Home ›› 18 Nov 2022 ›› Editorial
The global economy would enter 2023 facing a grim outlook with countries still reeling from the Covid-19 pandemic. For many, the worst of the pandemic seems to have passed; even then, the outlook is not that bright. The war in Ukraine has exacerbated the slowdown risking a “protracted period of feeble growth and elevated inflation” with a real risk of stagflation not seen since the 1970s. The global economy is facing a ‘confluence of calamities’.
The global economy is in the grip of profound challenges, impacted by the Russian invasion of Ukraine, the rising cost of living due to the persistently high inflation and the slowdown of economic activities in China. The global growth forecast by IMF remains unchanged at 3.2 per cent in 2022, and the projection for the next year, i.e. for 2023, at 2.7 per cent. One-third of the world economy will likely contract this year and next year amid shrinking real incomes owing to rising prices. The three largest economies, the US, China and Europe, are projected to continue to stall. GDP projections for 2022 and 2023, which have been appended below, indicate that storm clouds are gathering over the world economy.
The economic shock that healed the wound partially after post-pandemic has reopened due to the energy crisis. Many economists and analysts believe that the worst is yet to come. Analysts opined that global growth had to remain unchanged in 2022 and would slow down to 2.7 per cent in 2023. In the US, tightening monetary and financial policies would slow the growth rate to 1 per cent in 2023. In China, the growth has been forecasted to be 4.4 per cent in 2023 due to the energy crisis and weak property sector frequent lockdowns.
The slowdown is more pronounced in the Eurozone, where the war accompanies the energy crisis and will continue to take its toll, reducing growth to below 1 per cent in 2023. Rising food and energy prices would cause severe hardships to households, particularly the poor.
Despite the economy’s turn, inflationary pressures are proving broader and more persistent than anticipated. Global inflation is expected to rise to 9.5 per cent by 2023 and come down to 4.1 per cent by 2024. Inflation will not confine to food and energy but will spread to other sectors. Policy trade-offs to address the cost of living crisis have become challenging issues. The risk of monetary, fiscal or financial policy’s wrong calibration has risen sharply amid high uncertainty and growing fragilities. The global financial market condition may deteriorate further due to the strengthening of the US dollar, forcing investors to be more cautious. As such, the inflationary pressure would seriously impact emerging economies and developing countries. Inflation could persist if the labour market remains very tight. The war in Ukraine is raging, and further escalation could exacerbate the energy crisis.
The latest assessment of the risks by IMF said that global growth in 2023 could be below the traditional level of 2 per cent; provided many of the risks become real, global growth would decline to 1.1 per cent, accompanied by stagnant income per capita in 2023. So the likelihood of such an adverse outcome could raise the impact by 10 per cent to 15 per cent.
The increasing price pressures remain the most immediate threat to present and future prosperity by squeezing real income and undermining macroeconomic stability. Central banks are more focused on restoring price stability. There are risks in over and under-tightening monetary and financial policies to control inflation. It would only increase the cost of bringing inflation under control. Over-tightening of risks may push the ‘global economy into an unnecessarily severe recession. Financial markets may also feel the pinch. The costs of over and under-tightening of policy mistakes are not symmetric. It might undermine the central banks’ hard-earned credibility due to misjudging the persistence of inflation and might prove detrimental to future macroeconomic stability.
The cost of formulating fiscal policy is complex as the cost of living crisis complicates fiscal policy formulation. Fiscal policy and monetary policy should be used separately. Doing so will prolong inflation and could create severe financial instability. The energy crisis in Europe is not a transitory shock. The geopolitical alignment of energy supplies would be permanent, putting the winter of 2023 under a serious challenge. Price hikes may curb energy demand and increase supply. Price controls, untargeted subsidies or export bans are costly and may lead to excess demand and undersupply, misallocation and rationing. The fiscal policy helps economies adapt to a more volatile environment by investing in productive capacity, human capital, digitalization, green energy and supply chain diversification. Once these objectives are achieved, it will make economies more resilient to future crises.
Many emerging markets are to face the challenge of a strong dollar. The US is now at its strongest since the 2000s. The appreciation is more pronounced against Euro and pound. So far, the rise is driven by fundamental forces of tightening US monetary policy and the energy crisis. The strong US dollar is a significant challenge for emerging economies. The response in most emerging and developing countries is to calibrate monetary policy to maintain price stability while letting the exchange rate adjust, conserving valuable foreign exchange reserves when financial conditions worsen.
Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than usual in several decades. The cost of living crisis has tightened the financial conditions in most countries. Besides, the Russian invasion of Ukraine and the lingering COVID-19 pandemic severe energy crisis weigh heavily on the outlook. All adverse issues combined put the global economy under storm clouds. Global growth is to reach 2.7 per cent during 2023. It would be the lowest growth rate since 2001. Global inflation is to rise to 8.8 per cent in 2022 and then decline to 6.5 per cent in 2023. An acute short supply of gas would put Europe in a severe crisis during the coming winter of 2023. Monetary policy should stay on course to restore price stability, and fiscal policy should aim to alleviate the cost of living pressures. Structural reforms must support manufacturing productivity and ease supply constraints to fight inflation. IMF Managing Director recently viewed that she was optimistic about global recovery a year back. Still, now she has to point out the clouds of risks over the global economy. The risks could be faced by (i) domestic policies to build more resilience and inclusive economies, (ii) cross-border efforts to provide a more level playing field and (iii) partnership to global challenges.
As the world economy is headed for stormy waters, now is the time for emerging market policymakers to batter down the hatches. Eligible countries with sound policies should urgently consider improving their liquidity buffers including access to precautionary instruments from the fund. Countries should also aim to minimize the input of future financial turmoil. Many low-income countries are in or near debt distress. Restructuring the debt repayment schedule immediately may avert a wave of the debt crisis. Time may soon run out. The energy and food crisis and extreme summer temperatures are stark reminders of what an uncontrollable climate transition would look like. Progress on climate policing, debt resolution, and other targeted multilateral issues would prove that a focused multilateralism could achieve progress for all and succeed in overcoming geo-economic fragmentation pressure.
The writer is former Director General, EPB. He can be contacted at [email protected]
