Summary

The IMF forecasts steady global economic growth for 2018–19, but downside risks have risen. One decade into the recovery from the global financial crisis, how has output evolved across countries compared to pre-crisis trends?  And will inflation in emerging market economies remain low and stable as global financial conditions normalize?

On October 16, Ms. Francesca Caselli and Mr. Mico Mrkaic from the IMF visited the JVI to present the major findings from the latest World Economic Outlook, with special attention to two analytical chapters they co-authored.

Mr. Mrkaic first summarized the IMF’s assessment of global economic prospects and underlying economic policies. Global growth for 2018–19 is projected to remain at its 2017 level of 3.7 percent, 0.2 percentage point lower than forecast in April, and it has become less balanced. Advanced economies will grow above-trend in the near term, with some decline expected in the medium term. Growth in emerging markets and developing economies as a group will be stable into the medium term, but prospects differ by regions and individual countries. Meanwhile, downside risks to growth have been rising this year—including trade and geopolitical tensions and higher oil prices—and the potential for upside surprises has diminished.

Mr. Mrkaic then discussed the IMF’s analysis of the global economic recovery from the 2008 financial crisis. He stressed that output losses appeared to be permanent for a large number of countries, whether or not a country had suffered a banking crisis. Sluggish investment was the main channel through which these losses registered, but total factor productivity losses were also a factor. Research and development investment increased less and adoption of technology apparently slowed in countries that suffered larger output losses. Policy choices preceding and immediately after the crisis also influenced post-crisis variations in output.

Mr. Mrkaic underscored the importance of macroprudential policies and effective supervision. Countries with greater financial vulnerabilities pre-crisis suffered larger output losses post-crisis. At the same time, losses were smaller for countries with stronger pre-crisis fiscal positions and those that had more flexible exchange rate regimes. For some countries unprecedented policy actions after the crisis helped mitigate post-crisis output losses.

Ms. Francesca Caselli discussed the latest WEO’s second analytical chapter, which investigates the factors driving on average low and stable inflation in emerging markets and developing economies since the mid-2000s. She discussed whether the recent improvements in inflation performance are sustainable as global financial conditions normalize, highlighting three findings:

1. Emerging markets have generally improved their degree of anchoring of inflation expectations, but sizable heterogeneity across countries still remains.
2. Changes in longer-term inflation expectations are the main determinant of inflation dynamics. External conditions have a more limited role, which suggests that domestic rather than global factors are the main reason for recent gains in inflation performance.
3. Further improvements in anchoring inflation expectations can significantly improve the resilience of emerging market economies to adverse external shocks.

Anchoring expectations reduces inflation persistence and limits the pass-through of exchange rate fluctuations to domestic prices, allowing monetary policy to focus more on smoothing fluctuations in output. Whether the gains will be maintained largely depends on whether policymakers will stay committed to improving long-term fiscal sustainability and rebuilding fiscal buffers if needed.

The concluding plenary discussion touched on the main lessons learned from the 2008 global financial crises; the importance of fiscal consolidation in many countries in order to build buffers against future economic downturns; the difficulties of separating the impact of global economic crises from the effects of systematic monetary policy measures on falling inflation rates; and effective policies to limit the negative impact of crises on inequality.

In discussing inequality, the presenters stressed that prudent policy measures to mitigate increases in inequality during economic downturns are the same as before the crisis: carefully designed education programs, reducing barriers to education, increasing women’s participation rates, and fiscal redistribution policies that do not compromise corporate sector performance.

Tibor Hlédik, Lead Economist, JVI