ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Gloomy Global Outlook

The synchronised monetary tightening and external sector shocks will hurt global growth.

The World Economic Outlook (WEO) update in July 2022 by the International Monetary Fund (IMF) has revised down the global growth forecasts. The new estimates show that the growth of global output will decline by almost half from 6.1% in 2021 to 3.2% in 2022 and then slow down further to 2.9% in 2023. The downward revisions are sharper for the advanced economies where growth will slip from 5.2% to 2.5% and then to 1.4% during the three years. In contrast, the growth in emerging market and developing economies (EMDEs) will first slow down from 6.8% to 3.6% and then recover marginally to 3.9% during the period.

Myriad reasons are ascribed to the revising down of the global growth prospects. It is pointed out that the global output has contracted in the April–June quarter of 2022, primarily due to downturns in China and Russia. The slower-than-anticipated consumer spending in the United States (US), which can affect both domestic and external sector demand, is yet another reason. Another factor that has forced a relook at growth prospects is the higher-than-expected inflation in developed economies, especially the US and Europe, which has generally triggered a tighter monetary policy in major economies. The uncertainties caused by the Ukraine war also contributed.

What stands out is this paradox: while the growth of global output has been revised down, the inflation forecast has been pushed up. This is because the food and energy prices and the demand–supply imbalances are expected to further push up consumer price inflation to 6.6% in advanced economies and to a higher 9.5% in EMDEs in 2022. However, while consumer price inflation is expected to halve to 3.3% in developed economies in 2023, it will persist at a much higher 7.3% in EMDEs.

A major hurdle to growth is the marked slowdown in the volume of global trade in goods and services. This is because the forecasts show that the growth in the volume of trade in goods and services will decline by more than half to 4.1% in 2022 and then go further down to 3.2% in 2023. The scenario is especially bad for the EMDEs where the growth in the volume of trade in goods and services in 2022 is expected to sharply go down to around one-fifth the 2021 rates and then marginally recover to 3.3% in 2023. An offshoot of the sharp decline in the volume of international trade is the sharp deceleration and fall in commodity prices. While the oil price increase is expected to decelerate marginally to 50.4% in 2022 and then decline in 2023, the prices of non-fuel commodities are expected to shrink much faster. India being a major importer of oil can be a major beneficiary of these trends.

But then the report also warns of other downside risks. For one, the prolonged war in Europe can exacerbate the threats to the energy markets. Or inflation control may sometimes be jeopardised by the anchoring of inflation expectations, and the tight monetary policy stance could hold down growth even longer. Similarly, the tighter global financial markets can seriously undermine external sector stability in many EMDEs.

What is interesting is the sharp diversity in the impact of the pandemic and recovery of output across the EMDEs. The worst-hit by the pandemic were Latin America and the Caribbean eco­nomies where the output declined around threefold faster than the EMDE average. But the decline in growth of output in the EMDEs in Europe, sub-Saharan Africa, and Asia was lower than the average rates. In contrast, the recovery in 2021 was the highest in Asia, followed by Latin America and the Caribbean, Europe, and sub-Saharan Africa. However, forecasts for the next two years show that the output is expected to almost stagnate or even decline in Europe. While growth will decelerate to one-third, the previous levels in Latin America and the Caribbean will only slow down by a third in Asia. A stable growth is forecast only in sub-Saharan Africa.

Such huge disparities in recovery are visible across national economies. In India, which has been one of the nations worst-hit by the pandemic, with growth plummeting to -6.6% in 2020, the prospects are not too encouraging, though it registered a smart recovery with growth bouncing back to 8.7% in 2021, which was the third highest growth among the big economies. It was surpassed only by Argentina and Türkiye, with their growth touching double-digit levels. Though India’s growth rates for the next two years have been sharply revised down to 7.4% in 2022 and further to 6.1% in 2023, it still manages to rank at the top in the IMF growth forecasts in 2022 and 2023. The report cites the unfavourable external conditions and rapid monetary policy tightening as the reason for the expected slowdown in growth.

However, the IMF prescriptions for dealing with the current imbroglio of slower growth and rising inflation are baffling. Its number one priority is to tighten monetary policy to control prices. And it warns that though this will inevitably have a real economic cost, any delay in the process will only exacerbate it. But it offers no meaningful interventions for protecting the vulnerable economic groups who stand to lose the most from the disinflationary stance it advocates on the fiscal and monetary fronts. Worst still, the IMF also ignores the immediate need to make available more foreign exchange resources to countries affected by the tightening of the global financial conditions that has triggered off debt distress in countries like Sri Lanka.


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Updated On : 13th Aug, 2022
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