Recently published IMF forecast on the global economy has painted a very grim picture of the world which will see in the coming days an economy marred by rising inflation and a cost of living crisis. Yes, it’s true that the economy revolves in a cycle of boom and bust. But it’s not a normal bust we are witnessing. The ill effect of splurging without income by governments around the globe during the covid pandemic coupled with the food-and-energy crisis emerging out of the Russo-Ukrainian war is coming to bite us now.
The growing inflation rising on the back of borrowed spending will lead to tightening of fiscal and monetary spending which in turn will give birth to economic slowdown at best and recession at worst.
Overview aside, let’s come back to crunching some hard data released by the IMF
Global Growth Rate Cut and the Reasons
Global growth is expected to slow from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023. Don’t be surprised to know that this is the weakest growth projection since 2001 if we leave out the extraordinary period of the Covid pandemic and the 2008 financial crisis.
The Big Three: US, China and Europe
These 3, with a major emerging economy like India, can be called the driver of the world economy. Together they contribute over 50% of the total world GDP. Let’s have a look at what the forecast tells them.
The US
The economic superpower US is struggling on many fronts. Overspending during Covid lockdowns on the back of heavy borrowings led to inflation. Interest rates were hiked to control inflation and limit liquidity that in turn sucked money out of the market leading to stalled growth. Though it has contributed to the dollar getting stronger against other global currencies.
Europe
The US is relatively self-sufficient in energy requirements, but Europe is not. So no doubt they were going to be hit the hardest by spiking gas prices following the Russia-Ukraine War. Moreover, they also have to contend with falling currency (due to the rising dollar) and overspending during the Covid pandemic. Undoubtedly, they will be the worst affected ones in this global crisis.
China
China performs better than both the US and Europe. Still, its growth projection has plummeted to almost one-third of what it was last year. Periodic lockdowns imposed by its zero-COVID policy are badly hurting productivity, and the crash in the property sector – which makes up approximately one-fifth of China’s economic activity – are the topmost reasons why China is struggling.
Rising Global Inflation and the Corrective Measures that will hurt
The global inflation is expected to be at 8.8 per cent this year almost double that of 4.7 per cent in 2021. 2022 might be the worse period in terms of inflation as some relief is anticipated in 2023 (6.5 per cent inflation). The inflation might return to the acceptable rate of 4.1 per cent in 2024. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints
So what can be done and by whom?
There is no magic wand. There never was any. People have to suffer through the period more or less. The role of the central bank, however, becomes all the more important across the globe. The IMF in its report has urged central banks to tighten their monetary policy to some extent, raising interest rates on borrowing and thereby sucking the liquidity out of the market. Such missteps by developed nations, particularly the US, may also impact the growth trajectories of India and China as low liquidity in the US will severely reduce the export revenues that India and China get from the US.
So as a word of caution, Central Banks like our RBI are requested not to go overboard in tightening the screw as it might put the market into a spiral of excessive slowdown or recession.
India: a sole bright star in the dark horizons
Though IMF has lowered India’s growth estimate in 2022 to 6.8% from 7.4%, the country remains the best-performing major economy in the world. It’s still twice better as that of China which is projected to grow at 3.2%, a massive fall from the 8.1% growth rate in 2021. India will grow on strong domestic demands and frugal and targeted government spending during the lockdown, unlike many rich countries that spent too much. Further structural reforms, if there are any, can provide a further boost to the growth story that India is.
