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

Global Perspectives and Policies

The slowdown in global economic activity is widespread 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. The risks remain unusually high: monetary policy could miscalculate the right position to reduce inflation; divergent political trajectories in the largest economies could exacerbate US dollar appreciation; the tightening of global financing could trigger an over-indebtedness of emerging markets; and a worsening of the crisis in China’s real estate sector could undermine growth. Policymakers should focus on restoring price stability and easing cost of living pressures. Multilateral cooperation remains necessary to accelerate the green energy transition and prevent fragmentation.

The Now Hiring sign is visible at the storefront
Post-COVID-19 wage dynamics and risks of a price-wage spiral

Inflation has reached its highest level in 40 years in some economies. Although wage growth has generally remained below inflation so far, some observers warn that prices and wages could start to feed into each other, with wage and price inflation accelerating in a spiral. sustained wages and prices. This chapter examines past and recent wage dynamics and sheds light on the outlook. Similar historical episodes have not been followed by wage-price spirals on average. The analysis underlines that more backward-looking expectations require stronger and earlier monetary tightening to reduce the risks of inflation becoming unanchored. The risks of a lasting price-wage spiral seem limited since the underlying inflationary shocks come from outside the labor market and monetary policy is tightening aggressively.

Short-term macroeconomic impact of decarbonization policies

Decades of procrastination have turned what could have been a smooth transition to a more carbon neutral society into what will likely be more difficult. By the end of the decade, the world economy will have to emit 25% less greenhouse gases than in 2022 to have a chance of reaching the objectives set in Paris in 2015 and avoiding climate change. catastrophic. Using a new model developed at the IMF (GMMET), the chapter analyzes the short-term macroeconomic impact of feasible decarbonization policies and potential challenges for monetary policy.

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