Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained. Scope exists to start lowering nominal policy rates provided inflation continues to ease, but the policy stance should remain restrictive for some time to come. The pace and scale of policy rate reductions will be data dependent and may vary across countries depending on economic conditions.

The ratio of government debt to GDP is projected to rise further in many countries. Governments face mounting fiscal challenges from rising debt service costs and sizeable additional spending pressures from ageing populations, climate change mitigation and adaptation, defence and the need to finance new reforms. Without action, future debt burdens will rise significantly. Stronger near-term efforts to contain spending growth, reforms to enhance revenues, and early establishment of credible medium-term spending and tax plans tailored to country-specific developments are necessary.

Prospects for long-term growth and improvements in living standards appear modest. Stronger policy action is required to boost investment and enhance skills development and intensify innovation, to drive technological progress and productivity growth and boost employment. Innovation is crucial for a successful and cost-effective climate transition. While the majority of research efforts are undertaken in the private sector, government policies can and should continue helping foster innovation. Well-designed public support for R&D – both for basic government-funded research as well as through direct grants to businesses or R&D tax incentives – should aim to complement private investment, with rigorous evaluation of public efforts built into national investment strategies.