mask stark divergence
to most emerging market economies excluding China across countries. The exceptional recent performance
have been buoyant, and some low-income countries of the United States is certainly impressive and a major
and frontier economies regained market access (see the driver of global growth, but it reflects strong demand
April 2024 Global Financial Stability Report). factors as well, including a fiscal stance that is out of
Even more encouraging, we now estimate that line with long-term fiscal sustainability (see April 2024
there will be less economic scarring from the Fiscal Monitor). This raises short-term risks to the
pandemic—the projected drop in output relative disinflation process, as well as longer-term fiscal and
to prepandemic projections—for most countries financial stability risks for the global economy since it
and regions, especially for emerging market econo- risks pushing up global funding costs. Something will
mies, thanks in part to robust employment growth. have to give.
Astonishingly, the US economy has already surged In the euro area, growth will pick up this year, but
past its prepandemic trend. from very low levels, as the trailing effects of tight

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monetary policy and past energy costs, as well as Third, even as inflation recedes, real interest rates
planned fiscal consolidation, weigh on activity. Contin- have increased, and sovereign debt dynamics have
ued high wage growth and persistent services inflation become less favorable in particular for highly indebted
could delay the return of inflation to target. However, emerging markets. Countries should turn their sights
unlike in the United States, there is scant evidence of toward rebuilding fiscal buffers. Credible fiscal consoli-
overheating and the European Central Bank will also dations help lower funding costs and improve financial
need to carefully calibrate the pivot toward monetary stability. In a world with more frequent adverse supply
easing to avoid an excessive growth slowdown and shocks and growing fiscal needs for safety nets, climate
inflation undershoot. While labor markets appear adaptation, digital transformation, energy security,
strong, that strength could prove illusory if European and defense, this should be a policy priority. Yet this is
firms have been hoarding labor in anticipation of a never easy, as the April 2023 World Economic Outlook
pickup in activity that does not materialize. documented: fiscal consolidations are more likely to
China’s economy is affected by the enduring down- succeed when credible and when implemented while
turn in its property sector. Credit booms and busts the economy is growing, rather than when markets
never resolve themselves quickly, and this one is no dictate their conditions. In countries where inflation is
exception. Domestic demand will remain lackluster under control, and that engage in a credible multiyear
for some time unless strong measures and reforms effort to rebuild fiscal buffers, monetary policy can
address the root cause. Public debt dynamics are also help support activity. The successful 1993 US fiscal
of concern, especially if the property crisis morphs into consolidation and monetary accommodation episode
a local public finance crisis. With depressed domestic comes to mind as an example to emulate.
demand, external surpluses could rise. The risk is that Fourth, medium-term growth prospects remain
this will further exacerbate trade tensions in an already historically weak. Chapter 3 of this report takes an
fraught geopolitical environment. in-depth dive into the different drivers of the slow-
At the same time, many other large emerging down. The main culprit is lower total factor pro-
market economies are performing strongly, sometimes ductivity growth. A significant part of the decline
even benefiting from a reconfiguration of global supply comes from increased misallocation of capital and
chains and rising trade tensions between China and the labor within sectors and countries. Facilitating faster
United States. As Chapter 4 of this report documents, and more efficient resource allocation can help boost
these countries’ footprint on the global economy is growth. Much hope rests on artificial intelligence (AI)
increasing, and they will play an ever larger role in delivering strong productivity gains in the medium
supporting global growth in years to come. term. It may do so, but the potential for serious
A troubling development is the widening divergence disruptions in labor and financial markets is high.
between many low-income developing countries and Harnessing the potential of AI for all will require that
the rest of the world. For these economies, growth countries improve their digital infrastructure, invest
is revised downward, whereas inflation is revised up. in human capital, and coordinate on global rules of
Worse, in contrast with most other regions, scarring the road. Medium-term growth prospects are also
estimates for low-income developing countries, includ- harmed by rising geoeconomic fragmentation and the
ing some large ones, have been revised up, suggesting surge in trade restrictive and industrial policy mea-
that the poorest countries are still unable to turn the sures since 2019. Global trade linkages are already
page from the pandemic and cost-of-living crises. In changing as a result, with potential losses in efficiency.
addition, conflicts continue to result in loss of human But the broader damage is to global cooperation and
lives and raise uncertainty. For these countries, invest- multilateralism.
ing in structural reforms to promote growth-enhancing Finally, huge global investments are needed for a
domestic and foreign direct investment, and strength- green and climate-resilient future. Cutting emissions
ening domestic resource mobilization, can help is compatible with growth, as is seen in recent decades
manage borrowing costs and reduce funding needs during which growth has become much less emis-
while achieving development goals. Efforts must also sions intensive. Nevertheless, emissions are still rising.
be made to improve the human capital of their large A lot more needs to be done and done quickly. Green
young populations. investment has expanded at a healthy pace in advanced

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economies and China. Cutting harmful fossil fuel financing, much of it from the private sector, but some
subsidies can help create the necessary fiscal room for of it concessional.
further green investments. The greatest effort must be On these questions, as well as on so many others,
made by other emerging market and developing econo- there is little hope for progress outside multilateral
mies, which need to massively increase their green frameworks and cooperation.
investment growth and reduce their fossil fuel invest-
ment. This will require technology transfer by other Pierre-Olivier Gourinchas
advanced economies and China, as well as substantial Economic Counsellor

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