The energy crisis in Europe is worse
The ongoing conflict in Ukraine continues to deliver shocks across economies, with the hardest hit being low-income households and nations. Food prices are climbing rapidly, and the IMF notes that this is not a temporary blip in Europe, but a sustained impact that will linger into the coming years.
With well over 80 percent of Russia’s energy supply cut off, European gas prices have surged to levels unseen in recent memory, and concerns about food shortages are rising. Pierre-Olivier Gourinchas, the IMF’s chief economist, warned in the report’s preface that the winter of 2023 in Europe is likely to be tougher than the winter of 2022.
Inflation
Stubborn inflation remains the most urgent threat to the global economy, the IMF notes, eroding purchasing power and unsettling macroeconomic stability. Inflation has accelerated at a pace not seen since 1982 and is expected to peak this year around 8.8 percent before easing to about 6.5 percent in 2023, yet projections for 2024 show it could stay elevated at roughly 4.1 percent. This persistence challenges policymakers and households alike.
Central banks are expected to stay the course with monetary tightening aimed at inflation control, a stance that has already been reflected in rate hikes by major economies, including a significant advance by the United States Federal Reserve since the start of the year. The IMF notes these measures will continue to influence global growth and policy space going forward.
The shocks of 2022 are seen as reopening wounds that have not fully healed after the pandemic, with a stronger dollar potentially worsening debt and confidence issues in emerging markets. This backdrop weighs on growth sensitivity and could push some economies toward renewed vulnerability.
Despite signals of persistence, the IMF cautions against underestimating inflation. It urges central banks to resist calls for easier policy and warns that premature easing could push inflation deeper into price levels and erode policy credibility. The balancing act remains delicate: move gradually, avoid overshooting, and avoid turning inflationary pressures into a durable restraint on growth.
Fiscal policy
The IMF recommends policies that shield the most vulnerable populations without triggering unintended inflationary effects. Broad, untargeted stimulus should be avoided, while targeted support should be considered only within credible, medium-term fiscal frameworks. The aim is to maintain social protection without compromising macroeconomic stability or the long-term fiscal outlook.
Additionally, the report highlights the risk of missteps across monetary and fiscal domains when the world economy remains fragile and financial markets show signs of stress. In the face of turbulence, there is also a warning about potential financial turmoil as economic conditions tighten and uncertainty persists.
Climate change
The IMF devotes substantial attention to energy transition policies as essential tools in addressing the climate crisis. The message is clear: delaying action to wait out inflation or the energy squeeze would be costly. If appropriate policies are designed and implemented promptly and gradually over the next eight years, costs will continue to rise, yet they are still far smaller than the longer-run costs of inaction. The emphasis is on timely action that reduces long-term environmental, economic, and social costs.
In short, the IMF argues that a proactive energy and climate strategy can soften the hit to growth while accelerating the shift to a more sustainable and resilient economic framework. The overall outlook remains cautious, but it underscores a path where policy can both stabilize near-term inflation and lay the groundwork for stronger, greener growth in the future.