Executive Summary:
Commodity prices are expected to decrease by 5 percent in 2025 and 2 percent in 2026, after softening 3 percent this year. This would lead aggregate commodity prices to their lowest levels since 2020. The projected declines are led by oil prices but tempered by price increases for natural gas and a stable outlook for metals and agricultural raw materials. The Brent crude oil price is projected to average $80/bbl in 2024, before slipping to $73/bbl in 2025 and $72/bbl in 2026. Thus, from their 2022 high, annual average oil prices are expected to decline for four consecutive years through to 2026, settling just slightly above their 2021 level. The possibility of escalating conflict in the Middle East represents a substantial near-term upside risk to energy prices, with potential knock-on consequences for other commodities. However, over the forecast horizon, longer-term dynamics—including decelerating global oil demand, notably in China; diversifying oil production; and ample oil supply capacity held by OPEC+—suggest sizable downside risks to oil prices, especially if OPEC+ unwinds its latest production cuts. There are also two-sided risks to industrial commodity demand stemming from economic activity. On the one hand, concerted stimulus in China and above-trend growth in the United States could push commodity prices higher. On the other, weaker-than-anticipated global industrial activity could dampen them.
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Prepared by Adrian Page | Published as part of the ECB Economic Bulletin, Issue 7/2024.
In the post-pandemic period, Eurosystem/ECB staff projections for growth have performed well over short horizons, despite the large shocks that have occurred. While the performance of inflation projections since the start of the pandemic has been extensively documented in previous issues of the Economic Bulletin, this box looks at how the Eurosystem/ECB staff projections for real GDP growth have fared during this turbulent period.[1] The growth fluctuations in 2020 related to the initial phases of the pandemic could not have been predicted, resulting in historically high forecast errors.[2] This box therefore focuses on the performance of the projections made after the start of the pandemic. During this period, the near-term growth forecasts have been remarkably accurate (Chart A, panel a). With only some exceptions during 2021, when growth continued to be affected by the pandemic’s unpredictable path and the associated containment measures, errors in next-quarter projections for real GDP growth have been even smaller than usual despite large shocks, including those caused by supply chain disruptions and Russia’s war in Ukraine.
However, over one-year horizons, staff projections overestimated growth from mid-2022 onwards. Looking at a longer horizon, the one-year-ahead projections for annual GDP growth have been less accurate and, on several occasions – in 2022 and the first half of 2023, in particular – the absolute projection errors were bigger than the average absolute historical errors over that horizon (Chart A, panel b).[3] The projections between mid-2022 and mid-2023 overestimated growth but underestimated inflation. This is consistent with the fact that the largest shocks during that period related to supply chain bottlenecks and to energy supply shocks caused by the disruptions brought about by Russia’s war in Ukraine. These supply shocks pushed inflation higher while supressing growth. Although the magnitude of the projection errors for growth have diminished over the past year, they have nevertheless remained negative over the one-year horizon, implying a persistent overestimation of the strength of the recovery.

Chart A
Projection errors in real GDP growth since 2021

a) Next quarter ahead

b) One year ahead

(percentage points in quarter-on-quarter growth rates)

(percentage points in year-on-year growth rates)

Sources: Eurosystem/ECB staff projections and ECB staff calculations.
Notes: Error is the outturn (as published by Eurostat on 6 September 2024) minus the projection. “Next quarter ahead” refers to the projection for the quarter-on-quarter rate of change for the quarter after the one in which the respective projection was published (e.g. the error for the second quarter of 2024 in the March 2024 ECB staff macroeconomic projections). “One year ahead” refers to the projection for the annual rate of change for the same quarter in the year following the respective publication (e.g. the error for the second quarter of 2024 in the June 2023 Eurosystem staff macroeconomic projections). Average absolute real GDP errors refer to the period 1999-2019 and exclude outliers during the global financial crisis.

Private consumption and investment have been the main drivers behind one-year-ahead projection errors for most of this period, with net exports and stocks also playing a role more recently. Decomposing the projection errors into the individual demand components of GDP helps explain the source of the errors (Chart B). In 2021, projections made in the course of the previous year (i.e. during the initial phase of the pandemic) were subject to huge uncertainty, resulting in large but partially offsetting errors across the different components. Significant shifts in consumption patterns towards goods during the earlier phases of the pandemic and subsequently back to services led to disruptions in historical economic relationships, thus reducing the predictability of consumption, investment and trade. As the economic impact of the pandemic began to fade, global supply chain disruptions emerged during 2021, followed by Russia’s invasion of Ukraine in early 2022, which disrupted Europe’s energy supply. These shocks pushed up inflation, causing real incomes to fall unexpectedly and private consumption to surprise to the downside up until mid-2023. Since then, private consumption errors have been small, as upside surprises in disposable income have led to higher savings rather than higher consumption. Investment growth has also consistently surprised to the downside throughout the post-pandemic period. This can partly be explained by the high levels of uncertainty, which had been expected to dissipate but which instead persisted in the face of the series of adverse shocks mentioned. Another factor affecting real GDP and several demand components was the ECB’s monetary policy, which was tightened considerably in the face of surging inflation and by more than expected by markets. The contribution of net exports to growth has also tended to surprise to the downside related to a weaker-than-expected recovery in global trade but also to losses in competitiveness, as energy price shocks have been larger in the euro area than for other key trading partners. Over recent quarters, destocking has put an unexpected drag on growth, as reflected in the negative contributions from changes in inventories. The only component to have systematically surprised to the upside over this period is government consumption.[4]

Chart B
Decomposition of one-year-ahead real GDP projection errors into contributions of demand components

(percentage points in the year-on-year rate of change)

Sources: Eurosystem/ECB staff projections and ECB staff calculations.
Notes: See notes to Chart A. In the second quarter of 2024, the large and partially offsetting errors in the net exports and investment components partly relate to volatile and unpredictable developments related to intellectual property products in Ireland.

For most of the post-pandemic period, errors in the conditioning assumptions explain a large part of the projection errors. Another way to view the sources of projection errors is to look at the role of the technical assumptions and the projections for euro area foreign demand, both key inputs in the staff projection models.[5] Chart C decomposes the one-year-ahead GDP errors into the impact of errors in these assumptions and an unexplained residual related to other factors. This impact can be estimated using elasticities derived from Eurosystem staff projection models. The sharp, unexpected increases in oil and particularly gas prices from the second half of 2021 onwards played an important role in explaining downside growth surprises up until the end of 2022. From mid-2022 onwards, the financial assumptions also played some role, particularly the stronger-than-assumed increases in interest rates mentioned above. Errors in the exchange rate assumptions had a small, positive offsetting impact during 2022, switching signs to contribute negatively to growth errors from mid-2023 onwards. Lastly, foreign demand surprised mainly to the upside compared with staff expectations in the first half of the post-pandemic period, before contributing to the over-predictions of growth as of late 2022.

Chart C
Decomposition of one-year-ahead real GDP projection errors: the role of errors in conditioning assumptions

(percentage points in the year-on-year rate of change)

Sources: Eurosystem/ECB staff projections and ECB staff calculations.
Notes: See notes to Chart A. The contribution of errors in conditioning assumptions to the errors for real GDP growth are based on elasticities derived from Eurosystem staff macroeconomic models. Energy commodity prices refer to assumptions for oil and gas prices. Exchange rate refers to the nominal effective exchange rate of the euro. Financial assumptions refer to assumptions for short and long-term interest rates and stock market prices. “Adjusted errors” refers to all other sources of error beyond the errors in the conditioning assumptions mentioned. The dashed lines indicate the average absolute errors in the “Adjusted errors” component over the period 2003 (the earliest date for which the decomposition is available) until 2019, excluding outliers during the global financial crisis.

Adjusting for the errors in conditioning assumptions results in smaller errors, which may relate to persistent uncertainty and a possibly stronger-than-expected impact of monetary policy tightening. The conditioning assumptions are mainly based on market pricing and treated as exogenous to the staff projections for the euro area. Adjusting for errors in these assumptions makes it possible to isolate the remaining part of the overall projection error (shown as grey bars in Chart C), which can be attributed to the models used to build the projections and staff judgement.[6] These adjusted errors were notably smaller for most of the sample period, especially since mid-2023. The dashed lines in Chart C show the historical average of the absolute values for these adjusted errors during non-crisis periods. The adjusted errors (grey bars) are larger than these averages in absolute terms in only four quarters, despite large uncertainty during this period. But which factors could be behind these errors? As mentioned above, one extraordinary factor was large under-predictions of the surge in inflation (which went beyond what could be explained by technical assumptions) and the associated hit on disposable income. The energy price shock also led to persistent and unexpected losses in competitiveness beyond what was captured by the exchange rate assumptions. Geopolitical tensions, especially in Ukraine and more recently in the Middle East, have had a significant impact on uncertainty and confidence. Another factor may relate to the impact of monetary policy. While the green bars in Chart C capture the impact of errors in the financial assumptions based on Eurosystem staff projection models, other models suggest stronger impacts.[7] Moreover, non-linearities in the pass-through related to the exceptional speed and intensity of the monetary policy tightening or to the switch from a “low-for-long” to a high interest rate environment, may have had a stronger impact on the economy than suggested by the usual projection models.
In conclusion, despite the series of large shocks which hit the euro area economy in recent years, staff growth projection errors have been comparable to pre-pandemic averages. However, the outlook remains clouded by considerable uncertainty. Staff are continuously looking at ways to improve their forecasting models and make judgemental adjustments where the models systematically miss the mark. Some of the fruits of these efforts can be seen in the projection errors for near-term growth; these have been smaller than the historical average despite the huge shocks we have witnessed. While projection errors over the one-year-ahead horizon have been persistently negative, much of this can be explained by errors in the conditioning assumptions. The remaining errors likely reflect the significant and persistent changes observed in recent years in key economic relationships. It should be noted that the errors presented in this box refer to projections published up until June 2023. Staff have already taken the negative flow of information since then into account: for example, the growth outlook has been revised down from 1.5% in the June 2023 Eurosystem staff macroeconomic projections, to 0.8% for 2024 as recent information suggests a weaker-than-expected recovery. Nevertheless, economic projections remain clouded by considerable uncertainty. To illustrate the potential impact of the most relevant sources of uncertainty on the projections, the staff projections are usually accompanied by alternative scenarios highlighting key risks as well as more generic uncertainty bands.[8]

See “An update on the accuracy of recent Eurosystem/ECB staff projections for short-term inflation”, Economic Bulletin, Issue 2, ECB, 2024; “What explains recent errors in the inflation projections of Eurosystem and ECB staff?”, Economic Bulletin, Issue 3, ECB, 2022. See also “The empirical performance of ECB/Eurosystem staff inflation projections since 2000”, Economic Bulletin, Issue 5, ECB, 2024.
The projection for the second quarter of 2020 made in the March 2020 ECB staff macroeconomic projections resulted in the largest ever error for this horizon, with widespread COVID-19-related lockdown measures causing growth to contract by 11.1% compared with a projected value of 0.1%.
Projection errors over longer horizons, such as two years ahead, are not shown for the sake of brevity but follow a very similar pattern as those shown in Chart A, panel b, with systematic over-predictions from mid-2022 onwards.
This reflects the fact that over the sample period, fiscal policy had loosened beyond initial expectations, as governments progressively adopted and extended the range of stimulus measures and pushed consolidation into the future.
Technical assumptions refer to key variables, such as energy commodity prices and market interest rates, which are based on futures prices and the exchange rate, which is assumed to remain at recent levels at the time the projections were conducted.
See “Why we need models to make projections”, The ECB Blog, 5 July 2023.
See the box entitled “A model-based assessment of the macroeconomic impact of the ECB’s monetary policy tightening since December 2021”, Economic Bulletin, Issue 3, ECB, 2023.
See the uncertainty bands surrounding the projections for real GDP growth shown in Chart 1 and “Alternative scenarios for consumer confidence and the implications for the economy”, ECB staff macroeconomic projections for the euro area, September 2024.

 
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Prestigious Designation Unlocks $825 Million in Federal Funding for Semiconductor R&D at NY CREATES’ Albany NanoTech Complex
Cements New York as America’s Leading Semiconductor R&D Hub, Will Enable Continued Expansion of State’s High-Tech Ecosystem and Bring Back Hundreds of Good Paying Manufacturing Jobs to New York State
The CHIPS for America EUV Accelerator at NY CREATES Will Support U.S. Technological Sovereignty, National Security, American Economic Vitality and Lead to More Powerful Chips for Technology Used Everyday

Governor Kathy Hochul today celebrated the designation of NY CREATES’ Albany NanoTech Complex as the location of the CHIPS for America EUV Accelerator, an NSTC facility. This announcement marks an anticipated significant investment in EUV research and development under the Biden-Harris Administration’s CHIPS and Science Act. This prestigious designation unlocks $825 million in federal funding and makes New York State the first state in the nation to land one of three NSTC facilities.
“From day one of my administration, I pledged that New York State would lead the charge to bring back advanced manufacturing and R&D to the U.S., creating good jobs and economic opportunity in the process,” Governor Hochul said. “Thanks to the winning combination of federal CHIPS funding and New York’s determination and ingenuity, the Albany NanoTech Complex will be home to the CHIPS for America EUV Accelerator, and fuel America’s advanced manufacturing renaissance. I thank the Biden-Harris Administration, the Department of Commerce, Natcast, and our federal delegation for their partnership as we continue to work together to advance U.S. semiconductor leadership, safeguard our national security and create a brighter future for all.”
NY CREATES and Natcast, the operator of the NSTC, have signed a Memorandum of Understanding to support establishing the new EUV Accelerator in New York. The CHIPS for America EUV Accelerator will be supported by an investment of up to $825 million from the U.S. Department of Commerce and will be managed by Natcast. This prestigious and competitive award reinforces New York State’s role as a national and global leader in semiconductor innovation, strengthens the State’s position as a critical hub for the U.S. semiconductor industry, and will accelerate growth of New York’s high-tech ecosystem across the region and state while attracting innovation-based job opportunities. The EUV Accelerator will be accessible to NSTC members and Natcast researchers from across the country. NY CREATES and Natcast now expect to negotiate a contract with the final terms and conditions.
U.S. Secretary of Commerce Gina Raimondo said, “With this first proposed flagship facility, CHIPS for America is providing access to cutting-edge research and tools to the NSTC and its launch represents a key milestone in ensuring the United States remains a global leader in innovation and semiconductor research and development. The research and development component of the CHIPS and Science Act is fundamental to our long-term national security and ensuring the U.S. remains the most technologically competitive place on earth. Thanks to President Biden and Vice President Harris, we are not just producing the world’s most advanced semiconductors; we are building a resilient ecosystem that will power everything from smartphones to advanced AI, safeguarding U.S. national security and keeping America competitive for decades to come.”
Senate Majority Leader Charles Schumer said, “This is the dawn of a new day for Upstate NY and a turning point in U.S. leadership in semiconductor research. I am proud to announce America’s first major National Semiconductor Technology Center facility will be right here in Albany. This will help ensure advancements in semiconductors that will shape the next century are stamped ‘Made in America’ and not developed and made in places like China. Today, Uncle Sam is saying that Albany NanoTech is THE place for developing the next frontier of America’s technological future. I wrote the NSTC in my CHIPS & Science Law with Albany NanoTech as my inspiration, and now that dream is becoming a reality. Today we help usher in America’s next era of chip research and manufacturing, with Upstate NY leading the way.”
NY CREATES’ Albany NanoTech Complex is the most advanced, publicly-owned, accessible 300mm semiconductor R&D center in North America and is uniquely positioned to host the CHIPS for America EUV Accelerator, an NSTC Facility. Governor Hochul’s strategic $1 billion investment announced in December 2023, made this designation possible by establishing NY CREATES’ High NA EUV Lithography Center, which will support the research and development of the world’s most complex and powerful semiconductors and will be leveraged as part of the national center.
NY CREATES’ President Dave Anderson said, “With a legacy spanning more than 20 years of technological achievements, NY CREATES and our industry partners have been central to establishing and growing New York’s — and the nation’s — semiconductor R&D ecosystem. This is an historic moment for New York and the semiconductor industry, and we look forward to working closely with Natcast to leverage our resources, capabilities, and know-how to bring this innovative vision to fruition. We are thrilled that the EUV Accelerator at NY CREATES will become an even greater beacon of opportunity and collaboration for our partners as we transform today’s ideas into tomorrow’s technologies. Together, we can shape the future and in doing so, bolster America’s economic and national security while cementing our position as a global leader. We are grateful to Governor Hochul, whose unwavering commitment to the industry has positioned NY CREATES to host the EUV Accelerator, the Biden-Harris Administration, and Majority Leader Schumer for making the U.S. CHIPS & Science Act a reality.”
Empire State Development President, CEO, and Commissioner Hope Knight said, “It comes as no surprise that New York has been awarded the first flagship National Semiconductor Technology Center by the federal government, because there is no leader of any state putting more effort and resources into laying the foundation for America’s advanced manufacturing renaissance than Governor Hochul. ESD, along with our colleagues at GO SEMI and NY CREATES, are proud of the progress we have made advancing New York’s leadership in semiconductor technology and innovation but we are even more excited for the greater benefits to come — increased global investment, enhanced training and skill-building for our workforce, high quality and meaningful careers within a rapidly growing sector, and broader and more sustainable economic opportunities for all New Yorkers, particularly Upstate.”
SUNY Chancellor John B. King Jr. said, “The Albany NanoTech Complex’s well-deserved selection as the NSTC EUV Center hub is testament to the hard work and leadership of Governor Hochul and Senate Majority Leader Schumer. SUNY is proud to be a key engine of New York State’s meteoric rise in the semiconductor space, contributing our system’s academic excellence, research faculty, staff, and facilities, and educating the industry-skilled workforce necessary to meet the tremendous needs of the semiconductor industry at all levels that only a large system like SUNY can.”
The EUV Accelerator will be operated by Natcast, the non-profit entity created through the CHIPS and Science Act to operate the NSTC consortium. The EUV Accelerator’s location at NY CREATES’ Albany NanoTech Complex will allow NSTC members and Natcast researchers to access and leverage more than $25 billion in public-private investments that have been made since the site’s inception, including access to Standard NA EUV lithography by 2025 and access to High NA EUV lithography by 2026.
EUV is a critical process technology used to create advanced computer chips. Using the most advanced High NA EUV equipment, chip components will be able to be made smaller, more powerful and faster using less energy, helping the semiconductor industry become more environmentally sustainable.
Research and development at the EUV Accelerator will focus on cutting-edge innovation in semiconductor technologies, helping to secure the nation’s semiconductor supply chain and the development of next-generation chips. The EUV Accelerator will be America’s focal point for advanced semiconductor research and development initiatives that enable breakthrough technological innovations, and support programs that provide, foster, and grow a talented workforce.
Natcast CEO Deirdre Hanford said, “The CHIPS for America EUV Accelerator underscores our commitment to developing and advancing next-generation semiconductor technologies here in the U.S. Through this collaboration with NY CREATES, Natcast and NSTC members will have access to essential EUV lithography tools and processes to facilitate a wider range of research and accelerate commercialization of the technologies of tomorrow.”
IBM Chairman and CEO Arvind Krishna said, “We are thrilled that New York State has been selected as the home of our nation’s first NSTC EUV Center. For over 20 years, IBM and our public-private partners at NY CREATES’ Albany NanoTech Complex have produced many of the technical breakthroughs that have propelled the semiconductor industry forward. Thanks to Sec. Raimondo, Gov. Hochul, Sen. Schumer, and many others, the new Center in Albany will support the United States’ mission to lead global chip innovation.”
Micron Executive Vice President of Technology and Products Office Scott DeBoer said, “The compelling factors for Micron in choosing New York as home to our megafab are the rich ecosystem in support of research and development, synergistic university partnerships, an exceptional talent pipeline, and strong public support, which fosters an environment to grow semiconductor R&D in the U.S. Micron is pleased to see that the U.S. Department of Commerce has awarded the NY CREATES Albany NanoTech Center the designation of being named the NSTC’s EUV Accelerator. Thanks to the leadership of Majority Leader Schumer and Governor Hochul, we will be able to scale our memory technology leadership and advance next-generation semiconductor R&D.”
TEL Technology Center President Alex Oscilowski said, “We’re excited NY CREATES’ Albany NanoTech Complex has been selected as the home of the CHIPS for America EUV Accelerator. This marks the latest milestone in our 20-year partnership with NY CREATES, working together to drive unparalleled innovation in advanced semiconductor manufacturing technology.”
Applied Materials Semiconductor Products Group President Dr. Prabu Raja said, “Applied Materials is pleased to see Natcast and NY CREATES partnering to strengthen the nation’s semiconductor ecosystem with new investments in advanced patterning infrastructure. National R&D programs are critical for maintaining long-term leadership in chipmaking technology. The NSTC EUV Accelerator is highly complementary to commercial platforms like Applied’s META Center (Materials Engineering Technology Accelerator) at Albany NanoTech and EPIC Center in Silicon Valley. When national and commercial programs work together, they can lead to breakthrough innovations that propel U.S. technology leadership.”
Senator Kirsten Gillibrand said, “Building up America’s domestic semiconductor industry is critical to create good-paying jobs, protect our supply chains, and strengthen our national security, and I’m proud to see New York leading this effort. Upstate New York is already a hub for cutting-edge semiconductor manufacturing, research, and development, and the designation of NY CREATES’ Albany NanoTech Complex as the location of the CHIPS for America EUV Accelerator will help us maintain our status as a global leader in such a vital industry. I fought hard to pass the CHIPS and Science Act, and I’m proud to see this historic legislation bring scientific innovation and economic development to the Capital Region.”
Representative Paul Tonko said, “Today is a monumental moment for our region, for job creation, for cutting-edge research, and for our 21st century precision economy. In the years since Congress passed the CHIPS and Science Act, I have been relentlessly advocating alongside the many stakeholders who call NY CREATES home to leverage the shovel-ready infrastructure and advanced R&D capabilities right here at the Albany NanoTech Complex. Our region has long been poised to take the reins to steer America’s semiconductor revitalization and, thanks to the pioneering work and sound investment of New York leadership, local chip manufacturers, researchers, educational institutions, and other stakeholders, that reality is upon us. I’m thrilled to celebrate this groundbreaking announcement and remain as determined as ever to secure strong federal action that delivers for American workers, consumers, and communities.”
Albany County Executive Daniel P. McCoy said, “This designation of NY CREATES’ Albany NanoTech Complex as the location of the CHIPS for America EUV Accelerator is incredible news for Albany County and the Capital Region and reinforces New York State’s role as a global leader in semiconductor innovation. It was under a year ago that the Governor announced a $1 billion investment in the High NA EUV Lithography Center, setting the stage for today’s announcement. This designation further strengthens our position as a critical hub for the semiconductor industry. Congratulations to Senator Schumer and Governor Hochul, whose tireless efforts delivered this major economic driver and the job opportunities that will come with it.”
Albany Mayor Kathy Sheehan said, “This is a milestone day for the City of Albany, the Capital Region, the state of New York and the United States. I want to thank President Biden, Vice President Harris, Majority Leader Schumer, Senator Gillibrand, Congressman Tonko, and Governor Kathy Hochul for their tireless efforts and advocacy. The investment and award announced today continues our City and region’s legacy of developing cutting edge innovations, and will ensure our global leadership in EUV research and development. We look forward to continuing to grow our workforce, housing and cultural assets to ensure we attract the businesses and research institutions that will want to locate here because of this historic investment.”
The EUV Accelerator will also act as a magnet for a wide range of high-tech companies, spurring additional growth of the innovation ecosystem in New York State, the Northeast, and the U.S. This announcement builds upon billions in CHIPS and Science Act funding that has been announced for industry-leading semiconductor companies in New York State, including GlobalFoundries, Micron, Wolfspeed, and Edwards Vacuum, as well as for the establishment of the Northeast Regional Defense Technology Hub (NORDTECH), founded and led by NY CREATES, Cornell University, IBM, Rensselaer Polytechnic Institute, and the University at Albany, in addition to the Upstate New York Workforce Hub which spans from Buffalo to Rochester to Syracuse.
The new EUV Accelerator at NY CREATES opens the door to millions of dollars in additional awards and research opportunities in the future. NSTC members and Natcast researchers from across the state and nation will be able to leverage the cutting-edge equipment that will be available at the facility to continue to develop and then manufacture their advanced chips.
With the establishment of the new EUV Accelerator, significant workforce development efforts will be undertaken to address the need for skilled workers to allow individuals across New York and the country to gain valuable skills and career opportunities in the semiconductor industry. Academic institutions from New York State and beyond will be able to find additional ways to collaborate with NY CREATES and Natcast.
Governor Hochul’s Commitment to the Semiconductor Industry
Under Governor Hochul’s leadership, Upstate New York has seen a major revival in semiconductor related investment. The establishment of the EUV Accelerator in Albany builds on the continued commitment to establish New York State as a global chipmaking hub.
Governor Hochul has maintained a strong commitment to building a modern economy in New York State by growing a dynamic and innovative semiconductor industry. In 2022, the Governor signed New York’s historic Green CHIPS legislation to make New York a hub for semiconductor manufacturing, creating 21st century jobs and kick-starting economic growth while maintaining important environmental protections. As part of the FY24 Enacted Budget, Governor Hochul secured a $45 million investment to create the Governor’s Office of Semiconductor Expansion, Management, and Integration (GO-SEMI), which leads statewide efforts to develop the chipmaking sector. In December 2023, Governor Hochul announced a $10 billion public-private partnership – including $9 billion in private investment from IBM, Micron, Applied Materials, Tokyo Electron and other semiconductor leaders – to bring the future of advanced semiconductor research to New York’s Capital region by creating the nation’s first and only industry accessible, High NA EUV Lithography Center at NY CREATES’ Albany NanoTech Complex. All of these efforts are positioning New York as an innovation leader ready to support one of three CHIPS for America R&D facilities that will be established under the U.S. CHIPS & Science Act.
New York is home to a robust semiconductor industry which supports more than 150 semiconductor and supply chain companies that employ over 34,000 New Yorkers. Thanks to Governor Hochul’s efforts, the industry is continuing to grow with major investments from semiconductor businesses and supply chain companies like Micron, GlobalFoundries, AMD, Edwards Vacuum, Menlo Micro and TTM Technologies to expand their presence in New York. In fact, in the last two years, chip companies have announced over $112 billion in planned capital investments in New York – more than any other state – and one in four U.S.-made chips will be produced within 350 miles of Upstate New York. No other region in the country will account for a greater share of domestic production.

 
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The European Innovation Council (EIC), part of the EU research and innovation programme Horizon Europe, will support European deep tech research and high-potential start-ups with €1.4 billion next year. The EIC Work Programme 2025, which the Commission adopted today, represents an increase of nearly €200 million in comparison with 2024.
In addition to a bigger budget, the 2025 work programme brings several improvements, including better access to scale-up equity funding with the EIC Strategic Technologies for Europe Platform (STEP) scale-up scheme, introduced following the STEP regulation adopted earlier this year. Other improvements based on the recommendations of the EIC Board are also included.
The main highlights are:

New EIC STEP Scale-up scheme, which will work with a budget of €300 million in 2025 (and expected to grow to €900 million over the period 2025-27) to provide larger investments in companies aiming to bring strategic technologies to the EU market and avoid strategic dependencies. It will provide investments of between €10 and €30 million through the EIC Fund per company to leverage private co-investment, achieving at least €50 to €150 million in total. The EIC STEP Scale-up scheme will help address a market gap in deep tech scale-up funding in Europe, targeting digital technologies, clean and resource-efficient technologies including net-zero, and biotechnologies.

Updated set of ‘EIC Challenges’:

€120 million for emerging technologies including autonomous robots, climate resilient crops, converting waste to input materials and medical diagnosis.
€250 million for earlier stage companies in specific target technologies including generative artificial intelligence, new space, agri tech and future mobility solutions.

Increasing access to Business Acceleration Services for emerging companies from ‘widening countries’ (countries with lower levels of research and innovation performance).

Awarding of Seals of Excellence under the Transition and Accelerator calls and the new STEP Seal under the STEP Scale-up scheme and Accelerator Challenge calls: these Seals aim to facilitate access to complementary and alternative funding sources such as Cohesion Policy Funds as well as to EIC Business Acceleration Services.

Four schemes
The EIC Work Programme 2025 is built around three main funding schemes:

EIC Pathfinder – €262 million for multi-disciplinary research teams to undertake visionary early-stage technology research and development with the potential to lead to technology breakthroughs (grants up to €4 million).

EIC Transition – €98 million to turn research results into innovation opportunities, following up on results generated by EIC Pathfinder, European Research Council Proof of Concept and Horizon Europe Pillar 2 (societal challenges) collaborative projects (grants up to €2.5 million).

EIC Accelerator – €634 million for start-ups and SMEs to develop, commercialise and scale up innovations with the potential to create new markets or disrupt existing ones (grants below €2.5 million, investments from €500 000 to €10 million).

In addition, the EIC Strategic Technologies for Europe Platform (STEP) Scale-up scheme – €300 million – will provide additional equity funding to promising companies driving innovation in critical areas (SMEs, start-ups, spin-offs and small mid-caps) to help them secure larger private co-investment for further scaling their businesses (investments from €10 to €30 million).
Direct financial support to innovators is complemented with access to a wide range of business acceleration services and support actions offering leading expertise and linking with corporates, investors and ecosystem actors.
Background
The European Innovation Council was launched in March 2021 as a major novelty under the Horizon Europe programme, building on a pilot phase from 2018-2020. It has a budget of over €10 billion between in 2021-2027. So far, under Horizon Europe, the EIC has supported more than 630 companies and more than 450 research projects.
The EIC’s investment arm, the EIC Fund, has reached €1 billion in actual investments in deep tech start-ups, leveraging over four times as much in co-investments. This makes the EIC Fund the largest and the most active deep tech co-investment fund in Europe. To further boost access of breakthrough EIC companies to venture capital, the Commission has recently launched the EIC Trusted Investors Network.
The Strategic Technologies for Europe Platform (STEP) regulation entered into force in March 2024 and revises the Horizon Europe legislation to introduce new flexibilities for investment support and enabling larger investments under the EIC for companies in strategic areas. The EIC is one of a number of EU programmes that implements STEP.
All potential applicants can join the EIC information days that will take place on 5th (general one) and 6th (EIC Accelerator Challenges) of November 2024.
 
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Prepared by Lukas Boeckelmann, Lorenz Emter, Isabella Moder, Giacomo Pongetti and Tajda Spital
This box reviews recent developments in global and euro area greenfield foreign direct investment (FDI) and analyses the role of geopolitics in shaping these. As firms and policymakers increasingly look at ways to reduce the vulnerability of their supply chains, understanding recent dynamics in greenfield investment is important as these may foreshadow a reconfiguration of global trade networks, the fragmentation of which could be particularly detrimental for the euro area.[1] Greenfield FDI flows refer to foreign investments made by companies to build new or extend existing production capacity. In the last decade, annual FDI outflows and inflows amounted to 1.4% and 0.6% respectively of euro area GDP and 1.0% and 1.2% respectively of global GDP excluding the euro area. The euro area is the largest source of outward greenfield FDI, accounting for 19% of global outflows in the last two years, followed by the United States, which accounted for 15%. This box uses information on announced greenfield FDI projects from a dataset provided by fDi Markets.[2]
Ex ante, the effect of geopolitical fragmentation on the direction of FDI flows is ambiguous. On the one hand, firms and policymakers might look to friend-shore and/or near-shore production to make supply chains less vulnerable to geopolitical tensions or to safeguard their assets from potential future violations of property rights. On the other hand, firms might increase their investments in geopolitically distant countries, i.e. countries which take an observably different stance on foreign policy issues, if they think that future trade tensions might impede their access to local markets.
Aggregate greenfield FDI flows are already showing increasing signs of fragmentation along geopolitical fault lines. Western companies have been ramping up investment in friendly (western) countries, while lowering investment in geopolitically distant (eastern) countries.[3] Greenfield FDI flows within the western bloc have been on the rise since 2016, while flows between the eastern and western blocs have declined, suggesting that western companies are increasingly friend-shoring or near-shoring their production capabilities (Chart A). The increase in greenfield investment within blocs is in line with evidence collected from earnings calls, which have seen a noticeable uptick in references to “friend-shoring”.

Chart A
Global greenfield FDI flows

(four-quarter moving averages, USD billions)

Sources: fDi Markets and ECB staff calculations.
Note: The latest observations are for the first quarter of 2024.

Euro area outward flows have followed the same trend, with greenfield investments increasingly tilted towards geopolitically friendly countries, such as the United States. Euro area FDI outflows seem to be increasingly pulled towards western bloc countries, in particular the United States. One driver may be that euro area firms are trying to increase their local production content for the US market in response to incentives created by the US Inflation Reduction Act (IRA).[4] Flows of greenfield FDI into the euro area are, in turn, dominated by US investments, which accounted for more than 30% of overall inflows in 2023. The recent pick-up in investment in the euro area appears to be part of a broader trend of rerouting US investments away from China to the benefit of more friendly and neutral countries.
While flows between opposing blocs have been relatively contained, there is also evidence that firms have stepped up investment between geopolitical blocs in anticipation of protectionist measures and retaliatory tariffs. Available data suggest that the flow of Chinese FDI to the neutral and western blocs increased steeply around the time the IRA was passed into law. This suggests that, in response to the heightened domestic content requirements introduced by the IRA, Chinese firms shifted their production in order to bypass the trade restrictions imposed on their goods (Chart B, panel a). This mirrors similar developments after 2016 when the threat of higher US tariffs on Chinese goods coincided with an increase in Chinese FDI flows to the western and neutral blocs. Moreover, while overall greenfield FDI flows from the euro area to China are on a declining trend, German firms, mainly driven by the automotive sector, have increased their investment in China in recent years. At the same time, we see evidence of Chinese companies increasing domestic production content in the EU, mostly in non-euro area countries, particularly Hungary (Chart B, panel b). This might also be due to firms pre-emptively relocating their production in anticipation of rising trade tensions.

Chart B
Greenfield FDI from China

a) Chinese outbound FDI to geopolitical blocs

b) Chinese outbound FDI to the EU and the euro area

Sources: fDi Markets and ECB staff calculations.
Notes: The vertical line in panel a) refers to the third quarter of 2022, the period when the IRA was signed into law. The latest observations are for the first quarter of 2024.

A more formal econometric analysis suggests that fragmentation along geopolitical fault lines has increased over time. We employ a gravity model for FDI flows that distinguishes between flows within the western and eastern blocs and flows between the blocs.[5] The results suggest that trends in global FDI flows along geopolitical fault lines, as shown in Chart A, were not driven by country-specific characteristics (such as economic growth) and instead reflect increasing geopolitical fragmentation. Independent of geographic distance, it is estimated that FDI flows within geopolitical blocs were almost three times higher than FDI flows between geopolitical blocs in the three years up to the first quarter of 2024 (Chart C).

Chart C
Ratio of FDI flows within blocs to FDI flows between blocs

(ratio)

Source: ECB staff calculations.
Notes: The chart plots the ratio of the coefficients of FDI flows within the western and eastern blocs to the coefficients of FDI flows between the two blocs, estimated using a gravity model for 12-quarter rolling windows between the first quarter of 2003 and the first quarter of 2024. The latest observation is for the first quarter of 2024 and refers to an estimation period between the second quarter of 2021 and the first quarter of 2024.

Econometric evidence shows that the overall effect of geopolitical divides on FDI is negative. We find that the effect of geopolitical distance on global and euro area greenfield FDI flows has increased since Russia’s invasion of Ukraine (Chart D).[6] Our estimates suggest that the widening geopolitical divide has dampened global FDI flows by around 3% (or €30 billion).[7] For the euro area, the value of announced greenfield FDI projects is also significantly smaller in destination countries that are geopolitically more distant, and this negative relationship has become much more pronounced since the Russian invasion of Ukraine, with annual flows falling by €14 billion. Moreover, we find that the increase in geopolitical distance between the euro area and China over the same period is associated with a decrease of around 20% in the value of flows between the two areas.[8]

Chart D
Effect of geopolitical distance on value of bilateral greenfield FDI flows over time

(elasticities, percentages)

Sources: fDi Markets and ECB staff calculations.
Notes: The chart plots the coefficients of geopolitical distance for the euro area and the rest of the world, estimated using a gravity model following Aiyar et al., op. cit. Dots depict point estimates while bars refer to the 95% confidence interval. Intra-euro area flows are excluded.

The impact of the shifts in FDI on trade and euro area output remains uncertain. On the one hand, a shift by euro area firms to increase production in the United States or other countries – for example, in response to domestic content requirements – may dampen production at home. On the other hand, higher FDI outflows may safeguard the overall competitiveness of European exporters and may, for example by increasing FDI income streams, preserve some domestic jobs, particularly in high-skilled corporate services. Moreover, euro area and other EU countries also appear to have benefited from inward FDI, which has averaged 0.7% of GDP since 2022, exceeding pre-pandemic levels.[9] More broadly, to the extent that a change in global greenfield FDI patterns along geopolitical lines foreshadows an accelerating fragmentation of global trade networks, the trends detected may prove detrimental to global and euro area output. Given its greater openness to trade and stronger integration into global value chains, such fragmentation would be more detrimental for the euro area than for other large economies.[10]

Geoeconomic fragmentation of trade would be detrimental to the euro area, lowering GDP by more than 2% and raising consumer prices by almost 4%. See also the box entitled “Friend-shoring global value chains: a model-based assessment”, Economic Bulletin, Issue 2, ECB, 2023.
The data are collected primarily from publicly available sources (e.g. media outlets, industry organisations and investment-promoting agency newswires) and report investment-level information for over 300,000 greenfield FDI announcements between 186 countries starting in January 2003.
To analyse FDI fragmentation, the world economy is assumed to fragment into three distinct blocs: a “western” (United States-centric) bloc, an “eastern” (China-centric) bloc and a “neutral” bloc comprising non-aligned countries. This classification is based on the geopolitical index outlined in the special feature entitled “Geopolitical fragmentation risks and international currencies”, The international role of the euro, ECB, June 2023.
The IRA significantly steps up US efforts in the fight against climate change and aims to increase the ability of the United States to attract key green technologies. It provides for significant financial incentives (such as tax credits for the purchase of electric vehicles and investment in renewable energy equipment) that are conditional on specific domestic content requirements.
We estimate a gravity model for quarterly greenfield FDI flows between nearly 200 source and destination countries for the period from the first quarter of 2003 to the first quarter of 2024, using dummy variables for FDI flows within and between the geopolitical blocs. The gravity model assesses the flows within and between the western and eastern blocs against a third category, “other”, encompassing flows between these two blocs and neutral (non-aligned) countries and flows between neutral countries.
Instead of including dummy variables for geopolitical alignment as above, we use geopolitical distance as measured by an index proposed in Bailey, M.A., Strezhnev, A. and Voeten, E., “Estimating Dynamic State Preferences from United Nations Voting Data”, The Journal of Conflict Resolution, Vol. 61, No 2, February 2017, pp. 430-456, which is based on voting patterns in the United Nations General Assembly in order to proxy geopolitical distance, following Aiyar, S., Malacrino, D. and Presbitero, A.F., “Investing in friends: The role of geopolitical alignment in FDI flows”, European Journal of Political Economy, Vol. 83, June 2024.
These effects are relative to a counterfactual of no geopolitical tensions – but not necessarily relative to a counterfactual in which firms do not respond optimally to the associated risks by diversifying supplies and production and by buying insurance against future shocks.
These results are robust to excluding Russia from the sample, so we can exclude the possibility that a general decoupling between the West, in particular the euro area, and Russia is driving the larger coefficient estimates in the most recent period. Moreover, the extent to which the euro area may have become generally less attractive as an investment location, owing to its proximity to the conflict and, for example, the energy price shock it triggered, would be controlled for by the time-varying destination country fixed effects.
These developments are comparable to the United States, where FDI inflows have averaged 0.6% of GDP since 2022, also exceeding pre-pandemic levels.
See the box entitled “Friend-shoring global value chains: a model-based assessment”, op. cit.

 
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Leading up to the inaugural convening of the International Network of AI Safety Institutes, Commerce Department highlights implementation of President Biden’s historic AI Executive Order, which tasked the Department with numerous responsibilities to spur the safe development, deployment and adoption of responsible AI. 
Today, U.S. Secretary of Commerce Gina Raimondo marked the one-year anniversary of President Biden and Vice President Harris’ historic Executive Order (EO) on the Safe, Secure and Trustworthy Development of AI by reflecting on the progress made by the Commerce Department to implement significant pieces of the landmark EO.
“President Biden instructed me and leaders across the Administration to pull every lever to keep pace with rapid advancements in AI to mitigate the risks so we can harness the benefits. Over the last year, that is precisely what we’ve done at Commerce, building a national AI safety institute, collaborating with leaders in industry, academia, and civil society, and working with partners and allies around the world to write the rules of the road on AI,” said Secretary of Commerce Gina Raimondo. “We’ve made tremendous progress over the last year, but we’re clear-eyed on the work that remains. We’re going to continue charging ahead to fulfill the goals of this historic EO to spur the safe development and deployment of AI in our societies.”
Since President Biden signed the AI EO in October 2023, the Department of Commerce has led implementation of significant policy priorities. In the last year, the Department has established, staffed and stood up the U.S. AI Safety Institute (U.S. AISI); created a consortium dedicated to AI safety compromised of approximately 280 members; released new guidance and software to help improve the safety, security and trustworthiness of artificial intelligence systems; signed agreements for formal collaboration on AI safety research, testing, and evaluation with leading AI companies; and completed pre-deployment testing of a new advanced model, among other action items.
Just last week, the Biden-Harris Administration announced the release of the National Security Memorandum (NSM) on AI. The NSM is designed to galvanize federal government adoption of AI to advance the national security mission. Among other key announcements, the NSM designates the U.S. AI Safety Institute, housed within Commerce’s National Institute of Standards and Technology (NIST), as the center of the whole-of-government approach to advanced AI model testing and evaluation. It empowers the U.S. AISI to collaborate with the national security and intelligence community to ensure we’re working in lock step to drive the safe, secure, and trustworthy development and use of AI.
A White House Fact Sheet underscoring AI accomplishments in the year since the Biden-Harris Administration’s historic EO is available here.
Key Commerce EO Priorities Implemented Include:

Defense Production Act authorities to compel developers of the most powerful AI systems to report vital information, especially safety test results, to the U.S. government. These companies have notified the Department of Commerce about the results of their red-team safety tests, their plans to train powerful models, and large computing clusters they possess capable of such training. Last month, the Department of Commerce proposed a rule to require the reporting of this information on a quarterly basis.

Led the way on AI safety testing and evaluations to advance the science of AI safety. The U.S. AISI at the Department of Commerce has begun pre-deployment testing of major new AI models through recently signed agreements with two leading AI developers.

Developed guidance and tools for managing AI risk. The U.S. AISI and NIST at the Department of Commerce published voluntary frameworks for managing risks related to generative AI and dual-use foundation models, and earlier this month, AISI released a Request for Information on the responsible development and use of AI models for chemical and biological sciences.

Issued a first-ever National Security Memorandum (NSM) on AI. The NSM directs concrete steps by federal agencies to ensure the United States leads the world’s development of safe, secure and trustworthy AI; to enable agencies to harness cutting-edge AI for national security objectives, while protecting human rights and democratic values; and to advance international consensus and governance on AI. This essential document designates the AI Safety Institute as the center of the whole-of-government approach to advanced AI model testing and will guide rapid and responsible AI adoption by the Department of Defense and Intelligence Community.

Identified measures—including approaches for labeling content and improving transparency—to reduce the risks posed by AI-generated content. The Department of Commerce submitted to the White House a final report on science-backed standards and techniques for addressing these risks, while NIST has launched a challenge to develop methods for detecting AI-generated content.

Released a report on the potential benefits, risks, and implications of dual-use foundation models for which the model weights are widely available, including related policy recommendations. The Department of Commerce’s report draws on extensive outreach to experts and stakeholders, including hundreds of public comments submitted on this topic.

Announced a competition for up to $100 million to support the application of AI-enabled autonomous experimentation to accelerate research into – and delivery of – targeted, industry –relevant, sustainable semiconductor materials and processes.

Published guidance addressing vital questions at the intersection of AI and intellectual property. To advance innovation the U.S. Patent and Trademark Office (USPTO) has released guidance documents addressing the patentability of AI-assisted inventions, on the subject matter eligibility of patent claims involving inventions related to AI technology, and on the use of AI tools in pursuing patent and trademark applications.

Engaged foreign leaders on strengthening international rules and norms for AI, including at the 2023 UK AI Safety Summit, where Vice President Harris and Secretary Raimondo participated. U.S. AISI Director Elizabeth Kelly later participated in the AI Seoul Summit in May 2024. In the United Kingdom, Vice President Harris and Secretary Raimondo unveiled a series of U.S. initiatives to advance the safe and responsible use of AI, including the establishment of AISI at the Department of Commerce.

Announced a global network of AI Safety Institutes and other government-backed scientific offices to advance AI safety at a technical level. This network, which will launch in November at the inaugural network convening in San Francisco, will accelerate critical information exchange and drive toward common or compatible safety evaluations and policies.

Developed comprehensive plans for U.S. engagement on global AI standards and AI-related critical infrastructure topics. NIST and DHS, respectively, will report on priority actions taken per these plans in 90 days. Additionally, the United States has launched a global network of AI Safety Institutes and other government-backed scientific offices to advance AI safety at a technical level.
 
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Abstract:
This paper examines the asymmetry in global spillovers from Fed policy across tightening versus easing episodes several examples of which have been on display since the global financial crisis (GFC). We build a dynamic general equilibrium model featuring: (i) occasionally binding collateral constraints in the financial sector with significant cross-border exposure; and (ii) global supply chains, allowing us to match the asymmetry of spillovers across contractionary versus expansionary monetary policy shocks. We find clear asymmetries in the transmission of US monetary policy, with significantly larger spillovers during contractionary episodes under both conventional and unconventional monetary policy changes. Our results also reveal that the greater the size of international credit and supply chain networks and the policymakers’ aversion to exchange rate fluctuations in the rest of the world, the greater the spillover effects of US monetary policy shocks.
Read full post here.
 
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Prepared by Pedro Baptista, Colm Bates, Omiros Kouvavas, Pedro Neves and Katia Werkmeister
Understanding how consumers perceive drivers of inflation is crucial for interpreting shifts in their inflation expectations, which can significantly influence real economic decisions. The narratives consumers construct to explain inflation play a key role in shaping their expectations, with different drivers – such as wages or profits – implying different degrees of inflation persistence.[1] To explore this further, in June 2023 and March 2024 the ECB’s Consumer Expectations Survey (CES) asked consumers to select what they thought had been the main driver of the 2022-23 surge in inflation from three answer options: firms’ profits, wage costs, or other input costs. While consumer perceptions shifted, notably in the lead-up to early 2024, they have since stabilised, making the March 2024 survey data indicative of broader trends. Analysing these evolving perceptions helps explain adjustments in inflation expectations and how shifts in macroeconomic narratives affect inflation dynamics going forward.
In March 2024 most consumers in the euro area attributed the 2022-23 surge in inflation mainly to (other) input costs, followed by profits and wages. Panel a) of Chart A shows the percentages of respondents selecting each option for each country. Other input costs (e.g. energy, raw materials or other business costs) was selected as the main driver by 66% of euro area respondents, followed by firms’ profits (20%) and wages (14%). While this ranking of inflation drivers was common across individual countries, there was considerable variation in the frequency of each answer. The order of the countries is based on the percentage of respondents selecting wages as the main driver. The Netherlands (27%) and Belgium (22%) lead this ranking, with Austria (19%) and Germany (17%) following closely behind, and France (9%), Finland (8%) and Greece (8%) at the bottom. In Greece, a noticeable percentage of consumers (43%) believe firms’ profits were the main driver of inflation.

Chart A
Perceived main driver of inflation

a) By country
(percentages of respondents)

b) Change between June 2023 and March 2024
(percentage point changes; annual percentage changes)

Sources: ECB Consumer Expectations Survey (CES), Eurostat and ECB calculations.
Notes: Panel a): Weighted estimates. Percentages of respondents selecting each option per country in March 2024. The question in the CES reads as follows: “According to your view, what is the main factor driving the change in the general level of prices for goods and services in your country during the past 12 months”. The answer options were: “1. The main driver is firms’ profits; 2. The main driver is wage costs for firms; 3. The main driver is other input costs for firms (e.g. energy, raw materials or other business costs)”. Panel b): The bars refer to weighted estimates of the change in the percentages of respondents selecting each answer option between June 2023 and March 2024. The coloured points refer to the annual percentage changes in the second quarter of 2024 for unit labour costs, energy inflation and unit profits, as derived from official data.

 
Compared with June 2023, consumers’ perceptions of the main drivers of inflation shifted towards wages, although other input costs were still seen as the strongest driver overall. The question on the perceived main driver of inflation was first posed in the June 2023 CES and repeated in the March 2024 CES.[2] Panel b) of Chart A shows the change in the percentages of respondents selecting each answer option between June 2023 and March 2024 for the euro area as a whole. The percentage of consumers selecting firms’ profits decreased by 5 percentage points, while the percentage selecting wage costs increased by 6 percentage points. This is in line with developments in wage growth and unit profits over the same period. The percentage of respondents selecting other input costs remained broadly constant, changing only by less than 1 percentage point.

Chart B
Wages as the main driver of inflation

a) By respondent educational level and age
(percentages of respondents)

b) By country and wage growth level
(percentages of respondents; annual percentage changes)

Source: ECB Consumer Expectations Survey (CES).
Notes: Weighted estimates. Percentage of respondents selecting wages as the main driver of inflation per country in March 2024. Negotiated wages refers to the annual growth rate, including one-off payments, for the first quarter of 2024.

 
Consumers selecting wages as the main driver of inflation are generally younger, without a college degree and live in countries where wage growth has been relatively high in the past year. Panel a) of Chart B shows the prevalence of wages as the main driver of inflation according to educational level and age. A possible explanation for this finding is that recent wage growth has been particularly strong among minimum-wage employees, who typically have a lower level of education and are in the younger age group. Furthermore, in countries where past wage growth has been high, a greater proportion of respondents tend to select wages as the main driver of inflation (Chart B, panel b).
Changes in consumer perceptions of the main drivers of inflation follow recent developments. Wages have gained more weight in their perceptions, while the role of profits has waned, in line with recent developments in wages and unit profits. Such changes demonstrate how narratives about inflation are reflected in consumer perceptions of the main drivers of inflation, which, in turn, may affect how they form their inflation expectations. This therefore highlights the importance of monitoring shifts in inflation narratives.

 For empirical evidence, see Andre, P. et al., “Narratives about the Macroeconomy”, Discussion Paper, No 17305, Centre for Economic Policy Research (CEPR), May 2022.
The findings from the June 2023 CES are presented and discussed in the box entitled “What do consumers think is the main driver of recent inflation?”, Economic Bulletin, Issue 6, ECB, 2023.

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Growth is projected to hold steady, but amid weakening prospects and rising threats, the world needs a shift in policy gears
Blog Post by Pierre-Olivier Gourinchas | Let’s start with the good news: it looks like the global battle against inflation has largely been won, even if price pressures persist in some countries. After peaking at 9.4 percent year-on-year in the third quarter of 2022, we now project headline inflation will fall to 3.5 percent by the end of next year, slightly below the average during the two decades before the pandemic. In most countries, inflation is now hovering close to central bank targets, paving the way for monetary easing across major central banks.

The global economy remained unusually resilient throughout the disinflationary process. Growth is projected to hold steady at 3.2 percent in 2024 and 2025, but some low-income and developing economies have seen sizable downside growth revisions, often tied to intensifying conflicts.

In advanced economies, growth in the United States is strong, at 2.8 percent this year, but will revert toward its potential in 2025. For advanced European economies, a modest growth rebound is expected next year, with output approaching potential. The growth outlook is very stable in emerging markets and developing economies, around 4.2 percent this year and next, with continued robust performance from emerging Asia.

The decline in inflation without a global recession is a major achievement. As Chapter 2 of our report argues, the surge and subsequent decline in 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 tight monetary policy started to constrain demand, normalization in labor markets allowed inflation to decline rapidly without a major slowdown in activity.
Clearly, much of the disinflation can be attributed to the unwinding of the shocks themselves, together with improvements in labor supply, often linked to increased immigration. But monetary policy played a decisive role by keeping inflation expectations anchored, avoiding deleterious wage-price spirals, and a repeat of the disastrous inflation experience of the 1970s.
Despite the good news on inflation, downside risks are increasing and now dominate the outlook. An escalation in regional conflicts, especially in the Middle East, could pose serious risks for commodity markets. Shifts toward undesirable trade and industrial policies can significantly lower output relative to our baseline forecast. Monetary policy could remain too tight for too long, and global financial conditions could tighten abruptly.
The return of inflation near central bank targets paves the way for a policy triple pivot. This would provide much-needed macroeconomic breathing room, at a time where risks and challenges remain elevated.
The first pivot—on monetary policy—is under way already. Since June, major central banks in advanced economies have started to cut policy rates, moving toward a neutral stance. This will support activity at a time when many advanced economies’ labor markets are showing signs of cooling, with rising unemployment rates. So far, however, the rise in unemployment has been gradual and does not point to an imminent slowdown.

Lower interest rates in major economies will ease the pressure on emerging market economies, with their currencies strengthening against the US dollar and financial conditions improving. This will help reduce imported inflation, allowing these countries to pursue their own disinflation path more easily.
However, vigilance remains key. Inflation in services remains too elevated, almost double pre-pandemic levels. A few emerging market economies are facing a resurgence of inflationary pressures and have started to raise policy rates again.
Furthermore, we have now entered a world dominated by supply disruptions—from climate, health, and geopolitical tensions. It is always harder for monetary policy to contain inflation when faced with such shocks, which simultaneously increase prices and reduce output.
Finally, while inflation expectations remained well-anchored this time, it may be harder next time, as workers and firms will be more vigilant about protecting pay and profits.
The second pivot is on fiscal policy. Fiscal space is a cornerstone of macroeconomic and financial stability. After years of loose fiscal policy in many countries, 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 sufficient, especially as long-term real interest rates remain far above pre-pandemic levels. In many countries, primary balances (the difference between fiscal revenues and public spending net of debt service) need to improve.
For some, including the United States and China, current fiscal plans do not stabilize debt dynamics. 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: delaying consolidation increases the risk of disorderly market-imposed adjustments, while an excessively abrupt turn toward fiscal tightening could be self-defeating and hurt economic activity.

Success requires implementing a sustained and credible multi-year adjustments without delay, where consolidation is necessary. The more credible and disciplined the fiscal adjustment, the more monetary policy can play a supporting role by easing policy rates while keeping inflation in check. But the willingness or ability to deliver disciplined and credible fiscal adjustments have been lacking.
The third pivot—and the hardest—is toward growth-enhancing 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; coping with aging and shrinking populations in many parts of the world; tackling the climate transition; increasing resilience, and improving the lives of the most vulnerable, within and across countries.
Unfortunately, growth prospects for five years from now remain lackluster, at 3.1 percent, the lowest in decades. While much of this reflects China’s weaker outlook, medium-term prospects in other regions, including Latin America and the European Union, have also deteriorated.
Faced with increased external competition and structural weaknesses in manufacturing and productivity, many countries are implementing industrial and trade policy measures to protect domestic workers and industries. But external imbalances often reflect macroeconomic forces: a weakening domestic demand in China, or excessive demand in the United States. Addressing these will require setting the macro dials appropriately.
Moreover, while industrial and trade policy measures can sometimes boost investment and activity in the short run—especially when relying on debt-financed subsidies—they often lead to retaliation and fail to deliver sustained improvements in standards of living. They should be avoided when not carefully addressing well-identified market failures or narrowly defined national security concerns.
Economic growth must come instead from ambitious domestic reforms that boost technology and innovation, improve competition and resource allocation, further economic integration and stimulate productive private investment.
Yet while reforms are as urgent as ever, they often face significant social resistance. How can policymakers win the support they need for reforms to succeed?
As Chapter 3 of our report shows, information strategies can help but can only go so far. Building trust between government and citizens—a two-way process throughout the policy design—and the inclusion of proper compensation to offset potential harms, are essential features.
Building trust 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, in the year that we celebrate the 80th anniversary of the Bretton Woods institutions.
—This blog is based on the October 2024 World Economic Outlook. For more, see blog posts on the report’s analytical chapters: Global Inflationary Episode Offers Lessons for Monetary Policy and Support for Economic Reforms Hinges on Communication, Engagement, and Trust.

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