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WORLD ECONOMIC OUTLOOK2024OCTINTERNATIONAL MONETARY FUNDPolicy Pivot,Rising ThreatsWORLD ECONOMIC OUTLOOK2024OCTPolicy Pivot,Rising ThreatsINTERNATIONAL MONETARY FUND2024 International Monetary FundCover and Design:IMF CSF Creative Solutions DivisionComposition:Absolute Service,Inc.Cataloging-in-Publication DataIMF LibraryNames:International Monetary Fund.Title:World economic outlook(International Monetary Fund)Other titles:WEO|Occasional paper(International Monetary Fund)|World economic and financial surveys.Description:Washington,DC:International Monetary Fund,1980-|Semiannual|Some issues also have thematic titles.|Began with issue for May 1980.|1981-1984:Occasional paper/International Monetary Fund,0251-6365|1986-:World economic and financial surveys,0256-6877.Identifiers:ISSN 0256-6877(print)|ISSN 1564-5215(online)Subjects:LCSH:Economic developmentPeriodicals.|International economic relationsPeriodicals.|Debts,ExternalPeriodicals.|Balance of paymentsPeriodicals.|International financePeriodicals.|Economic forecastingPeriodicals.Classification:LCC HC10.W79HC10.80 ISBN 979-8-40028-115-0(English Paper)979-8-40028-317-8(English ePub)979-8-40028-313-0(English Web PDF)Disclaimer:The World Economic Outlook(WEO)is a survey by the IMF staff pub-lished twice a year,in the spring and fall.The WEO is prepared by the IMF staff and has benefited from comments and suggestions by Executive Directors following their discussion of the report on October 8,2024.The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMFs Executive Directors or their national authorities.Recommended citation:International Monetary Fund.2024.World Economic Outlook:Policy Pivot,Rising Threats.Washington,DC.October.Publication orders may be placed online,by fax,or through the mail:International Monetary Fund,Publication ServicesP.O.Box 92780,Washington,DC 20090,USATel.:(202)623-7430 Fax:(202)623-7201E-mail:publicationsIMF.orgbookstore.IMF.orgelibrary.IMF.orgErrataNovember 4,2024This web version of the WEO has been updated to reflect the following changes to the version published online on October 22,2024:-On page 8,1st column,last paragraph(Fiscal policy assumptions):“6.1 percent”was corrected to“6.0 percent”and“134 percent”was corrected to“131.7 percent.”-On page 9,1st column,first paragraph(Fiscal policy assumptions):“47.4 percent”was corrected to“45.8 percent”and“54.8 percent”was corrected to“53.2 percent.”International Monetary Fund|October 2024iiiAssumptions and Conventions viiFurther Information ixData xPreface xiForeword xiiExecutive Summary xivChapter 1.Global Prospects and Policies 1Uncertainty Seeping through as Policies Shift 1The Outlook:Stable yet UnderwhelmingBrace for Uncertain Times 6Risks to the Outlook:Tilted to the Downside 15Policy Priorities:From Restoring Price Stability to Rebuilding Buffers 18Box 1.1.The Global Automotive Industry and the Shift to Electric Vehicles 22Box 1.2.Risk Assessment Surrounding the World Economic Outlooks Baseline Projections 24Commodity Special Feature:Market Developments and the Inflationary Effects of Metal Supply Shocks 28References 39Chapter 2.The Great Tightening:Insights from the Recent Inflation Episode 41Introduction 41What Happened?Dissecting Inflation Dynamics 43The Monetary Policy Reaction 48Lessons for Monetary Policy:A Model-Based Analysis 51Summary and Policy Implications 55Box 2.1.The Role of Central Bank Balance Sheet Policies 58Box 2.2.The Role of Price-Suppressing Policies 60References 62Chapter 3.Understanding the Social Acceptability of Structural Reforms 65Introduction 65Social Acceptability of Reforms:A Primer 68The Challenge of Implementing Structural Reforms:Key Facts 68Attitudes toward Reforms:Evidence from Surveys 71Tools and Strategies for Sustainably Advancing Reform Agendas:Lessons from 11 Country Cases 76Conclusions and Policy Implications 78Box 3.1.Policies to Facilitate the Integration of Ukrainian Refugees into the European Labor Market:Early Evidence 80References 81CONTENTSWORLD ECONOMIC OUTLOOK:POLICy PIvOT,RIsINg ThREaTsivInternational Monetary Fund|October 2024Statistical Appendix 85Assumptions 85Whats New 85Data and Conventions 86Country Notes 87Classification of Economies 89General Features and Composition of Groups in the World Economic Outlook Classification 89Table A.Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP,Exports of Goods and Services,and Population,2023 91Table B.Advanced Economies by Subgroup 92Table C.European Union 92Table D.Emerging Market and Developing Economies by Region and Main Source of Export Earnings 93Table E.Emerging Market and Developing Economies by Region,Net External Position,Heavily Indebted Poor Countries,and Per Capita Income Classification 94Table F.Economies with Exceptional Reporting Periods 96Table G.Key Data Documentation 97Box A1.Economic Policy Assumptions underlying the Projections for Selected Economies 107Box A2.Revised World Economic Outlook Purchasing-Power-Parity Weights 111List of Tables 114Output(Tables A1A4)115Inflation(Tables A5A7)122Financial Policies(Table A8)127Foreign Trade(Table A9)128Current Account Transactions(Tables A10A12)130Balance of Payments and External Financing(Table A13)137Flow of Funds(Table A14)141Medium-Term Baseline Scenario(Table A15)144World Economic Outlook Selected Topics 145IMF Executive Board Discussion of the Outlook,October 2024 155TablesTable 1.1.Overview of the World Economic Outlook Projections 10Table 1.2.Overview of the World Economic Outlook Projections at Market Exchange Rate Weights 12Annex Table 1.1.1.European Economies:Real GDP,Consumer Prices,Current Account Balance,and Unemployment 33Annex Table 1.1.2.Asian and Pacific Economies:Real GDP,Consumer Prices,Current Account Balance,and Unemployment 34Annex Table 1.1.3.Western Hemisphere Economies:Real GDP,Consumer Prices,Current Account Balance,and Unemployment 35Annex Table 1.1.4.Middle East and Central Asia Economies:Real GDP,Consumer Prices,Current Account Balance,and Unemployment 36Annex Table 1.1.5.Sub-Saharan African Economies:Real GDP,Consumer Prices,Current Account Balance,and Unemployment 37Annex Table 1.1.6.Summary of World Real per Capita Output 38Table 3.1.Hypotheses to Boost Policy Support 73Table 3.2.Historical Employment Protection Legislation Reform Episodes 76CONTENTsvInternational Monetary Fund|October 2024CONTENTsTable A2.1.Changes in World GDP Shares from Purchasing-Power-Parity Revisions 112Table A2.2.Revisions to Real GDP Growth of World Economic Outlook Aggregates 113Online TablesStatistical AppendixTable B1.Advanced Economies:Unemployment,Employment,and Real GDP per CapitaTable B2.Emerging Market and Developing Economies:Real GDPTable B3.Advanced Economies:Hourly Earnings,Productivity,and Unit Labor Costs in ManufacturingTable B4.Emerging Market and Developing Economies:Consumer PricesTable B5.Summary of Fiscal and Financial IndicatorsTable B6.Advanced Economies:General and Central Government Net Lending/Borrowing and General Government Net Lending/Borrowing Excluding Social Security SchemesTable B7.Advanced Economies:General Government Structural BalancesTable B8.Emerging Market and Developing Economies:General Government Net Lending/Borrowing and Overall Fiscal BalanceTable B9.Emerging Market and Developing Economies:General Government Net Lending/BorrowingTable B10.Selected Advanced Economies:Exchange RatesTable B11.Emerging Market and Developing Economies:Broad Money AggregatesTable B12.Advanced Economies:Export Volumes,Import Volumes,and Terms of Trade in Goods and ServicesTable B13.Emerging Market and Developing Economies by Region:Total Trade in GoodsTable B14.Emerging Market and Developing Economies by Source of Export Earnings:Total Trade in GoodsTable B15.Summary of Current Account TransactionsTable B16.Emerging Market and Developing Economies:Summary of External Debt and Debt ServiceTable B17.Emerging Market and Developing Economies by Region:External Debt by MaturityTable B18.Emerging Market and Developing Economies by Analytical Criteria:External Debt by MaturityTable B19.Emerging Market and Developing Economies:Ratio of External Debt to GDPTable B20.Emerging Market and Developing Economies:Debt-Service RatiosTable B21.Emerging Market and Developing Economies,Medium-Term Baseline Scenario:Selected Economic IndicatorsFiguresFigure 1.1.Growth and Inflation Revisions 2Figure 1.2.Inflation Surprises and Importance of Food in CPI 2Figure 1.3.Recent Inflation Developments 3Figure 1.4.Labor Market Developments 3Figure 1.5.Monetary Transmission 4Figure 1.6.Fiscal Policy Stance 5Figure 1.7.Pressure on Emerging Markets 6Figure 1.8.Globalization and Trade Fragmentation 6Figure 1.9.Trade Fragmentation:Cold War and Now 7Figure 1.10.Continued Rotation to Services 7Figure 1.11.Global Assumptions 8Figure 1.12.Growth Outlook 9Figure 1.13.Inflation Outlook 14Figure 1.14.Medium-Term Outlook 14WORLD ECONOMIC OUTLOOK:POLICy PIvOT,RIsINg ThREaTsviInternational Monetary Fund|October 2024Figure 1.15.Current Account and International Investment Positions 15Figure 1.16.Inflation Surprises and Changes in Inflation Expectations 16Figure 1.17.Social Unrest Levels 17Figure 1.18.Required Fiscal Consolidation 19Figure 1.19.Government Spending Composition and Future Income Growth 20Figure 1.1.1.Productivity and Global Value Chains in the Automotive Sector 22Figure 1.1.2.Global Share of Electric Vehicles 23Figure 1.2.1.Forecast Uncertainty around Global Growth and Inflation Projections 24Figure 1.2.2.Impact of Scenario A on GDP and Headline Inflation 26Figure 1.2.3.Impact of Scenario B on GDP and Headline Inflation 27Figure 1.SF.1.Commodity Market Developments 28Figure 1.SF.2.Consumption of Copper and Oil 30Figure 1.SF.3.Intermediate Input Expenditure Share of Metals and Oil in Gross Output in the United States 30Figure 1.SF.4.Countries Input-Output Network Exposure to Metals and Oils 31Figure 1.SF.5.Impulse Responses 32Figure 2.1.Cross-Country Inflation Dynamics 42Figure 2.2.Movements in Sectoral Price Dispersion 43Figure 2.3.Sectoral Characteristics and Inflation Dynamics 44Figure 2.4.Energy Price Pass-Through into CPI Inflation 45Figure 2.5.Sectoral Inflation and Price Flexibility 45Figure 2.6.Evolution of Phillips Curves 46Figure 2.7.Inflation Drivers in the United States,Other Advanced Economies,and Emerging Markets 47Figure 2.8.Monetary Policy Tightening 48Figure 2.9.Comparison of Inflation Episodes 49Figure 2.10.Monetary Policy Transmission to CPI during Tightening Episodes 50Figure 2.11.Phillips Curve under Different Constraints 51Figure 2.12.Impacts of Supply Constraints and Commodity Sector Shocks 52Figure 2.13.Counterfactual Monetary Policy 54Figure 2.14.Role of Coordinated Monetary Policy 54Figure 2.15.Alternative Policy Rules 55Figure 2.1.1.Central Bank Balance Sheets 58Figure 2.1.2.Estimated Impact of Monetary Policy and LSAP Tightening 59Figure 2.2.1.Discretionary Inflation Stabilization Policies during the Pandemic 60Figure 2.2.2.Euro Area Actual and Counterfactual Energy Price Levels 60Figure 3.1.Structural Reforms:Uneven Convergence amid Public Resistance 66Figure 3.2.Reform Episodes by Implementation Outcome 69Figure 3.3.Strategies for Building Consensus for Reform 70Figure 3.4.Relative Importance of Reform Strategies for Predicting Reform Implementation 71Figure 3.5.Drivers of Reform Support 72Figure 3.6.Effect of Information Strategies on Reform Support 74Figure 3.7.Reasons for Nonsupport and the Role of Compensatory and Complementary Measures 75International Monetary Fund|October 2024viiA number of assumptions have been adopted for the projections presented in the World Economic Outlook(WEO).It has been assumed that real effective exchange rates remained constant at their average levels during July 30,2024August 27,2024,except for those for the currencies participating in the European exchange rate mech-anism II,which are assumed to have remained constant in nominal terms relative to the euro;that established policies of national authorities will be maintained(for specific assumptions about fiscal and monetary policies for selected economies,see Box A1 in the Statistical Appendix);that the average price of oil will be$81.29 a barrel in 2024 and$72.84 a barrel in 2025;that the three-month government bond yield for the United States will average 5.4 percent in 2024 and 3.9 percent in 2025,that for the euro area will average 3.5 percent in 2024 and 2.8 per-cent in 2025,and that for Japan will average 0.1 percent in 2024 and 0.5 percent in 2025;and that the 10-year government bond yield for the United States will average 4.1 percent in 2024 and 3.5 percent in 2025,that for the euro area will average 2.4 percent in 2024 and 2.5 percent in 2025,and that for Japan will average 1.0 percent in 2024 and 1.3 percent in 2025.These are,of course,working hypotheses rather than forecasts,and the uncertain-ties surrounding them add to the margin of error that would,in any event,be involved in the projections.The estimates and projections are based on statistical information available through October 7,2024,but may not reflect the latest published data in all cases.For the date of the last data update for each economy,please refer to the notes provided in the online WEO database.The following conventions are used throughout the WEO:.to indicate that data are not available or not applicable;between years or months(for example,202324 or JanuaryJune)to indicate the years or months covered,including the beginning and ending years or months;and /between years or months(for example,2023/24)to indicate a fiscal or financial year.“Billion”means a thousand million;“trillion”means a thousand billion.“Basis points”refers to hundredths of 1 percentage point(for example,25 basis points are equivalent to of 1 percentage point).Data refer to calendar years,except in the case of a few countries that use fiscal years.Please refer to Table F in the Statistical Appendix,which lists the economies with exceptional reporting periods for national accounts and government finance data.For some countries,the figures for 2023 and earlier are based on estimates rather than actual outturns.Please refer to Table G in the Statistical Appendix,which lists the latest actual outturns for the indicators in the national accounts,prices,government finance,and balance of payments for each country.What is new in this publication:Following the recent release of the 2021 survey by the World Bank Groups International Comparison Pro-gram for new purchasing-power-parity benchmarks,the WEOs estimates of purchasing-power-parity weights and GDP valued at purchasing power parity have been updated.For more details,see Box A2 in the Statistical Appendix.For Bangladesh,fiscal year estimates of real GDP and purchasing-power-parity GDP are now used in country group aggregates.For Zimbabwe,the authorities have recently redenominated their national accounts statistics following the introduction on April 5,2024 of a new national currency,the Zimbabwe gold,replacing the Zimbabwe dollar.The use of the Zimbabwe dollar ceased on April 30,2024.ASSUMPTIONS AND CONVENTIONSWORLD ECONOMIC OUTLOOK:POLICy PIvOT,RIsINg ThREaTsviiiInternational Monetary Fund|October 2024In the tables and figures,the following conventions apply:Tables and figures in this report that list their source as“IMF staff calculations”or“IMF staff estimates”draw on data from the WEO database.When countries are not listed alphabetically,they are ordered on the basis of economic size.Minor discrepancies between sums of constituent figures and totals shown reflect rounding.Composite data are provided for various groups of countries organized according to economic characteristics or region.Unless noted otherwise,country group composites represent calculations based on 90 percent or more of the weighted group data.The boundaries,colors,denominations,and any other information shown on maps do not imply,on the part of the IMF,any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.As used in this report,the terms“country”and“economy”do not in all cases refer to a territorial entity that is a state as understood by international law and practice.As used here,the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.International Monetary Fund|October 2024ixCorrections and RevisionsThe data and analysis appearing in the World Economic Outlook(WEO)are compiled by the IMF staff at the time of publication.Every effort is made to ensure their timeliness,accuracy,and completeness.When errors are discovered,corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary(see below).All substantive changes are listed in the online table of contents.Print and Digital EditionsPrintPrint copies of this WEO can be ordered from the IMF bookstore at imfbk.st/551243.DigitalMultiple digital editions of the WEO,including ePub,enhanced PDF,and HTML,are available on the IMF eLibrary at eLibrary.IMF.org/WEO.Download a free PDF of the report and data sets for each of the charts therein from the IMF website at www.IMF.org/publications/weo or scan the QR code below to access the WEO web page directly:Copyright and ReuseInformation on the terms and conditions for reusing the contents of this publication are at www.imf.org/external/terms.htm.FURTHER INFORMATIONInternational Monetary Fund|October 2024xThis version of the World Economic Outlook(WEO)is available in full through the IMF eLibrary(www.elibrary.imf.org)and the IMF website(www.imf.org).Accompanying the publication on the IMF website is a larger com-pilation of data from the WEO database than is included in the report itself,including files containing the series most frequently requested by readers.These files may be downloaded for use in a variety of software packages.The data appearing in the WEO are compiled by the IMF staff at the time of the WEO exercises.The histor-ical data and projections are based on the information gathered by the IMF country desk officers in the context of their missions to IMF member countries and through their ongoing analysis of the evolving situation in each country.Historical data are updated on a continual basis as more information becomes available,and structural breaks in data are often adjusted to produce smooth series with the use of splicing and other techniques.IMF staff estimates continue to serve as proxies for historical series when complete information is unavailable.As a result,WEO data can differ from those in other sources with official data,including the IMFs International Financial Statistics.The WEO data and metadata provided are“as is”and“as available,”and every effort is made to ensure their timeliness,accuracy,and completeness,but these cannot be guaranteed.When errors are discovered,there is a concerted effort to correct them as appropriate and feasible.Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary(www.elibrary.imf.org)and on the IMF website(www.imf.org).All substantive changes are listed in detail in the online tables of contents.For details on the terms and conditions for usage of the WEO database,please refer to the IMF Copyright and Usage website(www.imf.org/external/terms.htm).Inquiries about the content of the WEO and the WEO database should be sent by mail or online forum(telephone inquiries cannot be accepted):World Economic Studies DivisionResearch DepartmentInternational Monetary Fund700 19th Street,NWWashington,DC 20431,USAOnline Forum:www.imf.org/weoforumDATAInternational Monetary Fund|October 2024xiThe analysis and projections contained in the World Economic Outlook are integral elements of the IMFs surveillance of economic developments and policies in its member countries,of developments in international financial markets,and of the global economic system.The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments,which draws primarily on information the IMF staff gathers through its consultations with member countries.These consultations are carried out in particular by the IMFs area departmentsnamely,the African Department,Asia and Pacific Department,European Department,Middle East and Central Asia Department,and Western Hemisphere Departmenttogether with the Strategy,Policy,and Review Department;the Monetary and Capital Markets Department;and the Fiscal Affairs Department.The analysis in this report was coordinated in the Research Department under the general direction of Pierre-Olivier Gourinchas,Economic Counsellor and Director of Research.The project was directed by Petya Koeva Brooks,Deputy Director,Research Department,and Jean Marc Natal,Deputy Division Chief,Research Department.The primary contributors to this report are Silvia Albrizio,Jorge Alvarez,Hippolyte Balima,Emine Boz,Damien Capelle,Pragyan Deb,Bertrand Gruss,Eric Huang,Thomas Kroen,Toh Kuan,Colombe Ladreit,Alberto Musso,Diaa Noureldin,Galip Kemal Ozhan,Nicholas Sander,Yu Shi,Sebastian Wende,and Sihwan Yang.Other contributors include Maryam Abdou,Hites Ahir,Gavin Asdorian,Tohid Atashbar,Jared Bebee,Christian Bogmans,Benjamin Carton,Francesca Caselli,Yaniv Cohen,Allan Dizioli,Wenchuan Dong,Angela Espiritu,Rebecca Eyassu,Pedro de Barros Gagliardi,Ganchimeg Ganpurev,Ziyan Han,Alexander Kia Howe,Chris Jackson,Gene Kindberg-Hanlon,Eduard Laurito,Jungjin Lee,Weili Lin,Barry Liu,Jorge Miranda-Pinto,Joseph Moussa,Dirk Muir,Cynthia Nyanchama Nyakeri,Emory Oakes,Pablo Vega Olivares,Maximiliano Jerez Osses,Andrea Pescatori,Clarita Phillips,Naissa Pierre,Rafael Portillo,Shrihari Ramachandra,Nirav Shedge,Arash Sheikholeslam,Martin Stuermer,Nicholas Tong,Roc Walker,Xueliang Wang,Isaac Warren,Evgenia Weaver,Philippe Wingender,Yarou Xu,Max Yarmolinsky,Jiaqi Zhao,Canran Zheng,Dian Zhi,and Liangliang Zhu.Gemma Rose Diaz from the Communications Department led the editorial team for the report,with production and editorial support from Michael Harrup and additional assistance from Lucy Scott Morales,James Unwin,Grauel Group,and Absolute Service,Inc.Elad Meshulam,Mishri Someshwar,and John Michael Burkhardt from IMF Creative Lab assisted with the design of the surveys used in Chapter 3.Gabriele Ciminelli,Davide Furceri,Daisuke Fukuzawa,Ergys Islamaj,and Duong Trung Le provided updated estimates of selected IMF Structural Reform Database series used in Chapter 3.Tatiana Goriainova and Sylvie Poirot from CSF Library provided data licensing services and support.The analysis has benefited from comments and suggestions by staff members from other IMF departments,as well as by Executive Directors following their discussion of the report on October 8,2024.However,estimates,projections,and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.PREFACEInternational Monetary Fund|October 2024xiiThe Global Battle against Inflation Is Almost Won;A Policy Triple Pivot Is Now NeededThe global battle against inflation has largely been won,even though price pressures persist in some countries.After peaking at 9.4 percent year over year in the third quarter of 2022,headline inflation rates are now projected to reach 3.5 percent by the end of 2025,below the average level of 3.6 percent between 2000 and 2019.Moreover,despite a sharp and synchronized tight-ening of monetary policy around the world,the global economy has remained unusually resilient throughout the disinflationary process,avoiding a global recession.Growth is projected to hold steady at 3.2 percent in 2024 and 2025,even though a few countries,espe-cially low-income developing countries,have seen sizable downside growth revisions,often as a result of increased conflicts.While the global decline in inflation is a major mile-stone,downside risks are rising and now dominate the outlook:an escalation in regional conflicts,monetary policy remaining tight for too long,a possible resur-gence of financial market volatility with adverse effects on sovereign debt markets(see October 2024 Global Financial Stability Report),a deeper growth slowdown in China,and the continued ratcheting up of protec-tionist policies.What accounts for the decline in inflation?As Chapter 2 of this report argues,the surge and sub-sequent decline in global inflation reflects a unique combination of shocks:broad supply disruptions coupled with strong demand pressures in the wake of the pandemic,followed by sharp spikes in commodity prices caused by the war in Ukraine.These shocks led to an upward shift and a steepening of the relationship between activity and inflation,the Phillips curve.As supply disruptions eased and monetary policy tight-ening started to constrain demand,normalization in labor markets allowed inflation to decline rapidly with-out a major slowdown in activity.Clearly,much of the disinflation can be attributed to the unwinding of the shocks themselves,followed by improvements in labor supply,often linked to immigration.But monetary policy played an important role too by helping to keep inflation expectations anchored,avoiding deleterious wage-price spirals and a repeat of the disastrous infla-tion experience of the 1970s.The return of inflation to near central bank targets paves the way for a much-needed policy triple pivot.The firston monetary policyhas started.Since June,major central banks in advanced economies have started to cut their policy rates,moving their policy stance toward neutral.This will support activity at a time when many advanced economies labor markets are showing signs of weakness,with rising unemploy-ment rates.It will also help ward off the downside risks.The change in global monetary conditions is easing the pressure on emerging market economies,with their currencies strengthening against the US dollar and financial conditions improving.This will help reduce imported inflation pressures,allowing these countries to pursue more easily their own disinflation path.However,vigilance remains key.Inflation in services remains too elevated,almost twice as high as before the pandemic.Some emerging market economies are facing a resurgence of inflationary pressures,some-times because of elevated food prices.Furthermore,we have now entered a world dominated by supply disruptionsfrom climate,health,and geopolitics.It is always harder for monetary policy to maintain price stability when faced with such shocks,which simultaneously increase prices and reduce output.Finally,while inflation expectations have remained well anchored this time around,it may be harder next time,as workers and firms will be more vigilant in protect-ing their standards of living and profits going forward.The second pivot is on fiscal policy.Fiscal space is also a cornerstone of financial stability.After years of loose fiscal policy,it is now time to stabilize debt dynamics and rebuild much-needed fiscal buffers.While the decline in policy rates provides some fiscal relief by lowering funding costs,this will not be FOREWORDFOREWORDxiiiInternational Monetary Fund|October 2024sufficient,especially as long-term real interest rates are much above prepandemic levels.In many coun-tries,primary balances,the difference between fiscal revenues and public expenditures net of debt service,need to improve.For some countries,like the United States and China,debt dynamics are not stabilized under current fiscal plans(see October 2024 Fiscal Monitor).In many others,while early fiscal plans showed promise after the pandemic and cost-of-living crises,there are increasing signs of slippage.The path is narrow:unduly delaying adjustment increases the risk of disorderly market-imposed adjustments,while an excessively sharp turn toward fiscal consolidation would be self-defeating and hurt economic activity.Success requires staying the course by implementing gradual and credible multiyear adjustments without delay,where consolidation is necessary.The more credible and disciplined the fiscal adjustment,the more monetary policy will be able to play a supporting role.But the willingness and ability to deliver disciplined and credible adjustments have been lacking.The third pivotand the hardestis on structural reforms.Much more needs to be done to improve growth prospects and lift productivity,as this is the only way we can address the many challenges we face:rebuilding fiscal buffers,aging and declining populations in many parts of the world,young and growing populations in Africa in search of opportunity,tackling the climate transition,increasing resilience,and improving the lives of the most vulnerable,within and across countries.Unfortunately,medium-term global growth remains lackluster,at 3.1 percent.While much of this reflects Chinas weaker outlook,medi-um-term prospects in other regions,such as Latin America and the European Union,have also deterio-rated.The recently published Draghi report offers a clear-eyed assessment of the diminished prospects in the regionand the associated challenges.Faced with increased external competition and struc-tural weaknesses in manufacturing and productivity,many countries are implementing industrial and trade policy measures to protect their workers and industries.While these measures can sometimes boost investment and activity in the short runespecially when they rely on debt-financed subsidiesthey often lead to retaliation,are unlikely to deliver sustained improve-ments in standards of living at home or abroad,and should be firmly resisted when they do not carefully address well-identified market failures or national secu-rity concerns.Instead,economic growth must come from ambitious domestic reforms that boost technol-ogy and innovation,improve competition and resource allocation,further economic integration,and stimulate productive private investment.Yet while structural reforms are as urgent as ever,they often face significant social resistance.Chapter 3 of this report explores the factors that shape the social acceptability of reforms,one of the prerequisites for their eventual success.A clear message emerges from the chapter:better communication can only go so far.Instead,building trust between the government and its peoplea two-way process throughout the policy designand the inclusion of proper compensatory measures to mitigate distributional effects are essential features.This is an important lesson that should also resonate when thinking about ways to further improve international cooperation and bolster our multilateral efforts to address common challenges as we celebrate the 80th anniversary of the Bretton Woods institutions.Pierre-Olivier Gourinchas Economic CounsellorInternational Monetary Fund|October 2024xivGlobal growth is expected to remain stable yet underwhelming.At 3.2 percent in 2024 and 2025,the growth projection is virtually unchanged from those in both the July 2024 World Economic Outlook Update and the April 2024 World Economic Outlook.However,notable revisions have taken place beneath the surface,with upgrades to the forecast for the United States offsetting downgrades to those for other advanced economiesin particular,the largest European countries.Likewise,in emerging market and developing economies,disruptions to production and shipping of commoditiesespecially oilconflicts,civil unrest,and extreme weather events have led to downward revisions to the outlook for the Middle East and Central Asia and that for sub-Saharan Africa.These have been compensated for by upgrades to the forecast for emerging Asia,where surging demand for semiconductors and electronics,driven by significant investments in artificial intelligence,has bolstered growth.The latest forecast for global growth five years from nowat 3.1 percentremains mediocre compared with the prepandemic average.Persistent structural headwindssuch as population aging and weak productivityare holding back potential growth in many economies.Cyclical imbalances have eased since the beginning of the year,leading to a better alignment of economic activity with potential output in major economies.This adjustment is bringing inflation rates across coun-tries closer together and on balance has contributed to lower global inflation.Global headline inflation is expected to fall from an annual average of 6.7 percent in 2023 to 5.8 percent in 2024 and 4.3 percent in 2025,with advanced economies returning to their inflation targets sooner than emerging market and developing economies.As global disinflation continues to progress,broadly in line with the baseline,bumps on the road to price stability are still possible.Goods prices have stabilized,but services price inflation remains elevated in many regions,pointing to the importance of understanding sectoral dynamics and of calibrating monetary policy accordingly,as discussed in Chapter 2.Risks to the global outlook are tilted to the down-side amid elevated policy uncertainty.Sudden erup-tions in financial market volatilityas experienced in early Augustcould tighten financial conditions and weigh on investment and growth,especially in developing economies in which large near-term exter-nal financing needs may trigger capital outflows and debt distress.Further disruptions to the disinflation process,potentially triggered by new spikes in com-modity prices amid persistent geopolitical tensions,could prevent central banks from easing monetary policy,which would pose significant challenges to fiscal policy and financial stability.Deeper-or longer-than-expected contraction in Chinas property sector,especially if it leads to financial instability,could weaken consumer sentiment and generate neg-ative global spillovers given Chinas large footprint in global trade.An intensification of protectionist pol-icies would exacerbate trade tensions,reduce market efficiency,and further disrupt supply chains.Rising social tensions could prompt social unrest,hurting consumer and investor confidence and potentially delaying the passage and implementation of necessary structural reforms.As cyclical imbalances in the global economy wane,near-term policy priorities should be carefully calibrated to ensure a smooth landing.In many countries,shifting gears on fiscal policy is urgently needed to ensure that public debt is on a sustain-able path and to rebuild fiscal buffers;the pace of adjustment should be tailored to country-specific circumstances.Structural reforms are necessary to lift medium-term growth prospects,but support for the most vulnerable should be maintained.Chapter 3 discusses strategies to enhance the social acceptability of these reformsa crucial prerequisite for successful implementation.Multilateral cooperation is needed more than ever to accelerate the green transition and to support debt-restructuring efforts.Mitigating the risks of geoeconomic fragmentation and strengthen-ing rules-based multilateral frameworks are essential to ensure that all economies can reap the benefits of future growth.EXECUTIVE SUMMARYInternational Monetary Fund|October 20241Uncertainty Seeping through as Policies ShiftThe past four years have put the resilience of the global economy to the test.A once-in-a-century pan-demic,eruption of geopolitical conflicts,and extreme weather events have disrupted supply chains,caused energy and food crises,and prompted governments to take unprecedented actions to protect lives and livelihoods.The global economy has demonstrated resilience overall,but this masks uneven performance across regions and lingering fragilities.The negative supply shocks to the global econ-omy since 2020 have had lasting effects on output and inflation,with varied impacts across individual countries and country groups.The sharpest contrasts are between advanced and developing economies.Whereas the former have caught up with activity and inflation projected before the pandemic,the latter are showing more permanent scars(see the October 2023 World Economic Outlook),with large output short-falls and persistent inflation(Figure 1.1).They also remain more vulnerable to the types of commodity price surges that followed Russias invasion of Ukraine(Figure 1.2;October 2023 and April 2024 World Economic Outlook).Since the beginning of the year,signs have emerged that cyclical imbalances are being gradually resorbed,with economic activity in major economies better aligned with their potential.These developments may have helped bring inflation rates across countries closer together,but the momentum in global disinfla-tion appears to have slowed in the first half of the year(July 2024 World Economic Outlook Update).Goods prices have stabilized,and some are declining,but services price inflation remains high in many coun-tries,partly reflecting rapid wage increases,as pay is still catching up with the inflation surge of 202122.This has forced some central banks to delay their pol-icy-easing plans(Chapter 2),putting public finances under more pressure,especially in countries where debt-servicing costs are already high and refinancing needs significant.Now,as before,the global outlook will be shaped largely by fiscal and monetary choices,their interna-tional spillovers,the intensity of geoeconomic frag-mentation forces,and the ability of governments to implement long-overdue structural reforms.With infla-tion approaching central bank targets and governments striving to manage debt dynamics,the policy mix is expected to shift from monetary to fiscal tightening as monetary policy rates are brought down,closer to their natural levels.How fast such rotations occur in individual countries will have consequences for capital flows and exchange rates.The level of uncertainty surrounding the outlook is high.Newly elected governments(about half of the world population has gone or will go to the polls in 2024)could introduce significant shifts in trade and fiscal policy(Box 1.2).Moreover,the return of finan-cial market volatility over the summer has stirred old fears about hidden vulnerabilities.This has heightened anxiety over the appropriate monetary policy stanceespecially in countries where inflation is persistent and signs of slowdown are emerging.Further intensification of geopolitical rifts could weigh on trade,investment,and the free flow of ideas.This could affect long-term growth,threaten the resilience of supply chains,and cre-ate difficult trade-offs for central banks.On the upside,governments could succeed in building the necessary consensus around overdue and difficult-to-pass struc-tural reforms(Chapter 3),which would boost growth and enhance fiscal sustainability and financial stability.Steady Disinflation,yet Bumps in the Road Still PossibleIn many advanced economies,disinflation has come at a relatively low cost to employment,thanks partly to offsetting supply developments.These included a faster-than-expected decline in energy prices and a surprising rebound in labor supply,bolstered by substantial immigration flows that helped cool labor markets(April 2024 World Economic Outlook).Moreover,temporary sectoral bottlenecks during CHAPTERCHAPTERGLOBAL PROSPECTS AND POLICIES1WORLD ECONOMIC OUTLOOK:POLICY PIVOT,RISING THREATS2International Monetary Fund|October 2024and after the pandemic led to a steepening of the Phillips curve and implied a small sacrifice ratio(the slack required to decrease inflation).As explained in Chapter 2,a temporarily steeper Philips curve helps explain both the rapid surge in inflation and theso farrelatively painless disinflation(Figure 1.3,panel 1).Since the beginning of 2024,signs that cyclical imbalances are being gradually resorbed have helped bring inflation rates across countries closer together(Figure 1.3,panel 2).Disinflation has continued broadly as expected but did show signs of slowing in the first half of the year,suggesting potential bumps on the road to price stability(July 2024 World Economic Outlook Update).The persistence in core inflation has been driven primarily by services price inflation.At 4.2 percent,core services price inflation is about 50 percent higher than before the pandemic in major advanced and emerging market economies(excluding the US).This contrasts with core goods price inflation,which has declined all the way to zero(Figure 1.3,panel 3).Recent increases in shipping rates,especially for routes to and from China,have put upward pres-sure on goods prices.However,this source of upward pressure has been mitigated so far by declining prices for exports from China(Figure 1.3,panel 4).Stubbornness in services price inflation partly reflects higher nominal wage growth relative to prepandemic trends.Even as labor market pressure has started to ease(Figure 1.4,panel 2),wage negotiators have continued to aim for sizable raises to counter the cost-of-living squeeze felt after the 202122 inflation surge(Figure 1.4,panel 1).That nominal wage growth continues to run higher after the inflation surge is consistent with past inflationary episodeswhen real wages catch up to their equilibrium level determined by labor productivityand does not necessarily risk a wage-price spiral(see Chapter 2 of the October 2022 World Economic Outlook).With output gaps expected to close,and assuming no disruptions to labor supply in advanced economies,wage growth is expected to moderate.Whether recent increases translate into further persistence in core infla-tion will depend on(1)the impact of recent real wage increases on unit labor costs,which itself depends on labor productivity,and(2)the willingness of firms to absorb increased unit labor costs in their profit margins.These two factors seem to be working differently in the largest two advanced economies but should still allow disinflation to continue.In the United States,wage growth has reflected productivity gains lately,keeping unit labor costs contained.In the euro area,recent wage increases have exceeded productivity,raising unit labor costs(Figure 1.4,panel 3).However,European firms should be able to absorb those costs,given large increases in profit shares in recent years(Figure 1.4,panel 4).AEsEMMIEsLIDCsFigure 1.1.Growth and Inflation Revisions(Percentage points,relative to January 2020 WEO Update)520051015Infation rateCumulative GDP growthSource:IMF staff calculations.Note:X-axis reports latest estimates for cumulative GDP growth from 2020 to 2024 in deviation from January 2020 WEO Update forecast.Y-axis reports latest estimates for inflation rate in 2024 in deviation from January 2020 WEO Update forecast.AEs=advanced economies;EMMIEs=emerging market and middle-income economies;LIDCs=low-income developing countries;WEO=World Economic Outlook.40302010020301040AEsEMMIEsLIDCsFigure 1.2.Inflation Surprises and Importance of Food in CPI(Percent)20100020406080Average annual CPI infation,202024(deviation from Jan.2020 WEO Update)020406080Food and non-alcoholic beverages weight in CPISource:IMF staff calculations.Note:The solid line denotes linear regression.AEs=advanced economies;CPI=consumer price index;EMMIEs=emerging market and middle-income economies;LIDCs=low-income developing countries;WEO=World Economic Outlook.CHAPTER 1 GLOBAL PROSPECTS AND POLICIES3International Monetary Fund|October 2024Core goodsCore services,excluding USUS core servicesCompositeLos Angeles to ShanghaiRotterdam to New YorkRotterdam to ShanghaiShanghai to New YorkShanghai to RotterdamChina export prices(right scale)Figure 1.3.Recent Infation Developments1.Sacrifice Ratio for Inflation(Change in output gap fora change in inflation)0.03.00.51.01.52.02.51990:Q494:Q12000:Q102:Q208:Q309:Q322:Q424:Q12.Headline Inflation Distribution(Percent,year over year)2019:Q124:Q220:Q121:Q122:Q123:Q110505 10 15 20 25 303.Sticky Inflation Driven by Services(Percent,three month over three month,annualized)21002468201519 averagesJan.19Jan.20Jan.21Jan.22Jan.23Jan.24Aug.24Jan.20184.Rising Shipping Costs(US$per 40 ft.container;index,2010=100,right scale)020,0005,00010,00015,0001001801201401601517192123242013Sources:Haver Analytics;Organisation for Economic Co-operation and Development;and IMF staff calculations.Note:In panel 1,sample includes 37 advanced economies.Panel 2 shows the density distribution of headline inflation developments across 32 advanced economies and 13 emerging market and developing economies.The vertical line indicates the 2019:Q1 median.In panel 3,the two aggregates are the purchasing-power-parity-weighted averages.Sample includes 11 advanced economies and 9 emerging market and developing economies that account for approximately 55 percent of 2021 world output at purchasing-power-parity weights.EA union wageUS ECIPosted wage(major AEs)2019:Q4PeakLatestJapanUnited KingdomEuro areaUnited StatesLabor shareProfit shareOther input shareFigure 1.4.Labor Market Developments1.Wage Growth(Percent,year over year)06123452019:Q120:Q121:Q122:Q123:Q124:Q22.Vacancy to Unemployment(Ratio)0.02.50.51.01.52.0JPNUSAGBRDEUEACANAUSKORFRA3.Unit Labor Costs(Percent,year over year)203010010202017:Q118:Q119:Q120:Q121:Q122:Q123:Q124:Q24.Inflation and Profit Shares(Percent,annualized)US2022201019202021202324:Q1Euro area2022201019202021202324:Q11012345678Sources:Eurostat;Haver Analytics;US Bureau of Economic Analysis;and IMF staff calculations.Note:In panel 4,US decomposition uses data on factor shares from the nonfinancial corporate sector only.Euro area decomposition is based on whole-economy data.Data labels in the figure use International Organization for Standardization(ISO)country codes.AEs=advanced economies;EA=euro area;ECI=Employment Cost Index.WORLD ECONOMIC OUTLOOK:POLICY PIVOT,RISING THREATS4International Monetary Fund|October 2024Policy Mix:Tight Monetary,Loose Fiscal PoliciesEconomic developments over the past four years have had a lot to do with how individual countries have deployed fiscal and monetary policies since the pandemic.Following an initial period of easing,monetary policy has tightened significantly,with central banks in many emerging markets starting earlier than major central banks in advanced economies(Chapter 2).Most central banks stopped increasing nominal policy rates in the first half of 2023.But real rates continued to rise as inflation expectations started to decline(Figure 1.5,panel 1),tightening the monetary policy stance further.Real policy rates are currently above estimates of the natural rates and thus are acting to cool down economic activity and bring inflation back to target.Higher policy rates have led to higher mortgage and bank lending rates,a sign that the first leg of monetary transmission has worked as expected.The pass-through to market rates has been gradual but seems to have fin-ished.The increase in borrowing costs has in turn held back private credit growth and investment,moderating aggregate demand(Figure 1.5,panels 2 and 3).The contrast with fiscal policy is striking.Despite a strong rebound in activity in 2022 and generalized inflationary pressures,fiscal policy has remained looser.Some slippage with respect to consolidation plans is evident(see the October 2024 Fiscal Monitor),except in low-income developing countries,where limited fiscal space has constrained their ability to tackle energy and food crises(Figure 1.6,panel 1).From 2022 to 2024,monetary policy tightened significantly in most coun-tries,but fiscal policy lagged and even eased in many instances(Figure 1.6,panel 2),complicating the task of central banks in their effort to rein in inflation and delaying the necessary rebuilding of fiscal buffers.Tight monetary policy combined with relatively loose fiscal policy,particularly relevant in the United States,may be one of the key factors that has led to dollar appreciation in 2024.This is expected to change.With public-debt-servic-ing costs on an upward trend in emerging market and developing economies and a recent jump in the United States(Figure 1.6,panel 3),the baseline assumes a rotation of the policy mix.Necessary fiscal consoli-dation in many economies is expected to slow down growth and calls for looser monetary policy,which should in turn help governments trim deficits more easily(see“Policy Priorities:From Restoring Price Stability to Rebuilding Buffers”).United StatesEuro areaChinaOther AEsOther EMDEsPolicy rateCash deposit rateMortgage rateEuro area:Change in credit to residentsUS:Change in credit from all commercial banksFigure 1.5.Monetary Transmission1.Real Policy Rate Paths in Major Economies(Percent)6642024Jan.2020Jan.21Jan.22Jan.23Jan.24Jan.25Jan.26Dec.262.Median Bank Lending and Deposit Rates across Advanced Economies(Percent)012345678Jan.2019Jan.20Jan.21Jan.22Jan.23Jan.24Jul.243.Real Credit Growth(Percent change,month over month)0.80.40.00.40.81.21.6Jun.2021Jun.22Jun.23Jun.24ProjectionsSources:Bank for International Settlements;Consensus Economics;European Central Bank;Federal Reserve Board;Haver Analytics;and IMF staff calculations.Note:In panel 1,the gray area denotes discretionary tightening periods(nominal rate hikes,excluding China),and the blue area denotes nondiscretionary tightening periods(nominal rate pauses,excluding China).Sample includes 16 AEs and 65 EMDEs.“Other”aggregates are medians.Real rates are calculated by subtracting 12-month-ahead inflation expectations,computed based on Consensus Forecast surveys of professional forecasters,from nominal policy rates.The 12-month-ahead inflation expectations are constructed as the weighted sum of forecasts for the current and subsequent calendar years(see Buono and Formai 2018).Projections for United States and euro area real rates are based on market-implied policy rates and inflation swaps for expected inflation.Panel 2 includes Australia,Canada,Japan,New Zealand,the United Kingdom,and the United States.In panel 3,credit growth is deflated by GDP deflator.AEs=advanced economies;EMDEs=emerging market and developing economies.CHAPTER 1 GLOBAL PROSPECTS AND POLICIES5International Monetary Fund|October 2024Returning Financial Market VolatilityIn the first week of August,global financial mar-kets experienced significant turbulence,interrupt-ing a steady and rapid ascent of equity markets.Weaker-than-expected jobs data raised concerns about a potential recession in the United States,leading to a stock market correction.This,combined with the Bank of Japans decision to hike interest rates,resulted in a rapid unwinding of Japanese-yen-funded carry trades,which amplified the equity market correction(see Box 1.3 of the October 2024 Global Financial Stability Report and Box 1.4 of the April 2023 Global Financial Stability Report).Markets have rapidly stabilized.The Chicago Board Options Exchange Volatility(VIX)Index,after having surged to its highest point since 2020,has returned to its historical average.However,vulnerabilities that contrib-uted to the recent increase in market volatility persist.These include the disconnect between economic uncer-tainty and market volatility(see Chapter 1 of the October 2024 Global Financial Stability Report)and overstretched equity valuations,particularly in the technology sector.Revised market expectations regarding US mone-tary policy have aligned the outlook for rate cuts there more closely with those for other advanced economies,halting the appreciation of the US dollar against the currencies of major advanced economies.However,depreciation pressures remain high in emerging market and developing economies(Figure 1.7,panel 1).Many of these economies,which began hiking interest rates earlier,have also started easing earlier,leading to a nar-rowing of differentials between their policy rates and that of the United States.For some emerging market and developing econ-omies faced with large short-term external financing needsoften a significant share of their buffer of net international reservessovereign borrowing spreads have increased since April,posing an additional challenge(Figure 1.7,panel 2).Although few of these economies are in debt distressdefined as having spreads greater than 1,000 basis pointsheavy reliance on short-term external financing reveals vulnerabilities to sudden currency swings.Rising Geopolitical Tensions but Limited Impact on Global Trade So FarDespite ongoing geopolitical tensions,global trade volume as a share of world GDP has not deterio-rated.However,signs of geoeconomic fragmentation Projected consolidationActual consolidationAEs excluding USEMMIEsLIDCsUSCHNUSAINDRUSJPNDEUBRAIDNFRAGBRITAMEXKORCANAUSZAF1.Fiscal Slippage(Percentage points;2024 minus 2022 primary balance)Source:IMF staff calculations.Note:In panel 1,the projected and actual consolidations are from January 2022 WEO Update and October 2024 WEO,respectively;the panel uses the primary balance to broaden the country coverage.In panel 2,the primary balance refers to the general government structural primary balance in percent of potential GDP,and G20 economies are presented,except for Argentina,Saudi Arabia,and Trkiye,owing to lack of data availability.In panel 3,the projections are based on the October 2024 WEO.Data labels in the figure use International Organization for Standardization(ISO)country codes.AEs=advanced economies;EMMIEs=emerging market and middle-income economies;LIDCs=low-income developing countries;WEO=World Economic Outlook.Figure 1.6.Fiscal Policy Stance2.Monetary-Fiscal Policy Mix(Percentage points)3.General Government Interest Payments(Percent of general government revenues)332101241604812020481216Change in structural primary balance,202224Latest real policy ratesWorldAEsexcludingeuro areaEuroareaEMMIEsChinaLIDCs20081012141618202224262942 02468101214WORLD ECONOMIC OUTLOOK:POLICY PIVOT,RISING THREATS6International Monetary Fund|October 2024have started to emerge,with increasingly more trade occurring within geopolitical blocs rather than between them(Figure 1.8).Specifically,when the averages for the periods 2017 to 2022 and 2022 to the first quarter of 2024 are compared,goods trade growth is observed to have declined by approximately 2 percentage points more between geopolitically distant blocs than within blocs.A more fragmented global trade landscape could emerge if geopolitical tensions continue to develop in a way similar to that during the Cold War(Figure 1.9).Although fragmentation,if it goes hand in hand with an increase in intrabloc trade,may not necessarily imply rapid deglobalization(Gopinath and others 2024),it could reduce the resilience of global supply chains,increase funding costs,disrupt cross-border capital flows(see Chapter 3 of the April 2023 Global Financial Stability Report)and lower market efficiency,slow the transfer of knowledge between advanced and emerging market and developing economies(hamper-ing income convergence),increase costs and risks for businesses,and induce a larger economic cost for the green transition(Box 1.1).The Outlook:Stable yet UnderwhelmingBrace for Uncertain TimesThere has been little change in the global growth outlook since the April 2024 World Economic Outlook.Following the postpandemic rebound,the global projection for GDP growth has been hovering at about 3 percent,both in the short and the medium term.Weak growth extends beyond the disinflation period,suggesting that potential growth has been durably affected(see Chapter 3 of the April 2024 World Eco-nomic Outlook).Jan.2Apr.16Apr.16 to dateCumulativeTURARGBOLSLVEGYCMRGHAKENMOZTUNBLRGEOFigure 1.7.Pressure on Emerging Markets1.Exchange Rate Depreciation versus US Dollar(Percent appreciation from January to September 20,2024)8020706050403020100102.Short-Term External Financing Needs and Sovereign Spreads(Basis points)5004,50005001,0001,5002,0002,5003,0003,5004,000Sources:Haver Analytics;and IMF staff calculations.Note:In panel 1,percentage appreciation is computed as the difference in log exchange rates.In panel 2,fitted regression line is y=19.5 4.47x,with a slope t-statistic equal to 2.51.The regression is weighted by purchasing-power-parity GDP.The sample excludes EMDE oil exporters.Data labels in the figure use International Organization for Standardization(ISO)country codes.EMDE=emerging market and developing economy.MYSZAFPOLIDNROUDZACHNPHLINDHUNPERCHLCOLBRAMEXTUREGYNGAETHSovereign spreadsShort-term external fnancing needs,2025(percent of net international reserves)050100150200250300350400Goods tradeTotal tradeFigure 1.8.Globalization and Trade Fragmentation1.Global Trade Development and Outlook(Percent of GDP)2070304050602.Changes in Goods Trade Growth(Percentage points;difference in trade growth before and after war)625432101Sources:Gopinath and others 2024;and IMF staff calculations.Note:In panel 1,“trade”is defined as the sum of exports and imports.Global tradeand GDP for percentage calculation are in current US dollars.Dashed portions ofgraph lines indicate October 2024 World Economic Outlook forecasts.In panel 2,change is calculated as the average trade growth during 2022:Q224:Q1 minus theaverage trade growth during 2017:Q122:Q1 within and between blocs.For thecurrent period,bloc definition is based on a hypothetical Western bloc centered onthe US and Europe and a hypothetical Eastern bloc centered on China and Russia.Bilateral quarterly growth rates are computed as the differences in log bilateraltrade,which are then aggregated using bilateral nominal trade as weights.19808590952000051015202529Globalfnancialcrisis Between blocsWithin blocsCHAPTER 1 GLOBAL PROSPECTS AND POLICIES7International Monetary Fund|October 2024The picture is far from monolithic,however,and important sectoral and regional shifts underpin the stable global outlook that has emerged since the April 2024 World Economic Outlook.Relative to prepandemic trends,goods prices remain elevated compared with those for services,a lingering effect of the pandemic and its aftermath,which saw strong demand for goods alongside supply constraints(Figure 1.10,panel 1).Consequently,behind stable growth figures,a global shift from goods to ser-vices consumption is underway.This rebalancing is tending to boost activity in the services sector in advanced and emerging markets but is dampening manufacturing.Manufacturing production is also increasingly shifting toward emerging market econ-omiesin particular,China and Indiaas advanced economies lose competitiveness(Figure 1.10,panel 2).Global AssumptionsBefore regional developments are discussed,it is important to review the key assumptions about com-modity prices and fiscal and monetary policy on which the baseline projection is predicated.With acknowledgment of exceptional policy uncer-tainty associated with newly elected governments in 2024(in 64 countries representing about half of the global population),the baseline projection is flanked with two alternative scenarios,which lay out the main implications for growth and inflation of shifts in trade and fiscal policy.The scenarios are meant to be Since Russias invasion of Ukraine(February 2022)Cold War(initial year:1947)Figure 1.9.Trade Fragmentation:Cold War and Now(Percentage points)1.51.01.00.50.00.5Trade semi-elasticity for fowsbetween blocs04812162024283236Number of quarters since the start of the episode1.50.51.00.50.0Trade semi-elasticity for fows withnonaligned countries04812162024283236Number of quarters since the start of the episode1.Trade between Blocs2.Trade with Nonaligned Countries Sources:Gopinath and others 2024;and IMF staff calculations.Note:The figure plots the change in global trade between blocs(panel 1)and with nonaligned countries(panel 2)during the Cold War(blue line,with t0=1947)and since Russias invasion of Ukraine(red line,with t0=2021:Q4).For each episode,the figure plots the semi-elasticity of trade for flows,estimated using a difference-in-differences approach,with bilateral goods trade values on the y-axis,with importer-exporter,importer-year,and exporter-year fixed effects controlled for,and the associated 90 percent confidence bands.The missing category is trade within blocs.The Cold War results are obtained using yearly data from 1920 to 1990excluding the World War II years(193945),and with 1947 as an excluded yearand the bloc definition based on Gokmen(2017).The results for the most recent period are based on quarterly trade data from 2017:Q1 to 2024:Q1(with 2021:Q4 as an excluded quarter),with the wider bloc definition based on the ideal point distance(a measure based on voting patterns in the United Nations General Assembly computed by Bailey,Strezhnev,and Voeten 2017).United StatesEuro areaDeveloped markets:ManufacturingEmerging markets:ManufacturingDeveloped markets:ServicesEmerging markets:ServicesFigure 1.10.Continued Rotation to Services1.Relative Price of Core Goods versus Core Services(Core-goods-to-services ratio)80110859095100105Jan.2015Jan.17Jan.19Jan.21Jan.23Jul.242.Recent PMI trends(Index,50 =expansion)356040455055Jan.2022Jul.22Jan.23Jul.23Jan.24Aug.24Sources:Haver Analytics;and IMF staff calculations.Note:Solid lines denote GDP growth from the October 2024 World Economic Outlook,and dashed lines denote GDP growth forecasts from the April 2024 World Economic Outlook,respectively.PMI=purchasing managers index.WORLD ECONOMIC OUTLOOK:POLICY PIVOT,RISING THREATS8International Monetary Fund|October 2024illustrative but are quantitatively plausible alternatives around the baseline(Box 1.2).Commodity price assumptions:Oil prices are expected to rise by 0.9 percent in 2024 to about$81 a barrel as production cuts by OPEC (Organization of the Petroleum Exporting Countries plus selected nonmember countries,including Russia),sustained global oil demand growth,and geopolitical ten-sions in the Middle East offset strong non-OPEC supply growth.Overall,however,prices for fuel commodities are projected to fall on average by 3.8 percentowing to declines in prices of natural gas(by 16.4 percent)and coal(by 18.0 percent)as they come off their 2022 peaksbut less rapidly than assumed in April(Figure 1.11,panel 1).Food prices are expected to decline by 5.2 percent in 2024 and by a further 4.5 percent in 2025 as global grain produc-tion is forecast to reach record highs in 202425.Monetary policy assumptions:Compared with that in April 2024,the anticipated trajectory of policy rates for major central banks in advanced economies has shifted.In the euro area,100 basis points of cuts are expected in 2024 and 50 basis points in 2025,bringing the policy rate to 2.5 percent by June 2025.In the United States,the Federal Reserve pivoted to cutting rates in September,starting with a 50 basis point drop.The federal funds rate is pro-jected to reach its long-term equilibrium of 2.9 per-cent in the third quarter of 2026,almost a year earlier than what was expected in April.In Japan,however,policy rate projections have been revised upward(since the April 2024 World Economic Outlook),reflecting the Bank of Japans rate hike in July.The policy rate is projected to continue to rise gradually over the medium term toward a neutral setting of about 1.5 percent,consistent with keeping inflation and inflation expectations anchored at the Bank of Japans 2 percent target.Fiscal policy assumptions:Governments in advanced economies are on average expected to tighten their fiscal policy stances in both 2024 and 2025,halv-ing primary deficits by 2029.However,contrasts between the euro area and the United States are important.In the baseline,the US fiscal deficit is only marginally trimmed down,remaining at about 6.0 percent in 2029,with about half of this reflect-ing interest rate expenses.Under current policies,the US public debt is not stabilized,reaching almost 131.7 percent of GDP in 2029.In the euro area,on the other hand,the debt-to-GDP ratio is expected to have stabilized already at about 88 percent in 2024,although with some cross-country differ-ences.Large contrasts are apparent in the emerging market and developing economies country group as well.Whereas fiscal stances are expected to remain relatively loose on average in emerging markets,fiscal consolidation is ongoing among developing economies.Over the past few years,many low-income countries have either lost market access or EnergyFoodUnited StatesEuro areaJapanFigure 1.11.Global Assumptions1.Energy and Food Prices (Index,2022:Q4=100)50120607080901001102022:Q423:Q424:Q425:Q42.Monetary Policy Projections (Percent,quarterly average)01123456724:Q125:Q126:Q127:Q128:Q129:Q129:Q42023:Q13.Fiscal Policy Projections (Percentage points;change in fiscal balance)1.00.50.00.51.02023242526Advanced economiesEmerging market anddeveloping economies2023242526Source:IMF staff calculations.Note:In panels 1 and 2,solid lines denote projections from the October 2024 World Economic Outlook and dashed lines from the April 2024 World Economic Outlook.Also,the dotted line in panel 1 denotes projections from October 2023 World Economic Outlook.In panel 3,the fiscal balance used is the general government structural primary balance,which is the cyclically adjusted primary balance corrected for a broader range of noncyclical factors such as changes in asset and commodity prices.CHAPTER 1 GLOBAL PROSPECTS AND POLICIES9International Monetary Fund|October 2024been forced to drastically scale back deficits because higher interest rates have pushed up borrowing costs(see Chapter 1 of the October 2024 Global Financial Stability Report).Forced consolidation is expected to bring down their debt-to-GDP ratios to 45.8 percent in 2029 from 53.2 percent in 2024,a reduction of about 1.5 percent of GDP every year.Baseline Outlook:Stable Growth amid Continuing DisinflationGlobal growth is expected to remain broadly flatdecelerating from 3.3 percent in 2023 to 3.1 percent by 2029and is largely unchanged from World Economic Outlook forecasts in April 2024 and October 2023(Tables 1.1 and 1.2;Figure 1.12).1 Under the surface,however,offsetting revisions have brought major econ-omies closer together as cyclical forces wane and GDP moves closer to potential.As inflation recedes,policy rates are expected to follow suit,preventing undue increases in real interest rates.Interest rates are expected to gradually descend toward their natural levels:the lev-els of risk-free real interest rates compatible with output at potential and inflation at target.Although global revisions to the forecast since April have been minimal,offsetting shifts at the country group level reflect recent shocks and policies,most notably in emerging market and developing econo-mies.Cuts in production and shipping of commodities(oil in particular),conflicts,and civil unrest have led to downward revisions to the regional outlooks for the Middle East and Central Asia and for sub-Saharan Africa.At the same time,surging demand for semi-conductors and electronics,driven by significant investment in artificial intelligence,has fueled stronger growth in emerging Asia.Growth Outlook:Major Economies Draw Closer TogetherFollowing a reopening rebound in 2022,growth in advanced economies markedly slowed in 2023 and is projected to remain steady,oscillating between 1.7 and 1.8 percent until 2029.This apparent stability conceals differing country dynamics as various cycli-cal forces unwind and economic activity gets back in 1For the global and regional aggregates,this World Economic Outlook report uses the newly revised purchasing-power-parity GDP weights based on the latest release from the International Compari-son Program;see the Statistical Appendix for details.line with potential.In the United States,growth is expected to decelerate,with output reaching potential from above by 2029.In the United Kingdom and the euro area,on the other hand,activity is projected to accelerate,closing the output gap from below.In Japan,where the output gap is already closed,GDP is expected to grow in line with potential.In the United States,projected growth for 2024 has been revised upward to 2.8 percent,which is 0.2 percentage point higher than the July forecast,on account of stronger outturns in consumption and nonresidential investment.The resilience of con-sumption is largely the result of robust increases in real wages(especially among lower-income house-holds)and wealth effects.Growth is anticipated to slow to 2.2 percent in 2025 as fiscal policy is gradually tightened and a cooling labor market slows consumption.With GDP growth lower than potential,the output gap is expected to start closing in 2025.In the euro area,growth seems to have reached its lowest point in 2023.A touch weaker than projected in April and July 2024,GDP growth is WorldAdvanced economiesEmerging market and developing economiesUnited StatesEuro areaJapanKoreaChinaIndiaBrazilMexicoFigure 1.12.Growth Outlook1.Growth Outlook(Percent;dashes=April 2024,dots=October 2023)20232425262.Cyclical Forces Waning and Output Gaps Closing(Percent)32101232023242526272829Source:IMF staff calculations.Note:In panel 1,solid lines denote GDP growth from the October 2024 World EconomicOutlook,and dashed and dotted lines denote GDP growth forecasts from the April 2024World Economic Outlook and the October 2023 World Economic Outlook,respectively.0123456WORLD ECONOMIC OUTLOOK:POLICY PIVOT,RISING THREATS10International Monetary Fund|October 2024Table 1.1.Overview of the World Economic Outlook Projections(Percent change,unless noted otherwise)ProjectionsDifference from July 2024 WEO Update1Difference from April 2024 WEO12023202420252024202520242025World Output3.33.23.20.00.10.00.0Advanced Economies1.71.81.80.10.00.10.0United States 2.92.82.20.20.30.10.3Euro Area0.40.81.20.10.30.00.3Germany0.30.00.80.20.50.20.5France1.11.11.10.20.20.40.3Italy0.70.70.80.00.10.00.1Spain2.72.92.10.50.01.00.0Japan 1.70.31.10.40.10.60.1United Kingdom0.31.11.50.40.00.60.0Canada1.21.32.40.00.00.10.1Other Advanced Economies21.82.12.20.10.00.10.2Emerging Market and Developing Economies4.44.24.20.00.10.10.0Emerging and Developing Asia5.75.35.00.10.10.10.1China5.24.84.50.20.00.20.4India38.27.06.50.00.00.20.0Emerging and Developing Europe3.33.22.20.00.30.10.6Russia3.63.61.30.40.20.40.5Latin America and the Caribbean 2.22.12.50.30.20.20.0Brazil2.93.02.20.90.20.80.1Mexico3.21.51.30.70.30.90.1Middle East and Central Asia2.12.43.90.00.00.40.3Saudi Arabia0.81.54.60.20.11.11.4Sub-Saharan Africa 3.63.64.20.10.10.20.1Nigeria2.92.93.20.20.20.40.2South Africa0.71.11.50.20.30.20.3MemorandumWorld Growth Based on Market Exchange Rates2.82.72.80.00.00.00.1European Union0.61.11.60.10.20.00.2ASEAN-544.04.54.50.10.10.10.0Middle East and North Africa1.92.14.00.10.10.60.2Emerging Market and Middle-Income Economies4.44.24.20.10.00.10.1Low-Income Developing Countries4.14.04.70.20.40.50.4World Trade Volume(goods and services)0.83.13.40.00.00.10.1ImportsAdvanced Economies0.72.12.40.30.30.10.4Emerging Market and Developing Economies3.04.64.90.40.10.30.8ExportsAdvanced Economies1.02.52.70.10.20.00.2Emerging Market and Developing Economies0.64.64.60.40.50.90.7Commodity Prices(US dollars)Oil516.40.910.40.14.43.44.1Nonfuel(average based on world commodity import weights)5.72.90.22.11.82.80.2World Consumer Prices66.75.84.30.10.10.10.2Advanced Economies74.62.62.00.10.10.00.1Emerging Market and Developing Economies68.17.95.90.10.00.30.2Source:IMF staff estimates.Note:Real effective exchange rates are assumed to remain constant at the levels prevailing during July 30,2024August 27,2024.Economies are listed on the basis of economic size.The aggregated quarterly data are seasonally adjusted.WEO=World Economic Outlook.1 Difference based on rounded figures for the current,July 2024 WEO Update,and April 2024 WEO forecasts.Global and regional growth figures are based on new purchasing-power-parity weights derived from the recently released 2021 International Comparison Program survey(see Box A2)and are not comparable to the figures reported in the July 2024 WEO Update or the April 2024 WEO.2 Excludes the Group of Seven(Canada,France,Germany,Italy,Japan,United Kingdom,United States)and euro area countries.3 For India,data and forecasts are presented on a fiscal year basis,and GDP from 2011 onward is based on GDP at market prices with fiscal year 2011/12 as a base year.4 Indonesia,Malaysia,the Philippines,Singapore,and Thailand.5 Simple average of prices of UK Brent,Dubai Fateh,and West Texas Intermediate crude oil.The average price of oil in US dollars a barrel was$80.59 in 2023;the assumed price,based on futures markets,is$81.29 in 2024 and$72.84 in 2025.6 Excludes Venezuela.See the country-specific note for Venezuela in the“Country Notes”section of the Statistical Appendix.CHAPTER 1 GLOBAL PROSPECTS AND POLICIES11International Monetary Fund|October 2024Table 1.1.Overview of the World Economic Outlook Projections(continued)(Percent change,unless noted otherwise)Q4 over Q48ProjectionsDifference from July 2024 WEO Update1Difference from April 2024 WEO12023202420252024202520242025World Output3.43.33.10.10.20.10.0Advanced Economies1.71.91.70.20.10.10.0United States 3.22.51.90.50.10.40.1Euro Area0.21.21.30.30.20.20.1Germany0.20.31.30.50.40.40.5France1.30.71.50.10.00.40.0Italy0.31.00.60.50.70.30.0Spain2.32.92.00.60.11.00.1Japan 0.91.80.20.20.10.10.3United Kingdom0.32.11.10.60.50.60.2Canada1.02.32.10.10.10.50.2Other Advanced Economies22.01.82.60.10.20.30.0Emerging Market and Developing Economies4.74.44.30.10.10.10.2Emerging and Developing Asia5.95.45.00.10.00.30.3China5.44.54.70.10.20.10.6India37.86.76.50.20.00.30.1Emerging and Developing Europe4.32.32.70.10.70.90.1Russia4.82.41.20.60.50.20.0Latin America and the Caribbean 1.32.12.90.30.30.00.3Brazil2.23.52.20.60.20.50.7Mexico2.31.31.41.70.30.60.4Middle East and Central Asia.Saudi Arabia4.32.14.60.50.31.01.3Sub-Saharan Africa.Nigeria3.23.53.70.21.00.01.2South Africa1.31.71.00.40.10.40.2Memorandum World Growth Based on Market Exchange Rates2.82.82.60.10.20.10.0European Union0.51.61.40.10.40.00.3ASEAN-544.26.33.00.80.21.20.1Middle East and North Africa.Emerging Market and Middle-Income Economies4.74.44.30.10.10.10.2Low-Income Developing Countries.Commodity Prices(US dollars)Oil54.47.34.94.90.81.30.6Nonfuel(average based on world commodity import weights)0.23.80.53.90.03.00.1World Consumer Prices65.75.33.50.10.00.10.1Advanced Economies73.22.32.00.20.00.10.0Emerging Market and Developing Economies67.87.74.70.10.10.10.17 The assumed inflation rates for 2024 and 2025,respectively,are as follows:2.4 percent and 2.0 percent for the euro area,2.2 percent and 2.0 percent for Japan,and 3.0 percent and 1.9 percent for the United States.8 For world output,the quarterly estimates and projections account for approximately 90 percent of annual world output at purchasing-power-parity weights.For emerging market and developing economies,the quarterly estimates and projections account for approximately 85 percent of annual emerging market and developing economies output at purchasing-power-parity weights.WORLD ECONOMIC OUTLOOK:POLICY PIVOT,RISING THREATS12International Monetary Fund|October 2024expected to pick up to a modest 0.8 percent in 2024 as a result of better export performance,in partic-ular of goods.In 2025,growth is projected to rise further to 1.2 percent,helped by stronger domestic demand.Rising real wages are expected to boost consumption,and a gradual loosening of monetary policy is expected to support investment.Persistent weakness in manufacturing weighs on growth for countries such as Germany and Italy.However,whereas Italys domestic demand is expected to ben-efit from the European Unionfinanced National Recovery and Resilience Plan,Germany is experi-encing strain from fiscal consolidation and a sharp decline in real estate prices.Offsetting dynamics are also at play among other advanced economies.Growth is expected to deceler-ate in Japan in 2024,with the slowdown reflecting temporary supply disruptions and fading of one-off factors that boosted activity in 2023,such as the surge in tourism.With respect to April,growth is revised downward,by 0.6 percentage point,to 0.3 percent for 2024,reflecting a temporary supply disruption in the car industry and the base effect of historical data revisions.An acceleration to 1.1 is predicted in 2025,with growth boosted by private consumption as real wage growth strengthens.In the United Kingdom,in contrast,growth is projected to have accelerated to 1.1 percent in 2024 and is expected to continue doing so to 1.5 percent in 2025 as falling inflation and interest rates stimulate domestic demand.Growth Outlook:Emerging Markets Get Support from AsiaIn a manner similar to that for advanced economies,the growth outlook for emerging market and devel-oping economies is remarkably stable for the next two years,hovering at about 4.2 percent and steadying at 3.9 percent by 2029.And just as in advanced econo-mies,offsetting dynamics are occurring between coun-try groups.Compared with that in April,growth in emerging market and developing economies is revised upward by 0.1 percentage point for 2024,reflecting upgrades for Asia(China and India)that more than offset downgrades for sub-Saharan Africa and for the Middle East and Central Asia(Table 1.1).Emerging Asias strong growth is expected to subside,from 5.7 percent in 2023 to 5.0 percent in 2025.This reflects a sustained slowdown in the regions two largest countries.In India,the outlook is for GDP growth to moderate from 8.2 percent in 2023 to 7 percent in 2024 and 6.5 percent in 2025,because pent-up demand accumulated during the pandemic has been exhausted,as the economy reconnects with its potential.In China,the slow-down is projected to be more gradual.Despite persisting weakness in the real estate sector and low consumer confidence,growth is projected to have slowed only marginally to 4.8 percent in 2024,largely thanks to better-than-expected net exports.Compared with that in April,the forecast has been revised upward by 0.2 percentage point in 2024 and Table 1.2.Overview of the World Economic Outlook Projections at Market Exchange Rate Weights(Percent change)ProjectionsDifference from July 2024 WEO Update1Difference from April 2024 WEO12023202420252024202520242025World Output2.82.72.80.00.00.00.1Advanced Economies1.81.81.80.10.00.00.0Emerging Market and Developing Economies4.34.04.10.10.00.00.1Emerging and Developing Asia5.55.14.80.10.10.10.2Emerging and Developing Europe3.13.12.30.10.30.00.5Latin America and the Caribbean 2.21.92.40.20.20.00.1Middle East and Central Asia1.52.14.00.10.00.50.3Sub-Saharan Africa 3.43.44.10.20.10.20.1MemorandumEuropean Union0.51.01.50.00.10.10.2Middle East and North Africa1.31.84.00.30.00.70.3Emerging Market and Middle-Income Economies4.34.04.00.10.10.00.1Low-Income Developing Countries4.13.84.80.30.40.60.3Source:IMF staff estimates.Note:The aggregate growth rates are calculated as a weighted average,in which a moving average of nominal GDP in US dollars for the preceding three years is used as the weight.WEO=World Economic Outlook.1 Difference based on rounded figures for the current,July 2024 WEO Update,and April 2024 WEO forecasts.CHAPTER 1 GLOBAL PROSPECTS AND POLICIES13International Monetary Fund|October 20240.4 percentage point in 2025.Recent policy mea-sures may provide upside risk to near-term growth.In contrast,growth in the Middle East and Cen-tral Asia is projected to pick up from an estimated 2.1 percent in 2023 to 3.9 percent in 2025,as the effect on the region of temporary disruptions to oil production and shipping are assumed to fade away.Compared with that in April,the projection has been revised downward by 0.4 percentage point for 2024,mainly the result of the extension of oil pro-duction cuts in Saudi Arabia and ongoing conflict in Sudan taking a large toll.In sub-Saharan Africa,GDP growth is similarly pro-jected to increase,from an estimated 3.6 percent in 2023 to 4.2 percent in 2025,as the adverse impacts of prior weather shocks abate and supply constraints gradually ease.Compared with that in April,the regional forecast is revised downward by 0.2 per-centage point for 2024 and upward by 0.1 percent-age point for 2025.Besides the ongoing conflict that has led to a 26 percent contraction of the South Sudanese economy,the revision reflects slower growth in Nigeria,amid weaker-than-expected activ-ity in the first half of the year.In Latin America and the Caribbean,growth is projected to decline from 2.2 percent in 2023 to 2.1 percent in 2024 before rebounding to 2.5 per-cent in 2025.In Brazil,growth is projected at 3.0 percent in 2024 and 2.2 percent in 2025.This is an upward revision of 0.9 percentage point for 2024,compared with July 2024 World Economic Outlook Update projections,owing to stronger private consumption and investment in the first half of the year from a tight labor market,government transfers,and smaller-than-anticipated disruptions from floods.However,with the still-restrictive mon-etary policy and the expected cooling of the labor market,growth is expected to moderate in 2025.In Mexico,growth is projected at 1.5 percent in 2024,reflecting weakening domestic demand on the back of monetary policy tightening,before slowing further to 1.3 percent in 2025 on a tighter fiscal stance.Overall,offsetting revisions leave the regional growth forecast broadly unchanged since April.Growth in emerging and developing Europe is projected to remain steady at 3.2 percent in 2024 but to ease significantly to 2.2 percent in 2025.The moderation reflects a sharp slowdown in Russia from 3.6 percent in 2023 to 1.3 percent in 2025 as private consumption and investment slow amid reduced tightness in the labor market and slower wage growth.In Trkiye,growth is expected to slow from 5.1 percent in 2023 to 2.7 percent in 2025,with the slowdown driven by the shift to monetary and fiscal policy tightening since mid-2023.Inflation Outlook:Gradual Decline to TargetAlthough bumps on the path to price stability are still possible,global headline inflation is projected to decrease further,from an average of 6.7 percent in 2023 to 5.8 percent in 2024 and 4.3 percent in 2025 in the baseline.Disinflation is expected to be faster in advanced economieswith a decline of 2 percentage points from 2023 to 2024 and a stabilization at about 2 percent in 2025than in emerging market and developing economies,in which inflation is projected to decline from 8.1 percent in 2023 to 7.9 percent in 2024 and then fall at a faster pace in 2025 to 5.9 percent.There is a great deal of variation across emerging market economies,however,which is evident in the difference between median and average inflation(Figure 1.13,panel 1).Inflation in emerging Asia is projected to be on par with that in advanced econ-omies,at 2.1 percent in 2024 and 2.7 percent in 2025,in part thanks to early monetary tightening and price controls in many countries in the region.In contrast,inflation forecasts for emerging and develop-ing Europe,the Middle East and North Africa,and sub-Saharan Africa remain in double-digit territory on account of large outliers amid pass-through of past cur-rency depreciation and administrative price adjustment(Egypt)and underperformance in agriculture(Ethi-opia).For most countries in Latin America and the Caribbean,inflation rates have dropped significantly from their peaks and continue to be on a downward trend.However,large countries in the region have experienced upward revisions since the April 2024 World Economic Outlook that reflect a mix of(1)robust wage growth preventing faster disinflation in the services sector(Brazil,Mexico),(2)weather events(Colombia),and(3)hikes in regulated electricity tariffs(Chile).The decline in global inflation in 2024 and 2025 reflects a broad-based decrease in core inflation,unlike the situation in 2023,when headline infla-tion fell mainly because of lower fuel prices.Core inflation is expected to drop by 1.3 percentage points in 2024,following a 0.1 percentage point WORLD ECONOMIC OUTLOOK:POLICY PIVOT,RISING THREATS14International Monetary Fund|October 2024decrease in 2023,with advanced economies leading this decline.Factors contributing to lower core infla-tion include the delayed effect of tight monetary policies as well as diminishing pass-through effects from earlier declines in prices,especially in those for energy.Overall,returning inflation to target is expected to take until 2025 in most cases.Although the pace of disinflation for the median economy has been faster than expected in October 2023,the dispersion across economies is now expected to be larger.Comparison of official inflation targets with the latest forecasts for a representative group of inflation-targeting advanced and emerging market economies suggests that annual average inflation will exceed targets(or the midpoints of target ranges)in more than three-quarters of these economies in 2025(Figure 1.13,panel 2).But a great deal of this reflects annual carryover effects from 2024.Infla-tion is expected to decline steadily on a sequential basis,and by the end of 2025,most economies are expected to be either at target or within a stones throw of it.Medium-Term Outlook:A Low-Growth Regime Setting InAbsent a strong drive for structural reforms,output growth is expected to remain weak over the medium term(see Chapter 3 of the April 2024 World Economic Outlook).Although monetary policy is expected to return to a neutral stance by 2025 in the worlds largest econo-mies,growth in most economies is expected to remain feeble over the medium term.For many advanced and emerging market economies,the five-year-ahead forecast is weaker than the one-year-ahead forecast(Figure 1.14),suggesting that persistent headwinds to growth will remain prevalent over the medium term.Structural challenges such as population aging,weak investment,and historically low total factor productivity growth are still holding back global growth.The five-year-ahead forecast for global growth stands at 3.1 percent,indicating continued medio-cre medium-term prospects relative to prepandemic forecasts.Compared with those in April 2024,medi-um-term growth prospects for advanced economies are unchanged.Although investment is expected to AEs medianAEs averageEMDEs medianEMDEs averageOct.2023 WEOApr.2024 WEOOct.2024 WEOFigure 1.13.Inflation Outlook0122468102.Inflation Outlook(Percentage points;deviation from inflation target)1.Inflation in AEs and EMDEs(Percent)462024Sources:Central bank websites;Haver Analytics;and IMF staff calculations.Note:In panel 1,the averages are calculated using purchasing-power-parity GDPs as weights.Panel 2 shows the distribution(box-whisker plot)from each WEO report.The blocks in the middle of the boxes are the medians,and the upper(lower)limits of the boxes are the third(first)quartile.The whiskers show the maximum and minimum within a boundary of 1.5 times the interquartile range from upper and lower quartiles,respectively.AEs=advanced economies;EMDEs=emerging market and developing economies;WEO=World Economic Outlook.2920181920212223242526272820242526LIDCsAEsEMMIEsFigure 1.14.Medium-Term Outlook(Percent)0246810Five-year-ahead forecast(2029 growth)0246810One-year-ahead forecast(2025 growth)45-degree lineSource:IMF staff calculations.Note:Bubble size reflects size of the economy using 2024 GDP in purchasing-power-parity international dollars.Data labels in the figure use International Organization for Standardization(ISO)country codes.AEs=advanced economies;EMMIEs=emerging market and middle-income economies;LIDCs=low-income developing countries.USAJPNDEUGBRFRACHNINDIDNRUSBRABGDNGAETHUZBCHAPTER 1 GLOBAL PROSPECTS AND POLICIES15International Monetary Fund|October 2024pick up and productivity growth is also expected to see some normalization,the continued demographic drag is likely to produce an offsetting effect.Cerdeiro,Hong,and Kammer(2024)discuss underlying drivers of recent productivity divergence between the United States and euro area economies that may continue to define medium-term growth trends in these economies.For emerging market and developing economies,medium-term growth prospects have not improved compared with those in the April 2024 World Eco-nomic Outlook and are still much weaker than they were in prepandemic projections.This partly reflects prolonged scarring from the shocks of the past few years,especially for low-income developing countries.It also reflects a slower pace of structural reforms,which is holding back productivity growth.Projected slowdowns in the largest emerging market and developing economies imply a longer path to close the income gaps between poor and rich countries.Having growth stuck in low gear could also further exacerbate income inequality within economies.IMF staff analysis suggests that periods of low economic growth lasting four years or more tend to widen income inequality within countries,because sluggish job creation and wage growthas well as weaker fiscal positions preventing redistributiontend to affect low-income earners disproportionately(IMF 2024).Trade Growth Historically Low,yet in Line with Output GrowthGlobal trade is expected to continue to grow in line with GDP,reaching an average of 3 per-cent growth annually in 2024 and 2025,following a period of near stagnation in 2023.Despite an increase in cross-border restrictions affecting trade between geopolitically distant blocs,the global trade-to-GDP ratio is expected to remain stable.Intrabloc trade and trade with third countries have been com-pensating forces so far.Meanwhile,global current account balancesthe sums of absolute surpluses and deficitsare expected to continue to decline from their 2022 peaks(Figure 1.15).As reported in the IMFs 2024 External Sector Report,the significant moderation of current account balances in 2023 toward prepandemic levels reflected a reversal of large current account surpluses in commodity-exporting countries,continued economic recovery from the pandemic,and a slowdown in global goods trade during 2023.Over the medium term,global balances are expected to narrow gradually as commodity prices decline.Creditor and debtor stock positions reached historically elevated levels in 2022,with the increases reflecting widening current account balances.They are expected to moderate slightly over the medium term as current account balances gradually narrow.In some economies,gross external liabilities remain large from a historical perspective and pose risks of external stress.Risks to the Outlook:Tilted to the DownsideThe most prominent risks and uncertainties surrounding the outlook are now discussed.A mod-el-based analysis that quantifies risks to the global outlook and plausible scenariosincluding shifts in trade and fiscal policiesis presented in Box 1.2.European creditorsEuropean debtorsChinaUnited StatesJapanOthersOil exportersDiscrepancyFigure 1.15.Current Account and International InvestmentPositions(Percent of global GDP)1.Global Current Account Balance2.Global International Investment PositionSource:IMF staff calculations.Note:European creditors are Austria,Belgium,Denmark,Finland,Germany,Luxembourg,The Netherlands,Norway,Slovenia,Sweden,and Switzerland;European debtors are Cyprus,Greece,Ireland,Italy,Portugal,and Spain;oil exporters are Algeria,Azerbaijan,Iran,Kazakhstan,Kuwait,Nigeria,Oman,Qatar,Russia,Saudi Arabia,the United Arab Emirates,and Venezuela.3210123200507091113151719212325272920050709111315171921232527293020100102030WORLD ECONOMIC OUTLOOK:POLICY PIVOT,RISING THREATS16International Monetary Fund|October 2024Downside RisksSince the July 2024 World Economic Outlook Update,adverse risks have gained more prominence.Monetary policy tightening bites more than intended.Although policy rates are projected to normalize,an unanticipated back-loaded strengthening of the transmission of earlier rate increases could lead to a faster-than-anticipated deceleration in near-term growth and rising unemployment.Though the impact on growth is unlikely to be persistent given concurrent policy easing,a rapid weakening of activity could also work its way adversely through consumer and business sentiment.This would place a stronger drag on household spending and prompt businesses to dial back their investment plans,either(or both)of which could create a negative feedback loop to growth.In such circumstances,however,lower energy prices would cushion some of the neg-ative effects on growth as lower demand would push oil prices down.Financial markets reprice as a result of monetary policy reassessments.The global economy is at the last mile of disinflation,which may present greater challenges to monetary policy than expected if the cost of reducing inflation in terms of unem-ployment(the sacrifice ratio)is closer to prepan-demic estimates than suggested by recent evidence(Figure 1.3,panel 1).If underlying inflation proves more persistent than expected,consumers may adjust their near-term inflation expectations(Figure 1.16),forcing central banks to adjust the path of monetary policy normalization.This would weaken consumer and business confidence,lead to market repricing and tighter financial condi-tions,and slow economic recovery.Given existing vulnerabilities(see Chapter 1 of the October 2024 Global Financial Stability Report),financial market turbulence could resurge,prompting sizable price corrections.Contagion effects are possible and could increase risks to financial stability by,among other things,triggering sovereign debt stress in emerging markets.Sovereign debt stress intensifies in emerging market and developing economies.Although spreads have eased since peaking in July 2022,some emerging market and developing economies are still vulnerable to a repricing of risk.This could further increase their sovereign spreads and push them into debt dis-tress.Countries with large external financing needs and a low buffer of international reserves will be most affected,as many are already subject to large sovereign borrowing spreads(Figure 1.7,panel 2).With little room to maneuver on fiscal policy,forcing a front-loaded fiscal consolidation could precipitate an economic downturn amid a fragile recovery.Low-income countries will be particularly at risk given their limited fiscal space and the need to maintain expenditure on programs supporting the most vulnerable.Chinas property sector contracts more deeply than expected.Conditions for the real estate market could worsen,with further price corrections taking place amid a contraction in sales and investment.The experiences of Japan in the 1990s and the United States in 2008 suggest that a further price correction is a plausible downside risk if the crisis is not adequately addressed.Further price drops could dent consumer confidence(which is already at his-toric lows)even more,further weakening household consumption.This could cause domestic demand to falter,with negative spillovers to both advanced and emerging market economies given Chinas rising footprint in global trade(see Chapter 4 of the April 2024 World Economic Outlook).One year aheadThree years aheadFigure 1.16.Inflation Surprises and Changes in Inflation Expectations(Percentage points)432101234Infation expectations changes4321012345Infation surprisesSources:Federal Reserve Bank of New York,Survey of Consumer Expectations;and IMF staff calculations.Note:The figure covers the period January 2020 to May 2024.Dashed lines show fitted values.Inflation surprises are measured as the difference between actual year-over-year inflation and one-year(three-year)inflation expectations from one(three)years prior.Changes in inflation expectations are measured as the changes in one-year(three-year)inflation expectations relative to one(three)years prior.CHAPTER 1 GLOBAL PROSPECTS AND POLICIES17International Monetary Fund|October 2024Government stimulus to counter weakness in domestic demand would place further strain on public finances.Subsidies in certain sectors,if targeted to boost exports,could exacerbate trade tensions with Chinas trading partners.Renewed spikes in commodity prices arise as a result of climate shocks,regional conflicts,or broader geopolitical tensions.Intensification of regional conflicts,especially given the wider span of con-flict in the Middle East,or the war in Ukraine,could further disrupt trade,leading to sustained increases in food,energy,and other commodity prices.Commodity price volatility may result in higher inflation,especially for commodity-import-ing countries,and restrict central banks room to maneuver.Extreme heat and prolonged droughts amid record high temperatures worldwide could also have an impact on harvests,adding to pres-sures on food prices and food security.Low-in-come countries are likely to be disproportionately affected,since food and energy costs take up a large part of household expenditures there.Countries ratchet up protectionist policies.A broad-based retreat from a rules-based global trading sys-tem is prompting many countries to take unilateral actions.Not only would an intensification of protec-tionist policies exacerbate global trade tensions and disrupt global supply chains,but it could also weigh down medium-term growth prospects by limiting positive spillovers from innovation and technology transfer,which fueled growth in emerging market and developing economies as globalization took off.Social unrest resumes.Reports of social unrestincluding protests,riots,and major demonstra-tionshave picked up in some regions,although globally they remain fewer in number than the recent peak in late 2019 to early 2020(Figure 1.17).However,a resurgence of social turmoil,poten-tially driven by higher inflation,higher taxes,and associated loss of purchasing power;spillovers from conflicts;and rising inequality,could slow economic growth,particularly in countries with more lim-ited scope to cushion the impact through policies(Hadzi-Vaskov,Pienknagura,and Ricci 2023).Social unrest could also complicate the passage and implementation of necessary reforms.Chapter 3 emphasizes the crucial role of social consensus in achieving successful and sustainable implementation of structural reforms.Upside RisksMore favorable outcomes for global growth than in the baseline forecast are also plausible:Stronger recovery in investment in advanced economies:Public investment in advanced economies could accelerate to meet various pressing policy objectives,from the green transition to upgrading infrastructure and boosting investment in science and technology.This type of investment could also crowd in the private sector,increasing private investment,and lead to a higher-than-projected recovery in global demand and trade.Higher aggregate demand could be inflationary,although the pressure could be mitigated by the extent to which these investments enhance supply-side capacity(see Chapter 3 of the October 2022 World Economic Outlook).It also depends on how these investments are financed:fiscal slippage in advanced economies could further slow the pace at which central banks can bring inflation to target.Stronger momentum of structural reforms:Many advanced and emerging market economies may accelerate structural reform efforts to prevent pro-ductivity and potential growth from further lagging those of their more productive peers.Faster imple-mentation of macro-critical structural reforms to SSAEURAllWHME and CAAPACFigure 1.17.Social Unrest Levels(Percent of economies experiencing major social unrest)07123456Jan.2018Jan.19Jan.20Jan.21Jan.22Jan.23Jan.24Jun.24Sources:Barrett and others 2022;and IMF staff calculations.Note:The figure shows the share of economies within a world region experiencing major events of social unrest(including protests,riots,and major demonstrations)in the preceding 12 months.All=all economies;APAC=Asia and Pacific;EUR=Europe;ME and CA=Middle East and Central Asia;SSA=sub-Saharan Africa;WH=Western Hemisphere.WORL
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Global Development Policy CenterChina-Latin America and the Caribbean Economic Bulletin 2024 EDITIONJULY 2024Global Development Policy CenterREBECCA RAY,ZARA C.ALBRIGHT,ENRIQUE DUSSEL PETERSZara C.Albright is a Global China Pre-doctoral Research Fellow at the Boston University Global Development Policy Center and a Ph.D.student in the Political Science department at Boston University,where she studies global development and political economy,specifically in Latin Americas relationship with China.Her current work examines the politics of Chinas large infrastructure investments and related loans,exploring the incentives and tradeoffs facing policymakers in Latin America.Rebecca Ray is a Senior Academic Researcher at the Boston University Global Development Policy Center.She holds a PhD in Economics from the University of Massachusetts-Amherst and an MA in International Development from the Elliott School of International Affairs at the George Washington University.Since 2013,she has focused her work on the nexus of international development finance,particularly Chinas role in reshaping the global financial landscape and on sustainable development,primarily in Latin America.Enrique Dussel Peters is a Professor at the Graduate School of Economics at Universidad Nacional Autnoma de Mxico(UNAM),and is the Coordinator of the Center for Chinese-Mexican Studies(Cechimex)of the School of Economics at UNAM and of the Academic Network of Latin America and the Caribbean on China(Red ALCChina).He holds a PhD in Economics from the University of Notre Dame.Cover:Rio de Janeiro,Brazil.Photo by Sbastien Goldberg via Unsplash.Suggested Citation:Ray,Rebecca,Zara C.Albright and Enrique Dussel Peters.2024.“China-Latin America and the Caribbean Economic Bulletin,2024 Edition.”Boston University Global Development Policy Center.Acknowledgments:This research benefitted greatly from helpful comments by Diego Morro Paredes.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 3CONTENTSEXECUTIVE SUMMARY 4INTRODUCTION 7SETTING THE AGENDA:LAC PRESIDENTIAL VISITS AND AGREEMENTS IN CHINA 8TRENDS IN THE LAC-CHINA ECONOMIC RELATIONSHIP 12TRENDS IN CHINA-LAC MERCHANDISE TRADE 15TRENDS IN CHINESE OUTBOUND FOREIGN DIRECT INVESTMENT IN LAC 21TRENDS IN CHINESE INFRASTRUCTURE IN LAC 27DEVELOPMENT FINANCE AND DEBT 30FUTURE PROSPECTS 33REFERENCES 374 China-Latin America and the Caribbean Economic Bulletin|2024 EditionEXECUTIVE SUMMARYIn 2024,Latin American and Caribbean(LAC)governments took intentional steps forward in their relationships with China,with frequent visits to discuss the important emerging sectors,such as telecommunications and renewable energy supply chains.While lower-technology mineral and agricultural commodities continue to dominate LAC exports to China,Chinese firms operating in LAC have shown a broader array of interests,including automotive manufacturing in Mexico,energy in South America and transportation throughout LAC.These are among the findings of the China-Latin America and the Caribbean Economic Bulletin,2024 Edition.This report provides analysts and observers a reference to the ever-changing landscape of China-LAC economic relations,a landscape where data is not always readily accessible.Key findings:A record eight LAC presidents visited China in 2023,after just one visit in 2022 and none in 2021 or 2020.Major topics covered in these presidential agendas included cooperation in renewable energy and transition minerals,telecommunications,and trade agreements regarding traditional export commodities,such as beef and petroleum.LAC exports to China rose to approximately$208 billion in 2023,while Chinese exports to LAC fell to approximately$242 billion amidst slower Chinese exports overall.As a result,LAC saw its merchandise trade deficit with China shrink to approximately$33 billion,or 0.5 percent of regional GDP.LAC minerals exports to China declined in 2022 amidst lagging Chilean copper output,but that trend partially reversed in 2023.China now accounts for 34 percent of LACs mineral exports.For the first time since China became a major trading partner with LAC,beef entered the ranks of the top five regional exports to China in 2023.This change is due in part to falling prices of refined copper(the traditional fifth largest LAC-China export)but also to rising beef trade,which has doubled in volume in the last five years.Transition minerals continue to play a growing role in the LAC-China relationship.LAC-China exports now account for approximately half of global trade in the unprocessed forms of two major transition minerals:lithium carbonate and copper ores and concentrates.While raw commodities continue to dominate LAC-China exports,the same is not universally true for Chinese investment in LAC.New(“greenfield”)Chinese investment projects in Mexico,Central America and the Caribbean have been predominantly concentrated in manufacturing(particularly automotive)sectors for the last 12 years.This trend continued in 2023 with Solarever investing$1 billion and Ningbo Xusheng Group investing$350 million in electric vehicle and vehicle part manufacturing in Mexico.Minerals continue to play an important role in Chinese investment in South America,where Chengxin Lithium Group and Zijin Mining Group invested$823 million and$600 million in Argentinas lithium sector,respectively.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 5 Chinese investment through mergers and acquisitions(M&As)in LAC were concentrated in energy sectors in 2023,with State Grid Corporation purchasing Enel Peru for$2.9 billion and PowerChina purchasing Brazils Pontoon(and its Cear solar plant)for$360 million.New to the 2024 China-Latin America and the Caribbean Economic Bulletin is consideration of trends in infrastructure contracts:trade in services for building or operating public infrastructure projects.Over the last four years,the most important sector for Chinese infrastructure in LAC has been transportation,particularly in long-distance cargo rail and urban light rail.Chinese development finance to LAC consisted of just$1.3 billion in new commitments in 2023,comprised of two loans from the China Development Bank to its Brazilian counterpart,Banco Nacional de Desenvolvimento Econmico e Social(BNDES).Public and publicly guaranteed(PPG)debt to China is concentrated in a few countries.Suriname,the LAC country with the greatest PPG debt stock to China,owed 14.6 percent of GDP to China in 2022.From 2024-2028,its PPG debt service payments to China are expected to amount to 2.5 percent of exports.However,no country in LAC including Suriname owes Chinese creditors more than it owes other major creditor categories,including bondholders,Paris Club creditors,multilateral development banks(MDBs)or other creditors.Thus,any significant debt restructuring negotiations with countries facing unsustainable debt burdens will need to include significant participation of all creditor classes.LAC-China exports have been relatively buoyed in recent years thanks to rising global commodity prices.However,those elevated prices are not expected to remain high.Thus,over the next few years,LAC is likely to see a rebound in its trade deficit with China unless it sees significant progress in diversification or significant increases in the volume of its commodity exports.As Chinese firms have gained experience operating in LAC,they have relied less on the intermediation of Chinese development finance institutions and instead opted for direct investment or direct provision of infrastructure contracts.Thus,it is unlikely for develop-ment finance to rebound to the levels of its peak years,2009-2015.However,this shift is a sign of the maturation,rather than the weakening,of the China-LAC relationship.The shifts highlighted here toward electric vehicles,rail transportation,renewable energy,transition minerals and agricultural commodities together present mixed prospects for regional sustainable development.While electric vehicles and urban rail play a crucial role in decarbonizing transportation,beef and soy supply chains are drivers of deforestation and the loss of carbon sinks.Transition mineral extraction and renewable energy provision can play positive or negative roles in local sustainable development depending on their design and policy environment.Thus,the growth in government-to-government communication(including the record number of presidential visits to China)is an important precursor to ensuring that the China-LAC economic relationship is a“win-win”for both sides.6 China-Latin America and the Caribbean Economic Bulletin|2024 EditionBuenos Aires,Argentina.Photo by Nestor Barbitta via Unsplash.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 7INTRODUCTIONIn 2024,Latin American and Caribbean(LAC)governments took intentional steps forward in their relationships with China,with frequent visits to discuss the important emerging sectors,such as telecommunications and renewable energy supply chains.While lower-technology mineral and agricultural commodities continue to dominate LAC exports to China,Chinese firms operating in LAC have shown a broader array of interests,including automotive manufacturing in Mexico,energy in South America and transportation throughout LAC.These are among the findings of the China-Latin America and the Caribbean Economic Bulletin,2024 Edition.This report provides analysts and observers a reference to the ever-changing landscape of China-LAC economic relations,a landscape where data is not always readily accessible.This brief introduction is followed by a section describing the record number of LAC presidential visits to China and the economic themes that were most important in these trips and which set the tone for the relationship,particularly telecommunications,commodity exports,infrastructure and renewable energy supply chains.Next,the bulletin provides a comparison of the trends in trade,investment,infrastructure contracts and development finance.Rather than growing in tandem,China-LAC trade,investment and infrastructure have all continued to grow rapidly while Chinese development finance in LAC has receded dramatically.This shift may reflect a maturing of the relationship,as Chinese firms are more likely to work directly in the region rather than requiring the intermediation of Chinese development finance institutions(DFIs).The bulletin then gives a detailed description of trends in each avenue individually:trade,investment,infrastructure and development finance,with emphasis on remaining debt to China from the past decade of borrowing.Finally,the bulletin concludes with discussions of future prospects,including the continued strength of infrastructure and investment,and the implications of these shifts for sustainable development in LAC.8 China-Latin America and the Caribbean Economic Bulletin|2024 EditionSETTING THE AGENDA:LAC PRESIDENTIAL VISITS AND AGREEMENTS IN CHINARecent editions of the China-Latin America and the Caribbean Economic Bulletin(China-LAC Economic Bulletin)have explored the investment,trade and finance goals of LAC countries in their relations with China.In 2023,more LAC presidents made official visits to China than in any previous year,as highlighted in Figure 1,providing a unique opportunity to assess the regional and country-level agendas with China.The presidents of Argentina,Brazil,Chile,Colombia,Guyana,Honduras,Uruguay and Venezuela highlighted a combination of traditional cooperation on infrastructure projects and primary products exports and emerging partnerships in renewable energy and sustainable development.In addition to several cabinet-level ministers and undersecretaries,most visits also included extensive private sector business delegations seeking investment and export opportunities.Figure 1:LAC Presidential Visits to China,2010-202320102011201220132014201520162017201820192020202120222023ARGCHLGUYBOLBRACOLCRICUBBOLMEXSURURYVENMEXCHLARGCRIECUVEN(1)ARGBRAMEXPERURYARGBRACHLMEXPANBOLDOMECUSLVVENBRACOLSLVSURECUARGBRACHLCOLGUYHONURYVENVEN(2)Source:Author compilation.Note:ARG:Argentina;BOL:Bolivia;BRA:Brazil;CHL:Chile;COL:Colombia;CRI:Costa Rica;CUB:Cuba;DOM:Dominican Republic;ECU:Ecuador;GUY:Guyana;MEX:Mexico;PAN:Panama;PER:Peru;SLV:El Salvador;SUR:Suriname;URY:Uruguay;VEN:VenezuelaChina-Latin America and the Caribbean Economic Bulletin|2024 Edition 9LACs economic relationship with China has historically been dominated by two aspects:exports of primary commodities,chiefly agricultural and mining products,and financing for major infrastructure projects,particularly in the energy and transportation sectors.The 2023 presidential visits demonstrated the continued importance of these areas.Brazil,Chile,Colombia,Honduras,Uruguay and Venezuela all signed new phytosanitary protocols for exports of meat,fruit and other foodstuffs.These exports may be bolstered by new or potential free trade agreements(FTAs)with Ecuador,Honduras,Nicaragua and Uruguay,drawing praise from agro-exporting industries and criticism over concerns for environmental degradation and further re-primarization,or return to concentration in low-technology commodity production(Associated Press 2024,Invima 2023,Embajada de Colombia en China 2023,Kaieteur News 2023a,b,MRE 2023,Poder Popular 2024,Presidencia de Uruguay 2023c,Reuters 2023,Xinhua 2023).Telecommunications were also on the agenda during all of LACs presidential visits,with Huawei figuring prominently in these discussions.Presidents Alberto Fernndez(of Argentina),Luiz Incio Lula da Silva(of Brazil),Mohamed Irfaan Ali(of Guyana)and Xiomara Castro(of Honduras)all visited Huaweis research and development center in Shanghai(Casa Rosada 2023b,Kaieteur News 2023,Planalto 2023b,Poder Popular 2024).Chile signed a memorandum of understanding(MOU)with Huawei for cooperation on digital literacy.Argentina,Chile,Colombia and Guyana all courted Chinese investors for their information and communications technology(ICT)sectors.Colombia,Uruguay and Venezuela signed MOUs to collaborate on communications and media projects.LAC countries are taking advantage of Chinese companies expertise in this sector and the relatively low costs they offer for telecommunications infrastructure and technologies.Table 1 illustrates the main agenda items discussed on these visits in order of how many presidents addressed them on their visits.Table 1:Agendas of LAC Presidential Visits to China,2023Agenda itemARGBRACHLCOLGUYHONURYVENTotalTelecommunications8Commodity exports6Infrastructure5Renewable energy,transition minerals5Diplomacy4Green development3BRI Forum2Source:Author compilation.Although specific projects were not announced,infrastructure finance was on the agenda for Argentina,Colombia,Guyana,Honduras and Venezuela(Kaieteur News 2023).For Honduras,financing for the next phase of the Patuca Hydropower project could add to the complex,with earlier stages having been built by Power Construction Corporation of China(PowerChina).In line with Chinas evolving conception of the Belt and Road Initiative(BRI)and its overseas financing commitments,LAC countries are unlikely to see major loans from 10 China-Latin America and the Caribbean Economic Bulletin|2024 EditionChina for infrastructure projects like those of the previous decade(Ray 2023).However,new forms of infrastructure cooperation are possible,especially for renewable energy or telecommunications,two emerging priority areas in China-LAC relations.The involvement of Chinese contractors in urban light rail projects may also reflect an expansion of the Green BRI concept,the implications of which are explored in depth by scholars including Guo,Gallagher and Zhang(2023)and Albright et al(2023).In recent years,Chinese companies have won contracts for sections of Santiago,Chiles Metro Line 7 and Bogot,Colombias Metro Line 1,and the contract for Monterrey,Mexicos metro system(Dussel Peters 2024b).These projects aim to reduce urban congestion and improve sustainable transportation options in some of the regions largest cities.Chinese companies success in these open and competitive bidding processes without accompanying financing from the China Development Bank(CDB)or Export-Import Bank of China(CHEXIM)indicates a continued evolution of Chinas contributions to LACs infrastructure.In more recent years,sustainability and renewable energy supply chains have taken on greater importance in the China-LAC relationship,a trend that was highly visible during 2023s presidential visits.All eight presidents discussed or signed agreements related to renewable energy and sustainable development.Argentina and Chile both emphasized investments in lithium extraction and production of value-added products,such as cathodes and batteries.Brazil,Colombia and Uruguay signed MOUs related to green and sustainable development,including for joint cooperation on green hydrogen projects.Guyana emphasized its desire to play a role in energy security,and China agreed to assist Venezuela with water conservation efforts.Hondurass Patuca hydropower project is an example of a shifting focus towards renewable energy in Chinas overseas energy cooperation.These developments demonstrate the convergence of LACs and Chinas interests to support the energy transition and confront climate change.The rest of this section details each presidents specific agenda and priority areas.In the first of the 2023 presidential visits to China,Brazilian President Lulas April visit included nine cabinet ministers and five provincial governors and aimed to revitalize Brazil-China relations as part of Brazils more activist foreign policy agenda under President Lula(Planalto 2023a).The president also attended the inauguration of former President Dilma Rousseff as the head of the New Development Bank(NDB)and emphasized the growing role of the BRICS countries in the global economy(Prazeres 2023).Key agenda items for this visit were the resumption of Brazilian beef exports to China,an agreement to construct a sixth satellite and a potential peace plan for Russias war in Ukraine(Boadle 2023,Planalto 2023a).Three months after Honduras established diplomatic relations with the Peoples Republic of China in March 2023,President Castro visited China in June where she signed 22 agreements aiming to boost economic opportunities between the two countries(Presidencia de Honduras 2023b).In addition to an MOU joining the BRI,Honduras and China established a joint Trade and Investment Council(Presidencia de Honduras 2023a).Two major agenda items were also the negotiation of an FTA and potential investment for the next phase of the Patuca hydropower project(Cao and Lee 2023;Mistreanu 2023).Negotiations for an FTA began in July 2023,and in February 2024,Honduras and China signed an Early Harvest agreement for tariff-free shrimp exports;the government of Honduras anticipates conclusion of the FTA negotiations in 2024(Poder Popular 2024).China-Latin America and the Caribbean Economic Bulletin|2024 Edition 11In July,President Irfaan Ali of Guyana visited China with an agenda emphasizing Guyanas potential as a partner for China in food security,climate change cooperation and renewable energy(iNews 2023).Guyana has borrowed heavily from China in the past to complete major infrastructure projects,including the Demerara River Crossing and Cheddi Jagan airport expansion project(Kaieteur 2023a,Myers and Ray 2024).Building on this history,the two countries signed an MOU to create an Investment and Economic Cooperation Working Group focused on infrastructure,agriculture,health,energy and education(MFA 2023).In his visit to China in September,Venezuelan President Nicols Maduro and Chinese leader Xi Jinping upgraded the bilateral relationship between Venezuela and China to an All Weather Partnership,making Venezuela the first LAC country to be accorded this status(Xinhua 2023).The joint declaration also highlighted the conclusion of negotiations on a reciprocal investment agreement.Among the 31 additional agreements,the two countries agreed to cooperation in trade,education,tourism,science and technology,health and aerospace development(TeleSUR 2023).Maduro also announced the agendas for later visits of Venezuelan officials to China seeking investments in technology,petroleum development and agricultural projects(Infobae 2023).Argentine President Fernndezs October visit coincided with the Third Belt and Road Forum for International Cooperation,and the headline announcement from this visit was the extension of Argentinas central bank swap line to$6.5 billion(Casa Rosada 2023a,Fernndez 2023).The leaders also announced nearly$10 billion in planned infrastructure financing,to supplement the previously announced$14 billion alongside Argentinas adhesion to the BRI in 2022.Lithium investment and renewable energy were also high on President Fernndezs agenda.He met with five mining companies Gotion Argentina,PowerChina,CST Mining,Tsingshan and Tibet Summit Resources to discuss existing and potential investments in lithium extraction and processing and battery production(Casa Rosada 2023b).After a campaign characterized by strong political rhetoric criticizing China,the election of President Javier Milei in December 2023 led to an initial cooling of the bilateral relationship between Argentina and China.Since January 2024,however,there have been signs that pragmatism may prevail for both sides.Argentinas Minister of Foreign Affairs Mondino travelled to China in April 2024,and China approved a yearlong extension of the$5 billion swap line in June 2024(BRCA 2024,MRECIC 2024).President Gabriel Boric of Chile attended the Third Belt and Road Forum for International Cooperation in October,continuing the tradition of Chilean presidents attending these forums.During the visit,the seven government authorities travelling with the president signed 13 agreements ranging from agriculture and aquaculture to education and digital literacy(MSGG 2023).President Boric also attended the opening ceremony of ChileWeek,Chiles annual export and investment promotion event in China.The agenda was dominated by cooperation for the energy transition,lithium investments and telecommunications,(Urdinez and Montt 2023)and during the visit,President Boric announced China Yongqing Technology Co.Ltd.as the second company selected under CORFOs lithium value-added tender(MEFT 2023).The$233 million investment will construct a lithium cathode production plant in Antofagasta and allow Yongqing to access preferential prices from Chilean lithium producer Sociedad Qumica y Minera(SQM).Colombian President Gustavo Petro visited China just after the Belt and Road Forum,and though the two countries discussed infrastructure cooperation,particularly the Bogot metro 12 China-Latin America and the Caribbean Economic Bulletin|2024 Editionproject,they did not sign an MOU for Colombia to join the BRI(Rodrguez 2023,Myers 2023).During the visit,12 agreements were signed,including phytosanitary protocols for exports of Colombian beef and quinoa,the former of which had been under negotiation for nearly a decade(Cancillera 2023;Invima 2023).Alongside other agreements in trade,ecological development,the digital economy,agriculture,science,education and culture,Colombia and China also established a Strategic Partnership(Embajada de Colombia 2023;Declaracin Conjunta 2023).Uruguayan President Luis Lacalle Pous visit in November featured the signing of 24 agreements,including one elevating the bilateral relationship to a Comprehensive Strategic Partnership(Presidencia de Uruguay 2023a).The two leaders also discussed progress on the negotiation of a potential FTA,covered in last years edition of the China-LAC Economic Bulletin(Albright,Ray and Liu 2023,Presidencia de Uruguay in El Pas 2023).Eight other government officials travelled with President Lacalle Pou to China(Presidencia de Uruguay 2023b).The other agreements included easing trade through updated phytosanitary protocols for beef,sheep and goat meats,citrus fruits,and live seafood exports(El Pas 2023).The two countries also signed MOUs on green development and energy cooperation.TRENDS IN THE LAC-CHINA ECONOMIC RELATIONSHIPThe China-LAC Economic Bulletin has been tracing this economic relationship for over a decade.In that time,the relative importance of trade with China and Chinese development finance,infrastructure and outbound foreign direct investment(OFDI)have shifted significantly,as Figure 2 shows.Figure 2 traces the importance of each of these pathways as a share of the LAC economy.It does so in four-year periods,ending with the 2020-2023 period,to reflect the significant changes in the global economy after the outbreak of the COVID-19 pandemic and subsequent economic turbulence.Figure 2A follows the rising importance of merchandise trade with China.LACs exports to China have roughly doubled as a share of LAC gross domestic product(GDP)in the last decade,while Chinas exports to LAC have risen by 70 percent1.Figure 2B extends the analysis to Chinese development finance,OFDI and infrastructure provision in LAC.These categories of activity have not grown in tandem but instead demonstrate a significant shift away from development finance and toward Chinese firms direct provision of infrastructure in LAC.Chinese firms infrastructure provision in LAC has more than tripled as a share of LAC GDP over this period,while development finance has fallen dramatically.Chinese OFDI in LAC has grown at a more moderate pace,rising by about one-third in importance.This shift from sovereign finance to direct provision of services may reflect a maturation of the China-LAC relationship.As Akhtar et al(2023)note,the levels and types of firm risk exposure differ greatly among these various approaches to project development.While sovereign finance carries repayment risk,direct infrastructure provision also carries project risks and equity investments carry risks all along the project lifecycle.Thus,as Chinese firms gain experience operating in the region,they have taken on more project risk and relied less on the intermediation of development finance institutions(DFIs),shifting toward contracting directly 1Except where otherwise specified,trade data is measured as reported by the exporting partner rather than the importing partner(for example,Chinas exports to LAC rather than LACs imports from China).This choice highlights the value of the merchandise itself by excluding the costs of shipping and insurance,which are paid by importers and which can vary significantly with fuel costs.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 13for infrastructure projects and taking on equity stakes through FDI.Each of the pathways of economic interaction shown in Figure 2 merchandise trade,development finance,OFDI and infrastructure provision is described in turn in the sections that follow.Figure 2:China-LAC Economic Activity Relative to LAC GDP,2012-20232A.China-LAC Merchandise Trade Relative to LAC GDP,2012-20232.2%2.8%4.1%1.6%2.1%3.2%0.0%1.0%2.0%3.0%4.0%5.0 10-20142015-20192020-2023Percent of LAC GDPChina-LAC exportsLAC-China exports2B.Chinese development finance,infrastructure contracts and OFDI in LAC,2012-20240.21%0.14%0.01%0.05%0.06%0.10%0.06%0.13%0.16%0.00%0.05%0.10%0.15%0.20%0.25 10-20142015-20192020-2023Percent of LAC GDPChinese development finance in LACChinese outbound FDI in LACChinese infrastructure contracts in LACSource:Author calculation from Dussel Peters(2024a,b),IMF(2024),Myers and Ray(2024),UN DESA(2024).14 China-Latin America and the Caribbean Economic Bulletin|2024 EditionBogota,Colombia.Photo by Random Institute via Unsplash.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 15TRENDS IN CHINA-LAC MERCHANDISE TRADEAdvances in Trade AgreementsThe 2023 China-LAC Economic Bulletin outlined the state of several new and ongoing negotiations for FTAs between China and LAC countries(Albright,Ray and Liu 2023).Over 2023,important advances occurred in the FTAs with Ecuador and Nicaragua.Ecuador and China had previously concluded formal negotiations in December 2022,and the agreement was officially signed by both countries in May 2023.In February 2024,Ecuadors National Assembly approved the FTA,paving the way for its entry into force later this year(AP 2024).The agreement allows 99.6 percent of Ecuadorian exports to enter China without tariffs immediately or within 10 years,and it excludes a number of Chinese products in sensitive sectors,chiefly textiles and clothing(MPCEIP 2023).Outstanding questions remain about the potential environmental effects of the agreement,which may lead to increased deforestation and overfishing to meet new demand for agricultural and aquaculture products(AP 2024).Negotiations between Nicaragua and China began in July 2022 and after a year of negotiations,the agreement was signed in August 2023 and entered into force on January 1,2024(Xinhua 2024).Within 10 years,91 percent of Nicaraguan products will enter China with zero tariffs;many of these products are commodities and foodstuffs,such as meats,seafood and wood(VOA 2024).This agreement had been a priority for Nicaragua and comes two years after it re-established diplomatic relations with China in December 2021.These are the first new FTAs between China and LAC countries to enter into force since Costa Rica and Chinas FTA did so in 2011.This brings the total of LAC countries with FTAs with China to five;Colombia,Panama and Uruguay still have ongoing or stalled negotiation processes.On his visit to China,Uruguays President Lacalle Pou discussed the potential agreement with his counterpart,where the two leaders agreed to continue working towards an agreement(Presidencia de Uruguay in El Pas 2023).Trends in Trade FlowsOverall,Chinas exports to LAC declined in 2023 in a reflection of the countrys overall falling exports for the year,the first time since 2016 that China experienced declining exports(Tan 2024).This led to a contraction in the LAC regions overall merchandise trade deficit with China,to 0.5 percent of GDP,as Figure 3 shows.16 China-Latin America and the Caribbean Economic Bulletin|2024 EditionFigure 3:LAC Merchandise Trade Balance with China,2003-20230.7%1.7%2.3%3.0%3.7%0.6%1.0%1.6%2.5%3.2%-0.1%-0.7%-0.7%-0.4%-0.5%-2%-1%0%1%2%3%4%5 032008201320182023(est)Percent of LAC GDPChinas exports to LACLAC exports to ChinaBalanceSource:Author calculation from IMF(2024),UN Comtrade(2024).Due in parts to the dip in Chinas exports,most major LAC economies saw improving national trade balances with China,as Figure 4 shows.The exception to this pattern is Chile,which has the largest trade surplus with China among major LAC economies,but which saw a significant dip in its trade surplus in 2023,of over 0.5 percent of GDP.This decrease was largely due to a declining copper output for the year,which hit a 15-year low,a trend attributed by observers to water shortages and delays associated with new projects as the country considered potential constitutional changes(Azzopardi 2024,Cambero 2024).Figure 4:National Merchandise Trade Balances with China,2003-2023-6%-4%-2%0%2%4%6 032008201320182023(est)Percent of GDPArgentinaColombiaBrazilMexicoChilePeruLACSource:Author calculation from IMF(2024),UN Comtrade(2024).China-Latin America and the Caribbean Economic Bulletin|2024 Edition 17In fact,Chiles falling copper exports to China are not an isolated anomaly.As Figure 5 shows,LAC-China mineral exports began declining in 2022 in dollar value,amidst significant drops in the world prices of two major LAC-China mineral exports:iron(which saw a 25 percent drop in 2022)and copper(which had its own 5 percent drop).Figure 5 disaggregates LAC-China exports by sector,clearly showing the recent volatility in the value of minerals trade.Figure 5:LAC-China Exports by Sector,2003-20230.5%0.9%1.4%1.7%0.3%0.4%0.6%1.0%1.2%0.2%0.1%0.1%0.2%0.3%0.0%0.5%1.0%1.5%2.0 032008201320182023Percent of LAC GDPExtractionAgricultureManufacturingSource:Author calculation from IMF(2024),UN DESA(2024),UN Trade and Development(2024).In contrast,exports of petroleum oil from LAC to non-China trading partners surged,particularly from newly tapped deposits in Guyana,as well as traditional exporters Brazil and Mexico(Parraga 2023).As a result,Chinas share of LAC mineral exports fell from a record of 34 percent in 2020 to 33 percent in 2021 and to 25 percent in 2022,before rebounding to 34 percent in 2023.Figure 6 shows the resulting volatility in Chinas share of LAC extractive exports.Figure 6:Chinas Share of LAC Exports by Sector,2003-20234%64%7!#%2%1%2%2%3%5%9%0%5 %05 032008201320182023Chinas Share of LAC ExportsExtractionAgricultureManufacturingTotal ExportsSource:Author calculation from UN DESA(2024),UN Trade and Development(2024).18 China-Latin America and the Caribbean Economic Bulletin|2024 EditionVulnerability to the type of dramatic volatility shown in Figure 6 is one danger of the high concentration of regional exports to China in a few raw commodities.As mentioned in past editions of the China-LAC Economic Bulletin,more than two-thirds of the regions exports are drawn from just five commodities:unrefined copper,soybeans,unrefined iron,crude petroleum oil and copper.In turn,each of these products comes predominantly from a few major sources.Table 2 shows more detail for each of these five products since 2020.Table 2:LACs Top Exports to China,2020-2023ProductShare of totalMajor SuppliersCopper ores,concentrates18.6%Chile(51%),Peru(33%),Mexico(10%)Soybeans,other oilseeds18.1%Brazil(93%),Argentina(6%)Iron ores,concentrates14.1%Brazil(86%),Peru(7%)Crude petroleum oils10.9%Brazil(81%),Colombia(14%)Copper5.6%Chile(83%),Peru(14%)Total,top 5 products67.2%Source:Author analysis of UN DESA(2024)data.Scholars estimate that LACs“China boom”in commodities occurred roughly between 2002-2011(see for example Ray et al 2017,Dussel Peters and Armony 2015,Wise 2020).But as Figure 7 shows,LACs exports to China in primary products(raw commodities with little to no local value added such as soybeans and crude petroleum oils)continued to accelerate in total value after 2012,even outpacing resource-based products(those with some limited local value added such as soybean oil and refined gasoline).Manufactured exports to China,by contrast,have continued to account for less than one-fourth of one percent of LAC GDP.Figure 7:LAC-China Exports by Technology Level,Percent of LAC GDP,2003-20230.8%1.4%1.6%0.2%0.4%0.7%0.9%1.4%0.2%0.1%0.1%0.1%0.2%0.0%0.5%1.0%1.5%2.0 032008201320182023Percent of LAC GDPPrimary productsResource-based productsManufactured productsSource:Author calculation from IMF(2024),Lall(2010),UN DESA(2024).China-Latin America and the Caribbean Economic Bulletin|2024 Edition 19Two new commodities have been growing particularly quickly among China-LAC exports:beef and lithium.Beef exports rank in sixth place among LAC-China exports for the 2019-2023 period,just behind the top five exports shown in Table 2.In 2023,they rose to fifth place,displacing copper.LAC-China beef exports have doubled in volume in the last five years and roughly quintupled in the last decade,now accounting for over three-fourths of Chinas beef imports.In contrast,lithium is still trading at relatively low levels as a newly important commodity in global trade,but LAC-China lithium exports are growing at an even faster rate than beef:LAC-China lithium carbonate exports have quintupled over just the 2020-2023 period.Figure 8 shows more detail for selected important agricultural LAC-China exports:soybeans and beef.In each case,LAC-China exports expanded dramatically beginning in 2018,when China increased tariffs on agricultural imports from the United States(Bown and Kolb 2024,Mullen 2021).Chinas beef imports from LAC were further bolstered starting in 2018 amidst Chinas struggle with African swine fever,which boosted meat imports(Ma et al 2021,You et al 2021).However,LAC-China exports of both soybeans and beef have remained strong in the last few years,indicating that they are likely to continue to take prominence in the relationship in the years to come.Figure 8:Chinas Imports of Soybeans and Beef,by Source,2003-20238A.Soybeans 8B.Beef,Frozen-20 40 60 80 10020032008201320182023Millions of Metric TonsArgentinaBrazilOther LACOther Regions 00.511.522.5320032008201320182023Millions of Metric TonsArgentinaBrazilUruguayOther LAC Source:Author analysis of UN DESA(2024)data.20 China-Latin America and the Caribbean Economic Bulletin|2024 EditionFigure 9 gives more detail about two important mineral exports:lithium carbonate and copper ores and concentrates.In these cases,LAC comprises not only the majority of Chinas imports but a majority of world trade overall.For this reason,Figure 9 shows total global trade divided into four categories:LAC-China exports,LAC exports to other partners,Chinas imports from other partners and trade among other countries.In each case,LAC-China exports now account for about half of world trade.Note that Figure 9 shows data only through 2022,as South Korea(a major minerals importer)had not yet published data for 2023 as of June 2024.Figure 9:World Trade in Lithium Carbonate and Copper Ores and Concentrates,by Direction9A.Copper Ores and Concentrates 9B.Lithium Carbonate-10 20 30 4020022007201220172022Millions of Metric TonsLAC-ChinaLAC-OtherOther-ChinaOther-Other -50 100 150 200 25020022007201220172022Thousands of Metric TonsLAC-ChinaLAC-OthersOther-ChinaOthers-OthersSource:Author analysis of UN DESA(2024)data.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 21TRENDS IN CHINESE OUTBOUND FOREIGN DIRECT INVESTMENT IN LACPrevious editions of the China-LAC Economic Bulletin have included analyses of Chinese FDI data available through the private databases of FDIMarkets and DeaLogic(Albright,Ray and Liu 2023).The present edition draws from the Red Acadmica ALC-Chinas annual“Monitor of Chinese OFDI in Latin America and the Caribbean”(Dussel Peters 2024b).This choice allows for greater confidence in the resulting analysis,as the Red Acadmica data is manually verified,meaning that it excludes projects that have been announced but never materialized.Furthermore,the Red Acadmica data is recorded chronologically based on when activity begins rather than when investment intentions are initially announced,allowing for a more accurate representation of trends over time.China-LAC OFDI trends are covered in detail in the Red Acadmica China-LAC OFDI Monitor(Dussel Peters 2024b).Nonetheless,several trends merit mention for their contrast with trade.While LAC-China exports are dominated by a few raw or processed commodities,China-LAC OFDI has very different profiles for different parts of the LAC region.For example,Chinese OFDI in South America is overwhelmingly concentrated in energy supply chains(including upstream stages of mining and drilling,as well as downstream stages of power generation and transmission).In contrast,Chinese OFDI in Mexico,Central America and the Caribbean is concentrated in manufacturing,particularly in the automotive sector(Mexicos share outweighs that of Central America and the Caribbean,but the overall trends remain the same across the entire sub-region).Figure 10 shows Chinese new(“greenfield”)OFDI in LAC by sub-region and sector for the last 16 years.Notably,Figure 10 divides time into four-year periods rather than the more typical five-year periods,to allow consideration of the impact of the COVID-19 pandemic and subsequent economic turmoil.Figure 10:New(Greenfield)Chinese FDI in LAC by Sub-region and Sector,2008-202310A:LAC together6.3 1.1 2.3 2.1 1.2 1.2 1.4 2.2 2.2 2.2 3.2 3.0 3.6 5.7 12.1 5.8 14.2 12.5 21.0 05101520252008-20112012-20152016-20192020-2023Billions of USDTOTAL:Energy,minerals and miningAutomotiveOther manufacturingTelecoms and transportOther22 China-Latin America and the Caribbean Economic Bulletin|2024 Edition10B.South America5.80.42.60.90.90.80.82.92.74.712.05.010.48.713.2-5 10 152008-20112012-20152016-20192020-2023Billions of USDTOTAL:Energy,minerals and miningAutomotiveOther manufacturingTelecoms and transportOther10C.Mexico,Central America and the Caribbean0.22.10.70.20.40.62.21.41.92.90.91.00.83.83.87.8024682008-20112012-20152016-20192020-2023Billions of USDTOTAL:Energy,minerals and miningAutomotiveOther manufacturingTelecoms and transportOtherSource:Author analysis of Dussel Peters(2024a)data.The largest category in Figure 10,by far,is Chinese OFDI in the energy,minerals and mining sector in South America.The second largest sector shown in Figure 10 is Chinese automotive manufacturing OFDI in Mexico,Central America and the Caribbean.Chinese automotive investment has garnered international attention in the last few years,particularly since the recent imposition of US tariffs on vehicles manufacturing in China(CRS 2024,Ray 2024).However,as Figure 10 shows,this investment has not increased dramatically recently,but has grown at a relatively steady pace over the last 12 years.Indeed,the sector gained prominence in 2010 with Chery Automotives investment of$400 million in Brazil.By 2015,the automotive industry was the top sector for Chinese greenfield FDI in Mexico,Central America and the Caribbean.In 2023,the largest Chinese greenfield investments in LAC include:Solarevers$1 billion investment in electric vehicle manufacturing in Mexico.Chengxin Lithium Groups$823 million investment in the SDSA lithium project in Argentina.Huaweis$800 million investment in smartphone manufacturing in Brazil.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 23 Zijin Mining Groups$600 million investment in Argentinas Tres Quebradas lithium project.Ningbo Xusheng Groups$350 million investment in a new electric vehicle plant in Mexico.Minerals and Metals Groups(MMGs)investment of$350 million to expand its Las Bambas copper mine in Peru.BYDs investment of$290 million in a lithium cathode factory in Chile.Figure 11 shows the sector distribution among Chinese mergers and acquisitions(M&A)OFDI in LAC.It shows much the same trend as Figure 10,with the exception that automotive manufacturing does not have the same major significance it has among greenfield investments,as M&As are not a common method for automotive OFDI.Instead,the most important sector for Chinese M&A OFDI in Mexico,Central America and the Caribbean has been non-automotive manufacturing.The largest purchase in that sector dates from 2016,when Qingdao Haier,a subsidiary of the Haier Group,purchased GE Appliances from General Electric for$5.4 billion,including its stake in Mexican appliance company Controladora Mabe.In 2023,the largest Chinese M&A investments in LAC include:State Grid Corporation of Chinas purchase of Enel Peru for$2.9 billion.PowerChinas purchase of Brazils Pontoon and its Cear solar plant project for$360 million.Midea Groups joint venture with Carrier in the Brazilian air conditioning manufacturing sector for$122 million.Finally,previous editions of the China-LAC Economic Bulletin have noted the rising prominence of private Chinese enterprises relative to the traditionally important Chinese public-sector investors.Figure 12 shows this trend in more detail.Public-sector Chinese investors still represent the majority of Chinese OFDI in LAC overall,with private firms accounting for approximately 40 percent of all Chinese OFDI in LAC in the last four years.However,Figures 12B and 12C which differentiate between sub-regions of LAC show that private Chinese enterprises have been the driver of Chinese investments in Mexico,Central America and the Caribbean for the last eight years and accounted for approximately three-fourths of this investment in the last four years.24 China-Latin America and the Caribbean Economic Bulletin|2024 EditionFigure 11:Chinese M&A Investment in LAC by Sub-region and Sector,2008-202311A.LAC together5.7 2.2 3.7 8.0 2.6 32.4 16.9 27.8 21.7 37.0 22.7 44.6 25.2 010203040502008-20112012-20152016-20192020-2023Billions of USDTOTAL:Energy,minerals and miningAutomotiveOther manufacturingTelecoms and transportOther11B.South America5.2 2.0 2.3 2.2 2.6 30.316.327.120.334.420.036.223.30102030402008-20112012-20152016-20192020-2023Billions of USDTOTAL:Energy,minerals and miningAutomotiveOther manufacturingTelecoms and transportOther11C.Mexico,Central America and the Caribbean0.5 0.8 1.5 5.9 0.5 2.1 0.5 0.8 1.4 2.6 2.7 8.4 1.9 02468102008-20112012-20152016-20192020-2023Billions of USDTOTAL:Energy,minerals and miningAutomotiveOther manufacturingTelecoms and transportOtherSource:Author analysis of Dussel Peters(2024a)data.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 25Figure 12:China-LAC Investment by Sub-Region and Chinese Firm Ownership,2008-202312A.LAC together 38.7 26.4 35.8 28.1 10.5 21.3 18.2 42.8 36.9 57.2 46.2 02040602008-20112012-20152016-20192020-2023Billions of USD TOTAL:Private sectorPublic sector12B.South America 6.6 11.7 10.9 36.8 23.9 33.2 25.6 39.4 30.4 44.9 36.5 010203040502008-20112012-20152016-20192020-2023Billions of USDTOTAL:Public sectorPrivate sector12C.Mexico,Central America and the Caribbean3.9 9.7 7.3 2.5 2.6 2.5 3.4 6.4 12.2 9.7 024681012142008-20112012-20152016-20192020-2023Billions of USDTOTAL:Public sectorPrivate sectorSource:Author analysis of Dussel Peters(2024a)data.26 China-Latin America and the Caribbean Economic Bulletin|2024 EditionMontevideo,Uruguay.Photo by Drone 5 via Shutterstock.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 27TRENDS IN CHINESE INFRASTRUCTURE IN LACNew to the 2024 edition of the China-LAC Economic Bulletin is consideration of Chinese firms participation in LAC infrastructure contracts,as reflected in the Red Acadmica ALC-Chinas annual“Monitor of Chinese Infrastructure to LAC”(Dussel Peters 2024b).These projects are service contracts to build and/or operate infrastructure projects,separate from FDI projects in which Chinese firms take equity stakes in projects(such as State Grid Corporation of Chinas purchase of Enel Perus energy transmission infrastructure).As highlighted in the annual Monitors of Chinese Infrastructure to LAC(Dussel Peters 2024b),an infrastructure project is understood as a service between a client and a supplier through a contract-usually the result of a bidding process,although the process can be by direct designation in which the ownership belongs to the client.This definition is important in order to distinguish infrastructure contracts from OFDI transactions which do not include a client and a supplier(as they are usually intrafirm decisions),do not include a contract and the ownership is always of the firm.This definition allows for a clear distinction in the registration of OFDI and infrastructure projects.Some projects may also be included as development finance,if the contracts are financed through loans from CDB or CHEXIM.For example,Ecuadors Coca-Codo Sinclair hydropower plant involved both an infrastructure contract(with Sinohydro,a subsidiary of PowerChina)and financing from CHEXIM.Other projects,such as Nicaraguas Punta Huete airport,received lending from Chinese commecial entities(in this case,CAMC Engineering).Still other projects,such as the Puerto Peasco solar power plant in Sonora,Mexico,do not involve Chinese financing,but a Chinese firm is involved as a contractor.Figure 13 shows the resulting infrastructure trends by sector and LAC sub-region.In the last four years,transportation projects have risen to become the most important sector in the China-LAC infrastructure relationship.This is true in South America,as well as the broader LAC region.Transportation projects have mostly included rails,including long-distance cargo routes in Argentina and Brazil,as well as urban passenger rail in Colombia and Mexico.This trend reinforces the pattern discussed regarding China-LAC OFDI:a South American concentration on commodities for export to China and a focus elsewhere in LAC on urban areas,including manufacturing and urban transport.Figure 13:Chinese Infrastructure in LAC by Sub-region and Sector,2008-202313A.LAC together 5.0 2.7 0.9 5.3 9.2 29.1 13.3 4.9 22.1 11.2 14.8 14.1 37.2 46.0 010203040502008-20112012-20152016-20192020-2023Billions of USDTOTAL:EnergyTransportationTelecommunicationsOther28 China-Latin America and the Caribbean Economic Bulletin|2024 Edition13B.South America3.0 0.9 4.1 8.3 20.7 8.3 4.4 19.6 10.1 8.8 11.6 31.6 35.9 0102030402008-20112012-20152016-20192020-2023Billions of USDTOTAL:EnergyTransportationTelecommunicationsOther13C.Mexico,Central America and the Caribbean0.5 0.7 2.1 0.5 0.5 1.0 8.4 5.0 2.5 1.2 6.0 2.5 5.6 10.1 0246810122008-20112012-20152016-20192020-2023Billions of USDTOTAL:EnergyTransportationTelecommunicationsOtherSource:Author analysis of Dussel Peters(2024b)data.Fittingly,the most active Chinese contractors in LAC have been major state-owned entprises in the communications and transportations sectors.Table 3 shows the 10 most active firms in the region.China Communication Construction Company(CCCC)has done the most in the last four years,as well as over the entire 16-year period considered,with over$16 billion in infrastrucure contracts(despite its name,CCCC is mostly active in transportation sector).However,newly active firms such as China Railway Construction Corporation(CRCC)and China National Nuclear Corporation(CNNC)have risen sharply in prominence as rail and nuclear energy projects have been developed.Table 3:Top 10 Providers of Infrastructure Services in LAC,2012-2023(Billions of USD)2012-20152012-20152016-20192020-2023TOTALChina Communication Construction Co.(CCCC)0.61.46.97.416.3Power Construction Corp.of China(PowerChina)4.72.32.54.113.6China-Latin America and the Caribbean Economic Bulletin|2024 Edition 292012-20152012-20152016-20192020-2023TOTALChina Railway Construction Corp.(CRCC)0.10.82.58.111.6China National Petroleum Corp.(CNPC)5.00.03.20.08.2China National Nuclear Corp.(CNNC)0.00.00.07.97.9China National Machinery Industry Corp.(Sinomach)1.64.10.51.27.4China Energy Engineering Group(CEEC)0.80.34.71.57.3State Grid Corp.of China(SGCC)0.00.74.40.05.1CRRC Group Corporation(CRRC)0.00.00.44.54.9Huawei Technologies Co.Ltd.0.00.00.23.03.2Source:Author analysis of Dussel Peters(2024b)data.Note:Projects with multiple Chinese contractors are excluded from this table.In 2023,the largest Chinese infrastructure projects in LAC include:Metro lines and trains in Monterrey,Mexico,provided by China Railway Construction Corporation(CRCC)for$1.2 billion.The second stage of the Puerto Peasco solar plant in Sonora,Mexico,provided by China Energy Engineering Group(CEEC)for$800 million.The Camarai Industrial Park in Bahia,Brazil,provided by BYD for$620 million.The Mesopotanian branch of the Urquiza railway in northern Argentina,provided by CRRC for$550 million.30 China-Latin America and the Caribbean Economic Bulletin|2024 EditionDEVELOPMENT FINANCE AND DEBTAs Chinese firms have gained exerience operating in LAC,they have relied less on Chinas DFIs,CDB and CHEXIM,to initiate and finance new activities.This finding is reflected in the low levels of sovereign finance shown in the 2024 update to the Chinese Loans to Latin America and the Caribbean Database,produced by the Inter-American Dialogue and Boston University Global Development Policy Center(Myers and Ray 2024,Ray and Myers 2024).In 2023,Myers and Ray(2024)note that Chinese DFIs extended just two sovereign loans,both by the CDB to its peer in Brazil,the Banco Nacional de Desenvolvimento Econmico e Social(BNDES).These included an$800 million loan for long-term investments and a$500 million loan for short-term investments,such as trade finance.Figure 14 shows Chinese development finance to LAC from 2005-2023.Whereas Chinese DFIs committed about as much as or more than the World Bank and the Inter-American Development Bank(IDB)from 2009-2016,a rapid decline began in 2017 and has continued since.Figure 14:Chinese Development Finance in LAC,2005-202305101520252005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023Billions of USDChina(CDB CHEXIM)World Bank(IBRD IDA)IDBSource:Myers and Ray 2024.Note:IBRD:International Bank for Reconstruction and Development;IDA:International Development Association.IDB commitments include only sovereign operations.After years of strong sovereign borrowing,it is important to consider the remaining levels of debt to China across the LAC region.Figures 15 and 16 explore various aspects of LAC countries debt to China.Figure 15 maps LAC debt to China in two ways:Figure 15A shows each countrys debt stock as a share of GDP and Figure 15B shows near-term(2024-2028)debt service payments to China as a share of projected exports.Notably,Figures 15 and 16 are limited to countries that report debt through the World Bank International Debt Statistics.Countries may be excluded either because they are higher-income countries(as in the cases of Antigua and Barbuda,the Bahamas,Barbados,Chile,Panama,St.Kitts and Nevis,Trinidad and Tobago,and Uruguay)or for lack of robust public debt data(as in the cases of Cuba,St.Lucia,St.Vincent and the Grenadines,and Venezuela).Venezuelas absence is particularly noteworthy:as Myers and Ray(2024)indicate,Venezuela accounted China-Latin America and the Caribbean Economic Bulletin|2024 Edition 31for nearly half of Chinese development finance commitments in LAC between 2005-2023.Nonetheless,Figures 15 and 16 demonstrate the most robust data available for public and publicly guaranteed(PPG)debt to China in the remainder of the LAC region.Figure 15:LAC External Public and Publicly Guaranteed(PPG)Debt to China 15A.PPG Debt to China,2022 15B.PPG Debt Service to China,2024-2028(Percent of GDP)(Percent of Projected Exports)GeoNames,Microsoft,OpenStreetMap,TomTomPowered by Bing0.5%0.2%0.0%0.0%0.0%3.3%0.0%7.3.6%Percent of GDP3.6%3.6%3.9%(DMA)2.0%(GRD)3.6%(GUY)14.6%(SUR)1.2%GeoNames,Microsoft,OpenStreetMap,TomTomPowered by Bing0.1%0.0%0.0%0.0%0.9%0.8%0.0%1.2%2.5%Percent of Projected Exports1.0%(DMA)0.5%(GRD)0.2%(GUY)2.5%(SUR)1.2%0.6%1.0%Source:Author calculation from Boston University Global Development Policy Center(2024),Ray and Simmons(2024).Note:PPG:Public and publicly guaranteed.Grey territories indicate no available data.Includes PPG debt to commercial creditors.As Figure 15A shows,Suriname stands out among LAC countries as having by far the highest PPG debt to China:14.6 percent of its GDP and over three times higher than any other LAC country with publicly available data.No other LAC country has publicly-reported PPG debt to China exceeding 4 percent of GDP.Five countries Bolivia,Dominica,Ecuador,Guyana and Jamaica all owe China between 3-4 percent of GDP and the remainder of LAC countries owe China less than 2 percent of GDP.Figure 15B explores LAC debt through near-term(2024-2028)repayment burdens.Suriname once again stands out as owing China more than any other LAC country:2.5 percent of projected export revenue over the 2024-2028 period.Ecuador is in a distant second place,owing 1.2 percent of the value of its projected exports to China from 2024-2028.No other country with public data in the region is expected to owe more than approximately 1 percent of its export revenue in debt service payments to China over the next five years.Among the four largest classes of creditors worldwide(bondholders,China,Paris Club and multilateral creditors),China plays a relatively minor role as a LAC creditor.Chinese creditors are not the largest creditors for any LAC country.Figure 16 shows LAC countries external PPG debt to China in comparison to four other creditor classes:bondholders,Paris Club creditors,multilateral development banks(MDBs)and other creditors.Figure 16A compares debt stock 32 China-Latin America and the Caribbean Economic Bulletin|2024 Editionacross creditors,while Figure 16B does the same for debt service.In each case,China plays a relatively minor role overall and in most countries.Figure 16:LAC External PPG Debt,by Creditor Class16A.Exernal PPG Debt Stock,2022(Percent of GDP)15%4%4%4%3%4%60%7 $%5%5%7%2%4%4%3%4%5%H8)5%5!%9%2%5%4%8%5%2%7%5%5dVTQDDC74110)(! %0 0Pp%SURVCTDMAJAMGRDBLZNICSLVECUDOMPRYBOLHNDCOLCRIMEXARGPERGUYGTMHTIBRAPercent of GDPChinaBondholdersParis ClubMDBsOther16B.Exernal PPG Debt Service,2024-2028(Percent of Projected Exports)1%2%1%1%1%1%1%1%8%7%5%4%1%3%2%2%3%3%1%4%1%3%1%1%1%3%1%1%1%2%3%4%4%4%7%8%8%5%9%5%4%5%5%3%3%1%2%2%1%2%1%2%3%1%9%9%9%9%8%8%7%5%5%5%5%5%4%1%0%2%4%6%8%DOMJAMCOLHTISURSLVVCTBOLECUNICHNDDMABLZPRYGTMARGMEXGRDPERBRACRIGUYPercent of Projected ExportsChinaBondholdersParis ClubMDBsOtherSource:Author calculation from Boston University Global Development Policy Center(2024),Ray and Simmons(2024).Note:PPG:Public and publicly guaranteed.Includes PPG debt to commercial creditors.China-Latin America and the Caribbean Economic Bulletin|2024 Edition 33As Figure 16A shows,11 countries owe MDBs more than any other creditor class,eight owe the most to bondholders and one(Brazil)owes the most to Paris Club creditors.Over the next five years,Figure 16B shows that MDBs play an even greater role,with 13 countries owing more in debt service payments to MDBs than any other creditor class.Thus,for LAC countries undergoing debt restructuring,participation of bondholders as well as mutilateral creditors,in addition to China,will be crucial for finding meaningful relief.FUTURE PROSPECTSThis edition of the China-LAC Economic Bulletin has highlighted the rise in Chinese firms participation in infrastructure contracting amidst a dramatic fall in development finance.For its part,Chinese OFDI to LAC has fluctuated strongly in the last decade,growing to represent 10.6 percent of all inbound FDI in LAC from 2020-2023,but falling in absolute terms since the COVID-19 pandemic.Chinese infrastructure projects present stronger growth:with almost$46 billion for the most recent period 2020-2023,Chinese infrastructure projects reflect an important upward tendency.While both OFDI and infrastructure projects are likely to continue to grow in importance,infrastructure shows the strongest growth potential.As Chinese firms become increasingly experienced operating in LAC,they are likely to engage through investment and through infrastructure contracts independent of the intermediation of Chinas DFIs.Thus,development finance is likely to continue to lag in comparison to other forms of economic engagement.In countries with a tradition of expanding infrastructure through FDI,such as Peru,this activity is likely to come through equity investment,such as the$1.8 billion Chancay port,which was developed by China Ocean Shipping Group Company(COSCO)in 2019 and is expected to be inaugurated at the November 2024 Asia-Pacific Economic Cooperation(APEC)summit in Peru(Sihue 2024).In other countries with a tradition of public ownership of infrastructure,such as Nicaragua,this will likely be through government infrastructure contracts,such as the Punta Huete airport,financed through a commercial Chinese firm(CAMC Engineering).Future prospects for commodity tradeFigure 17 shows global prices for the four top LAC-China export commodities since 2011,including forecasts for 2024 and 2025 by the Economist Intelligence Unit(EIU)and the World Bank.All four of the top commodities in the LAC-China export relationship(copper,soybeans,iron and petroleum)lost significant ground in their global prices in the decade after their peak years,but mostly returned to peak levels in 2021 or 2022.However,the recent returns to peak prices are unlikely to stick,as they emerged from supply-chain complications due to the uneven return to economic activity after the initial years of the COVID-19 pandemic,as well as Chiles lull in copper production and Russias war in Ukraine(UN DESA 2023).By 2025,most of these top four commodities with the exception of copper are expected to return to lower price levels.Thus,trade balances are likely to worsen for countries other than the top copper exporters(Chile and Peru),unless increased volumes make up for the difference.34 China-Latin America and the Caribbean Economic Bulletin|2024 EditionFigure 17:Global Prices of Major LAC-China Export Commodities,2011-2025-75%-50%-25%0% 1120122013201420152016201720182019202020212022202320242025Cumulative change from 2011Copper(EIU)Soybeans(EIU)Iron ore(EIU)Crude oil(EIU)Copper(WB)Soybeans(WB)Iron ore(WB)Crude oil(WB)Actual ForecastsSource:Author calculation from EIU(2024a,b)and World Bank(2024).Prospects for future sustainabile development Significant shifts in the China-LAC relationship will shape the prospects of the relationships impact on LACs sustainable development.This is particularly true for the growing importance of a few sectors:automotive manfuacturing(particularly electric vehicles),rail and renewable energy infrastructure,and trade in beef,soy,lithium and copper.Together,these sectors create a mixed portrait of the implications for sustainable development in LAC.Chinese electric vehicle manfuacturers and urban rail builders are undoubtedly contributing to reducing the carbon intensity of transportation in the LAC region.LACs hybrid and electric vehicle market are relatively new but growing quickly,and are expected to more than double by the end of the present decade(Statista 2024).Observers including Myers(2024)and Tobin(2024)note the crucial role that Chinese firms have played in this growth,through both trade and investment.Urban rail is another crucial element in sustainable transit.Monterey,Mexico ranked among the 10 most congested cities in the world in 2022,making the expansion of urban rail crucial for quality of life as well as air quality(INRIX 2023).Renewable energy,as well as its mineral inputs such as lithium and copper,are crucial for reducing global carbon emissions.The local sustainability impacts of these projects on social,environmental and economic fronts depend in large part on their design and governance.Albright et al(2023)explore the policy challenges posed by these nascent supply chains in Latin America,finding that the vast majority of environmental,social,economic and traparency governance needs have yet to be filled either by policy or by academic research to support policy.LAC has made significant strides in recent years,including the ratification of the Regional Agreement on Access to Information,Public Participation and Justice in Environmental Matters in Latin America and the Caribbean(commonly known as the Escaz Agreement)by 16 countries.Nonetheless,building specific policies and procedures to embody these principles will require ongoing attention from national governments(Chinese as well as LAC),civil society and academic researchers(ECLAC 2024).China-Latin America and the Caribbean Economic Bulletin|2024 Edition 35Trade in South American beef and soy is associated with significant environmental and social risks,which will need significant collaboration if they are to be managed successfully.Ermgassen et al(2020b)trace the deforestation risk from Brazils global beef exports and find that Chinas demand carries the greatest exposure to deforestation risk among Brazils trading partners(between 15,900 and 23,000 hectares per year).On soy,the prospects are more positive and point to areas for potential future collaboration to limit environmental risks.Ermgassen et al(2020a)note that the Chinese meat industry has adopted a zero deforestation commitment(ZDC)for its purchases of Brazilian soy and that Chairman Jun Lyu of Chinese agricultural giant COFCO Corporation has called for the expansion of the Soy Moratorium(a voluntary industry agreement to end purchase of soy from the Amazon biome)to also include the Cerrado,the surrounding tropical savannah(Lyu 2019).Such an extension could have a significant impact on the sustainability of the soy industry,as the Cerrado is home to most Brazilian soy production.Across all of these sectors,international collaboration is crucial for ensuring that the China-LAC relationship benefits or at least does not harm local economies and ecosystems.The increase in 2023 LAC presidential visits to China are a positive sign for the strengthening of government-to-government dialogue.Mobilizing those avenues of dialogue for sustainable and inclusive development will remain a crucial agenda item for the coming years,particularly as transition minerals continue to play a growing role in the LAC-China relationship and the global energy transition.36 China-Latin America and the Caribbean Economic Bulletin|2024 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Annual EconomicReportJune 2024Promoting global monetary and financial stabilityISSN 2616-9428 ISBN 978-92-9259-570-8Bank for International Settlements(BIS)www.bis.orgemailbis.orgBISAnnual Economic Report June 2022BISAnnual EconomicJune 2022Report Bank for International Settlements 2024.All rights reserved.Limited extracts may be reproduced or translated provided the source is stated.www.bis.orgemailbis.orgFollow usAnnual EconomicReportJune 2024BISThis publication is available on the BIS website(https:/www.bis.org/publ/arpdf/ar2024e.htm).Bank for International Settlements 2024.All rights reserved.Brief excerpts may be reproduced or translated provided the source is stated.ISSN 2616-9428(print)ISSN 2616-9436(online)ISBN 978-92-9259-772-6(print)ISBN 978-92-9259-771-9(online)BIS Annual Economic Report 2024ContentsSo far,so good .ixIntroduction .ixThe year under review .ixPressure points and risks ahead .xPolicy challenges .xiiThe AI wave .xviI.Laying a robust macro-financial foundation for the future .1The year in retrospect .2On course for a smooth landing .2Sustained disinflation opened the door to a monetary policy pivot .4Box A:China as a disinflationary force .6The financial system positioned for a smooth landing .8Box B:The role of monetary policy in the recent inflation episode .11Pressure points .13Inflation pressure points .13Macro-financial pressure points .14Box C:Commercial real estate risks in the spotlight .17Box D:The challenge of private credit .20Fiscal pressure points .22Productivity pressure points .22Box E:Life insurance companies legacy risks from“low for long”.23Turbulence scenarios and policy implications .26Turbulence scenarios .26Policy implications .28Endnotes .32Technical annex .34References .38II.Monetary policy in the 21st century:lessons learned and challenges ahead .41Introduction .41Monetary policy conduct in the 21st century:a brief review .42Lessons learned .44Central banks can forestall inflation de-anchoring .45Central banks can stabilise the financial system in times of stress .46Prolonged monetary easing runs into limits .49Box A:Are the effects of balance sheet policies(a)symmetric?.52Communication has become more complicated .56Box B:Central bank financial results and their economic implications .57FX intervention and macroprudential policies can enhance stability .60Challenges ahead .62Implications for monetary policy .64iiiBIS Annual Economic Report 2024Robustness .64Realism in ambition.65Box C:The natural rate of interest:a blurry guidepost for monetary policy .66Safety margins .67Nimbleness .68Box D:Central bank balance sheet choices .69Complementary policies .71Conclusion .72Endnotes .74Technical annex .78References .82III.Artificial intelligence and the economy:implications for central banks .91Introduction .91Developments in artificial intelligence .93Box A:Words as vectors:a primer on embeddings .95Box B:A primer on the transformer architecture.98Financial system impact of AI .99Harnessing AI for policy objectives .103Box C:BIS Innovation Hub projects in artificial intelligence .107Box D:Nowcasting with artificial intelligence .108Macroeconomic impact of AI .109Box E:Gen AI and labour productivity:a field experiment on coding .110Toward an action plan for central banks .114Endnotes .117Technical annex .120References .121ivvBIS Annual Economic Report 2024GraphsChapter I1 Evolution of realised and forecasted output growth .22 Several factors sustained economic resilience .33 Inflation receded towards central bank targets .44 Inflation abated as commodities retreated and spending rotation reversed .55 Both supply and demand contributed to disinflation .56 Equity markets rallied as earnings improved .97 Spreads narrowed,market expectations converged to central bank assessments 98 Risk-on phase contrasted with high bond volatility and a stronger dollar .109 Lending standards were tight,loan demand and credit growth were weak .1010 Banks remained resilient and EMEs weathered the tightening cycle well .1211 Two key relative price adjustments are still incomplete .1312 The financial cycle is peaking .1513 Private sectors financial buffers are diminishing .1614 Sharp declines in real estate prices pose risk to outlook .1915 Chinese FX swap markets and riskiest loan segments point to stress .1916 Greater public spending demand with dwindling fiscal space .2217 Productivity has been sluggish as employment underpins economic growth .2518 Productivity growth at a crossroads .2519 Relative price adjustments could slow inflations convergence to target .27Chapter II1 Inflation,growth and monetary policy since 1900 .422 Central bank balance sheet size and composition .433 Crises,FX reserves and macroprudential measures .444 Low-versus high-inflation regimes .465 The role of monetary policy in countering the inflation surge .476 Central bank policies during crises alleviate stress .487 From lender of last resort to market-maker of last resort .498 Weaker traction of monetary policy when interest rates are low .519 The impact of monetary policy on inflation in the US .5110 Side effects of prolonged monetary easing .5511 Projected central bank balance sheet trajectories in AEs .5612 Communication challenges:market reactions,inflation and wider topic range .5913 FX intervention as a quasi-macroprudential tool in EMEs .6114 Macroprudential tightening reduces the likelihood of financial stress .6215 Public debt projections and debt service cost counterfactuals .63Chapter III1 The adoption of AI .922 Decline in correspondent banking has changed the global payments landscape 1003 Households trust in generative AI(gen AI).1024 Machine learning models performance in different monitoring scenarios .1045 Anti-money laundering(AML)in the next generation of correspondent banking 1056 Opportunities from generative AI adoption for cyber security in central banks .1067 AI and productivity .1118 The impact of AI on labour demand and wages .1129 The impact of AI on output and inflation .11310 Challenges in recruitment and retention .115viBIS Annual Economic Report 2024This Report went to press on 21 June 2024 using data available up to 31 May 2024.A technical annex containing detailed explanations for the graphs and tables is included at the end of each chapter.Conventions used in the Annual Economic Reportstd dev standard deviation2 variance$USdollarunlessspecifiedotherwise000 thousandsmn millionbn billion(thousand million)trn trillion(thousand billion)%pts percentage pointsbp basis pointslhs,rhs left-hand scale,right-hand scalepa per annumsa seasonally adjustedsaar seasonally adjusted annual ratemom month on monthyoy year on yearqoq quarter on quarter.not available.not applicable nil or negligibleComponents may not sum to totals because of rounding.The terms“country”and“economy”used in this publication also cover territorial entities that are not states as understood by international law and practice but for which data are separately and independently maintained.The designations used and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the BIS concerning the legal status of any country,area or territory or of its authorities,or concerning the delimitation of its frontiers or boundaries.Names of countries or other territorial entities are used in a shortformwhichisnotnecessarilytheirofficialname.TableChapter III1 Opportunities,challenges and financial stability risks of AI in the financial sector 99viiBIS Annual Economic Report 2024Country codes AE United Arab EmiratesAR ArgentinaAT AustriaAU AustraliaBE BelgiumBR BrazilCA CanadaCH Switzerland CL ChileCN China CO ColombiaCZ Czechia DE GermanyDK Denmark DZ AlgeriaEA euro areaEE Estonia ES SpainFI FinlandFR FranceGB United Kingdom GR GreeceHK Hong Kong SARHR CroatiaHU HungaryID Indonesia IE IrelandIL IsraelIN India IT Italy IS IcelandJP Japan KR KoreaKW KuwaitLT Lithuania LU LuxembourgLV Latvia MA MoroccoMT MaltaMX MexicoMY MalaysiaNL Netherlands NO Norway NZ New Zealand PE PeruPH PhilippinesPL Poland PT PortugalRO RomaniaRU Russia SA Saudi ArabiaSE SwedenSG SingaporeSI Slovenia SK SlovakiaTH ThailandTR TrkiyeTW Chinese TaipeiUS United StatesVN VietnamZA South Africa Currency codesAED UAE dirhamARS Argentine pesoAUD Australian dollarBRL Brazilian realCAD Canadian dollarCHF Swiss francCLP Chilean pesoCNY(RMB)Chinese yuan(renminbi)COP Colombian pesoCZK Czech korunaDKK Danish kroneDZD Algerian dinarEUR euroGBP pound sterlingHKD Hong Kong dollarHUF Hungarian forintIDR Indonesian rupiahILS new shekelINR Indian rupeeJPY Japanese yenKRW Korean wonKWD Kuwaiti dinarMAD Moroccan dirhamMXN Mexican pesoMYR Malaysian ringgitNOK Norwegian kroneNZD New Zealand dollarPEN Peruvian solPHP Philippine pesoPLN Polish zlotyRON Romanian leuRUB Russian roubleSAR Saudi riyalSEK Swedish kronaSGD Singapore dollarTHB Thai bahtTRY Turkish liraUSD US dollarVND Vietnamese dongZAR South African randviiiBIS Annual Economic Report 2024Advanced economies(AEs):Australia,Canada,Denmark,the euro area,Japan,New Zealand,Norway,Sweden,Switzerland,the United Kingdom and the United States.Major AEs(G3):the euro area,Japan and the United States.Other AEs:Australia,Canada,Denmark,New Zealand,Norway,Sweden,Switzerland and the United Kingdom.Emerging market economies(EMEs):Algeria,Argentina,Brazil,Chile,China,Colombia,Czechia,Hong Kong SAR,Hungary,India,Indonesia,Israel,Korea,Kuwait,Malaysia,Mexico,Morocco,Peru,the Philippines,Poland,Romania,Russia,Saudi Arabia,Singapore,South Africa,Thailand,Trkiye,the United Arab Emirates and Vietnam.Global:all AEs and EMEs,as listed.Depending on data availability,country groupings used in graphs and tables may not cover all the countries listed.The grouping is intended solely for analytical convenience and does not represent an assessment of the stage reached by a particular country in the development process.ixBIS Annual Economic Report 2024So far,so goodIntroductionSo far,so good.The world economy appears to be finally leaving behind the legacy of the Covid-19 pandemic and the commodity price shock of the war in Ukraine.The worst fears did not materialise.On balance,globally,inflation is continuing to decline towards targets,economic activity and the financial system have proved remarkably resilient,and both professional forecasters and financial market participants see a smooth landing ahead.This was by no means a given a year ago.It is a great outcome.Still,there is a“but”.Challenges remain.The recent stickiness of inflation in some key jurisdictions reminds us that central banks job is not yet done.Financial vulnerabilities have not gone away.Fragile fiscal positions cast a shadow as far as the eye can see.Subdued productivity growth clouds economic prospects.Beyond the near term,laying a more solid foundation for the future is as difficult as ever.It could not be otherwise:it is an arduous task that requires a long-term view,courage and perseverance.As is customary,this years Annual Economic Report(AER)takes the pulse of the global economy and explores policy challenges.It also devotes particular attention to two issues.Looking back,it reflects on the lessons learned so far from the conduct of monetary policy in the tumultuous first quarter of the 21st century.Looking forward,it examines the opportunities and risks associated with the rise of artificial intelligence(AI).The year under reviewIn the year under review,the global economy made further progress in absorbing the huge and long-lasting dislocations caused by the pandemic and Russias invasion of Ukraine.Inflation has continued to decline from its peak in 2022.Both headline and core inflation kept moving down for much of the period under review.The rotation in the contribution to inflation from goods to services proceeded further,as commodity prices edged down while services price growth proved stickier.By the end of the period,inflation had come down substantially further:monetary policy had delivered(see below).At the same time,although it was more subdued in places,particularly in Asia,it was still hovering above central bank targets across much of the world.There were signs that the decline had become more hesitant in some key jurisdictions,notably the United States.Economic activity held up surprisingly well,indicating that a“normalisation”in both demand and supply had helped disinflation.Employment remained unusually buoyant in relation to output,supporting demand further in the near term.Households again dipped into savings accumulated during the pandemic.The lingering effects of extraordinarily generous fiscal support,and in some cases additional fiscal expansion,boosted activity.Having borrowed at longer maturities and at fixed rates,households and firms were partly shielded from higher interest rates and the burden of debt.The resilience of the financial system and financial market sentiment underpinned activity.There were no renewed serious banking strains la March 2023.And while xBIS Annual Economic Report 2024banks were rather cautious in granting credit,conditions in financial markets remained quite easy.Equity prices rose,with those in the technology sector reaching heady heights,and bond spreads remained quite narrow by historical standards.For much of the period,buoyant investor sentiment reflected eager expectations of an immediate and substantial easing of monetary policy that did not materialise.Against this backdrop,the most intense and synchronised monetary policy tightening in decades gave way to a somewhat more differentiated picture,in line with the growing differences in domestic inflation outlooks.Central banks prepared the ground for easing,for example in the euro area and much of Asia,or made the first cuts,such as in some countries in Latin America,where policy had been tightened ahead of the rest,and in Asia.The Peoples Bank of China eased further in response to weak domestic conditions and given subdued inflation.In Japan,the central bank finally exited the negative interest rate policy era and abandoned yield curve control while retaining an accommodative stance.This more differentiated picture has raised the prospect of larger interest rate differentials and pressures on currencies.In particular,following the latest monthly inflation readings in the United States,financial market participants expect greater divergence in policy rate trajectories,especially between the Federal Reserve and other central banks.This has reinforced a broad-based dollar appreciation,which has been especially marked vis-vis the yen.The appreciation has already elicited policy responses,including in some cases foreign exchange intervention or adjustments in the policy stance.And it has raised broader questions about the impact on capital flows and financial markets.Pressure points and risks aheadLooking ahead,the central scenario painted by professional forecasters and priced in financial markets is a smooth landing.Price stability is restored,economic growth picks up,central banks ease,and the financial system remains strain-free.Compared with past expectations,which were generally that a significant economic slowdown could be required to lower inflation,this is an impressive outcome.That said,risks persist.Some are more near-term,others further out.Some reflect an incomplete adjustment to the pandemic dislocations,others longer-standing weaknesses.To varying degrees,they all stem from the same root cause analysed in previous AERs:the pandemic hit a global economy that,while enjoying low inflation and growing briskly,had been relying for too long on an unsustainable debt-fuelled growth model.Hence worrying signs emerged,such as the historically high levels of private and public debt and the drastically reduced monetary and fiscal policy headroom.Consider several pressure points pertaining to inflation,the macro-financial nexus and real economy factors,respectively.While somewhat arbitrary given the tight interconnections involved,this classification can help organise the discussion.At the heart of the risks to inflation is the partial adjustment of two,closely related,relative prices thrown out of kilter by the pandemic.One is the price of services relative to that of(core)goods;the other is the price of labour(wages)relative to that of goods and services(the price level),ie real wages.The pandemic-induced dislocations interrupted the secular increase in the price of services relative to that of goods.As demand rotated away from services to goods and clashed with inelastic supply,the price of goods rose by much more.And as demand subsequently rebounded strongly after having been first artificially suppressed by public health measures and then turbocharged by economic policies,its rotation back to services failed to re-establish the pre-pandemic relative price relationships even as services became the prime inflation driver.It is possible that the pandemic,and associated aggregate demand stimulus and supply disruptions,has permanently xiBIS Annual Economic Report 2024altered the trend relative price relationship between goods and services.However,it is not clear why this should be the case,to the extent that the trend reflected deep-seated structural forces.These include a growing relative demand for services as incomes rise,slower productivity growth in services than in goods and nominal wage increases that do not compensate for the productivity growth rate differential in the two sectors.If the relative price between goods and services did return to its previous trend,it would raise overall inflation significantly above pre-pandemic rates for some time,unless disinflation in goods proceeded sufficiently fast,with prices growing below those rates.It might be hard for goods prices to grow that slowly in a world in which globalisation tailwinds are waning.The pandemic-induced dislocations also interrupted the secular increase in real wages,as the surprising inflation flare-up eroded purchasing power.Real wages have recovered somewhat since then,but generally languish considerably below the previous trend.The shortfall could add to wage pressures ahead,especially given continued tightness in labour markets and sluggish productivity growth(see below).To the extent that profit margins have benefited from surprise inflation,there should be room for adjustment.But having regained a taste for pricing power during the inflation phase,firms might be tempted to use it again.The two relative price adjustments are closely linked because the services sector is more labour-intensive.This is one reason why services price increases tend to be stickier than those of goods.And it helps to explain why the pass-through from wages to prices is much higher in this sector.These incomplete relative price adjustments could provide fertile ground for other sources of inflationary pressures.Any commodity price spikes linked to,say,geopolitical tensions or the withdrawal of price subsidies would be more likely to trigger second-round effects.And the likelihood is higher following the long phase of above-target inflation,which can encourage and entrench inflation psychology.Macro-financial pressure points reflect the combination of higher interest rates and financial vulnerabilities in private sector balance sheets in the form of high debt and stretched valuations.The current configuration is rather unique.The previous globally synchronised and intense monetary policy tightening took place during the Great Inflation era of the 1970s,when a repressed financial system had not allowed widespread vulnerabilities to develop(see previous AERs).The outcome,so far,has been surprisingly benign,but tougher tests may lie ahead.The significant banking strains in March 2023 stemmed in many cases from the materialisation of interest rate risk alone,as higher interest rates shook valuations without causing borrowers to default.The materialisation of credit risk is still to come;the only question is when and how intense it will be.The lag is typically quite long,and yet it can appear deceptively short as memories fade.There are indications that financial cycles have started to turn.Savings buffers are dwindling.Debts will have to be refinanced.Within this broad picture,specific macro-financial pressure points abound.There are those we know about.Commercial real estate,historically a much more typical source of banking stress than residential real estate,has been on supervisors radar screen for quite some time.The office segment,in particular,has fallen victim to the confluence of post-pandemic structural and cyclical forces.Similarly,the opaque risks in the burgeoning private credit markets have attracted considerable attention.And then there are certainly vulnerabilities we know far less about.They could catch markets by surprise and shake confidence and trust.The intensity of any stress that could emerge will naturally depend on the condition of financial institutions.Banks are now much better capitalised than before the Great Financial Crisis,notably thanks to stronger prudential regulation.Their profits have also benefited from higher interest rates,which have buoyed net interest xiiBIS Annual Economic Report 2024margins.That said,many are still facing longer-term profitability challenges and investor mistrust,as reflected in depressed price-to-book ratios.The more lightly regulated parts of the non-bank financial sector remain a source of concern as stress amplifiers,owing to hidden leverage and liquidity mismatches.Two real economy pressure points stand out:fragile fiscal positions and subdued productivity growth.As assessed in detail in last years AER,fiscal trajectories represent one of the biggest threats to macroeconomic and financial stability in the medium to longer term.Pre-pandemic,the threat was masked by the long phase of exceptionally low interest rates,which had taken the debt service burden to historical lows despite historically high debt-to-GDP ratios.Since then,further broad-based fiscal support has darkened the picture.In some cases,fiscal policy is still adding stimulus to the economy,acting at cross-purposes with monetary policy.Absent consolidation measures,debt ratios are set to climb over time,even in a scenario in which interest rates remain below the growth rate of the economy.And demands on fiscal authorities have been increasing,as the financing needs of the green transition and geopolitical considerations have come on top of the looming burden of ageing populations.Post-pandemic,productivity growth the key to longer-term prosperity has been generally lacklustre compared with previous trends,although the United States is one exception.The lingering impact of the pandemic makes it especially hard to parse the influence of cyclical and structural forces.But gradually slowing productivity growth was a concern even before Covid-19 struck.The wave of technological advances under way,notably AI,could significantly improve the picture.Still,it would be unwise to simply assume it will.Should slow productivity growth continue,it would make the economic and political environment more challenging.It would add to inflationary pressures,reduce the headroom for both monetary and fiscal policy,and,more generally,widen the gap between societys expectations and policymakers capacity to meet them,making any adjustments much harder.Policy challengesThe overarching policy challenge is to complete the job of returning to price stability while at the same time keeping a firm eye on the longer term,thereby laying the foundations for sustainable and balanced growth.This has implications for both policy settings and frameworks in the monetary,prudential,fiscal and structural domains.Near-term policy settingsThe priority for monetary policy is to firmly re-establish price stability.In doing so,the lessons learned from the conduct of policy in the tumultuous years since the turn of the century can be helpful in guiding decisions(see below).This means travelling the last mile of the disinflation with a steady hand,being especially alert to the risk of further significant upward surprises and not hesitating to tighten again if inflation proves to be more stubborn and unresponsive than anticipated.It also means safeguarding the room for policy manoeuvre that central banks have finally regained the only silver lining of the inflation flare-up.For instance,it would be imprudent to cut interest rates significantly based on the view that the“neutral”or“natural”interest rate(r-star)remains as low as it was perceived to be before inflation took hold.We simply know too little about where such a rate might be and what its determinants are.Rather,it would be safer to be guided by actual inflation and to take this opportunity to wean the economy off the low-for-long state that can generate longer-term risks for financial,macroeconomic and,hence,price stability.xiiiBIS Annual Economic Report 2024The prospects of greater divergence in the outlook for interest rates and concomitant pressures on exchange rates and capital flows could raise additional challenges for adjustments in monetary policy settings.Emerging market economies,in particular,are in a better position to address them than in the past,thanks to the build-up of foreign currency reserve buffers and stronger policy frameworks generally.As experience in recent years indicates,this should provide greater room for manoeuvre in the calibration of monetary policy,supported,where appropriate,by judicious use of foreign exchange(FX)intervention.The priority for prudential policy is to strengthen further the resilience of the financial system.There is still a window of opportunity to build up defences for the credit losses that will inevitably materialise at some point.In particular,on the macroprudential side,it would be important to avoid a premature loosening,calibrating the measures with respect to financial cycle conditions.On the microprudential side,tight supervision can temper risk-taking and help ensure adequate provisioning and realistic asset valuations.Should financial stress emerge,supervisors would need to act in concert with monetary and fiscal authorities to manage the strains in an orderly way while allowing monetary policy to focus on re-establishing price stability.The priority for fiscal policy is to consolidate with clear-eyed and firm resolve.This would relieve pressure on inflation,even if in the near term any removal of lingering energy and food subsidies would raise prices a foreseen side effect.More importantly,it would pave the way for the arduous long-term task of ensuring the sustainability of public finances.Longer-term policy frameworksMonetary policy frameworks have faced a series of extraordinary tests since the Great Financial Crisis shattered the deceptive tranquillity of the so-called Great Moderation.And central banks have delivered:they have contained the damage of financial crises;they avoided major shortfalls of inflation from target all the way to the pandemic;and they have put in place a solid basis for a return to price stability following the post-pandemic inflation surge.The years ahead may be no less challenging.Unless fiscal positions are brought under control,the threats to financial and macroeconomic stability will grow.The risk of global fragmentation,the reality of climate change and demographic trends could make the supply of goods and services less elastic and the world more inflation-prone.At the same time,a return of persistent disinflationary pressures cannot be ruled out either,especially if the current wave of technological advances bears fruit.Against this backdrop,Chapter IIs in-depth analysis of the conduct of monetary policy over this long historical phase points to a number of lessons that could inform refinements to existing frameworks.Some of these lessons confirm previous widely held beliefs;others temper previous expectations.Together,they help us to better understand monetary policys strengths and limitations.Five lessons stand out.First,forceful monetary tightening can prevent inflation from transitioning to a high-inflation regime.Arguably,central banks underestimated the extent to which the exceptional and prolonged further easing at the time of the pandemic would contribute to the flare-up in inflation,and could have responded more promptly once inflation surged.But their subsequent vigorous and determined response has so far succeeded in preventing a shift to a high-inflation regime.Second,forceful action can stabilise the financial system at times of stress and prevent the economy from falling into a tailspin,thereby eliminating a major source of deflationary pressures.On such occasions,the deployment of the central bank balance sheet does the heavy lifting,as the central bank is called upon to perform as lender and,increasingly,market-maker of last resort.That said,whenever the solvency xivBIS Annual Economic Report 2024of borrowers,financial or non-financial,is threatened,this requires government backstops.And those interventions,if repeated,can distort risk-taking incentives in the longer term.Hence the importance of strengthening regulation and supervision further.Third,exceptionally strong and prolonged monetary easing has limitations.It exhibits diminishing returns,it cannot by itself fine-tune inflation in a low-inflation regime,and it can generate unwelcome side effects over the long term.These include weakening financial intermediation and inducing resource misallocations,encouraging excessive risk-taking and the build-up of vulnerabilities,and raising economic and political economy challenges for central banks as their balance sheets balloon.These limitations were not fully appreciated at the time the measures were first introduced.Fourth,communication has become more complicated.The multiplicity of instruments makes it difficult to aggregate their effect and to understand which of them are intended to influence the stance,and when.The failure to anticipate the surge in inflation has threatened credibility.More generally,there is a growing“expectations gap”between what central banks are expected to deliver and what they can actually deliver.Finally,the experience of emerging market economies,in particular,has illustrated how the deployment of complementary tools can help to improve the near-term trade-offs that monetary policy faces between price and financial stability.If used judiciously,FX intervention a form of balance sheet policy,but in foreign currency allows the build-up of FX buffers that strengthens resilience and can help to address disruptive swings in global financial conditions and exchange rates.Macroprudential measures,which central banks either control or help set,have been a welcome addition to the toolkit to address financial booms and busts.These lessons highlight the importance of four features that could inform refinements to frameworks:robustness,realism in ambition,safety margins and nimbleness.Together,they can reduce the risk that monetary policy,just as fiscal policy,is relied upon excessively to drive growth the“growth illusion”analysed in detail in last years AER.And they are designed to ensure that monetary policy focuses on maintaining inflation within the region of price stability while safeguarding financial stability.Consider the implications of these considerations for the definition of the inflation objective,for acceptable deviations from targets,for the deployment of the tools,and for the institutional arrangements that support policy,including the role of communication in that context.The operational definition of price stability would need to help hardwire a low-inflation regime while allowing for deviations consistent with central banks ability to control inflation.Ideally,the objective would be low enough so that inflation would not materially influence economic agents behaviour.Adjusting current targets upwards,quite apart from the risk of undermining central banks hard-earned credibility,would not be consistent with this goal and would risk squandering the self-equilibrating properties that inflation exhibits in such a low-inflation regime.When inflation evolves in a low-inflation regime,there is room for greater tolerance than in the past for moderate,even if persistent,shortfalls of inflation from narrowly defined targets.The additional room would take advantage of the self-equilibrating properties of inflation and reduce the side effects of keeping interest rates very low for extended periods.This would allow central banks to better take into account the threats to financial,macroeconomic and price stability that develop over longer horizons and would reduce the risk of losing precious safety margins.At the same time,the self-reinforcing nature of transitions from low-to high-inflation regimes underscores the importance of reacting strongly when inflation rises sharply above levels consistent with price stability and threatens to become xvBIS Annual Economic Report 2024entrenched.It is one thing to avoid fine-tuning,leveraging the self-stabilising properties of the low-inflation regime;it is quite another to put the systems self-equilibrating properties to the test.The desirability of operating with safety margins to reduce the vulnerability of the economy puts a premium on the prudent deployment of instruments.This means implementing policies that include as an explicit consideration retaining policy room for manoeuvre over successive business and financial cycles.It means putting a premium on exit strategies from extreme policy settings designed to stabilise the economy and on keeping balance sheets as small and riskless as possible,subject to effectively fulfilling mandates.And it means avoiding overreliance on approaches that may unduly hinder flexibility,such as certain forms of forward guidance,critical dependencies on unobservable and highly model-specific concepts,or frameworks designed for seemingly invariant economic environments.Good monetary policy often requires taking actions that may involve costs in the short run to reap benefits in the longer run.This calls for appropriate supporting communication strategies and institutional arrangements.As regards communication,the toughest and growing challenge is to narrow the“expectations gap”a major source of pressure on the central bank to test the limits of sustainable economic expansions and to pursue mutually inconsistent and overly ambitious objectives.Failing to do so can ultimately undermine the central banks legitimacy and societys trust.As regards institutional arrangements,there is a need to shield the central bank from political economy pressures,be they linked to inflation or the build-up of financial imbalances.Safeguards for central bank independence are essential.They may become even more important in the years ahead.Monetary policy frameworks,however,are only one element of the broader policy setup.Indeed,the trade-offs monetary policy faces can become unmanageable,and sustainable macroeconomic and financial stability remain beyond reach,unless other policies also play a key role in a coherent whole what the BIS has termed a holistic macro-financial stability framework.In the years ahead,further efforts will be needed to strengthen prudential frameworks.In the near term,it is essential to complete the international banking reforms,known as Basel III,in a full,timely and consistent manner.In the longer term,as discussed in more detail in last years AER,it will be important to adjust regulatory and supervisory arrangements in the light of the evolving financial landscape and the lessons drawn from episodes of financial stress,both recent ones and inevitable future ones.An area that requires urgent action is the non-bank financial intermediation sector.Despite many post-Great Financial Crisis initiatives,a systemic stability-oriented(“macroprudential”)regulatory framework has proved beyond reach.Making substantial progress may well require more incisive steps,not least to include financial stability as an explicit objective in the mandate of securities regulators.Fiscal policy frameworks,too,require strengthening.It is imperative that sufficient institutional safeguards be put in place to ensure that fiscal positions are sustainable and that,just like monetary policy,fiscal policy can operate with adequate safety margins.The types of remedy are well known.They all involve constraints that can be embedded in legislation and enforced in a variety of ways,with different degrees of stringency.Ultimately,though,no remedy is workable without the political will to adopt it.And implementing the necessary policy adjustments has arguably become harder since the Great Financial Crisis,as expectations of government support have grown.The same political will is needed to revive the flagging effort to reinvigorate the supply potential of the global economy.Only structural policies can deliver the productivity improvements needed to enable higher sustainable growth.Recognising xviBIS Annual Economic Report 2024this point,in turn,calls for a broad change of mindset to dispel the deeply rooted“growth illusion”at the heart of the debt-fuelled growth model that the world has de facto relied on for too long.The analysis and proposals in this report are intended to promote such a change.The AI waveAmong the structural developments of relevance to central banks,AI figures high on the list.AI has taken the world by storm and has set off a gold rush across the economy,with an unprecedented pace of adoption and investment in the technology.The technology underpinning AI has been in development for decades,but AI has come of age with the ready availability of unstructured data and the computing power that can process it.Machine learning excels at imposing mathematical structure on unstructured data,such as text or images,to allow enormous computing power to process the information.The result is the uncanny versatility of the latest AI applications.They can perform tasks that they were not specifically trained to perform,or need only minimal training to do so;they are“zero-shot learners”or“few-shot learners”.Large language models(LLMs)are trained on the totality of the text and non-text data on the internet,drawing on connections in the data to tackle a wide range of tasks.Such versatility distinguishes the latest AI models from past expert systems that were good for only narrowly defined domains.For these reasons,AI will have a profound impact on daily lives.AI impinges on the job of central banks in two important ways.First,it bears on central banks core activities as stewards of the economy.The versatility of AI models will have far-reaching implications for the economy.In the labour market,AI could displace some workers but could complement the skills of others and introduce altogether new tasks that boost economic activity,innovation and growth.Central banks mandates around monetary and financial stability would be profoundly affected by AI.The impact on inflation will depend on how the balance of supply and demand effects plays out,but widespread adoption of AI could enhance firms ability to adjust prices quickly in response to changing circumstances,affecting inflation dynamics.Financial markets will also be affected,with implications for market dynamics and financial fragility.These issues are rightly of great concern to central banks.AI also affects central banks as users of the technology.The ability to impose mathematical structure on unstructured data makes AI ideally suited to identify patterns that are otherwise obscured.This ability“to find a needle in the haystack”could offer breakthroughs in nowcasting economic activity and in the monitoring of financial systems for the build-up of risks.The“zero-shot”or“few-shot”nature of LLMs also means that they can perform tasks other than simply analysing textual information.LLMs excel at detecting patterns.Just as LLMs are trained by guessing the next word in a sentence using a vast database of textual information,macroeconomic forecasting models can use the same techniques to forecast the next numerical observation from a sea of structured and unstructured data.Many central banks already support their economic analysis with nowcasting models,producing real-time assessments of the economy.Financial market applications by central banks mirror AI tools already in use by private sector institutions in their data analytics,risk management and fraud detection,but AIs potential impact could be of even greater importance for central banks given their influence on the economy.All this said,AI also introduces new challenges.One such challenge is new sources of cyber risk that exploit weaknesses in LLMs to make the model behave in unintended ways,or to reveal sensitive information.By the xviiBIS Annual Economic Report 2024same token,however,AI can be harnessed to strengthen cyber security by uncovering anomalies,trends or correlations that might not be obvious to the naked eye.Most importantly,the new era of AI highlights the importance of data governance.While the underlying mathematics of the latest AI models follow basic principles that would be familiar to earlier generations of computer scientists,their capabilities derive from the combination of vast troves of data and massive computing power that is up to the task of unlocking the insights.The centrality of data demands a rethink of central banks traditional roles as the compilers,users and disseminators of data.Our conventional approach to data favours using existing structured data sets organised around traditional statistical classifications.However,the age of AI will rely increasingly on unstructured data drawn from all walks of life,collected by autonomous AI agents.Data availability and data governance are key enabling factors for central banks use of AI.Both will require investment in technology and in human capital.Above all,the challenges of the age of AI necessitate close cooperation among central banks.Central banks need to come together to foster a“community practice”to share knowledge,data,best practices and AI tools.1BIS Annual Economic Report 2024I.Laying a robust macro-financial foundation for the futureThe global economy appears to be poised for a smooth landing.The sudden post-pandemic burst of inflation was met with the most synchronised and intense monetary policy tightening in a generation.So far,the efforts have borne fruit,defying last years concerns of looming recessions and very sticky inflation.The financial system has proved resilient.The baseline going forward is a gradual convergence of growth rates to their medium-term trends as inflation approaches central bank targets.Still,old risks have not gone away while new ones have come into sight.A number of pressure points could compromise the benign baseline scenario.Inflationary dynamics could re-emerge,spurred by ongoing adjustments of relative prices.Geopolitical events and commodity price increases could complicate the last mile of disinflation.Varying exposure to inflationary pressures could deepen the divergences across jurisdictions,bringing about disorderly adjustment in exchange rates and capital flows.Fiscal policies could boost demand at an inopportune time,while debt sustainability concerns could strain the financial system.Depleted buffers and the cumulative effects of past monetary policy tightening could reach tipping points and prompt a sharp squeeze in private demand.Seemingly dormant,macro-financial imbalances could unwind in a costly way.In this challenging landscape,policies will need to finish the job of guiding the economy back to price stability and set the foundation for durable growth.In doing so,macroeconomic policies will need to keep a firm eye on the longer-term consequences of near-term decisions.Monetary policy will need to stay alert to a re-emergence of inflationary pressures and preserve the regained room for manoeuvre.Fiscal consolidation remains essential to support disinflation and restore debt sustainability.Prudential policy needs to remain vigilant and continue the efforts to strengthen the resilience of the financial system.Structural reform efforts,which have flagged for too long,need to be revived to support higher sustainable growth and a better income distribution.Enhancing growth and resilience through reforms that foster competition,flexibility and innovation will improve economic well-being and ensure the capacity for effective macro-stabilisation policy responses,when the need arises.Key takeaways Following the most synchronised and intense monetary policy tightening in a generation,inflation has declined substantially with little collateral damage so far.The financial system has been largely strain-free since March 2023,and market pricing suggests a smooth landing.That said,a number of pressure points could throw the global economy off track.Inflationary pressures may prove more stubborn than anticipated,growth may stall and long-standing fiscal and macro-financial vulnerabilities may lead to stress.Monetary policy will need to finish the job on disinflation.Fiscal policy will need to consolidate.Prudential policy will need to remain vigilant and continue efforts to enhance resilience.Structural policy will need to set the basis for sustainable growth and prepare the economy for the challenges ahead.2BIS Annual Economic Report 2024This chapter reviews economic and financial conditions over the past year.It then discusses the key pressure points and lays out scenarios for how they might threaten a smooth landing.Finally,it elaborates on the near-and long-term policy challenges.The year in retrospectOn course for a smooth landingThe global economy proved resilient over the past year.Growth surprised to the upside across several major advanced economies(AEs),including the United States and Japan,as well as large emerging market economies(EMEs),such as India,Mexico and Brazil(Graph 1).At 3.2%for 2023,global growth exceeded expectations as of mid-2023,slowing only moderately from 3.5%in 2022.Fears of a global recession proved unfounded.Growth this year is expected to hold up at 3.0%.To date,the smooth-landing trajectory appears intact.Two factors help explain this surprising resilience.First,the labour market remained unusually buoyant in relation to output.Unemployment rates stayed close to pre-pandemic levels,edging up only slowly despite sharp monetary policy tightening.Based on historical relationships,the labour market was generally stronger than would have been predicted by output growth(Graph 2.A).Labour market tightness reflected the continued cyclical uplift from the services-led recovery,which is more labour intensive,and pandemic-related behavioural shifts.1 This,in turn,lent support to household income(purple bars in Graph 2.B)and domestic demand,contributing to more resilient activity.Second,the transmission of monetary policy to the real economy proved smooth and non-disruptive.One reason was the measured pass-through of monetary policy to financial conditions.Buoyant market sentiment kept risk spreads compressed and the financial system remained largely strain-free(see below).Importantly,the pass-through Restricted Evolution of realised and forecasted output growth1 In per cent Graph 1 1 For 2023,the starting point of the arrow shows the forecasted GDP growth for 2023 in June 2023,and the end point shows the realised GDP growth in 2023.For 2024,the starting point of the arrow shows the forecasted GDP growth for 2024 in June 2023,and the end point shows the latest forecast(as of May 2024)for GDP growth for 2024.Sources:IMF;Consensus Economics;BIS.6420Other EMEsBRMXCNINOther AEsGBEAJPUSWorldAEsEMEs23 2423242324UpwardMinimal(0.1%pts)Downward Revisions:Forecast as of June 20233BIS Annual Economic Report 2024from tighter financial conditions to real activity was dampened by robust household and corporate balance sheets.While private debt levels are high,the prominence of fixed-rate loans and the lengthening of loan maturities delayed the impact of higher rates on borrowers(Graph 2.C).More generally,large cash cushions allowed investment to remain robust,while excess savings from the Covid-19 era and the lingering effects of fiscal support,including energy subsidies(yellow bars in Graph 2.B),played a part in sheltering consumption.EMEs were resilient,contrary to some earlier tightening cycles,reaping the benefits of stronger policy frameworks and domestic financial systems.Since the early 2000s,the shift towards inflation targeting and greater exchange rate flexibility,supported by larger reserves,had enhanced central bank credibility,helping to anchor inflation expectations and to reduce the pass-through of changes in the exchange rate to inflation(Chapter II).Stronger prudential regulation and supervision had strengthened the banking systems resilience.Fiscal policy frameworks had also improved somewhat,and many EMEs benefited from a greater market tolerance for government indebtedness,hence the broad stability of sovereign credit ratings despite much higher debt levels for many countries.A substantial reduction in currency mismatch in borrowers balance sheets and the development of domestic-currency bond markets reduced the sensitivity of EME bond spreads to global financial conditions.2 Not all jurisdictions around the world proved equally resilient,however,and differences in growth became more apparent as the year progressed.Growth was remarkably strong in the United States,supported by substantial fiscal spending.Latin American economies,most notably Brazil and Mexico,performed well,also benefiting from proximity to the United States.By contrast,the euro area,the United Kingdom and several small open AEs registered barely positive growth.Economic activity was also typically weaker in central Europe and emerging Asia.Subdued global trade amid a continued manufacturing slump played a role,given some of these economies Several factors sustained economic resilience1 Graph 2A.Labour markets were strongerthan expected given activityB.together with transfers,supporting spendingC.More fixed-rate and long-termcorporate debt than post-GFC2%Cumulative changes since Q4 2019,%1 See technical annex for details.NFC=non-financial corporation.The start(end)of an arrow represents 2010(2023).2Sources:OECD;LSEG Datastream;S&P Capital IQ;national data;BIS.1086420THKRMYIDCLTRUSGBEASGMXPHINBRCHAUCASEActualPredictedAEs:Unemployment rate:EMEs:201001020302023202220212020Real consumption in AEsSavings rate changeConsumption deflatorTransfersNet incomeContributions:AmericaLatinCNAEs OtherJPAsian EMEsITFRDEEAUS756045301510080604020AEsEMEs(%of total NFC debt)Long-term debt Fixed rate debt(%of total NFC debt)CA4BIS Annual Economic Report 2024reliance on exports.The greater impact of rising energy prices,especially in Europe,and smaller fiscal support also played a part.In China,domestic real estate woes continued to beset the economy and weigh on consumer confidence,prompting further policy support for the sector.Activity was held up by strong investment in manufacturing and infrastructure as well as by exports.Sustained disinflation opened the door to a monetary policy pivotGlobal inflation continued to recede from the peak it reached in 2022.Inflation was back to around central bank targets across a range of countries,including several euro area economies(Graph 3).In the United States,the disinflation journey largely followed the forecasted path,notwithstanding the upside surprises in early 2024,and inflation remained a little above target.Most EMEs also saw inflation decline,with a few exceptions,such as Argentina and Trkiye.In both Latin America and Asia,disinflation was broad-based,with Thailand and China even seeing falling prices at one point.Chinas export drive may have acted as a global disinflationary force for importing countries(Box A).The decline in inflation was common for both core and headline,but headline decreased more,especially in AEs.Headline inflation dropped below 3%in AEs and below 4%in EMEs(Graph 4.A).This was in large part due to commodity prices retreating from 2022 peaks,despite elevated geopolitical tensions(red line in Graph 4.B).By early 2024,contributions to inflation from food and energy had largely disappeared in AEs and had dropped significantly in EMEs(yellow bars in Graph 4.A).Among core inflation components,moderation in price growth was more pronounced in(core)goods than in services.Benign supply chain conditions(blue line in Graph 4.B)and a continued rotation of spending from goods back to services(Graph 4.C)supported these patterns.The main inflation driver in AEs became services price growth,a more persistent component historically.Similarly,in EMEs,contributions to inflation from services doubled since 2021 and remained large,while contributions from food,energy and other goods shrank.Restricted Evolution of realised and forecasted output growth1 In per cent Graph 1 1 For 2023,the starting point of the arrow shows the forecasted GDP growth for 2023 in June 2023,and the end point shows the realised GDP growth in 2023.For 2024,the starting point of the arrow shows the forecasted GDP growth for 2024 in June 2023,and the end point shows the latest forecast(as of May 2024)for GDP growth for 2024.Sources:IMF;Consensus Economics;BIS.Inflation receded towards central bank targets Year on year,in per cent Graph 3 1 Headline CPI used for cross-country comparability and may not correspond to the central banks preferred measure.Peak since 2021.Countries are sorted by distance of the latest value of headline inflation relative to the target(midpoint for those with an interval).2 Inflation targets are official point targets,target bands,tolerance ranges or unofficial objectives announced by authorities.3 Monthly headline inflation average for 19902019.Sources:LSEG Datastream;national data;BIS.6420Other EMEsBRMXCNINOther AEsGBEAJPUSWorldAEsEMEs23 2423242324UpwardMinimal(0.1%pts)Downward Revisions:Forecast as of June 202312.510.07.55.02.50.0ROCLMXCZILIDBRPEINCNNOATUSNZNLIEDEGBPTCADKCOSGKRVNPHHUZAMYPLHKTHESBEGRSEAUJPLUFRFICHITAEs EMEs19182617Peak to latest1Target/tolerance interval2Historical average35BIS Annual Economic Report 2024 Restricted Inflation receded towards central bank targets Year-on-year changes,in per cent Graph 3 1 Headline CPI used for cross-country comparability and may not correspond to the central banks preferred measure.Peak since 2021.Countries are sorted by distance of the latest value of headline inflation relative to the target(midpoint for those with an interval).2 Inflation targets are official point targets,target bands,tolerance ranges or unofficial objectives announced by authorities.3 Monthly headline inflation average for 19902019.Sources:OECD;LSEG Datastream;national data;BIS.Inflation abated as commodities retreated and spending rotation reversed Graph 4A.Both headline and core inflation declined1 B.Commodity prices and supply disruptions down from 2022 highs C.Spending started to rotate back to services1,3 yoy,%2 Jan 2018=100 std dev%1 See technical annex for details.Core inflation does not add up to the sum of serv2ices(red bar)and goods(blue bar)because the sum shows the contributions to headline inflation.3 Dashed lines correspond to trend based on 19932019 data.Sources:OECD;LSEG Datastream;Macrobond;national data;BIS.86420201519202120222023Apr 24201519202120222023Apr 24AEsEMEsHeadlineCore2ServicesGoods(excl food and energy)Food and energyContributions to headline:18016014012010080604321012242322212019181716Bloomberg Commodity Index(lhs)Index(rhs)Global Supply Chain Pressure5040302023181308039893USEAOther AEsGoods share of nominal consumption:Restricted Both supply and demand contributed to disinflation1 Graph 5A.Supply and demand contributed to the decline in inflation from peak B.Anchored inflation expectations contributed to disinflation C.Inflation dropped more for cyclically sensitive sectors%pts 1 See technical annex for details.2 The sectors in order of highest to lowest cyclical sensitivity are:transport,housing and utilities,restaurants and hotels,education,food and non-alcoholic beverages,clothing and footwear,furniture,miscellaneous,recreation and culture,health,alcoholic beverages and tobacco,and communications.Sources:Firat and Hao(2023);Federal Reserve Bank of Cleveland;Federal Reserve Bank of New York;Federal Reserve Bank of St Louis;OECD;Bloomberg;LSEG Datastream;BIS.Equity markets rallied as earnings improved Graph 6A.Global stock markets rallied,with the exception of China B.as expected earnings improved2 C.Price-to-earnings ratios for major tech firms remained above norms3 1 Jul 2022=100 3 Jan 2022=100 Ratio a Start of period under review(1 June 2023).1 Shanghai Shenzhen CSI 300 equity index.2 EPS=earnings per share.Current shows latest figures as of 31 May 2024.3 See technical annex for details.Sources:IMF;Bloomberg;LSEG Datastream;LSEG Workspace;BIS.KRIDMXZAJPFRDECAUSGB2101234EMEsAEsTotalDemandSupply%pts105051015202320222021expectationsInflationLagged inflationin the US:Contribution to change in inflation pressuresSupply chainOther 05101520250.80.60.40.20.0USEA Cyclically sensitive sectors(coefficient)2Change in price growth(%pts)6BIS Annual Economic Report 2024Box AChina as a disinflationary forceDeclining prices in China have been delivering a disinflationary impulse to prices elsewhere.Through falling prices for its exports,as well as the impact of weaker domestic demand on commodity prices,developments in China are estimated to have reduced the annual rate of import price increases in other major economies by around 5 percentage points over 2023,on average.It can take time for such downward pressures to be fully reflected in consumer prices given that many of Chinas exports are intermediate goods(such as steel)or capital goods(such as machinery).1 While these direct effects are the focus of this box,indirect effects are also likely to be arising from Chinas role as the marginal producer of many products,which would lead competitors from other countries to also reduce prices.In China,headline consumer price index(CPI)inflation has been close to zero since April 2023(Graph A1.A,red line).While declining food prices are part of the explanation,core inflation has also been weak:the level of core CPI was around the same in early 2024 as two years before.Producer prices have fallen by even more(Graph A1.A,blue line),although declines in producer prices are much more common than in consumer prices.Chinas export prices have also fallen sharply(Graph A1.A,yellow line).Nearly all exporting sectors had seen price drops in 2023,with the steepest ones in labour-intensive sectors such as clothing and miscellaneous manufacturing(Graph A1.B).Not surprisingly,Chinese export volumes have grown significantly(Graph A2.A,yellow line).For iron and steel products,the export volume increased by 9.4%in the year to February 2024 while prices fell 15.7%,and for the automobile sector,the volume increased by 27.7%while prices fell 4.4%.The depreciation of the Chinese yuan against many other currencies further boosted Chinas competitiveness,amplifying the impact of Chinas domestic disinflation on export volumes.Between early 2022 and early 2024,the nominal effective exchange rate fell by about 6%(Graph A2.A,red line).The combination of falling prices and a depreciating currency caused the yuans real value to depreciate by 13%over the same period(Graph A2.A,blue line).Declining prices in China have increasingly translated into lower import prices in other countries.Estimates based on four-quarter changes in export prices within the network of bilateral product-level trading relationships among 12 major countries indicate that,during 2022,Chinas exports added around 2 percentage points to the increase in import prices in its trading partners.2 In contrast,by the third quarter of 2023 their median estimated effect was a 5.8 percentage point reduction,which moderated to 4.1 percentage points the following quarter(Graph A2.B).Looking at individual countries,the effect was stronger where Chinese exports made up a larger share,such as in Australia,Brazil and India.Restricted Sharp declines in real estate prices pose risk to outlook1 Graph 14A.The commercial real estate price bust in the 1990s was costly2 B.A repeat today would disrupt the benign growth outlook C.Stretched residential property valuations could add to risk 1989=100%pts%pts Index(de-meaned)a Commercial property price peak(1989).1 See technical annex for details.2 PNFS=private non-financial sector.Shades show interquartile ranges;lines show medians.Sources:Borio et al(1994);Zhu(2002);OECD;Bloomberg;national data;BIS Chinas prices have weakened Graph A1A.China price indices B.Changes in export prices and quantities by sector2 yoy changes,%1 Three-month moving average.2 The changes are between H1 2023 and H2 2023;the size of the circle reflects the relative magnitude oftotal exports of the sector.Sources:CEIC;Macrobond;BIS.100806040200510152019981994199019861982apricesReal commercial property Lhs:Real GDPBank credit to PNFSproperty prices peak:Rhs,growth rate relative to commercial03691201234 LhsRhsCommercial property pricesCredit growthGDP growthestate shock:Effects of adverse commercial real3020100102030Latest20s10s00s90s80sMedianfrom historical average:House price-to-income ratio deviation Interquartile range 1050510Q1 24Q3 23Q1 23Q3 22CPIPPIExport unit price1Electric&electronicTextilesMetal productsMachinery&transportMisc manufacturingChemicalsRubber&plasticMedicalClothing101520201510505Change in quantity(%)Change in unit price(%)7BIS Annual Economic Report 2024While the effects on CPI are likely to build over time,elasticity estimates from other studies suggest that a 5.8 percentage point decrease in import prices would eventually translate into a 1.5 percentage point lower CPI inflation rate,on average,albeit with significant variation across countries.31 Di Sano et al(2023)suggest that the effect of Chinas lower prices on euro area inflation is relatively limited,decreasing headline inflation by around 0.4 percentage points in the year to June 2023.However,given that 43%of Chinese exports to the European Union are intermediate goods,the impact takes some time to feed through supply chains to inflation.2 This follows the approach in Amiti et al(2024),which provides an estimate of the contribution of each source country to import price inflation in each destination country at each point in time.3 Goldberg and Campa(2010)assess the sensitivity of the CPI to import prices across 21 countries based on input-output tables for around the year 2000.The sensitivity varies from 0.07 for the United States to 0.56 for Ireland,with an average of 0.26.This implies that,on average,a 1%increase in import prices at the border is associated with a 0.26 percentage point rise in the CPI across these countries.Restricted Chinas prices have weakened Graph A1A.China price indices B.Changes in export prices and quantities by sector2 yoy changes,%1 Three-month moving average.2 The changes are between H1 2023 and H2 2023;the size of the circle reflects the relative magnitude oftotal exports of the sector.Sources:CEIC;Macrobond;BIS.Chinas disinflation is translating into lower import prices in other countries Graph A2A.Effective exchange rates and export volumes B.Contribution of China to import price inflation2 yoy changes,%end-2021=100 yoy,%pts NEER=broad nominal effective exchange rate;REER=broad real effective exchange rate.1 Three-month moving average.2 Estimated effect of China on the year-on-year inflation rate of imported goods,following the approach in Amiti et al(2024).The sample consists of AU,BR,CA,CN,DE,ES,GB,IN,IT,JP,MX and US.Sources:United Nations Comtrade;Macrobond;BIS.15105051015115110105100959085Q1 24Q3 23Q1 23Q3 22Q1 22Export volume1Lhs:NEERRhs:REER5051015Q4 23Q3 23Q2 23Q1 23Q4 22Q3 22Q2 22AUINBRJPDEUSMedianOther countriesBoth supply and demand factors played a role in the disinflation process.Distinguishing their respective contributions is difficult,but results from a range of stylised exercises can help shed some light.One exercise,which distinguishes supply and demand based on the relationship between price and quantity changes,points to cross-country differences.3 This analysis suggests that more than half of the decline in inflation from its peak reflects increased supply in the United Kingdom,the United States,South Africa,Indonesia and Korea(Graph 5.A).By contrast,weaker demand appears to have accounted for more of the inflation decline in Canada,France and Mexico.A complementary simple regression exercise provides further insights by breaking down US inflation into the contribution of a wider range of factors(Graph 5.B).According to these estimates,the resolution of supply chain pressures explains a significant portion of the inflation decline since late 2022(blue bars),confirming the importance of supply factors.Monetary policy has also played a key role(see Box B for further discussion).One important channel is by anchoring inflation expectations,following their upward drift during the inflation flare-up(red bars).Expectations of low and stable future inflation influence current spending as 8BIS Annual Economic Report 2024well as the price-and wage-setting decisions of firms and households;anchored expectations therefore limit second-round effects and in turn contribute to the actual decline in inflation in future.Another channel is by restraining demand.Indeed,sectors that are more sensitive to the output gap,such as transportation and food,experienced larger drops in price growth(Graph 5.C).Not captured in these estimates,the globally synchronised tightening has also had an impact by cooling commodity price increases.4After a notable period of synchronisation,divergence eventually emerged in monetary policy stances across countries.With notable progress towards meeting their inflation targets,some central banks reduced policy rates and others signalled easing ahead.Most central banks in Latin America cut rates,after being among the first to tighten.Among AEs,the Swiss National Bank was the first to cut and was followed by Sveriges Riksbank,while the ECB and the Bank of Canada both lowered their policy rates in June.The Federal Reserve kept policy rates constant,reiterating the need for greater confidence in inflation converging to target before considering an easing.Changes in policy rates in Asia were more moderate and varied,partly reflecting lower inflation in the region and greater use of other stabilisation instruments,such as foreign exchange intervention.The Peoples Bank of China eased monetary policy further in response to weak domestic conditions.The Bank of Japan increased the policy rate for the first time since 2007 in response to accumulated evidence that inflation could finally rise to the 2%target on a durable basis.Bank Indonesia raised rates,while several Asian EMEs intervened in foreign exchange markets to mitigate pressure on their currencies linked to interest rate differentials with AEs.The financial system positioned for a smooth landingAgainst this benign macroeconomic backdrop,exuberant financial markets anticipated a smooth landing,in part helped by a lack of major incidents like those in March 2023.The prospects of lower policy rates and resilient growth,alongside improving earnings,propelled equity markets across most AEs and EMEs(Graphs 6.A and 6.B).The rally was particularly strong in technology stocks,which benefited from optimism related to artificial intelligence(AI).Valuation ratios of AI stocks reached lofty heights,above historical norms(Graph 6.C).China was a notable exception to this general picture,as stocks there slumped at the beginning of 2024 before partly recovering.Credit markets also reflected the general risk-on sentiment.Credit spreads of investment grade and high-yield bonds continued their downward trajectory from mid-2022.They started the review period above historical norms but finished it deeply below(Graph 7.A).Despite such narrow spreads,corporate bond issuance remained subdued in both the euro area and the United States.The optimism in financial markets contrasted with more cautious central bank communication.While taking cues from incoming data and policy announcements,market participants anticipated more monetary easing ahead than central banks did for much of the period,especially in the United States.Accordingly,they paid less attention to inflation surprises than the Federal Reserve(Graph 7.B).Still,the perception gap narrowed over time(Graph 7.C),and markets converged to central bank assessments by the second quarter of 2024 amid renewed inflation concerns.On balance,global financial conditions tightened during the review period,despite the risk-on mood.They tightened sharply in the third quarter of 2023 and loosened through end-2023,finishing the review period tighter than where they started and tighter than historical averages(Graph 8.A).Conditions danced to the tune of evolving perceptions of the degree of monetary easing ahead.Uncertainty about the future path of interest rates was high,to the point that bond volatility hovered well above equity volatility a rare occurrence.The gap between the two volatilities 9BIS Annual Economic Report 2024 Restricted Both supply and demand contributed to disinflation1 Graph 5A.Supply and demand contributed to the decline in inflation from peak B.Anchored inflation expectations contributed to disinflation C.Inflation dropped more for cyclically sensitive sectors%pts 1 See technical annex for details.2 The sectors in order of highest to lowest cyclical sensitivity are:transport,housing and utilities,restaurants and hotels,education,food and non-alcoholic beverages,clothing and footwear,furniture,miscellaneous,recreation and culture,health,alcoholic beverages and tobacco,and communications.Sources:Firat and Hao(2023);Federal Reserve Bank of Cleveland;Federal Reserve Bank of New York;Federal Reserve Bank of St Louis;OECD;Bloomberg;LSEG Datastream;BIS.Equity markets rallied as earnings improved Graph 6A.Global stock markets rallied,with the exception of China B.as expected earnings improved2 C.Price-to-earnings ratios for major tech firms remained above norms3 1 Jul 2022=100 3 Jan 2022=100 Ratio a Start of period under review(1 June 2023).1 Shanghai Shenzhen CSI 300 equity index.2 EPS=earnings per share.Current shows latest figures as of 31 May 2024.3 See technical annex for details.Sources:IMF;Bloomberg;LSEG Datastream;LSEG Workspace;BIS.KRIDMXZAJPFRDECAUSGB2101234EMEsAEsTotalDemandSupply%pts105051015202320222021expectationsInflationLagged inflationin the US:Contribution to change in inflation pressuresSupply chainOther 05101520250.80.60.40.20.0USEA Cyclically sensitive sectors(coefficient)2Change in price growth(%pts)1201008060Q2 24Q4 23Q2 23Q4 22aUSAEs excl USCN1EMEs excl CN100908070605040Q2 24Q4 23Q2 23Q4 22Q2 22 S&P 500 MSCI World EURO STOXX 600forecasts:Long-term EPS median:2000current3020100Major techEMEsAEs AEs EMEs Major US tech firmsHistorical:Latest:Restricted Spreads narrowed,market expectations converged to central bank assessments1 Graph 7A.Corporate spreads narrowed2 B.Inflation surprises influenced terminal-rate expectations C.Market expectations converged to that of the central bank bp bp%a Start of period under review(1 June 2023).1 See technical annex for details.2 HY=high-yield;IG=investment grade.Sources:Board of Governors of the Federal Reserve System;Bloomberg;ICE Data Indices;BIS.Banks remained resilient and EMEs weathered the tightening cycle well1 Graph 10A.Bank valuations increased after Silicon Valley Bank collapse B.EMEs weathered the current tightening cycle better than the tightening episodes pre-20002 Ratio a Silicon Valley Bank(SVB)announced capital raising(9 March 2023).1 See technical annex for details.2 Changes relative to the month prior to the first policy rate hike,scaled by the corresponding increase inthe policy rate(except for the policy rate itself).na=not available.Sources:Federal Reserve Bank of St Louis;Bloomberg;EPFR;JPMorgan Chase;LSEG Datastream;national data;BIS.55040025010031023015070202420232022Actual:median:2005currenta US Europe US EuropeHY(lhs):IG(rhs):1.00.50.00.53.53.02.52.01.51.00.5FOMC dot plotFed funds rate futuresJune 2021June 2024:Inflation surprise(%pts)Revision to terminal rate(%pts)5.04.54.03.53.0Q2 24Q1 24Q4 23Q3 23end-2024 fed funds rateFOMC dot plot median for December 24Fed funds rate futures for 1.41.21.00.80.6Q2 24Q1 24Q4 23Q3 23Q2 23Q1 23aUSEAOther AEsEMEsBanks price-to-book ratio:na0.10.142022010010flowsyieldsrateportfolioequitiesspreadgovyieldfundsEMEFX rateEMEEMBIEME10y USTFedLhs Rhs%pts%naUSD bn Episodes in 198090s Current cyclefunds rate:Changes in fed of policy tightening:Changes per 1%pt10BIS Annual Economic Report 2024 Restricted Risk-on phase contrasted with high bond volatility and a stronger dollar1 Graph 8A.Global financial conditions tightened B.Positive gap between bond and equity volatility was historically wide C.Dollar appreciated,especially against the yen Index Index pts Index Q1 2022=100 a Start of period under review(1 June 2023).1 See technical annex for details.Sources:Bloomberg;Goldman Sachs Global Investment Research;LSEG Datastream;BIS.101.25101.00100.75100.50100.25100.00Q2 24Q4 23Q2 23a Financial conditions tightenGoldman Sachs global FCI010203040505040302010024232221201918VXTLTVIX differenceLhs:VXTLTRhs:VIX 1301201101009080202420232022 USD appreciatesaJPY/USDLatin AmericaOther AEsAsian EMEsOther EMEs1510505JPGBEAUSQ1 20240102030JPGBEAUSQ1 2024864202EMEsJPGBEAUSQ1 2024Historical median(200919)financial sector:Bank credit to the private non-11 Restricted Risk-on phase contrasted with high bond volatility and a stronger dollar1 Graph 8A.Global financial conditions tightened B.Positive gap between bond and equity volatility was historically wide C.Dollar appreciated,especially against the yen Index Index pts Index Q1 2022=100 a Start of period under review(1 June 2023).1 See technical annex for details.Sources:Bloomberg;Goldman Sachs Global Investment Research;LSEG Datastream;BIS.Lending standards were tight,loan demand and credit growth were weak Graph 9A.Lending standards tightened B.Loan demand was subdued C.Credit growth was weak%yoy changes,%1 See technical annex for details.Sources:LSEG Datastream;national data;BIS.1510505JPGBEAUSQ1 20240102030JPGBEAUSQ1 2024864202EMEsJPGBEAUSQ1 2024Historical median(200919)financial sector:Bank credit to the private non-11was positive for most of 2023 and 2024 and the widest in 20 years unlike in previous years(Graph 8.B).In contrast to past risk-on episodes,the dollar appreciated(Graph 8.C).Notably,the Japanese yen dropped to record lows against the dollar,on account of interest rate differentials.In contrast to the exuberance in financial markets,bank lending remained cautious.Banks reported tighter lending standards(Graph 9.A)and weaker demand 11BIS Annual Economic Report 2024Box BThe role of monetary policy in the recent inflation episodeInflation has declined considerably following the strongest surge seen in decades.The effects of the robust post-pandemic rebound in aggregate demand,further boosted by fiscal and monetary policies,have faded,while those of the rotation in demand are still under way.Supply chain disruptions and war-induced commodity price shocks have ebbed.But monetary policy has also played an important role.This box examines the impact of monetary policy through the initial burst and subsequent decline of inflation.At the onset of the inflation spike,the stance of monetary policy was extraordinarily accommodative.Indeed,in response to the pandemic,central banks globally cut policy interest rates to historical lows,and some stepped up asset purchases.This came on top of the unusually long period of extraordinarily easy policy that had followed the Great Financial Crisis,given the persistent shortfall of inflation from point targets.While inflation flared up in early 2021,major central banks began to lift rates only one year later,partly due to uncertainty about its persistence after the long period of very subdued price increases(Graph B1.A).With the benefit of hindsight,the exceptional degree of accommodation put in place to support the economy probably contributed to the surprisingly strong rebound in economic activity,increasing the risk of second-round price adjustments.As the full extent of inflationary pressures became apparent,monetary policy responded forcefully to rein in inflation.Central banks raised policy rates to two-decade highs,keeping them there even as inflation began to come off the peak.Central banks also clearly signalled their willingness and determination to act as needed to return inflation to target.These decisive policy actions illustrated central banks commitment to price stability and helped to restrain demand,a key force that had pushed inflation higher.To quantify the role of monetary policy,one approach is to appeal to historical relationships and ask what has been different this time.Focusing on the United States,the exercise uses a time series model to capture the joint evolution of inflation,monetary policy and other key macroeconomic variables,and identifies the effects of monetary policy as those consistent with theory.The exercise then compares the actual outcomes with one where monetary policy would have reacted more promptly to the inflation burst,in line with the past reaction function.The comparison suggests that the initial slow response of monetary policy to inflation did contribute to price pressures.Had monetary policy kept pace with macroeconomic developments,in line with past Monetary policy and inflation Graph B1A.Inflation bursts prompted a delayed but sharp policy tightening1 B.Monetary policy contributed to latest inflation surge and retreat2 C.Decisive policy actions anchored medium-term inflation expectations3%yoy changes,%pts%1 GDP-PPP weighted averages for 10 AEs(AU,CA,DK,EA,GB,JP,NO,NZ,SE and US)and 10 EMEs(CL,CO,IN,KR,MX,MY,PH,TH,TR and ZA).Shaded areas represent persistent inflation periods.2 Simulation based on a Bayesian vector autoregression(BVAR)model of corepersonal consumption expenditures(PCE)inflation,output gap,financial condition index and monetary policy stance index(an optimallyweighted average of policy rate and balance sheet size).Blue line is the counterfactual inflation outcome assuming zero monetary policy shocks,identified through sign restrictions.Methodology based on Mojon et al(forthcoming).3 Median across countries within regions.Other AEs=AU,CA,CH,DK,GB,JP,NO,NZ and SE.Sources:Mojon et al(forthcoming);Congressional Budget Office;Federal Reserve Bank of Chicago;Federal Reserve Bank of St Louis;Consensus Economics;national data;BIS.15105024140494847464Headline inflation(yoy)Policy rates5432102.52.01.51.00.50.00.52322212019Rhs:ActualCounterfactualDifferenceUS core PCE:Lhs:2.752.502.252.001.751.502423222120191817USEAFive-year inflation expectations:EMEsOther AEs 12BIS Annual Economic Report 2024patterns,and tightened earlier,core personal consumption expenditure(PCE)inflation would have been around 1 percentage point lower than the actual peak of 5.6%in early 2022(Graph B1.B).The analysis also indicates that this effect was temporary,as the subsequent swift policy tightening brought the monetary stance in line with past behaviour.Higher interest rates associated with this catch-up in turn contributed importantly to the disinflation observed since mid-2023.The preceding analysis,subject to the usual caveats of any statistical model,does not directly capture a key role played by monetary policy:anchoring economic agents expectations to a low-inflation regime.In a low-inflation environment,such anchoring is relatively trivial because households and businesses pay little attention to inflation.But as inflation rises,it can quickly draw public focus.A strong monetary policy response becomes crucial in pre-empting a transition to a high-inflation regime.Without it,the central banks commitment to price stability could be called into question,resulting in a much higher and more persistent inflation surge(see Chapter II).Indicators of inflation expectations confirm this role.Central banks forceful policy tightening appears to have kept them in check.Although medium-term inflation expectations ticked up in some cases early on,they eventually settled within the pre-pandemic range(Graph B1.C).for credit across major AEs(Graph 9.B).Credit growth was generally subdued in major AEs,except Japan,as well as in EMEs(Graph 9.C).The financial system remained resilient despite the challenges posed by the higher interest rate environment.Some signs of strain did emerge.US regional banks were in the spotlight again,following losses in New York Community Bancorp.And Chinese banks remained under pressure as the problems in the real estate sector continued.That said,the strains were localised and were nothing like those seen in March 2023 among regional banks in the United States or in Europe,where a global systemically important bank,Credit Suisse,had gone under.And any incipient stress was absorbed in an orderly manner.Bank valuations recovered(Graph 10.A),and Restricted Spreads narrowed,market expectations converged to central bank assessments1 Graph 7A.Corporate spreads narrowed2 B.Inflation surprises influenced terminal-rate expectations C.Market expectations converged to that of the central bank bp bp%a Start of period under review(1 June 2023).1 See technical annex for details.2 HY=high-yield;IG=investment grade.Sources:Board of Governors of the Federal Reserve System;Bloomberg;ICE Data Indices;BIS.Banks remained resilient and EMEs weathered the tightening cycle well1 Graph 10A.Bank valuations increased after Silicon Valley Bank collapse B.EMEs weathered the current tightening cycle better than the tightening episodes pre-20002 Ratio a Silicon Valley Bank(SVB)announced capital raising(9 March 2023).1 See technical annex for details.2 Changes relative to the month prior to the first policy rate hike,scaled by the corresponding increase inthe policy rate(except for the policy rate itself).na=not available.Sources:Federal Reserve Bank of St Louis;Bloomberg;EPFR;JPMorgan Chase;LSEG Datastream;national data;BIS.55040025010031023015070202420232022Actual:median:2005currenta US Europe US EuropeHY(lhs):IG(rhs):1.00.50.00.53.53.02.52.01.51.00.5FOMC dot plotFed funds rate futuresJune 2021June 2024:Inflation surprise(%pts)Revision to terminal rate(%pts)5.04.54.03.53.0Q2 24Q1 24Q4 23Q3 23end-2024 fed funds rateFOMC dot plot median for December 24Fed funds rate futures for 1.41.21.00.80.6Q2 24Q1 24Q4 23Q3 23Q2 23Q1 23aUSEAOther AEsEMEsBanks price-to-book ratio:na0.10.142022010010flowsyieldsrateportfolioequitiesspreadgovyieldfundsEMEFX rateEMEEMBIEME10y USTFedLhs Rhs%pts%naUSD bn Episodes in 198090s Current cyclefunds rate:Changes in fed of policy tightening:Changes per 1%pt13BIS Annual Economic Report 2024capital ratios remained stable or improved.Despite one of the most synchronised and fastest tightening cycles in AEs,financial markets in EMEs managed to weather the change very smoothly compared with past episodes(Graph 10.B).Pressure pointsA smooth landing is the central scenario,but several pressure points remain.Four stand out:the underlying inflation trajectory,the macro-financial backdrop,fiscal positions and productivity growth.These pressure points,and their interactions,could compromise the expected benign outcome.Inflation pressure pointsDespite encouraging progress to date,two key and closely related relative price adjustments could stretch out the path towards inflation targets.The first relative price adjustment is that of core goods versus services.The powerful pandemic-induced sectoral shifts in demand interrupted the decades-long entrenched trend of services prices outpacing core goods prices(Graph 11.A).5 The initial plunge in the relative price of services vis-vis core goods has partly unwound following the resolution of supply disruptions and the fall in commodity prices.Indeed,most of the recent disinflation has been driven by goods prices;services inflation has proven more stubborn,and its contribution to overall inflation has increased.Despite the recent unwinding,the relative price of services vis-vis goods remains below the pre-pandemic trend in most economies,and a further adjustment is likely.The price of services vis-vis core goods in EMEs is still well below its 2019 Restricted Two key relative price adjustments are still incomplete1 Graph 11A.The relative price of services vs goods lags pre-pandemic trend B.as do real wages,in both services and manufacturing C.Wage-to-price pass-through is stronger in services than in industry2 Ratio of CPIs,2019=1 Q4 2019=100%1 See technical annex for details.2 Cumulated response at different horizons(in quarters)of producers price indices in the industrial and services sectors to a 1 percentage point increase in hourly wages.Sources:Amatyakul,Igan and Lombardi(2024);Ampudia et al(2024);Eurostat;OECD;LSEG Datastream;national data;BIS.Private sectors financial buffers are diminishing1 Graph 13A.Excess savings are already or close to depleted B.Non-financial companies face debt rollover in the coming years C.Interest rates on household mortgage loans are to reset%of GDP USD trn%1 See technical annex for details.Sources:De Soyres et al(2023);CGFS(2023);Board of Governors of the Federal Reserve System;S&P Capital IQ;national data;BIS.1.051.000.950.900.85242118151209 AEs EMEsActual:Pre-pandemic trend:104102100989624232221201918 Manufacturing ServicesActual:Pre-pandemic trend:100755025025201612840Euro area:Pass-through intervals 90%confidence Industry:Private services:Quarters since increased hourly wages14BIS Annual Economic Report 2024pre-pandemic ratio,while it has just recently crossed it in AEs.In both cases,the relative price remains below the previous trend.Unless the pandemic-induced disruptions have permanently altered preferences or productivity patterns,the upward trend in the relative price would re-establish itself.If lower core goods price growth does not compensate for the shortfall,the upward pressure on inflation could be sizeable(see scenario 1 below).There are signs that are consistent with this risk.Demand for services has been growing more strongly than that for goods in many economies an indication that consumers are reverting to pre-pandemic preferences.Input most notably labour cost pressures also remain more pronounced for services.Admittedly,core goods price growth could slow further,including owing to developments in China(Box A).That said,goods price increases could gather pace at some point,given the indications of greater fragmentation in the global economy.The second relative price adjustment is that of labour versus consumer goods and services,ie real wages.As inflation surged,real wages plummeted across most jurisdictions,and have yet to recover despite robust labour markets(Graph 11.B).The catch-up may take time and be less than complete if workers bargaining power remains as limited as it was before the pandemic.6 Even so,there is a risk that sustained robust conditions in labour markets lead to persistent wage demands in excess of growth in productivity.And since terms of trade effects have largely dissipated,there is no obvious reason why real wages should not catch up.These pressures could remain in the pipeline even after inflation subsides,especially in jurisdictions where wage bargaining is more centralised and staggered.If the purchasing power lost in the recent inflation burst were recouped in the coming years,there could be significant upward pressure on inflation(see scenario 1 below).The risks are related because services are more labour-intensive than goods.This is one reason why price growth in the services sector generally tends to be more persistent.It also helps to explain why the pass-through from wages to prices tends to be higher in that sector.For example,estimates based on the euro area suggest that the pass-through is twice as large in the private services sector than in industrial sectors.Moreover,the lags are significant,about two to three years(Graph 11.C).7 In addition to the incomplete adjustment of relative prices,other pressure points are noteworthy.Rather mechanically,the withdrawal or expiration of support measures could unleash new short-term price increases.In particular,fuel subsidies are still substantially above pre-pandemic levels,highlighting the significant role of fiscal policy in containing living costs.Lifting the subsidies is essential,both from a fiscal sustainability point of view and to avoid medium-term inflationary pressures.But,as was clear from the outset,dismantling them will have short-term costs in terms of inflation and make the disinflation journey bumpier.In addition,further disruptive supply side shocks cannot be ruled out,particularly in the current geopolitical environment.Tensions could flare up and have a significant impact on commodity prices in particular.After a long period of inflation well above target,further shocks would be more likely to threaten a shift to a high-inflation regime,as behaviour adjusts to the recent more inflationary experience.Macro-financial pressure pointsAlthough the financial system has been resilient so far,macro-financial imbalances could unwind and cause headwinds due to historically high levels of debt and debt service costs.As the impact of pandemic-era loan assistance programmes fades,some households and businesses might find themselves in a precarious position.The cumulative effects of policy tightening could then carry momentum.15BIS Annual Economic Report 2024Indeed,particularly in AEs,there are signs that the financial cycle has peaked,as credit indicators and real property prices start returning to their longer-term trends(Graph 12.A).Typically,this is a harbinger of credit losses ahead and weaker economic activity.8 Historically,financial stress tends to show up within two to three years following the first rate hike,as loan impairment ratios rise and economic activity weakens(Graph 12.B,yellow and blue lines,respectively).9 The current cycle is still in very early stages of the post-peak phase(red and purple lines).This historical comparison suggests that it is typical for stress to emerge only with a lag.The risk is higher the longer interest rates stay up,putting pressure on borrowers that need to refinance their debts,especially once the pandemic support that kept defaults artificially low fades.Within this broad picture,several pressure points merit particular attention.First,deteriorating balance sheets in the non-financial sector and dwindling savings buffers could cause domestic demand to falter.Even for those households benefiting from large fiscal support,excess savings have run out or diminished substantially(Graph 13.A).10 As maturity walls are hit(Graphs 13.B and 13.C),the need to roll over debt at higher interest rates could further dent the financial buffers of households and firms.The cumulative effects of past monetary tightening could generate a materially stronger contractionary effect on domestic demand than seen in the last few years.Second,and more specifically,commercial real estate(CRE)is facing both cyclical and structural headwinds(Box C).CRE bankruptcies could impact banks lending capacity and overall financial health.Signs of possible future stress in the sector appeared initially in 2023,with losses on US CRE exposures crystallising in the books of a few US regional banks and banks elsewhere.Major banks have also reportedly started increasing provisions in anticipation of future losses.So far,the banking system has proved resilient,but vulnerabilities could become evident if exposures to CRE are underreported and if prices drop more than expected.The financial cycle is peaking1 Graph 12A.Credit and property price indicators are returning to their longer-term trends B.pointing to possible stress ahead2 std dev%pts%pts a Start of the Asian financial crisis(Q3 1997).Start of the Great Financial Crisis(Q3 2007).b1 See technical annex for details.Lines show medians and shaded areas show interquartile ranges across countries.2Sources:Fitch;national data;BIS.210123202320182013200820031998199319881983abInterquartile rangeMedianAEs:Financial cycle indicator:EMEs:0.90.60.30.00.30.62.50.02.55.07.510.0 20 16 12 8 404 Loan impairment ratio(lhs)GDP(rhs)Current:Past:Quarters around US financial cycle peaks16BIS Annual Economic Report 2024The macro-financial impact of a large CRE correction could be significant.In the 1990s,when CRE prices fell by over 40%in real terms,credit and GDP growth dropped by 12 and 4 percentage points,respectively(Graph 14.A).An econometric estimate of macro-financial responses to CRE price shocks suggests a sharp fall in CRE prices this time could have a similarly material impact on credit and GDP growth(Graph 14.B).While naturally uncertain,these estimates highlight the possible repercussions of a CRE bust.And the impact could be amplified by credit losses or a broader drop in other asset prices.Indeed,the risk of such a drop looms large for the residential segment of real estate markets,where house price valuations continue to be very stretched relative to in the past(Graph 14.C).Third,nonbank financial intermediation merits close monitoring.In particular,private credit and equity markets have grown exponentially in the post-Great Financial Crisis(GFC)years of cheap financing(Box D).11 This has increased their vulnerability to higher interest rates.Despite the recent drop in credit spreads,the gap between those in the riskiest and those in other loan segments has increased(Graph 15.A),highlighting pockets of vulnerability.Opaque valuations and infrequent updates of these valuations might create a lagged reaction of private markets to a potential correction in public markets.A correction in private equity and credit could spark broader financial stress via at least three channels.First,investors might liquidate assets elsewhere,potentially transmitting the shock to other market segments.Insurance companies could be quite vulnerable given their increased exposure to private credit(Box E).Second,firms that tap the market could find themselves squeezed,generating spillovers on their clients and the economy.Third,banks remain exposed to the sector,either directly or indirectly,not least as ultimate providers of liquidity.Finally,a slowdown in the Chinese economy and troubles in its financial sector,particularly related to real estate,could spill over globally.The falling equity market Restricted Two key relative price adjustments are still incomplete1 Graph 11A.The relative price of services vs goods lags pre-pandemic trend B.as do real wages,in both services and manufacturing C.Wage-to-price pass-through is stronger in services than in industry2 Ratio of CPIs,2019=1 Q4 2019=100%1 See technical annex for details.2 Cumulated response at different horizons(in quarters)of producers price indices in the industrial and services sectors to a 1 percentage point increase in hourly wages.Sources:Amatyakul,Igan and Lombardi(2024);Ampudia et al(2024);Eurostat;OECD;LSEG Datastream;national data;BIS.Private sectors financial buffers are diminishing1 Graph 13A.Excess savings are already or close to depleted B.Non-financial companies face debt rollover in the coming years C.Interest rates on household mortgage loans are to reset%of GDP USD trn%1 See technical annex for details.Sources:De Soyres et al(2023);CGFS(2023);Board of Governors of the Federal Reserve System;S&P Capital IQ;national data;BIS.1.051.000.950.900.85242118151209 AEs EMEsActual:Pre-pandemic trend:104102100989624232221201918 Manufacturing ServicesActual:Pre-pandemic trend:100755025025201612840Euro area:Pass-through intervals 90%confidence Industry:Private services:Quarters since increased hourly wages108642022023202220212020USEAGBJPExcess savings since Q1 2020:54321030292827262524USAEs excl USEMEsYear of maturity806040200SANLLUKRAUFRBEGBCANZHKVariable rateUp to 2 yearsFrom 3 to 5 yearsFrom 6 to 10 yearsFor greater than 10 yearsFixed rate:17BIS Annual Economic Report 2024Box CCommercial real estate risks in the spotlightCommercial real estate(CRE)markets are smaller than residential real estate(RRE)markets,yet they present a greater risk to financial stability.Historically,it was losses on CRE,rather than RRE,that often caused financial crises.1 The Covid-19 pandemic generated a structural shift in the demand for CRE,particularly office space.Compounded by a rising interest rate environment,this put downward pressure on prices in the sector,reducing valuations and creating losses for lenders.Such losses have already started generating stress at some banks and other financial intermediaries.These losses are poised to weigh on profits and may cause further strains a risk recognised by authorities in a number of countries.2 The post-pandemic shift in the CRE landscape has affected property values worldwide.Vacancy rates in office CRE have risen in many large cities in the past two years,especially in the United States and China(Graph C1.A).Higher vacancy rates depress rent revenues and put downward pressure on property prices.CRE prices have declined in many countries,particularly in the office sector,with the largest drops in US cities.Declining CRE prices have increased the risk of default and losses at financial intermediaries.Banks non-performing CRE loans rose starting in 2022(Graph C1.B).CRE makes up about 18%of bank loans in the United States,12%in Germany and 10%in the Netherlands countries where non-performing loans(NPLs)have risen sharply.While banks are typically the key lenders,non-bank financial institutions(NBFIs)have been playing a growing role and have seen risks materialise for example in commercial mortgage-backed securities(CMBS)(Graph C1.C).In the United States,the impact on the financial system has not yet led to actual stress,as in past episodes.Vacancy rates are at an all-time high,bank lending standards have tightened,and thus far the decline in market returns for CRE investors has already exceeded that of the 1990 CRE stress(Graph C2.A).Despite this,however,credit to the CRE sector continues to expand,even at a faster pace than overall bank credit(same panel).This may stem in part from the distribution of CRE exposure and losses.While direct exposure to the CRE sector as a whole in the US banking system is largest at small and mid-sized banks,NPLs have thus far risen mainly among Restricted Commercial real estate(CRE)prices are falling,risk is rising Graph C1A.Office prices fall as vacancies rise1 B.CRE NPLs rise2 C.CMBS spreads elevated3%of loans bp 1 Top three cities in each area with largest price drop between Q4 2021 and Q1 2024.2021 vacancy rate approximated by Q1 2022 value forAsia.NPL=non-performing loans.Commercial mortgage-backed securities(CMBS)spreads refer to the difference in yield between23CMBS and a benchmark interest rate.For US,it is the five-year on-the-run AAA CMBS spread over the Secured Overnight Financing Rate(SOFR).For EA,it is the five-year euro CMBS spread over Euribor.Sources:European Banking Authority;BankRegData;Bloomberg;CommercialEdge;JPMorgan Chase;Knight Frank;Macrobond;Statista;BIS.20151050020406080San FranciscoChicagoSeattleSingaporeTokyoShanghaiLondonFrankfurtParisUS:Asia:Europe:2023:Vacancy(lhs):2021:(rhs):Price change642020232
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GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q3,2024weakness of the Chinese economy may have weighed on sentiment,as well as fears about the risk of a U.S.recession.The survey was completed before the Chinese authorities announced a pivot to a more aggressive policy stimulus.A sharp decline in confidence in the UK weighed heavily on the index for Western Europe,amid concerns about predicted tax rises in the upcoming Budget.Cost concerns remain elevated,but indicators of corporate stress are still not concerning.The proportion of respondents reporting increased operating costs remains elevated by historical standards in most regions(see Chart 5),suggesting central banks need to proceed quite cautiously with monetary easing,particularly given events in the Middle East.But concerns that customers and/or suppliers could go out of business remain close to historical averages and the proportion of global firms having problems accessing finance has moved lower amid easing global financial conditions(see Charts 7 and 8).The global risks section asked accountants to rank their top three risk priorities.Regulatory change was the top concern for the second quarter running for respondents in financial services,while the economy remained well out in front for those in the corporate sector.Both public sector entities and small and medium-sized practices(SMPs)put cybersecurity as their top priority,and for the first time since the risk survey started,climate change claimed a top three spot,with the public sector placing it third.Another first-ever was Western Europe being the only region to rank talent scarcity as its highest risk priority.GECS survey points to some slowing in global growth in Q3.The global economy has been quite resilient so far in 2024,but the latest survey of accountants points to some easing in growth at the current juncture.On a positive note,the increased policy stimulus should boost the Chinese economy over the coming months and quarters,and the move to rate cuts by the U.S.Federal Reserve,and many other central banks,will increasingly support global activity.That said,geopolitical risks are very elevated,with the conflict in the Middle East escalating.In addition to potentially weighing on confidence,any further spike in oil prices would clearly be problematic for central banks and consumers.Meanwhile,significant uncertainty about the upcoming U.S.election could increase corporate caution.Executive summary Confidence among global accountants declined in Q3 to its lowest since Q4 2023.CHART 1:GECS global indicators-60-50-40-30-20-100102030 Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)IndexQ3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 20241 The median is used to calculate the averages.Confidence among accountants and chief financial officers(CFOs)declines.The ACCA and IMA Global Economic Conditions Survey(GECS)suggests that global confidence among accountants and finance professionals declined moderately in Q3.It is now at its lowest since Q4 2023 and slightly below its historical average.1 There was also a moderate decline in the forward-looking New Orders Index,and modest falls in the Capital Expenditure and Employment indices(see Chart 1).The message coming from the global CFOs in our panel was also more cautious.Confidence among CFOs fell moderately,and is now below its historical average,and there was a sharp deterioration in their assessment of new orders(see Chart 15).Some recovery in confidence in North America,but large falls in Asia Pacific and Western Europe.Confidence improved in North America(see Chart 2),although it recouped less than half of its Q2 fall,and the key indicators for the region look weak by historical standards.Growth in the U.S.economy is likely to slow over coming quarters,but a soft landing looks the most likely scenario.There was a marked decline in confidence in Asia Pacific,erasing most of the gains made earlier in 2024.Concerns about the continued Accountants and CFOs become more pessimistic on global economic prospects in Q3.21.Global and regional analysisThere was a wide divergence in the regional changes in confidence in Q3(see Chart 2).The largest rise was in the Middle East,and there were decent gains in South Asia and North America.The improvement in the latter was driven by quite a large rise in U.S.confidence after a huge fall previously.While less than half of the previous decline was recouped,it would suggest that fears about a potential U.S.recession may have eased somewhat.That said,the other key indicators look consistent with a slowing economy.Meanwhile,there was a huge decline in confidence in Asia Pacific,wiping out most of the gains made earlier in 2024.This may reflect growing concerns about the weakness of the Chinese economy,fears The Global New Orders Index declined moderately in the latest quarter(see Chart 3).It is now at its lowest since Q4 2020,albeit only slightly below its average over the surveys history.The declines in orders were quite broad-based across regions.The largest falls occurred in the key regions of Western Europe,North America,and Asia Pacific,with more modest declines in Africa and the Middle East.Bucking the trend was South Asia,with a small rise.Compared with their history,new orders are meaningfully below average in North America and Western Europe,but above average by varying degrees in Asia Pacific,Africa,South Asia,and the Middle East.Confidence fell sharply in Asia Pacific in Q3 and registered quite a large decline in Western Europe.There was some improvement in North America after the huge fall in Q2.CHART 2:Confidence change over the past quarter/year,by region-30-20-1001020CHART 3:GECS Orders change over the past quarter/year,by region-10-5051015South AsiaMiddle EastAfricaGlobalAsia PacificNorth AmericaWestern EuropeSource:ACCA/IMA(202324)Orders over the past quarter Orders over the past yearThe Global New Orders Index declined moderately in Q3,driven by falls in the key Asia Pacific,North America and Western Europe regions.Index pointsMiddle EastSouth AsiaNorth AmericaAfricaGlobalWestern EuropeAsia PacificSource:ACCA/IMA(202324)Confidence over the past quarter Confidence over the past yearIndex pointsabout the risk of a hard landing for the U.S.economy,and the recent weakening in the global manufacturing sector.The survey was carried out before the announcement of a more aggressive policy stimulus by the Chinese authorities.There was also quite a material decline in confidence in Western Europe,driven by a very sharp fall in the UK.Concerns about tax rises in the upcoming Budget and other policy changes appear to have been a key factor.Confidence is moderately below its historical average in North America,Western Europe,and Africa,and very slightly lower in Asia Pacific.Confidence is significantly above average in the Middle East,and meaningfully so in South Asia.There was some recovery in confidence in North America,but a sharp fall in Asia Pacific.3The proportion of global respondents reporting increased costs was largely unchanged in Q3 but remains elevated by historical standards(see Chart 4).At the regional level,cost pressures increased materially in Western Europe(driven by a very significant rise in the UK),rose slightly in the Middle East,and were largely unchanged in Asia Pacific.Cost pressures fell very sharply in South Asia,and to a much lesser extent in Africa and North America.Cost pressures remain elevated by historical standards in Western Europe,Africa,Asia Pacific,and North America(see Chart 5),suggesting that central banks enacting,or contemplating,monetary easing in those regions need to tread somewhat carefully.Cost pressures are around their historical averages in the Middle East and South Asia.Concerns about costs among CFOs declined meaningfully versus the previous quarter(see Chart 6),but over 60%are still reporting increased operating costs compared with a historical average of under 50%.The proportion of respondents reporting increased operating costs remained elevated by historical standards in Q3.CHART 4:Concerns about increased operating costs20304050607080Source:ACCA/IMA(201424)%of global respondents reporting increased costs Median over survey historyQ3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 2024%Cost pressures facing businesses remain elevated in Western Europe,Asia Pacific,North America,and Africa.CHART 5:Concerns about increased operating costs%of respondents reporting increased costs020406080North AmericaWestern EuropeMiddle EastAsia PacificSouth AsiaAfricaSource:ACCA/IMA(2024)Q3 2024 Median over survey historyThe proportion of CFOs experiencing increased operating costs declined materially in Q3 and is now similar to that of the broader panel.CHART 6:Global CFO concerns about increased operating costs020406080100%of respondents reporting increased costsMedian over survey historySource:ACCA/IMA(201424)Q3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 20244GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q3,2024Concerns globally that customers could go out of business rose slightly in Q3,while concerns about suppliers eased again.Neither of our two GECS fear indices look worrying by historical standards(see Chart 7).Meanwhile,global problems accessing finance eased for the second consecutive quarter,with only 14%of respondents reporting issues accessing finance,below the historical average of 20%.The recent decline likely reflects the improvement in global financial conditions since autumn 2023 and the beginning of rate cuts by the major global central banks.Global problems securing prompt payment also eased slightly and are below their historical average(see Chart 8).The easing in global financial conditions has been a helpful tailwind for the global economy,and monetary easing by central banks,particularly the U.S.Federal Reserve,is clearly very beneficial.Nevertheless,absent a sharp slowing in growth,interest-rate-cutting cycles are likely to be quite gradual and rates are still likely to remain high by the standards of the post-Global Financial Crisis period.Hence,firms and households that locked in very low interest rates in recent years are likely to experience a rise in borrowing costs when they come to renew their loans.CHART 7:GECS global fear indicesSource:ACCA/IMA(201424)01020304050 GECS:Index of concern about customers going out of business GECS:Index of concern about suppliers going out of businessIndexQ3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 2024Concerns globally that customers could go out of business edged up in Q3,but concerns about suppliers continued to ease.Neither series looks alarming by historical standards.Global problems accessing finance have eased quite materially in 2024 and are close to record lows.CHART 8:Problems securing prompt payment and accessing finance101520253035 GECS:Global problems accessing finance GECS:Global problems securing prompt payment%Source:ACCA/IMA(201424)Q3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 20245GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q3,2024NORTH AMERICAConfidence improved somewhat in Q3,albeit recouping less than half of Q2s decline(see Chart 9),and remains below its historical average.The New Orders,Capital Expenditure and Employment indices all declined by varying degrees and are well below their historical averages.Somewhat encouragingly,the proportion of respondents reporting increased operating costs eased to its lowest since Q1 2021,while remaining high by historical standards.All in all,while the increase in confidence is welcome,the key indicators are consistent with some slowing in the U.S.economy and significant caution on behalf of businesses.But with the job market showing resilience and the Federal Reserve beginning its rate-cutting cycle,the most likely scenario for the U.S.economy still looks to be a soft landing.Nevertheless,given the uncertainty faced by firms amid the election,and sharply heightened geopolitical tensions,one cannot rule out a sharper-than-expected slowdown.ASIA PACIFICConfidence fell very sharply in Q3,erasing most of the gains made earlier in the year,although it is only slightly below its historical average.There was also quite a meaningful decrease in the forward-looking New Orders Index(see Chart 10),but it remains well above average.The message coming from the Capital Expenditure and Employment indices was mixed.The former improved slightly and is above average,while the latter fell quite materially,but is close to its average.All in all,the key indicators point to a more downbeat backdrop for the region.The continued weakness of the Chinese economy was likely a factor,as well as concerns about the U.S.economy and signs of weakening in global manufacturing.The move to a more aggressive policy stimulus by the Chinese authorities,subsequent to the survey period,should help activity in the region,as will falling U.S.interest rates.The U.S.election and geopolitics remain important risks.WESTERN EUROPEThere was quite a large decline in confidence,which is now at its lowest since Q4 2023(see Chart 11).Similarly for the New Orders Index,which is now meaningfully below its historical average.More encouragingly,the Capital Expenditure Index edged slightly higher,and there was a decent gain in the Employment Index.The former is below its historical average while the latter is just above.Meanwhile,the proportion of respondents reporting increased operating costs jumped and remains well above its average.Much worse than expected,outturns for the UK heavily influenced the results.UK confidence fell markedly,and there was a meaningful decline in the New Orders Index.The proportion of UK respondents citing increased operating costs also soared.The UK results seem to fly in the face of the improving data this year,both on the activity and inflation front,and likely reflect business concerns about policy changes and tax rises at the Budget on 30 October.CHART 9:North America-60-40-200204060 Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)CHART 10:Asia Pacific-70-60-50-40-30-20-1001020 Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)CHART 11:Western Europe-60-40-200204060 Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)IndexIndexIndexQ3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 2024Q3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 2024Q3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 20246GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q3,2024MIDDLE EASTConfidence in the region improved quite sharply in Q3,as did the Capital Expenditure and Employment indices(see Chart 12),all of which are now well above their historical averages.By contrast,there was a small fall in the New Orders Index,although it remains above average.The latest results were clearly encouraging and come despite conflict in the region and the fall in oil prices since the Q2 survey.The positive results likely reflect the continued resilience of the non-oil economies in key countries such as Saudi Arabia,as well as rising expectations of easier U.S.monetary policy,with many currencies in the region pegged to the U.S.dollar.Compared with Q2,survey respondents also became more optimistic on the prospects for increases in government spending over the next 12 months.On a note of caution,the survey was conducted before the latest intensification of hostilities in the region,which risk weighing on business and consumer sentiment,despite pushing oil prices higher.SOUTH ASIAConfidence registered a decent increase in Q3 it is now at its highest level since Q3 2022 and above its historical average.There was also a small improvement in the New Orders Index,which remains above its average(see Chart 13).There were solid gains in both the Capital Expenditure and Employment indices.The former is above its historical average,while the latter is at it.Meanwhile,the proportion of survey respondents reporting increased operating costs fell sharply and is now at its historical average.Overall,the key indicators are consistent with a quite positive backdrop for South Asia.The regions largest economy,India,should continue to be the worlds fastest growing major economy in both 2024 and 2025.It should benefit from strong infrastructure investment by the government,fast growth in the services sector,and the continued diversification of international supply chains.The job market remains an area of some weakness though.AFRICAAll the key indices declined by varying degrees in Q3(see Chart 14).The Confidence and New Orders indices both registered quite small falls.The former is below its historical average,while the latter is above it.The Capital Expenditure Index recorded a modest decline,but there was a larger retreat in the Employment Index.Both indices are below their historical averages,but not significantly.Meanwhile,the proportion of respondents reporting increased operating costs eased in Q3 while remaining elevated by historical standards.Inflation remains a major issue in the region,although the improving picture in some countries is allowing central banks to reduce policy rates.Monetary easing by the U.S.Federal Reserve should prove very helpful by reducing currency depreciation pressures,but geopolitical developments remain a major risk,given their potential impact on commodity prices.CHART 12:Middle East-80-60-40-200204060CHART 13:South Asia-80-60-40-2002040CHART 14:Africa-80-60-40-2002040IndexIndexIndex Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)Q3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 2024Q3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 2024Q3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 20247GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q3,2024Confidence among CFOs declined in Q3,and there was a very sharp fall in the New Orders Index.CHART 16:GECS global indicators CFOsCHART 15:GECS global indicators CFOsSource:ACCA/IMA(201424)-80-60-40-2002040 Confidence Index Orders Index IndexThe message from the Capital Expenditure and Employment indices was mixed,with the former declining and the latter rising.The Capital Expenditure Index for CFOs fell moderately after a very large gain previously(see Chart 16).It remains below its historical average,although it has been materially lower on several occasions since Russia invaded Ukraine.It remains lower than the index for the broader panel,but not significantly.The Employment Index increased moderately and is above its average(see Chart 16)and well above that of the broader panel.Meanwhile,the proportion of CFOs experiencing increased operating costs declined by almost 10 percentage points but remains elevated by historical standards(see Chart 6).All in all,the latest results from CFOs point to some increase in caution in Q3,and are consistent with some slowing in global growth.The large fall in the proportion of CFOs reporting increased operating costs is a welcome development,nonetheless,and points to an inflationary backdrop that is becoming more conducive to a reduction in the magnitude of central banks policy restraint.That said,with cost concerns remaining on the high side historically,policymakers still need to tread carefully.Median over survey historySource:ACCA/IMA(201424)-80-60-40-20020 Capital Expenditure Index Employment Index IndexMedian over survey historyQ3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 2024Q3 2014Q3 2016Q3 2018Q3 2020Q3 2022Q3 20242.Chief Financial Officers(CFOs)Confidence among CFOs falls in Q3,amid a big decline in new orders.The indices reported in this section reflect the survey responses of CFOs who are part of our broader global panel of accountants and finance professionals.Confidence among CFOs recorded a moderate decline in Q3 and is now slightly below its historical average.The New Orders Index fell sharply,though,and is well below average(see Chart 15).The Confidence Index for CFOs is just below that of the broader panel(accountants,auditors,etc.,as well as CFOs),while the New Orders Index is meaningfully lower.8Financial ServicesCorporate SectorPublic sector not-for-profitSmall or medium-sized practice(SMP)Regulatory/compliance/legalEconomic inflation/recession/interest ratesTalent scarcity/skills gaps/employee retentionTechnology/data/cybersecurityClimate change/related regulation/its social and economic impactsInternational and geopolitical instabilityLogistics/supply chain disruption/supply shortages3.The ultimate year of national elections and geopolitical uncertaintiesWhile accountants around the world again ranked macroeconomics as the highest risk priority overall,differences across sectors painted a telling story about how the profession is making sense of todays landscape.Worldwide,more voters in history will have headed to the polls by the end of 2024,with at least 64 countries,plus the European Union,holding national elections,the results of which may prove consequential for years to come.With intensifying conflicts in the Middle East and the war between Russia and Ukraine,responses to the risk section of our third-quarter 2024(Q3 2024)GECS report reveal how challenging it has become for financial professionals to understand the economic impacts of this unprecedented combination of risks.By region,North America had the largest proportion of respondents to rank economic inflation,recession and interest rates as their top risk priority for Q3 2024.Answers to the open-ended question,what do you feel is the most underestimated risk facing your organisation?illustrate the degree of emerging threats facing businesses in todays poly-crisis environment.U.S.respondents pointed to a range of scenarios from trade tariffs to changing cybersecurity reporting requirements and artificial intelligence(AI)laws.A financial manager from a manufacturer in the Midwest said:the implications of these are hard to measure.Others also showed growing concerns about the shortage of skills,not least in the accountancy profession.A controller from another U.S.manufacturer replied more candidly about blind spots within her own company,saying that the biggest risks to my organisation are internal.With no consistent internal controls or centralised risk assessment,I believe there are things happening that could cause irreparable damage in the future.Bearish is the best way to describe risk survey responses from the UK,which accentuated what ACCAs chief economist wrote in the previous section about falling confidence despite long-awaited economic growth.The most underestimated risk for us is the reduction in charitable donations if the new government increases taxes,said an ACCA member from the not-for-profit sector.This respondent also said that the biggest impact the economy had on his business was scaling back investment in capital projects and staff.Most respondents expressed concerns about the upcoming Budget speech.One said that the most underestimated risk was uncertainty around changes to taxation and employment law and how that impacts recruitment,which is already difficult.I worry how we will be able to provide acceptable levels of support for our customers.Responses from those working at small-to-medium-sized enterprises(SMEs)also struck chords about the increasing risk overload and thinning capacity.One commented how higher taxation and increased workers rights are hitting small business employers hard while another ACCA member added,I have never seen such uncertainty since qualifying.Respondents from the corporate sector ranked macroeconomics as the highest risk priority,but responses from around the world showed how interconnected everything is.For example,one ACCA member in Australia,noted the increasing possibility of a global AI-triggered crash while also suggesting that automation will help eliminate inefficiencies.A finance director at a transportation company in the United Arab Emirates emphasised the web of risks facing multinational corporates:Geopolitical uncertainty is affecting global shipping in many ways,but were also exposed to volatile currency fluctuations,new cyber threats and talent retention problems,plus global freight and bunker charges variations that we have never seen before.As for financial services,challenges with sanctions compliance came up more,suggesting that many firms do not have dedicated teams or personnel with the necessary knowledge and skills to conduct effective screening.Its clear that many are struggling to keep up with the constantly evolving sanctions landscape and therefore finding it difficult to identify potentially costly risks.A Kenya-based CFO working in financial services said:There is a lack of capabilities of long-serving employees to understand risk in this new environment we operate in.Climate change and nature-related risks were also mentioned more than previously,with many suggesting that the economic implications are just as existential.An accountant in Ghana said:The rate at which the environment and water bodies are being destroyed through illegal mining is critical.Water could be a very serious problem in the near future,which for now is not on the hot plate for discussion.Another,from a retailer in Zimbabwe,pointed out the pervasiveness of fraud and underlined the sheer lack of trust in leadership seen across all sectors and regions:Fraudulent activities involving senior management and how theyre protected are underestimated given the existential risks we face.An internal auditor from financial services in Ireland summed it up:Environmental and social risks have become so political,it is hard to know where next for the economy and society at large.CHART 17:Top ranked risk priorities in Q3 2024 Financial Services vs Corporate Sector vs Public sector not-for-profit vs SMPsSource:ACCA/IMA Global Risks surveys(2024)9ACCA The Adelphi 1/11 John Adam Street London WC2N 6AU United Kingdom / 44(0)20 7059 5000 /IMA 10 Paragon Drive Suite 1 Montvale NJ 07645-1760 USA / 1(201)573-9000 /www.imanet.org The Association of Chartered Certified Accountants,Institute of Management Accountants,October 2024.About ACCA We are ACCA(the Association of Chartered Certified Accountants),a globally recognised professional accountancy body providing qualifications and advancing standards in accountancy worldwide.Founded in 1904 to widen access to the accountancy profession,weve long championed inclusion and today proudly support a diverse community of over 247,000 members and 526,000 future members in 181 countries.Our forward-looking qualifications,continuous learning and insights are respected and valued by employers in every sector.They equip individuals with the business and finance expertise and ethical judgment to create,protect,and report the sustainable value delivered by organisations and economies.Guided by our purpose and values,our vision is to develop the accountancy profession the world needs.Partnering with policymakers,standard setters,the donor community,educators and other accountancy bodies,were strengthening and building a profession that drives a sustainable future for all.Find out more at About IMA (Institute of Management Accountants)IMA is one of the largest and most respected associations focused exclusively on advancing the management accounting profession.Globally,IMA supports the profession through research,the CMA(Certified Management Accountant),CSCA(Certified in Strategy and Competitive Analysis),and FMAA(Financial and Managerial Accounting Associate)certification programs,continuing education,networking,and advocacy of the highest ethical business practices.Twice named Professional Body of the Year by The Accountant/International Accounting Bulletin,IMA has a global network of about 140,000 members in 150 countries and 350 professional and student chapters.Headquartered in Montvale,N.J.,USA,IMA provides localized services through its six global regions:The Americas,China,Europe,Middle East/North Africa,India,and Asia Pacific.For more information about IMA,please visit:www.imanet.orgAbout this reportThe Global Economic Conditions Survey(GECS),carried out jointly by ACCA(the Association of Chartered Certified Accountants)and IMA(Institute of Management Accountants),is the largest regular economic survey of accountants around the world,in both the number of respondents and the range of economic variables it monitors.The GECS has been conducted for over 10 years.Its main indices are good lead indicators of economic activity and provide a valuable insight into the views of finance professionals on key variables,such as investment,employment,and costs.Fieldwork for the 2024 Q3 survey took place between 3 and 19 September 2024,gathering 697 responses:476 from ACCA members and 221 from IMA members.ACCA and IMA would like to thank all members who took the time to respond to the survey.It is their first-hand insights into the fortunes of companies around the world that make GECS a trusted barometer for the global economy.Read the previous GECS reports hereContactsFor further information about the Global Economic Conditions Survey and the series of quarterly reports,please contact:Jonathan Ashworth Chief Economist ACCA Alain Mulder Senior Director Europe Operations&Special Projects IMA amulderimanet.orgThe section The ultimate year of national elections and geopolitical uncertainties was produced by:Rachael JohnsonHead of Risk Management and Corporate Governance for Policy&Insights ACCA
2024-11-07
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GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q2,2024 The Association of Chartered Certified Accountants,Institute of Management Accountants,July 2024.About ACCA We are ACCA(the Association of Chartered Certified Accountants),a globally recognised professional accountancy body providing qualifications and advancing standards in accountancy worldwide.Founded in 1904 to widen access to the accountancy profession,weve long championed inclusion and today proudly support a diverse community of over 247,000 members and 526,000 future members in 181 countries.Our forward-looking qualifications,continuous learning and insights are respected and valued by employers in every sector.They equip individuals with the business and finance expertise and ethical judgment to create,protect,and report the sustainable value delivered by organisations and economies.Guided by our purpose and values,our vision is to develop the accountancy profession the world needs.Partnering with policymakers,standard setters,the donor community,educators and other accountancy bodies,were strengthening and building a profession that drives a sustainable future for all.Find out more at About IMA (Institute of Management Accountants)IMA is one of the largest and most respected associations focused exclusively on advancing the management accounting profession.Globally,IMA supports the profession through research,the CMA(Certified Management Accountant),CSCA(Certified in Strategy and Competitive Analysis),and FMAA(Financial and Managerial Accounting Associate)certification programs,continuing education,networking,and advocacy of the highest ethical business practices.Twice named Professional Body of the Year by The Accountant/International Accounting Bulletin,IMA has a global network of about 140,000 members in 150 countries and 350 professional and student chapters.Headquartered in Montvale,N.J.,USA,IMA provides localized services through its six global regions:The Americas,China,Europe,Middle East/North Africa,India,and Asia Pacific.For more information about IMA,please visit:www.imanet.orgAbout this reportThe Global Economic Conditions Survey(GECS),carried out jointly by ACCA(the Association of Chartered Certified Accountants)and IMA(Institute of Management Accountants),is the largest regular economic survey of accountants around the world,in both the number of respondents and the range of economic variables it monitors.The GECS has been conducted for over 10 years.Its main indices are good lead indicators of economic activity and provide a valuable insight into the views of finance professionals on key variables,such as investment,employment,and costs.Fieldwork for the 2024 Q2 survey took place between 4 and 20 June 2024,and gathered 665 responses:463 from ACCA members and 202 from IMA members.ACCA and IMA would like to thank all members who took the time to respond to the survey.It is their first-hand insights into the fortunes of companies around the world that make GECS a trusted barometer for the global economy.ContactsFor further information about the Global Economic Conditions Survey and the series of quarterly reports,please contact:Jonathan Ashworth Chief Economist ACCA Alain Mulder Senior Director Europe Operations&Special Projects IMA amulderimanet.orgThe section The uncertainties keeping accountants up at night was produced by:Rachael JohnsonHead of Risk Management and Corporate Governance for Policy&Insights ACCAThe ACCA and IMA Global Economic Conditions Survey(GECS)suggests that global confidence among accountants and finance professionals improved slightly in Q2 2024 and is just above its historical average.1 There were also small gains in the Capital Expenditure,Employment,and New Orders indices(see Chart 1).The first of these is slightly below its average,while the other two are slightly above average.The key global indicators for chief financial officers(CFOs)all rose,with sharp gains in the New Orders and Capital Expenditure indices(see Charts 15 and 16).There was some notable divergence at the regional level(see Chart 2).Confidence among accountants registered another decent increase in Western Europe,consistent with continued recovery in the euro area and UK economies.There was a small rise in confidence in Asia Pacific,which came after a huge gain previously,and a marked increase in the New Orders Index.The region is benefiting from improvements in the global economy,including the manufacturing sector and technology cycle.By contrast,there was a large fall in confidence in North America,which was even more pronounced for the U.S.The U.S.economy has slowed from the heady pace of expansion in the second half of 2023,and the latest results raise the risk of some further moderation over coming quarters.The probability that the U.S.Federal Reserve will begin easing monetary policy after the summer has increased,although inflation developments over coming months will be crucial.Our global fear indices,which reflect respondents concerns that customers and/or suppliers may go out of business,both eased in the latest quarter and dont look particularly worrying by historical standards(see Chart 7).A similar story is evident for global problems accessing finance and securing prompt payment(see Chart 8).Global concerns about operating costs eased slightly but remain elevated by historical standards(see Chart 4).We also asked accountants to rank their top three risk priorities and,for the first time in a year,the economy is not the top concern for respondents working in financial services,although it is close to the highest it has ever been for those in the corporate sector.Responses to the question,what is the most underestimated risk?,suggest leaders are increasingly struggling to steer their enterprises through the accumulating waves of uncertainty this year,particularly as regards cybersecurity,which ranks as the third-highest risk priority for all sectors combined.All in all,the GECS points to some further improvement in the global economy in Q2.Further signs of a pickup in the important Western European and Asia Pacific regions are encouraging,although the decline in the North American and U.S.indices bear watching closely.Meanwhile,despite the resilience of the global economy so far in 2024,many important downside risks and challenges remain.Sticky inflation could limit central banks scope for monetary easing,while geopolitical and domestic political risks remain very elevated and will continue to create significant uncertainty.Executive summary CONFIDENCE AMONG GLOBAL ACCOUNTANTS AND FINANCIAL PROFESSIONALS IMPROVED AGAIN IN Q2 2024,DESPITE A BIG FALL IN NORTH AMERICA.Confidence among global accountants improved again in the second quarter,and there were also small gains in the other key indicators.CHART 1:GECS global indicators-60-50-40-30-20-100102030 Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)IndexQ2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 20241 The median is used to calculate the averages.31.Global and regional analysisCONFIDENCE ROSE THE MOST IN WESTERN EUROPE,BUT FELL SHARPLY IN NORTH AMERICA.There was some notable divergence in the regional changes in confidence in Q2(see Chart 2).The largest gain was in Western Europe,which followed a decent rise in Q1.This is consistent with continuing recovery in the euro area and UK economies after the weakness in the second half of 2023.The increase in confidence in Asia Pacific was small but notable,because it came after a huge rise previously.The improvement in the global economy and manufacturing and semiconductor sectors is likely an important contributor to rising confidence in the region.By far the largest decline in confidence occurred in North America,erasing almost three-fifths of the gains made over the previous two quarters.The decline in confidence was even more pronounced in the U.S.,pointing to some slowing in economic growth.Confidence is significantly higher than its historical average in Asia Pacific,slightly above in the Middle East and Western Europe,at its average in South Asia,slightly below average in Africa,and well below average in North America.The GECS Global New Orders Index increased modestly again in the latest quarter(see Chart 3)and remains slightly above its average over the surveys history.There was quite a bit of divergence at the regional level.There was a very sharp increase in the New Orders Index in Asia Pacific,which is now significantly above its historical average.The largest fall was in the Middle East,although the index here remains meaningfully above its average.Among the other regions,compared with their history,new orders are comfortably above average in Africa and to a much lesser extent South Asia,and slightly below average in North America and Western Europe.The proportion of global respondents reporting increased costs eased in Q2,after rising in the previous quarter.As Chart 4 shows,while cost pressures are down from their peak,they remain elevated by historical standards.At the regional level,cost pressures eased somewhat in Western Europe,but were largely unchanged in Asia Pacific,North America,and the Middle East.Confidence rose globally in the second quarter but there was some interesting regional divergence.There was another decent gain in Western Europe but a sharp fall in North America.CHART 2:Confidence change over the past quarter/year,by regionIndex points-20-100102030Western EuropeAfricaGlobalAsia PacificSouth AsiaMiddle EastNorth AmericaSource:ACCA/IMA(201424)Confidence over the past quarter Confidence over the past yearCHART 3:GECS Orders change over the past quarter/year,by regionIndex points-20-1001020Asia PacificSouth AsiaGlobalWestern EuropeAfricaNorth AmericaMiddle EastSource:ACCA/IMA(201424)Orders over the past quarter Orders over the past yearThe Global New Orders Index rose modestly in the second quarter,but there was a very large gain in Asia Pacific.4Cost pressures rose again in South Asia,and to a lesser extent Africa.Cost pressures remain elevated by historical standards in all regions except the Middle East(see Chart 5),suggesting that those central banks enacting,or contemplating,monetary easing should tread very carefully.Concerns about costs among CFOs were largely unchanged since the previous quarter(see Chart 6),with over 70%currently experiencing increased operating costs compared with a historical average of under 50%.Concerns globally that customers and suppliers might go out of business eased in Q2.Neither of our two GECS fear indices look alarming by historical standards(see Chart 7).Digging below the global level,Asia Pacific and South Asia are the only regions where concerns about customers going Concerns about increased costs eased slightly in the second quarter but remain elevated by historical standards.CHART 4:Concerns about increased operating costs20304050607080Source:ACCA/IMA(201424)%of global respondents reporting increased costs Median over survey historyQ2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 2024%Cost pressures remain elevated in most regions,including North America and Western Europe.CHART 5:Concerns about increased operating costs%of respondents reporting increased costs020406080North AmericaWestern EuropeMiddle EastAsia PacificSouth AsiaAfricaSource:ACCA/IMA(2024)Q2 2024 Median over survey historyThe proportion of CFOs experiencing increased operating costs was largely unchanged in Q2 and remains elevated by historical standards.CHART 6:Global CFO concerns about increased operating costs020406080100%of respondents reporting increased costsMedian over survey historySource:ACCA/IMA(201424)Q2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 20245GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q2,2024out of business are above average,albeit not materially so.Concerns about suppliers going out of business are at their average in Asia Pacific,but below average elsewhere.Meanwhile,global problems with accessing finance and securing prompt payment declined in the latest quarter(see Chart 8),and both series are below their historical averages.In none of the major regions do problems accessing finance appear to be a particular issue,with only the series for Western Europe and South Asia being slightly above their averages.A similar story was largely evident in problems securing prompt payment,with only Western Europe and South Asia being modestly above their averages.The lagged impact of global monetary tightening is likely to affect countries,sectors,and firms to varying degrees over the coming quarters and years.The easing in global financial conditions since last autumn has been a helpful tailwind for the global economy,and the expected monetary easing by the major central banks,particularly the U.S.Federal Reserve,over coming quarters,will clearly be beneficial.Nevertheless,interest rates are still likely to remain high by the standards of the post-Global Financial Crisis period.CHART 7:GECS global fear indicesSource:ACCA/IMA(201424)01020304050 GECS:Index of concern about customers going out of business GECS:Index of concern about suppliers going out of businessIndexQ2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 2024Concerns globally that customers or suppliers could go out of business eased in the latest quarter and dont look alarming by historical standards.Global problems accessing finance and securing prompt payment declined and are below their historical averages.CHART 8:Problems securing prompt payment and accessing finance101520253035 ACCA Global problems accessing finance ACCA Global problems securing prompt payment%Source:ACCA/IMA(201424)Q2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 20246GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q2,2024NORTH AMERICAConfidence fell sharply in Q2 in North America(see Chart 9)and is now well below its historical average.There were also small declines in the New Orders and Capital Expenditure indices,although there was a decent increase in the Employment Index.All three indices are below their historical averages,employment and capital expenditure quite materially so.The results for the U.S.were much worse than for the continent as a whole,including a fall in confidence of 28 points,a large decline in the Capital Expenditure Index,and a small fall in the Employment Index.After the extremely robust expansion in the second half of 2023,U.S.economic growth slowed in the first half of 2024.The fall in our U.S.indicators reflects this and may augur some further moderation in growth.The probability is increasing that the Federal Reserve begins to ease monetary policy after the summer.Inflation developments over coming months will be key.ASIA PACIFICConfidence rose very modestly in Q2,after a huge gain previously,and remains significantly above its historical average.There was also a very large increase in the forward-looking New Orders Index (see Chart 10),which is at its second highest on record.Meanwhile,there was quite a large rise in the Capital Expenditure Index,which is now above its historical average.The Employment Index declined,however,although it remains well above average.All in all,the key indicators point to an increasingly positive backdrop for Asia Pacific.The export-oriented region is benefiting from the improving global economy,including the pickup in the manufacturing sector and global technology cycle.The sharp improvement has occurred despite the rather tentative recovery of Chinas economy amid continuing problems in its housing market.Key risks for the region are a more pronounced than expected slowing in the U.S.economy and rising protectionism.WESTERN EUROPEConfidence rose moderately for the second consecutive quarter in Q2 and is now at its highest since Q1 2023 and slightly above its historical average.Nonetheless,the picture for the other key indicators was mixed.The New Orders Index was largely unchanged and remains slightly below its average.The Capital Expenditure Index fell quite materially,while employment rose both are below their historical averages.Overall,the continued rise in confidence is consistent with a recovery in the economy of Western Europe,although the key indicators do not suggest a particularly robust expansion(see Chart 11).The euro area and UK economies are benefiting from improving real incomes among households amid the sharp fall in inflation and strong pay growth.Monetary policy is also beginning to become somewhat less restrictive.The European Central Bank cut interest rates in June and the Bank of England may follow suit over coming months.Nevertheless,monetary easing is likely to be cautious and gradual.CHART 9:North America-60-40-200204060 Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)CHART 10:Asia Pacific-70-60-50-40-30-20-1001020 Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)CHART 11:Western Europe-60-40-200204060 Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)IndexIndexIndexQ2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 2024Q2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 2024Q2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 20247GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q2,2024MIDDLE EASTConfidence declined somewhat in Q2 but remained slightly above its historical average.There were also reasonably large falls in the New Orders,Capital Expenditure and Employment indices(see Chart 12).The New Orders Index remains meaningfully above its historical average,the Employment Index is around its average,while the Capital Expenditure Index is well below average.Survey respondents have become noticeably less optimistic on the prospects for increases in government spending over the next year.All in all,the latest results were disappointing and paint a somewhat mixed picture for the region.The purchasing managers surveys have also recently pointed to some slowing in the non-oil private sectors in Saudi Arabia and the United Arab Emirates,although they remain consistent with solid growth.The beginning of rate cuts by the U.S.Federal Reserve should be helpful for the region,but geopolitical risks remain.SOUTH ASIAConfidence in South Asia declined very slightly in Q2 and is currently at its historical average(see Chart 13).The New Orders Index improved and is at its highest since Q3 2022 and above its average.There was also a small improvement in the Capital Expenditure Index,which is now at its historical average.Less encouragingly,there was a huge fall in the Employment Index,which lost its very large gains over the previous two quarters.It is now materially below its historical average,although its current level is certainly not unprecedented by historical standards and this can be a volatile index.Overall,the key indicators(save employment)remain consistent with a broadly reasonable backdrop for South Asia.The regions largest economy,India,should continue to be the fastest-growing major global economy over coming years:the International Monetary Fund(IMF)forecasts annual growth in excess of 6%through the end of the decade.AFRICAConfidence improved slightly again in Q2(see Chart 14)but remains just below its historical average.The New Orders Index declined modestly but remains meaningfully above average.There were decent increases in both the Capital Expenditure and Employment indices after sharp falls previously.The former is slightly below average,while the latter is above it.High inflation remains a major issue in the region.Concerns about increased operating costs rose again and remain elevated by historical standards,while 73%of survey respondents expect the rate of inflation to rise over the next three months in the country where they work,while only 14%expect a decline.Against such a backdrop,51%of respondents expect an increase in interest rates over the next three months in the country where they work,while only 14%expect a decline.The beginning of monetary easing by the U.S.Federal Reserve would be very helpful for the region,but geopolitical developments remain a major risk.CHART 12:Middle East-80-60-40-200204060CHART 13:South Asia-80-60-40-2002040CHART 14:Africa-80-60-40-2002040IndexIndexIndex Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)Confidence Index Orders Index Capital Expenditure Index Employment IndexSource:ACCA/IMA(201424)Q2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 2024Q2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 2024Q2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 20248GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q2,2024Confidence among CFOs improved in Q2,and there was a large rise in the New Orders Index.CHART 16:GECS global indicators CFOsCHART 15:GECS global indicators CFOsSource:ACCA/IMA(201424)-80-60-40-2002040 Confidence Index Orders Index IndexThe CFOs Employment Index improved slightly in Q2,while the Capital Expenditure Index increased sharply.Chief Financial OfficersKEY INDICES POINT TO GROWING OPTIMISM AMONG CFOS,BUT COST CONCERNS REMAIN ELEVATED.The indices reported in this section reflect the survey responses of the CFOs who are part of our broader global panel of accountants and other finance professionals.Confidence among CFOs recorded a decent increase in Q2 and is now slightly above its historical average.New orders improved sharply and are well above average(see Chart 15).The Confidence Index for CFOs is almost equal to that of the broader panel(accountants,auditors,CFOs,etc.),while the New Orders Index is materially higher than that for the broader panel.The Capital Expenditure Index for CFOs registered its third-largest gain on record and is now just below its historical average.It is now only slightly lower than that for the broader panel,after being significantly below in previous quarters.The CFOs Employment Index increased modestly and is now at its average(see Chart 16).It remains slightly higher than that of the broader panel.Meanwhile,the proportion of CFOs experiencing increased operating costs remains elevated by historical standards(see Chart 6).All in all,the across-the-board gains in the Confidence,New Orders,Capital Expenditure and Employment indices among CFOs are clearly encouraging,with the key indicators currently indicative of a broadly decent global economic backdrop.That said,continued elevated concerns about operating costs add a note of caution.Median over survey historySource:ACCA/IMA(201424)-80-60-40-20020 Capital Expenditure Index Employment Index IndexMedian over survey historyQ2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 2024Q2 2014Q2 2016Q2 2018Q2 2020Q2 2022Q2 20249GLOBAL ECONOMIC CONDITIONS SURVEY REPORT:Q2,20242.The uncertainties keeping accountants up at nightFor the first time in a year,the economy is not the top risk priority for respondents working in financial services,although it is close to the highest it has ever been since the global risks survey was first carried out among accountants in the corporate sector.The global risks survey,initiated in November 2022 as part of ACCAs research series on Risk Culture:Building Resilience and Seizing Opportunities,was added as a new section in ACCA-IMAs GECS in 2023s Q2 report.One year on,it continues to shed light on the risk perspectives of financial professionals around the world and findings from the second quarter of 2024(Q2 2024)are particularly telling about the increasing lack of foresight among,and eroding trust in,business leaders.While economic inflation,recession,interest rates remained the top risk priority overall,its lead narrowed because fewer respondents from financial services ranked it in their top three and instead ranked regulatory,compliance,legal issues higher for the first time since Q4 2022.On the other hand,the corporate sector kept economic inflation,recession,interest rates as an even stronger first priority and put international and geopolitical instability back into the top three after dropping it down to fourth place in Q1 2024.We also continue to see how risk concerns vary across industries,quarter-to-quarter.For example,accountants in financial services put misconduct,fraud,reputational damage into the top three for the first time.This is interesting since,as discussed in previous reports,we found it to be a big blind spot,having consistently ranked at the bottom overall despite the rising number of fraud cases in both financial services and the corporate sector.Indeed,it was ranked as the lowest priority of all one year ago and is still the lowest-ranking priority for respondents in the corporate sector.The open-ended question,what do you believe is the most underestimated risk facing your organisation?,helps put all this into context.Certain key functions are exclusively in the hands of third parties,for example,our money transfer application.Various fraud incidents have been investigated,but controls are still not fully implemented,a respondent from Sierra Leone commented.From new monetary and fiscal policies to the perils and promises of artificial intelligence(AI)and intensifying impacts of climate change,respondents in Q2 2024 didnt hold back about the challenges they face given the unprecedented number of elections this year on top of already accelerating green and digital transformations.While cybersecurity has been a concern for financial institutions for years,the sophistication and frequency of cyberattacks,many state-run,continue to evolve and no one really understands the consequences or how to account for them,a respondent in the U.S.said.Another in India explained:Climate change,poor state of finances of local governments and increased taxes are all factors that need to be considered,but the most difficult problem is customer confidence in the economy and their own capacity to invest in things like housing.As talent scarcity,skills gaps,employee retention continues to fall down the ranks of concerns in financial services,our findings show that they are becoming ever more challenging for the corporate sector,with many respondents saying staff turnover is the biggest underestimated risk.Big or small,corporates are also naturally concerned with logistics,supply chain disruption,supply shortages and we see a growing lack of confidence in how boards and senior management tackle the interconnectedness of all these issues.The company is good at increasing prices of our products instead of finding ways to increase volumes,said one ACCA member.Senior managements drive to change for the sake of shareholder narrative,rather than true growth and exploitation of opportunities,is wasting capital on non-value-adding paths,added another.Additionally,as a respondent in Australia noted,My organisation has outdated technology that will limit progress going forward.Another,in the U.S.,concluded,We are at a high risk of being unable to bring in new business owing to changing buying habits;the question is,what are we doing about it?.CHART 17:Top ranked risk priorities change over the past year1015202530Economic inflation/recession/interest ratesTalent scarcity/skills gaps/employee retentionTechnology/data/cybersecurityRegulatory/compliance/legalInternational and geopolitical instabilityClimate change/related regulation/its social and economic impactsMisconduct/fraud/reputational damageLogistics/supply chain disruption/supply shortagesWithdrawal of fiscal measures/higher taxationCurrency,including crypto and digital assetsSource:ACCA/IMA Global Risks surveys(202324)Q2 2024 Q1 2024 Q4 2023 Q3 202310Links to previous Global Economic Conditions Survey(GECS)reports:Click on the covers to view previous reports online:GECS-Q2-2024ACCA The Adelphi 1/11 John Adam Street London WC2N 6AU United Kingdom / 44(0)20 7059 5000 /IMA 10 Paragon Drive Suite 1 Montvale NJ 07645-1760 USA / 1(201)573-9000 /www.imanet.orgACCA,IMA and the global economyGlobal economic conditions continue to dominate business and political life.News and debates on economic issues are almost constantly the focus of media attention.While most national economies are now growing once again,it is far from clear how sustainable this growth is or how long it will be before a sense of normalcy returns to the global economy.ACCA and IMA have been prominent voices on what the accounting profession can do to help turn the global economy around.Both bodies have published extensively on a range of topics,from the regulation of financial markets or the prevention of fraud and money laundering,to fair value or the role of international accounting standards,to talent management and the development of an ethical business culture.ACCA and IMA aim to demonstrate how an effective global accountancy profession contributes to sustainable global economic development;to champion the role of accountants as agents of value in business;and to support their members in challenging times.Both professional bodies believe that accountants add considerable value to business,and never more so than in the current environment.Accountants are particularly instrumental in supporting the small business sector.Small and medium-sized enterprises(SMEs)account for more than half of the worlds private sector output and about two-thirds of all employment.Both ACCA and IMA focus much of their research and advocacy efforts on articulating the benefits to SMEs of solid financial management and reliable financial information.WHERE NEXT?As countries around the world continue to consider strategies to promote stability and stimulate growth,the interconnectedness of national economies,and how they are managed and regulated,is now under close scrutiny.The development of the global accountancy profession has benefited from,and in turn contributed greatly to,the development of the interconnected global economy.The fortunes of the two are tied.ACCA and IMA will,therefore,continue to consider the challenges ahead for the global economy,and focus on equipping professional accountants for the uncertain future.TO FIND OUT MORE VISIT: www.imanet.org
2024-11-07
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Chamber pulse Global markets,local landscapes2024 editionPlease cite as:Chamber pulse:Global markets.
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Industrial Policy as Zombie Economics2024Steven GlobermanSeptember 2024 Fraser InstituteIndustrial Policy as Zombie EconomicsSteven Globermaniiifraserinstitute.orgContentsExecutive Summary 11.Introduction32.Overview of Industrial Policy43.Arguments For and Against Traditional Industrial Policy94.Some Evidence on the Effectiveness of Industrial Policy165.Features of New Industrial Policy and an Evaluation216.Concluding Comments25References27About the Author 31Acknowledgments31Publishing Information 32About the Fraser Institute 33Editorial Advisory Board 341fraserinstitute.orgExecutive SummaryRecently,many developed economies,including Canada and the US,haveimplemented major government programs to promote the growth of specificindustries and sectors including electronic vehicles(EVs)and the criticalinputs to manufacturing EVS such as batteries,semiconductors,and ArtificialIntelligence(AI).While not new,the resurgence of industrial policy reflects,in part,concernsabout Chinas competitive position in the so-called industries of the future.Italso reflects a renewed focus on the importance of growing the manufacturingsector to ensure self-sufficiency in the production of products such as pharma-ceuticals,medical supplies,and semiconductor chips.The key premise behind industrial policy is that the government can andshould promote the expansion of specific industries and activities that havethe greatest potential to increase societys standard of living.The corollary isthat the private sector,if left to itself,will underinvest in industries promisinglarge net social benefits.Most economists have criticized the underlying premise of industrial policy.In particular,critics of industrial policy argue that bureaucrats ordinarily donot have the knowledge or the incentive to reallocate productive resources soas to accelerate real economic growth.Case studies of industrial policy initia-tives tend to support this criticism.While supporters of industrial policy acknowledge the failure of many past in-itiatives,they argue that the underlying problems can be addressed by modi-fying the industrial policy process.In particular,they argue for embeddinggovernment in the private sector in what amounts to a public-private partner-ship to engage in transformative innovation.Public-private partnerships(PPPs)have been used for decades primarily inthe construction and operation of infrastructure assets such as roads,ports,and hospitals.The track record of PPPs is,at best,mixed.Specifically,manyPPPs have failed to deliver their anticipated net benefits because of hightransactions costs associated with assigning responsibilities,monitoring theperformance of the involved parties,and enforcing terms of the underlying2 Industrial Policy as Zombie Economicsfraserinstitute.orgcontractual agreement.Too often,the outcome is the termination of the PPP before its intended maturity.PPPs are usually structured around achieving specific explicit objectives.They also usually draw upon well understood technological and managerial prin-ciples.However,these conditions typically do not obtain apply in the case of transformative industrial policies which,by their nature,involve many more“partners”than do PPPs,as well as much greater economic and technological uncertainty.Given the problems that many PPPs have experienced,it seems unlikely that the complex cooperation and coordination between the public and private sec-tors as called for in new models of industrial policy will lead to more success-ful initiatives in the future than have been achieved in the past.3 fraserinstitute.orgIntroductionThe critical policy consideration is not whether states should organize their economies,but how they should be organized.US Senator Marco Rubio,quoted in Tucker(2019:43)In the aftermath of the COVID-19 pandemic,the long-standing debate surrounding the role and nature of industrial policy has strengthened.1 The debate has been reinvigorated in part by a concern that Western economies are losing their innovative edge,particularly relative to China.It has also come to the fore in part due to worry from the Western econ-omies about relying on political and military adversaries,again particularly China,not just for critical products in the green energy supply chain,but for semiconductors,phar-maceuticals,and precursors for medicines,among other high profile products.A grow-ing consensus that climate change requires an accelerated substitution of green energy sources for carbon-based fuels has also motivated renewed support for industrial policy in Canada,the US,and Western Europe.Both supporters and critics of the initiatives have identified major public policy ini-tiatives introduced recently by governments of wealthy countries,including the US and Canada,as contemporary examples of industrial policy.The most significant recent initia-tives are focused on helping to accelerate a transition away from the use of carbon fuels to sources of green energy.Prominent examples include major subsidies by federal and provincial governments in Canada to companies participating in different stages of the EV supply chain,as well as the Biden Administrations Inflation Reduction Act,which is largely focused on restructuring the US economy away from fossil fuels and toward green energy.2 Tariffs and related trade policy initiatives levied by the US and European governments against Chinese EVs and other products have also reemerged as prominent instruments of industrial policy.Ilyina,Pazarbasioglu,and Ruta(2024)used machine learning software to identify the dramatic growth in what the International Monetary Fund identifies as industrial policy interventions.Specifically,they found that a count of industrial policy initiatives increased consistently over the period 2010-2021,and that there were more than 2,500 industrial 1 See Agarwal(2023)for an overview of the recent renewal of interest in industrial policy by academics and policymakers.2 Both governments are also subsidizing domestic initiatives in the semiconductor chip and Artificial Intelligence sectors(see Bivens,2023).4 Industrial Policy as Zombie Economicsfraserinstitute.orgpolicy interventions worldwide in 2023 alone,which underscores a growing commitment by governments to industrial policies in the past few years.The authors conclude that competitiveness was the objective for one-third of all industrial policy measures in 2023.The remaining two-thirds of these measures were motivated by climate mitigation,supply chain resilience,and national security considerations.Different forms of subsidies and export-related initiatives together account for most of the industrial policy measures they identified.While industrial policy-related interventions and the debate surrounding industrial policy have a long history,a growing number of scholars and policymakers are calling for much more ambitious and systemic government intervention into the economy than did earlier proponents of industrial policy.The recent programs identified above,involving massive subsidies to specific participants in the EV supply chain,as well as subsidies to producers of semiconductor chips and AI software,underscore a seemingly renewed commitment to transformative industrial policy on the part of Western governments.The purpose of this paper is to identify how the nature of industrial policy and the debate surrounding its merits have evolved in recent years,and to consider whether the chang-ing nature of industrial policy is likely to make it more economically effective or,instead,whether industrial policy deserves to be characterized as a form of“zombie economics.”3The paper proceeds as follows.The next section identifies definitions and objectives of what might be called traditional industrial policy.Section 3 provides a discussion of the rationale for and objections to traditional industrial policy.Section 4 briefly reviews some of the available empirical evidence bearing upon the economic consequences of industrial policy.Section 5 presents and addresses claims that some recent proponents of industrial policy have made,specifically,that new models and planning that they put forward rep-resent a substantial improvement upon the traditional industrial policy model.Section 5 also includes an argument that the empirical literature on public-private partnerships provides relevant insights into the likely consequences of implementing what has been put forward as a new model of industrial policy.The section reviews some of the relevant evidence on the performance of public-private partnerships.The papers final section pro-vides concluding comments.3 Zombie economics is a derogatory descriptor of economic ideas that have been discredited but still survive in public policy debates.It was originally used to demean supply-side economics.For a discus-sion of applications of this term to economic theories,see Quiggin(2012).5 fraserinstitute.org2.Overview of Industrial PolicyFor centuries governments have practiced industrial policy.For example,in the late 1790s,then Secretary of the Treasury,Alexander Hamilton,argued successfully that the US should encourage the growth of manufacturing in the newly formed United States of America in order to diversify employment and to help the country become independent of foreign nations for military and other essential supplies.The Canadian National Policy of 1879-1895 was an instance of deliberate protection of infant industries;it used trade protection to spur the development of a domestic manufacturing sector.4 While government industrial policies may be centuries old,analysis of industrial pol-icy drawing on economic principles only started proliferating in the late 1970s and early 1980s.5 Numerous definitions of traditional industrial policy can be identified in the lit-erature,although there is a substantial degree of similarity in the definitions.Table 1 provides a summary overview of a set of definitions.6 The various definitions highlight the redistributive nature of traditional industrial policy,i.e.,it generally encouraged some activities and discouraged others.The activities can be industry-specific,firm-specific,and/or location-specific.The definitions also suggest that industrial policy is meant to improve upon the performance of the market system,either by encouraging specific activities that would otherwise not be undertaken or by promoting increased or decreased levels of spe-cific activities so as to achieve levels that are judged to be socially,if not privately,efficient.7 Table 2 identifies specific objectives of industrial policy from various sources.While the number of sources cited is necessarily limited,the information in the table leads to at least two observations.One is that earlier studies tend to emphasize the importance of 4 Kedrosky(2022),among others,argues that the promotion of import substitution came at relatively low cost to Canadian consumers.Harris,Keay,and Lewis(2015)provide some evidence that indus-tries receiving greater protection under Canadas 1879 National Policy experienced faster growth in output and productivity than other industries.However,Alexander and Keay(2018)suggest that a multilateral move to free trade would have resulted in the best welfare outcome for Canadians,a pos-ition that is supported by successive Canadian federal governments seeking to address long-standing productivity problems through global and regional trade agreements.5 Wraight(2024)asserts that arguments for industrial policy drawing on the concept of market failure emerged as the American lefts answer to supply-side economics.6 The summaries represent this authors interpretation and consolidation of the discussion in each of the studies cited.This is also how we prepared the summaries in table 2.7 Put differently,traditional industrial policy was primarily focused on correcting for market failures whereby the private sector would produce too much or too little of a specific good or service in the absence of government intervention.6 Industrial Policy as Zombie Economicsfraserinstitute.organticipating and promoting the growth of firms and industries that are technologically promising from a commercial perspective,while also helping workers transition from declining industries to sunrise industries.8 A second is that more recent studies identify ESG-related objectives as being important priorities for industrial policy.9 In particular,the recent literature on industrial policy highlights policies that encourage a transition away from fossil fuels to green energy.One also sees a greater number of direct and indirect 8 Wraight(2024)summarizes the objectives of industrial policy by advocates in the early 1980s as gov-ernment identifying so-called sunrise sectors with high potential to create productivity spillovers and supporting those sectors,while identifying sunset sectors and implementing longer term plans to modernize and restructure them.9 ESG is an acronym for corporate practices related to a companys environmental,social,and govern-ance performance.Dudash(2016)is arguably one of the earlier proponents of industrial policy to identify improving environmental standards as an objective of industrial policy along with boosting the growth prospects of specific sectors.Mazzucato(2015)calls for an entrepreneurial state to gener-ate new and innovative approaches to tackle pressing problems such as climate change mitigation and poverty alleviation.Table 1:Definitions of Industrial Policy1.Reich(1982):Industrial Policy favours business segments that promise to be strong international competitors,while promoting the adjustment of labour to structural changes in the world economy.2.Neely(1993):Industrial Policy is a set of policies designed to promote promising industries,while easing the fall of declining industries.3.Schultze(2016):Industrial policy aims to channel the flow of private investment towards some firms and industries and away from others.4.Tucker(2019):Industrial Policy encourages resources to shift from one industry or sector to another.5.Hufbauer and Jumg(2021):Industrial Policy encompasses government efforts to support and nurture favoured economic sectors.6.Lincicome(2021):Industrial Policy is trageted government intervention intended to achieve specific,market-beating industrial and commercial domestic outcomes.7.Agarwal (2023):Governemnt efforts to shape the economy by targeting specific industries,firms or activities.8.Siripurapu and Berman(2023):Government efforts to support particular industries that are considered stra-tegically important.9.Jukasz,et.al.(2023):Policies that explicitly target the transformation of economic activity in pursuit of some public goal.10.Wraight(2024):Government designates target industries and supports their growth.Industrial Policy as Zombie Economics 7fraserinstitute.orgreferences to policies targeted at addressing inequalities related to the location,occupation,or demographic status of specific sets of workers.10In summary,the main ostensible objective of traditional industrial policy is technol-ogy-led economic growth,with a related objective of mitigating the economic harm that workers in sunset industries suffer,primarily by providing temporary income support and retraining.While promoting innovation and economic growth is also a focus of newer models of industrial policy,the latter also highlight ESG-related objectives,particularly the transition to a green economy.Academic discussions of industrial policy identify a wide variety of policy tools.They include financial subsidies,tax incentives,protective trade barriers and regulations,gov-ernment-funded infrastructure,government-mandated buy-domestic programs,and research and development support.11 Earlier vintages of industrial policy tended to empha-size trade-related measures including protective tariffs and subsidies to so-called infant 10 A focus on addressing inequalities is embedded in the term“inclusive growth”explicitly used by Agar-wal(2023).In the context of a new industrial policy Tucker(2019)discusses selecting industries for favourable government treatment based partly on their employment of women and people of colour.11 See Tucker(2019)and Agrawal(2023)for a discussion of the range of tools.Table 2:Focus of Industrial Policy1.Reich(1982):Reduce the short-term costs of capital and labour for emerging industries and assist workers forced to retrain or relocate.2.Neely(1993):Promote the development of new technology with commercial possibilities and retrain workers displaced in declining industries.3.Schultze(2016):Provide direct and indirect assistance to existing firms and new entrants in cutting-edge sec-tors and support and rehabilitate major declining industries.4.Alternburg and Rodrik(2017):Reduce regional disparities;encourage labour-intensive industries and small businesses;promote environmental sustainability.5.Bivens(2023):Address climate change,the shortage of child and elder care and the fragility of supply chains.6.Agarwal(2023):Enhance national security;support job-rich and inclusive growth;revitalize left-behind com-munities.7.Siripurapu and Berman(2023):Promote industries critical for national security;encourage innovation.8.Van Reenan(2023):Promote transition to green energy.8 Industrial Policy as Zombie Economicsfraserinstitute.orgindustries,particularly directed at stimulating domestic manufacturing industries.12 More recent proponents of industrial policy tend to emphasize the role of the state in promot-ing innovation and entrepreneurship by shaping investments in technology,including through major R&D programs such as those that facilitated the US moon landing or the development of the Internet.13 While preferences regarding which specific tools of industrial policy work best differ over time,the differences are not as prominent in their implications as in the proposed scope of industrial policy,as well as the implied relationship between governments and private sector participants.In broad terms,traditional industrial policy did not encompass national economic planning.Indeed,one of the most well-known proponents of traditional industrial policy,Robert Reich(1982),argued that industrial policy was not national plan-ning but rather a process for making the economy more adaptable and dynamic.More recently,however,Tucker(2019)posits that it is impossible to have an effective industrial policy without an economy-wide planning process with a strong national mission at its centre.Tucker further argues that mission-oriented industrial policies must foster inter-action involving many different groups in society,so that formal and binding five-and ten-year indicative government planning is advisable.12 See Reich(1982)for a discussion of how US politicians saw Japans trade practices as a rationale for US import-substitution initiatives to promote domestic manufacturing industries.Juhsz,Lane,and Rodrik(2023)posit that government subsidies and export-related measures together account for most industrial policy interventions in recent years.Populist politicians in the US have returned to the theme that domestic manufacturing industries should be protected from“unfair”foreign competition.13 See,for example,Schwab and Malleret(2022).As noted above,trade protection seems to be returning as a prominent tool of industrial policy,particularly directed by western governments against Chinese products.9 fraserinstitute.org3.Arguments For and Against Traditional Industrial PolicyThe fundamental rationale for industrial policy is the same broad rationale for any form of government intervention into private market transactions,namely,that such intervention will improve social welfare.Both traditional and newer arguments for industrial policy draw upon presumed imperfections in private markets that lead to too much or too little of some specific activity being carried out from the perspective of societys overall welfare.Alternatively,the imperfection may be an undesirable geographic location of an activity or an undesirable unequal income distribution resulting from economic activity.14One specific market-failure-based rationale for industrial policy is the existence of public goods.These are goods or services characterized as being non-exhaustive and for which exclusion for non-payment is difficult or impossible.Non-exhaustive means that increased consumption of the good or service does not necessarily cause increased scar-city.Put differently,non-exhaustion refers to situations where increased consumption of the good or service by one group of consumers does not result in less of it being available to other consumers,holding total cost constant.National security is the classic example of a public good.By definition,securing a nation from external threats means providing security to its entire population.Increased security for one citizen does not translate into less for another.Government-funded basic research is another example of a public good,since fundamental scientific insights,once put into the public domain,are available for unlimited use.That is to say,the use of insights from basic science to advance the inno-vative process in one set of industrial activities does not diminish the availability of that same knowledge to advance innovations in another set of industries.Non-excludability means that it is not economically feasible to meter the use of a ser-vice in order to price its use and exclude non-payers from accessing the service.National security is again put forward as an example of the non-feasibility of using the price system 14 The decline of Rust Belt states in the United States and the accompanying concentration of technology clusters in coastal cities has been cited by some,including current Republican vice-presidential candidate J.D.Vance,as necessitating government industrial policies to promote investment in manufacturing industries in midwestern states.For some proponents of industrial policy,the“need”for industrial policy is premised on a multi-dimensional failure of private markets.For example,Altenburg and Rodrik(2017)argue that the unfettered market-based allocation of resources is unlikely to foster structural change in a socially optimal manner that allows for high-productivity,broad-based societal inclusion and environmental sustainability.10 Industrial Policy as Zombie Economicsfraserinstitute.orgto ration consumption and exclude non-payers.Since national security is supplied on an“all or nothing”basis,price has no obvious role to play in rationing consumption.Similarly,once basic scientific information is in the public domain,there is no economic justification for rationing its use,and it would be prohibitively costly to monitor and charge for its use even if it were desirable to do so.Few economists would dispute that financing and,in some cases,providing public goods is a potentially legitimate activity for government.However,most would argue that“supplying”national security or basic scientific knowledge should not be characterized as industrial policy,since the supply is not targeted at specific industrial sectors,geograph-ical regions,or segments of the population.For example,Lincicome(2021)argues that all government actions taken to advance the interests of the economy as a whole should not be understood as industrial policy.This would include not only public goods but also interventions such as free trade agreements or the distribution of vaccines to suppress epidemics such as COVID-19.Prominent supporters of industrial policy such as Bivens(2023)and Altenburg and Rodrik(2017)agree that supplying public goods should not be part of any academic debate about the merits of industrial policy,since industrial policy is mostly about“correcting”the private sectors misallocation of resources across product and geographic markets.Addressing income and wealth inequality as well as health care,food,and housing inse-curity is another prominent rationale for government economic intervention in wealthy countries(Bivens,2023).In most cases,income transfers are implemented through dedi-cated programs such as Old Age Security(OAS)in Canada or Medicaid in the US.However,in some cases,government programs to promote specific economic activities,such as starting new businesses,will have conditions or set-asides to advantage particular groups,such as women or Indigenous peoples.Whether income and wealth inequality should be characterized primarily as a market failure or a consequence of misfortune or some other non-market-related cause can be debated.Whatever the causes of income and wealth inequality,Lincicome(2021)and other industrial policy skeptics argue that it is an unrea-sonable extension of the concept of industrial policy to identify it with programs that are primarily aimed at redistributing income as opposed to promoting faster economic growth or higher real wages.Externalities are a second and more ubiquitous source of market failure associated with a misallocation of resources across economic sectors.Externalities arise when the private costs or benefits of specific market activities differ from the social costs or benefits.For example,calls for government policies to promote environmental sustainability are Industrial Policy as Zombie Economics 11fraserinstitute.orgdefended on grounds that unless such policies are implemented,market participants will ignore the environmental costs of their actions as they affect other segments of society.As a result,market participants will overestimate the net social benefits of their activ-ities and produce“too much”output from an overall social welfare perspective.Most economists accept the relevance of environmental externalities.Most also acknowledge a role for government in addressing environmental externalities.What is contentious is the appropriate form of government intervention,as well as when specific interventions constitute industrial policy.In this regard,critics such as Lincicome(2021)would not consider a carbon tax that is applied to all participants in an economy to be industrial policy,even though carbon-inten-sive activities would obviously be more affected by a carbon tax than would other activities.On the other hand,extending government financial subsidies to manufacturers of batter-ies for electric vehicles,or to companies that mine for minerals used to produce electrical vehicle batteries,would be characterized by most policy analysts as industrial policy,since the governments actions are explicitly targeted at specific sectors of the economy in order to address what it sees as an economy-wide issue.The key distinction is that in the case of a carbon tax,the reallocation of resources is in response to changes in relative prices,i.e.,the prices of carbon-intensive outputs would increase relative to non-carbon-intensive outputs,such that consumers will voluntarily shift their purchases away from the former and toward the latter,while producers would be motivated to implement less carbon-in-tensive production and distribution technologies into their business models.In the case of financial subsidies,government officials substitute their judgment regarding how to reduce environmental externalities for that of market participants responding to price signals.15 To my knowledge,there is no explicit discussion in the industrial policy literature per se focusing on why a carbon tax is inferior to government subsidies to participants in the green energy supply chain as a policy approach to reducing the use of carbon fuels.16 Alten-burg and Rodrik(2017)suggest one reason:they posit that consumers do not respond perfectly to price signals.Specifically,they assert that even when new products exist that are cheaper and better than existing products,many consumers stick to the“bad,old”alternatives because they do not understand the choice situation well or simply out of 15 In a later section,we will expand upon and address arguments that have been made for why bureaucratic decision-making is a more efficient mechanism than the price system to address externalities.16 McKitrick(2013)makes the case for a carbon tax being more efficient than what he characterizes as a mishmash of regulations.12 Industrial Policy as Zombie Economicsfraserinstitute.orgforce of habit.As a consequence,industrial policy is presumably preferable to waiting for markets to reward superior energy alternatives.Productivity spillovers are another prominent externality featured in debates about industrial policy.Productivity spillovers are a major contributor to external economies of scale.The latter arise when increases or decreases in economic activity in one segment or sector of the economy affect productivity growth in other segments or sectors.Bartelme,Costinot,Donaldson,and Rodriguez-Clare(2021)assert that the textbook case for indus-trial policy exists if some sectors are subject to external economies of scale,whereas others are not.In such cases,they argue that a prima facie conceptual case exists for government to subsidize the first group of sectors at the expense of the second.The productivity spillover concept as it appears most typically in the industrial policy literature encompasses so-called external(or agglomeration)economies that have been identified in studies of regional and urban innovation clusters.The basic notion underlying the relevance of geographical clustering is that as more activity of a specific type takes place in a geographical location,the more profitable it is(up to a point)for future activity to be undertaken in that location.While there are different sources of external economies,a major source is technology spillovers which exist when scientific,engineering,and organizational innovations imple-mented by one or more firms are adopted by other firms without the innovating organi-zations being fully compensated by the beneficiaries for the efficiency(and presumably profitability)gains that are generated by copying or reengineering the original innovations.The implication of external economies is that as more activity of a specific type takes place in a geographical location,the more profitable it is(up to a point)for future activity of that type to take place in that location.However,innovative organizations that are potential first movers may not make the necessary initial investments at scale given the risks asso-ciated with being a first mover,as well as the likely competition from fast followers who can be expected to copy or reengineer the new techniques or business practices introduced by the first movers.Since existing evidence suggests that technology spillovers tend to be confined to relatively circumscribed geographical areas,e.g.,a portion of a census metropolitan area such as downtown Toronto or the San Francisco Bay area,public policies to promote tech-nological change frequently intersect with regional development policies.17 However,what 17 For a discussion of the geographical scope of productivity spillovers with an empirical application to the Canadian software industry,see Globerman,Shapiro,and Vining(2002).Industrial Policy as Zombie Economics 13fraserinstitute.orgmakes industrial policy distinct from regional development policy is the notion that gov-ernment planners can identify economic activities characterized by significant external economies of scale and implement industrial policies that promote increased investment in those activities,thereby effectively moving productive resources from slower growing to faster growing industries and locations.The relatively strong empirical evidence in support of the relevance of technology spill-overs related to the geographical clustering of firms and skilled scientists and engineers is a potentially strong rationale for government intervention of some sort.Even so,a relevant point of contention between proponents and opponents of industrial policy con-cerns whether government intervention targeted at promoting specific sectors,regions,and producers will stimulate technological change more efficiently than policies focused on improving the environment for innovation broadly,i.e.,across all firms,industries,and locations,e.g.,through general tax policy,support for public education,intellectual property protection,and so forth.To extend the market-versus-bureaucrat decision-making dialectic,lower capital gains taxes,stronger intellectual property protection,increased supplies of skilled scientists and engineers,and private property rights effectively make innovation a more profitable market activity,either by lowering input prices and/or by increasing the net profit margin associated with innovating.This should encourage more innovation activity generally,and thereby increase technology spillovers,particularly in industrial sectors and geographical locations where entrepreneurs believe it is most efficient to carry out innovative activities.The industrial policy approach would have government officials extend direct subsidies or tax incentives to specific firms engaged in particular activities and in specific locations.A recent example of the latter is the hefty subsidization by the federal and provincial gov-ernments in Canada of EV battery production and mining of critical minerals in specific locations,e.g.,southwestern Ontario and Quebec,respectively.It is possible to debate whether and when economically significant external economies exist such that there is an opportunity to create net social benefits through industrial pol-icy.In this regard,a criticism of industrial policy is that policymakers employ exaggerated estimates of production externalities in many,if not all cases(see Bartelme et.al.,2024).As a result,government intervention often ends up having net costs to society.A related and important caveat is that secure private property rights can facilitate the internation-alization of potential technology spillovers.For example,transportation infrastructure creates economic opportunities for new businesses located near that infrastructure includ-ing property developers and retailers.Fees charged directly for the relevant transportation 14 Industrial Policy as Zombie Economicsfraserinstitute.orgservices will not fully capture the economic value created by the transportation infrastruc-ture,which has been an historical argument for governments to subsidize railroads,port facilities,and the like to encourage infrastructure investment.However,in many cases,companies developing infrastructure can potentially invest in activities that benefit from economic spillovers if they are not prevented from doing so by regulations or competition policies.To the extent that market solutions to internalizing spillovers are feasible and not restricted by laws or regulations,the spillover argument for industrial policy becomes more tenuous.A more general criticism of industrial policy is that government officials have insuf-ficient information to deliver net social benefits through selective industrial policy ini-tiatives.That is,policymakers are insufficiently informed about where major industrial growth opportunities exist in the economy.A related concern is that the reallocation of productive resources resulting from industrial policy will be unduly influenced by political lobbying such that productive resources are wasted,and governments will be captive to entrenched interests,often specific firms and industry groups,so that inefficient patterns of production created by industrial policy are perpetuated for long periods of time.18 Holcombe(2013)discusses the phenomenon of“crony capitalism”in which govern-ment relies on business expertise to design and implement regulations,as well as direct and indirect government subsidies to the private sector.Since industry participants have more information than do government bureaucrats about the industry,they will steer public policy in directions favourable to the industry and not to the general public.Fur-thermore,the increased profits from initial government policies will be capitalized in the prices of assets once they are sold by the original beneficiaries.The buyers of those assets will then have strong incentives to lobby for the continuation of policies that created the additional profitability in the first instance.This dynamic contributes to the perpetuation of lobbying for inefficient interventions into the private sector by government,as well as the perpetuation of the underlying policies.19Prominent advocates of industrial policy such as Altenburg and Rodrik(2017)acknowl-edge that policymakers are,at most,no better than entrepreneurs at anticipating com-mercial opportunities.Moreover,they concede that markets encourage the creativity of individuals who take personal risks in pursuit of profits.Nevertheless,they argue that“improved”models of industrial policy can address the acknowledged weaknesses of 18 For a discussion of these various criticisms of industrial policy,see Lincicome(2021)and Hufbauer and Jung(2021).19 Holcombe(2013)references an extensive literature on regulatory capture to support this line of argument.Industrial Policy as Zombie Economics 15fraserinstitute.orgtraditional industrial policy.We discuss and evaluate proposed new versions of industrial policy in Section 5.In the next section,we review some empirical evidence on the effec-tiveness of industrial policy.fraserinstitute.org 164.Some Evidence on the Effectiveness of Industrial PolicyThere is a substantial literature focused on evaluating industrial policy,and it is beyond the scope of this study to provide a comprehensive review of this literature.Table 3 pro-vides a brief review of some studies of industrial policy focused primarily on promoting specific industrial sectors and regional clusters.Specifically,table 3 summarizes a num-ber of studies that assess different government initiatives targeting specific industries,geographic locations,or firms.20 In the table,a plus or minus sign indicates whether the author(s)of the relevant study concludes that the industrial policy in question was an economic success or failure,respectively,given the policys objectives.A combined plus and minus sign indicates that the economic outcome of the policy in question was mixed or that the author offered an equivocal assessment of the policy.The broad takeaway from table 3 is that the evidence on the outcome of industrial policy is mixed,although the majority of studies summarized in the table offer a negative assessment.In particular,industrial policies promoting individual companies tend to fare badly(Hufbauer and Jung,2021).Table 3 identifies several assessments of attempts by governments to create a“national champion”in specific industries.Agarwal(2023)dis-cusses the cases of Airbus and COMAC.The Airbus consortium was created in Europe in the late 1960s and received direct government subsidies,as well as a government com-mitment to absorb financial losses.As is well known,Airbus became a formidable com-petitor to Boeing,although the company continued to receive subsidies for decades after it was established.Conversely,the Commercial Aircraft Corporation of China(COMAC),a state-owned company,has yet to have its commercial airliner certified by any major aviation authority outside of China,notwithstanding government investments of up to US$70 billion.Hufbauer and Jung(2021)identify the US governments financial support of Solyndra,a manufacturer of solar cells,as a notable failure at using financial incentives to promote an individual company.Conversely,Warwick and Nolan(2024)argue that the rise to prominence of the Korean electronics firms Samsung and LG in the 1990s can be 20 Warwick and Nolan(2014)note that most evaluations of industrial policy focus on industries or sectors.They also discuss in detail the challenges associated with evaluating the success or failure of industrial policies.It should be acknowledged that the studies summarized in table 3 might overrepresent or underrepresent evidence of successful industrial policy.However,the sample of case studies is relatively large and therefore likely to reflect a consensus in the literature.Industrial Policy as Zombie Economics 17fraserinstitute.orgtraced to financial support provided to those companies by the Korean government in earlier decades.A larger number of studies focus on sectoral industrial policies,especially as imple-mented by European and Asian governments,and particularly by Japan.Neely(1993)disputes the notion that industrial policy was primarily responsible for Japans economic success.Indeed,she highlights cases where industrial planning would have gotten things spectacularly wrong had it actually been implemented,such as the efforts of Japans Min-istry of International Trade and Industry(MITI)to discourage Honda from getting into the automobile industry and Sony from getting into the consumer electronics business.Lechevalier,Ikeda,and Nishimura(2010)discusses public programs aimed at supporting Table 3:Some Findings on the Impact of Industrial PolicyCountry LevelIndustry LevelFirm LevelAgarwal (2023)European ConsortiumAirbus COMAC Siripurapu,et.al.(2023JapanSteel Semiconductors South KoreaSemiconductors?TaiwanSemiconductors?Hufbauer&Jung(2021)U.S.Military Technology Research Triangle Park Steel Textiles Semiconductors Solar PanelsSolyndra Lincicome(2021)U.S.SemiconductorsSEMATECH Neely(1993)JapanSteel Oil Honda Sony Lechevalier,et al.JapanRobots /Stern,et al.(2013)SwedenCompetence Centres Program Martin,et al.(2011)FranceLocal Productive Systems Bellago,et al.(2013)SwedenPoles of Competitivenss Policy Nishimura and Okamura(2011)JapanIndustrial Cluster Project Engel,et al.(2012)GermanyBiotech Viladecano-Marsal,et al.(2012)SpainCluster Initiative /Danish Agency for Science(2011)DenmarkCluster Policies 18 Industrial Policy as Zombie Economicsfraserinstitute.orgthe emergence of next generation robots in Japan in the early 1990s.The programs appar-ently had a positive effect on the research productivity of participating firms but failed to stimulate the emergence of a Japanese robotics industry,other than in a few niche applications.Neely(1993)identifies steel and oil as two of the many Japanese industries that have received government financial support but that have been a drag on the Japa-nese economy.Nishimura and Okamura(2011)evaluated the impact of Japans Industrial Cluster Project on the R&D productivity of company participants.They concluded that participation in the initiative did not affect the R&D productivity of participants.More generally,Beason and Weinstein(1996)and Lee(1997)failed to find a clear association between government sectoral support and total factor productivity growth in Japan and Korea,respectively.Cohen and Noll(1991)examine six US federal government industrial policy programs originating in the 1960s and 1970s and found that none were successful.21 Similarly,Huf-bauer and Jung(2021)identify a number of US industries,including steel,textiles and apparel,automobiles,and semiconductors,that received trade protection and government financial support but could not meet foreign competition or improve productivity.To be sure,there are studies that identify successful industrial policy initiatives,par-ticularly policies designed to promote technology clusters.For example,Engel,Mitze,Patielli,and Reinkowski(2013)conclude that German government initiatives aimed at fostering inter-firm collaboration in the biotech sector gave rise to increases in biotech patent applications.22 Falck,Heblich,and Kipar(2010)evaluated the 1999 Bavarian High Technology Cluster initiative in Germany.This government program aimed to increase innovation and competitiveness in the region of Bavaria by stimulating co-operation between universities,businesses,and financial institutions in five target industries.The authors found that the initiative increased the probability that firms in a target industry would innovate.The Danish Agency for Science,Technology and Innovation(2011)eval-uated cluster policy in Denmark and found strikingly positive program impacts in terms of the increased probability of participating firms being innovative.Hufbauer and Jung(2021)identify the North Carolina Research Triangle Park and Floridas Biotech Center as successful examples of government policies to promote technology clusters.21 The six programs involved federal government financial support for the supersonic transport,the space shuttle,communications satellites,the breeder reactor,photovoltaics,and synthetic fuels.In the auth-ors opinion,the programs suffered from unsustainable annual budgets made worse by the fact that they continued to receive financial support long after they should have been terminated.22 Conversely,Wong(2011)discusses the billions of dollars that Korea,Taiwan,and Singapore poured into commercial development of biotech with no significant resulting commercial success.Industrial Policy as Zombie Economics 19fraserinstitute.orgConversely,Viladecans-Marsal and Arauzo-Carod(2012)assess a policy implemented in Barcelona,Spain,aimed at forming a cluster of knowledge-based firms.The authors found that the cluster initiative did increase the share of knowledge-based firms in the locality but only modestly.Moreover,the effect stagnated over time,and at least some of the positive effects might have come at the expense of neighbouring areas.Martin,Mayer,and Mayneres(2011)evaluated the Local Productive Systems in France which was aimed at supporting inter-firm cooperation across a range of economic sectors.The policy was found to have no effect on employment or exports.Nor did it reverse declining total fac-tor productivity in industries suffering from weak productivity growth.Also,the authors found no significant effect with regard to enterprise survival rates.France launched a subsequent policy that involved government financial subsidies for innovative projects managed collectively by the research departments of selected companies and universities.Bellago and Dortet-Bernadet(2013)assessed this policy.Their evaluation found that firms targeted by the policy increased their R&D spending more than similar firms not targeted.However,targeted firms did not enjoy increased sales,patents,or exports compared to other similar firms.Broad evaluations of industrial policies at the national level also offer conflicting con-clusions regarding their effectiveness.Again,a major focus of these broad evaluations is on East Asian countries.Juhsz,Lane,and Rodrik(2023)assert that many regional spe-cialists ascribe at least part of the East Asia regions economic success to the strong hand of the state during industrialization.23 However,most mainstream economists hold the view that industrial policies were,at best,ineffective and at worst harmful.In a similar vein,Siripurapu and Berman(2023)note that while many experts contend that industrial policy stoked the East Asian miracle,others maintain that the effects of industrial policy on economic growth are overstated or mistaken.For example,a number of economists have argued that the economic success of South Korea and Taiwan is the result of their embrace of international trade,not industrial policy.Cheang(2024)also questions the relevance of industrial policy to Singapores remark-able record of economic growth following its independence in 1965.While he does not reject the contribution of industrial policy,he highlights the importance of the govern-ments open international trade policy and its receptiveness to inward foreign direct investment as contributors to its success.He identifies the rule of law and a relatively 23 Juhsz and Lane(2024)specifically argue that South Koreas Heavy and Chemical Industry government program in the 1960s that set out to transform the nation into a heavy industry powerhouse drove increased output and export development in the targeted sectors.20 Industrial Policy as Zombie Economicsfraserinstitute.orgcorruption-free government as factors encouraging the capital investment that has been a major contributor to Singapores impressive economic growth.24South America also receives attention in the industrial policy literature.Siripurapu and Berman(2023)capture the broad conclusion of the relevant studies in their observation that governments in the region have sought to promote domestic industries by discour-aging the importation of manufactured goods through tariffs and other trade restrictions.Some new industries and successful companies have been formed,but industrial policy has also resulted in corruption,inefficiency,and unsustainable government deficits.25In summary,the empirical evidence regarding the economic benefits and costs of industrial policy is not definitive,although it provides strong grounds for skepticism about whether the current enthusiasm among Western governments for major industrial policy initiatives is justifiable as good public policy.26 Notwithstanding the empirical evidence discussed above,proponents of so-called“new”industrial policy argue that past failures of industrial policy reflect poor design and implementation,and that the shortcomings can be remedied.In the next section,we discuss and evaluate this argument.24 Chang cautions that to the extent industrial policy was successful in Singapore,that success might be specific to institutional features of Singapores economy.Others have raised similar cautions about drawing inferences about the success or failure of industrial policy based on the experiences of specific countries.25 Kedrosky(2022)identifies the Canadian National Policy of 18791895 as a successful instance of the deliberate protection of infant industries using tariff protection to develop a national manufacturing sector.However,in many secondary manufacturing industries in Canada,productivity performance has been relatively poor such that policymakers came to see trade liberalization with the United States,in particular,as a necessary remedy.On the latter point,see Head and Ries(1999).26 Juhsz,Lane,and Rodrik(2023)argue that new studies employing sophisticated econometric tech-niques provide more favourable support for industrial policy success than older studies,although they acknowledge that success is dependent upon the policys goals and the instruments used.Ilyana,Pazar-basioglu,and Ruta(2024)cite analysis by the International Monetary Fund(IMF)of industrial policy initiatives worldwide in 2023,which concludes that industrial policy is frequently captured by special interest groups,as critics of industrial policy warn.The IMF also found that policies implemented by individual countries lead to trade and subsidy-related retaliation by other countries.21 fraserinstitute.org5.Features of New Industrial Policy and an EvaluationWhereas traditional industrial policy was motivated primarily by perceived specific market failures that potentially justified government intervention,more recent arguments for industrial policy emphasize the prominent role that government plays in the economy by providing public goods,regulating specific business practices,financing and carrying out research and development,and so forth.It therefore makes sense for the extensive inter-actions between the public and private sectors to be coordinated with due consideration to the ongoing overall“competitiveness”of the private sector.27 In this regard,a notable distinction between traditional and new industrial policies is the latters embrace of public-private partnerships to promote social goals rather than top-down government directives.In an early example,Rodrik(2004)posits that the right model for industrial policy is not that of an autonomous government applying taxes,sub-sidies,and other policy instruments,but of strategic collaboration between the private sector and the government with the aim of uncovering where the most significant obstacles to restructuring lie and what types of interventions are most likely to remove them.He goes on to argue that the right way of thinking about industrial policy is as a discovery process where firms and government learn about underlying costs and opportunities and engage in strategic coordination.Altenburg and Rodrik(2017)characterize the collaboration between the private sector and government as“embeddedness,”whereby government policymakers maintain close relationships with the private sector and other stakeholders in order to acquire a deep understanding of how specific economic sectors function,what the business rationale of private actors is,and where bottlenecks exist to achieving optimal outcomes in the public interest.They go on to say that industrial policy is about facilitating stakeholder dialogues on the direction of structural change,moderating different viewpoints,finding compromise,and creating consensus on broadly defined development pathways.In short,industrial policy,in this newer formulation,should be perceived as a collaborative process in which public and private sector stakeholders closely interact and continuously negotiate 27 To be sure,references to addressing market failure through industrial policy still resonate in the recent literature on industrial policy,especially related to climate change as discussed earlier.See,for example,Altenburg and Rodrik(2017).22 Industrial Policy as Zombie Economicsfraserinstitute.organd adapt their contributions to industrial development and particularly to technological innovation and entrepreneurship.28 Altenburg and Rodrik(2017)acknowledge the risk that collaboration between pri-vate sector stakeholders and governments could encourage and facilitate rent-seeking by stakeholders that harms productivity and generates subsidies for narrow private sector interests at the taxpayers expense.However,they argue that governments can draw a line between collaboration in the public interest and favouritism by implementing clear and transparent rules regarding who makes what decisions and the criteria by which decisions are made.29 They also argue that policymakers can be held accountable for their industrial policies by disclosure requirements that can be audited by central auditing authorities and challenged in independent courts.It is difficult to criticize a suggestion that governments should be better informed about how specific laws and regulations will affect private sector activities.Nor is it par-ticularly controversial to posit that broad public policy goals such as reducing the use of carbon fuels in favour of wind and solar energy sources should be determined through the democratic process in which voters choose political representatives whose positions best align with theirs on specific policy goals.Rather,the relevant issue surrounding the new industrial policy is whether and to what extent stakeholder-government partnerships will enable government to more efficiently accelerate innovative and sustainable real economic growth by identifying and promoting specific industrial sectors and technologies rather than by broadly encouraging innovation and entrepreneurship through instruments such as the tax code,trade and investment agreements,funding and carrying out basic research,immigration and education policies,and so forth.In this regard,the experience of public-private partnerships(PPPs)can be informative.PPPs are partnerships between the public sector and the private sector for the purpose of developing a project or a service traditionally provided by the public sector.The claimed advantage of PPPs is that private sector managerial skills and financial acumen will create better value-for-money outcomes for taxpayers when proper cooperative arrangements 28 Mazzucato(2015)has been especially prominent in calling for a“developmental network state”in which government facilitates collaboration among a range of actors with diverse specializations and technical capacities to help generate new and inventive approaches to ensuring innovative growth.Juhsz and Lane(2024)acknowledge that effective collaboration likely requires substantial investments in creating administrative capacity.29 Altenburg and Rodrik(2017)suggest using independent scientific and engineering expertise to evalu-ate proposed industrial policy initiatives as one safeguard against specific interest groups“capturing”government policies.See,for example,Hufbauer and Jung(2021).Industrial Policy as Zombie Economics 23fraserinstitute.orgbetween the private and public sectors exist.They involve the type of embeddedness of government in private sector activity that is a feature of new industrial policy.To be sure,PPPs are much less ambitious than industrial policy that aspires to trans-form whole sectors of the economy,as the former are typically focused on specific and well-defined projects such as building a road or a port facility.30 They also involve fewer stakeholders than the transformative agendas that are featured in initiatives such as Green New Deals.Hence,to the extent that PPPs are not generally successful in generat-ing enhanced value for taxpayers money,there is ample reason to be skeptical about how successful ambitious industrial policies will be in achieving accelerated rates of innovation and real economic growth on an economy-wide basis.As in the case of industrial policy,the literature on PPPs provides an ambiguous assess-ment.For example,Casady,Verweij,and van Meerkerk(2022)review a number of studies evaluating PPPs in different industrial sectors and across a range of countries.They con-clude that the evidence for a cost-performance advantage for PPPs is mixed.However,there is clearer evidence that PPPs have a performance advantage in time and service quality.Wang and Zhao(2018)also highlight a mixed result for a sample of five Virginia PPP high-way projects.Specifically,the projects were successful in accessing innovative finance,but their performance was largely unsatisfactory in terms of reducing contracting cost risk.Ontario 360(2023)provides a less equivocal evaluation of PPPs.This report notes that for the past two decades,PPPs have been the favoured model for delivering large-scale infrastructure in Canada,including public transit lines,highways,bridges,and hospitals.It asserts that PPPs have become synonymous with some of the worst performing infra-structure projects in the country.In particular,projects in the transit sector increasingly appear to be unaccountable and unmanageable.31 Vining,Boardman,and Poschmann(2005)present and discuss a model that identifies the serious challenges to successful collaboration between the public and private sectors for PPPs.Specifically,PPPs can often be prone to conflict between the contracting parties,as well as high contracting costs and opportunism,where the latter phenomenon refers 30 The“counterfactuals”are also different when comparing PPPs to industrial policy.In the former case,the counterfactual is the government sector financing and operating the relevant infrastructure asset(s).In the case of industrial policy,the counterfactual is that investment and innovation decisions are directed by market forces and not by consultation with government accompanied by direct or indirect government financial incentives.31 Chong,Huet,Saussier and Steiner(2006)examine a database of 5,000 French local authorities to explore the impact of PPPs focused on water distribution where the performance measure is consumer prices.They conclude that conditional on the choice of a PPP,consumer prices are higher on average for PPPs than for government financed and managed systems.24 Industrial Policy as Zombie Economicsfraserinstitute.orgto one or the other party to a collaboration seeking to renegotiate more favourable terms to the original agreement.They provide case study evidence from six major infrastructure projects in Canada,as well as a summary analysis of PPPs for prison systems in the US.The cases cited confirm the difficulties associated with cooperation based around contracting,particularly in the presence of complexity,uncertainty,and the requirement for one or another party to invest in assets that are specific to the project in question.Asset specific-ity creates the potential for opportunism which,in turn,often undermines the necessary ongoing cooperation between the contracting parties.The challenges associated with public-private sector coordination in pursuit of indus-trial policy goals such as transformational innovations or eliminating the use of carbon fuels or remedying income inequality across gender and racial lines,are orders of mag-nitude greater than those facing conventional PPPs of the types briefly reviewed above.As discussed earlier,proponents of a new approach to industrial policy characterize it as a process of discovery through close interaction between public and private sector par-ticipants who must continuously negotiate and adapt their contributions to industrial development and/or to achieving broad environmental or social goals.The need for even periodic renegotiation of terms of agreement between parties to PPPs is a major hurdle to the success of PPPs,even when the projects objective is well defined and the underlying technology is well understood.The broader and less easily measured goals of recent and suggested industrial policies compared to PPPs,along with the increased number of likely participants,and the much greater technological and eco-nomic uncertainty surrounding so-called“moonshot”public policy initiatives,make it very unlikely that many of the relevant initiatives will be successfully and efficiently carried out.25 fraserinstitute.org6.Concluding CommentsIndustrial policy,while not always identified as such,has been practiced by governments for decades if not centuries.The focus and specific features vary over time,but the endur-ing principle underlying industrial policy is that the government should,directly or indi-rectly,promote the expansion of specific activities(e.g.,Artificial Intelligence)or broad sectors of the economy(e.g.,the Electric Vehicle supply chain),while“cushioning”or facilitating the orderly contraction of other,less economically promising or otherwise undesirable activities or sectors(e.g.,oil and gas exploration,extraction,and refining).Historically,industrial policy has focused on encouraging the growth of specific manufac-turing and advanced technology sectors.More recently,a major focus of industrial policy in developed countries is to encourage the electrification of their economies in pursuit of climate change goals,although populist politicians in the US have made the reshoring of manufacturing a prominent recent feature of their support for industrial policy.An enduring criticism of industrial policy is that capital markets and not government officials are best positioned and have the greatest incentives to determine how financial capital and other productive inputs should be allocated in order to promote real economic growth and higher standards of living.Private investors,including operating businesses,have the incentive to identify and finance economic opportunities in pursuit of increased wealth,and to defund investments that prove to be financially unpromising.While pro-ponents of industrial policy argue that bureaucrats can be made financially accountable to taxpayers in the same way that companies and investment managers are accountable to their shareholders and clients,the fact that government employees have no residual claim on any net economic benefits linked to their decisions regarding resource allocation is a critical feature of government funding that distinguishes it from private investing.In fact,proponents of new approaches to industrial policy do not argue for displacing private sector decision-making with decision-making by government officials.Rather,they argue that the public and private sectors should effectively act as partners to identify opportunities for transformational innovation and economic development,as well as to identify and implement broad initiatives and specific actions that will ensure that financial and other productive resources are made available for the expansion of prioritized sectors and activities.They further argue that while embedding the public sector into private sector decision-making presents challenges,the resulting partnership can improve upon the autonomous decisions and actions taken by private sector managers and investors.26 Industrial Policy as Zombie Economicsfraserinstitute.orgThe limited success of PPPs,which are far more narrowly focused in their objectives and circumscribed in scope compared to the transformational changes envisioned for recent industrial policy initiatives or in calls for future attempts at moonshot innovations,is a reason for strong skepticism about whether new industrial policies will be any more suc-cessful than earlier versions.In particular,the broader,less well-defined,and more complex the tasks that must be defined and accomplished,the more likely it is that the parties to the relevant activities will be less accountable and act more opportunisticallywhich is a recipe for policy failure.27 fraserinstitute.orgReferencesAgarwal,Ruchir(2023).Industrial Policy and the Growth Strategy Trilemma.International Monetary Fund.,as of August 30,2024.Alexander,Patrick,and Ian Keay(2018).A General Equilibrium Analysis of Canadas National Policy.Explorations in Economic History 68(April):115.,as of August 30,2024 paywall.Altenburg,Tilman,and Dani Rodrik(2017).Green Industrial Policy:Concepts,Policies,Country Experiences.UN Environment.,as of August 30,2024.Bartelme,Dominick,Arnaud Costinot,Dave Donaldson,and Andres Rodriguez-Clare(2021).The Textbook Case for Industrial Policy:Theory Meets Data.MIT.,as of August 30,2024.Beason,Richard,and David E.Weinstein(1996).Growth,Economies of Scale and Targeting in Japan(19551990).Review of Economics and Statistics 78,2:286-295.,as of August 30,2024 paywall.Bellago,Christophe,and Vincent Dortet-Bernadet(2013).The French Cluster Policy and the R&D Spending of SME and Intermediate-Sized Enterprises.Document number 0213Q6.National Institute of Statistics and Economic Studies(France)INSEE.,as of August 30,2024.Bivens,Josh(2023).The Industrial Policy Revolution Has Begun,But Another Is Still Needed.Economic Policy Institute(United States).,as of August 30,2024.Casady,Carter,Stefan Verweij,and Ingmar van Meerkerk(2022).Conclusions About the Performance Advantages of PPPs.In Stefan Verweij,et.al.(eds).Assessing the Performance Advantage of Public-Private Partnerships(Edward Elgar Publishing):1-26.Cheang,Bryan(2024).Chapter 1:An Overview of Singapores Development and Public Policies.In Steven Globerman(ed.),Meritocracy,Personal Responsibility and Encouraging Investment:Lessons from Singapores Economic Growth Miracle.Realities of Socialism series.(Fraser Institute):732.,as of August 30,2024.Chong,Eshien,Freddy Huet,Stephane Saussier and Faye Steiner(2006).PublicPrivate Partnerships and Prices:Evidence from Water Distribution in France.Review of Industrial Organization 29:149-169.,as of August 30,2024.Cohen,Linda R.,and Roger G.Noll(1991).The Technology Pork Barrel.Brookings Institution.28 Industrial Policy as Zombie Economicsfraserinstitute.orgDadush,Uri(2016).Industrial Policy:A Guide for the Perplexed.Policy Brief number PB-16/05.OCP Policy Center(Morocco).,as of August 30,2024.Danish Agency for Science,Technology and Innovation(2011).The Impacts of Cluster Policy in Denmark An Impact Study on Behaviour and Economic Effects of Innovation Network Denmark.Danish Agency for Science,Technology and Innovation.,as of August 30,2024.Engel,Dirk,Timo Mitze,Roberto Patielli,and Janina Reinkowski(2013).Does Cluster Policy Trigger R&D Activity?Evidence from German Biotech Contests.European Planning Studies 21,11:1735-1759.,as of August 30,2024 paywall.Falck,Oliver,Stephan Heblich,and Stefan Kipar(2010).Industrial Innovation:Direct Evidence from a Cluster-Oriented Policy.Regional Science and Urban Economics 40,6(November):574-582.,as of August 30,2024 paywall.Globerman,Steven,Daniel Shapiro,and Aidan Vining(2002).Clusters and Intercluster Spillovers:Their Influence on the Growth and Survival of Canadian Information Technology Firms.Industrial and Corporate Change 14,1:27-60.,as of August 30,2024.Harris,Richard,Ian Keay,and Frank Lewis(2015).Protecting Infant Industries:Canadian Manufacturing and the National Policy,1870-1913.Explorations in Economic History,Vol.56(April):15-31.,as of August 30,2024 paywall.Head,Keith,and John Ries(1999).Rationalization Effects of Tariff Reductions.Journal of International Economics 47,2(April):295-320.,as of August 30,2024 paywall.Holcombe,Randall G.(2013).Crony Capitalism:By-Product of Big Government.The Independent Review 17,4(Apring):541-559.,as of August 30,2024 paywall.Hufbauer,Gary C.,and Euijin Jung(2021).Lessons Learned from Half a Century of U.S.Industrial Policy.Realtime Economics.Peterson Institute for International Economics.,as of August 30,2024.Ilyina,Anna,Ceyla Pazarbasioglu,and Michele Ruta(2024,April 12).Industrial Policy is Back,But the Bar to Get It Right is High.Blog.International Monetary Fund.,as of August 30,2024.Juhsz,Rka,and Nathan Lane(2024).A New Economics of Industrial Policy.Finance and Development Magazine F&D(June):66-70.International Monetary Fund.,as of August 30,2024.Juhsz,Rka,Nathan J.Lane,and Dani Rodrik(2023).The New Economics of Industrial Policy.Working Paper 31538.National Bureau of Economic Research.,as of August 30,2024.Kedrosky,Davis(2022,July 25).Protectionism in One Country:How Industrial Policy Worked in Canada.Great Transformations Substack blog.,as of August 30,2024.Lechevalier,Sebastien,Yukio Ikeda,and Junichi Nishimura(2010).The Effect of Participation in Government Consortia on the R&D Productivity of Firms:A Case Study of Robot Technology in Japan.Economics of Innovation and New Technology 19,8:669-692.,as of August 30,2024 paywall.Lee,Jong-Wha(1997).Government Interventions and Productivity Growth in Korean Manufacturing Industries.Journal of Economic Growth 1,3:391-414.,as of August 30,2024.Lincicome,Scott(2021).Industrial Policy:A Bad Idea Is Back.Cato Policy Report.CATO Institute.,as of August 30,2024.Martin,Philippe,Thierry Mayer,and Florian Mayneris(2011).Public Support to Clusters:A Firm-Level Study of French Local Productive Systems.Regional Science and Urban Economics 41,2:108-123.,as of August 30,2024.Mazzucato,Mariana(2015).The Innovative State.Foreign Affairs(JanuaryFebruary).,as of August 30,2024 paywall.McKitrick,Ross(2013).An Evidence-Based Approach to Pricing CO2 Emissions.The Global Warming Policy Foundation.,as of August 30,2024.Neely,Michelle Clark(1993,April 1).The Pitfalls of Industrial Policy.Regional Economist.Federal Reserve Bank of St.Louis.,as of August 30,2024.Nishimura,Junichi,and Hiroyuki Okamura(2011).R&D Productivity and the Organization of Cluster Policy:An Empirical Evaluation of the Industrial Cluster Project in Japan.Journal of Technology Transfer 36,2:117-144.,as of August 30,2024 paywall.Ontario 360(2023).PublicPrivate Partnerships:Is a Reassessment Underway?Policy Papers(November 30).Ontario 360.,as of August 30,2024.Quiggin,John(2012).Zombie Economics:How Dead Ideas Still Walk Among Us.Princeton University Press.30 Industrial Policy as Zombie Economicsfraserinstitute.orgReich,Robert(1982).Why the U.S.Needs an Industrial Policy.Harvard Business Review(January):58-71.,as of August 30,2024.Rodrik,Dani(2004).Industrial Policy for the Twenty-First Century.John F.Kennedy School of Government,Harvard University.,as of August 30,2024.Schwab,Klaus,and Thierry Malleret(2022).Mariana Mazzucato on Rethinking the State to Improve Partnerships.The Great Narrative for a Better Future.World Economic Forum.,as of August 30,2024.Siripurapu,Anshu,and Noah Berman(2023).Is Industrial Policy Making a Comeback?Backgrounder.Council on Foreign Relations.,as of August 30,2024.Tucker,Todd(2019).Industrial Policy and Planning:What It Is and How to Do It Better.Roosevelt Institute.,as of August 30,2024.Viladecans-Marsal,Elisabet,and Josep-Maria Arauzo-Carod(2012).Can a Knowledge-Based Cluster Be Created?The Case of the Barcelona 22 District.Papers in Regional Science 91,2:377-301.,as of August 30,2024 paywall.Vining,Aidan R.,Anthony E.Boardman,and Finn Poschmann(2005).PublicPrivate Partnerships in the US and Canada:“There Are No Free Lunches.”Journal of Comparative Policy Analysis:Research and Practice 7,3:199-220.,as of August 30,2024 paywall.Wang,Yin,and Zhirong Jerry Zhao(2018).Performance of Public-Private Partnerships and the Influence of Contractual Arrangements.Public Performance and Management Review 41,1:177-200.,as of August 30,2024 paywall.Warwick,Ken,and Alistair Nolan(2024).Evaluation of Industrial Policy:Methodological Issues and Policy Lessons.OECD Science,Technology and Industry Policy Papers number 16.OECD Publishing.,as of August 30,2024.Wong,Joseph(2011).Betting on Biotech:Innovation and the Limits of Asias Developmental State.Cornell University Press.Wraight,Tom(2024).Rethinking the American Industrial Policy Debate:The Political Significance of a Losing Idea.Journal of Political History 36,2:191-214.,as of August 30,2024 paywall.Industrial Policy as Zombie Economics 31fraserinstitute.orgAbout the AuthorSteven Globerman is a senior fellow and Addington Chair in Measure ment at the Fraser Institute.Previously,he held tenured appointments at Simon Fraser University and York University and has been a visiting professor at the University of California,Univer-sity of British Columbia,Stockholm School of Economics,Copenha-gen School of Business,and the Helsinki School of Economics.He has written more than 200 academ ic articles and monographs and is the author of the book The Impacts of 9/11 on Canada-U.S.Trade as well as a textbook on international business management.He served as a researcher for two Canadian Royal Com missions on the economy as well as a research advisor to Investment Canada on the subject of foreign direct investment.He earned his BA in economics from Brooklyn Col-lege,his MA from the University of California,Los Angeles,and his PhD from New York University.AcknowledgmentsThe author thanks three reviewers for many helpful comments on an earlier draft.Any remaining errors or oversights are the sole responsibility of the authors.As the researcher has worked independently,the views and conclusions expressed in this paper do not nec-essarily reflect those of the Board of Directors of the Fraser Institute,the staff,or sup-porters.This publication in no way implies that the Fraser Institute,its directors,or staff are in favour of,or oppose the passage of,any bill;or that they support or oppose any particular political party or candidate.32 Industrial Policy as Zombie Economicsfraserinstitute.orgPublishing InformationDistributionThese publications are available from in Portable Document Format(PDF)and can be read with Adobe Acrobat or Adobe Reader,versions 8 or later.Adobe Reader DC,the most recent version,is available free of charge from Adobe Systems Inc.at .Readers having trouble viewing or printing our PDF files using applications from other manufacturers(e.g.,Apples Preview)should use Reader or Acrobat.Ordering publicationsTo order printed publications from the Fraser Institute,please contact:e-mail:salesfraserinstitute.org telephone:604.688.0221 ext.580 or,toll free,1.800.665.3558 ext.580 fax:604.688.8539.MediaFor media enquiries,please contact our Communications Department:604.714.4582 e-mail:communicationsfraserinstitute.org.CopyrightCopyright 2024 by the Fraser Institute.All rights reserved.No part of this publication may be reproduced in any manner whatsoever without written permission except in the case of brief passages quoted in critical articles and reviews.Date of issueSeptember 2024ISBN978-0-88975-799-8CitationSteven Globerman(2024).Industrial Policy as Zombie Economics.The Fraser Institute.Industrial Policy as Zombie Economics 33fraserinstitute.orgAbout the Fraser InstituteOur mission is to improve the quality of life for Canadians,their families,and future gen-erations by studying,measuring,and broadly communicating the effects of government policies,entrepreneurship,and choice on their well-being.Notre mission consiste amliorer la qualit de vie des Canadiens et des gnrations venir en tudi-ant,en mesurant et en diffusant les effets des poli tiques gouvernementales,de lentrepreneuriat et des choix sur leur bien-tre.Peer review validating the accuracy of our researchThe Fraser Institute maintains a rigorous peer review process for its research.New research,major research projects,and substantively modified research conducted by the Fraser Institute are reviewed by experts with a recognized expertise in the topic area being addressed.Whenever possible,external review is a blind process.Updates to previously reviewed research or new editions of previously reviewed research are not reviewed unless the update includes substantive or material changes in the methodology.The review process is overseen by the directors of the Institutes research departments who are responsible for ensuring all research published by the Institute passes through the appropriate peer review.If a dispute about the recommendations of the reviewers should arise during the Institutes peer review process,the Institute has an Editorial Advisory Board,a panel of scholars from Canada,the United States,and Europe to whom it can turn for help in resolving the dispute.34 Industrial Policy as Zombie Economicsfraserinstitute.orgMembersPast membersEditorial Advisory BoardProf.Terry L.AndersonProf.Robert BarroProf.Jean-Pierre CentiProf.John ChantProf.Bev DahlbyProf.Erwin DiewertProf.J.C.Herbert EmeryProf.Jack L.GranatsteinProf.Herbert G.GrubelDr.Jerry JordanProf.Ross McKitrickProf.Michael ParkinProf.Friedrich SchneiderProf.Lawrence B.SmithDr.Vito TanziProf.Armen Alchian*Prof.Michael Bliss*Prof.James M.Buchanan*Prof.Stephen Easton*Prof.James Gwartney*Prof.Friedrich A.Hayek*Prof.H.G.Johnson*deceased;nobel laureateProf.Ronald W.Jones Prof.F.G.Pennance*Prof.George Stigler*Sir Alan Walters*Prof.Edwin G.West*
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