For emerging markets and developing economies, the shocks of 2022 will “re-open economic wounds that were only partially healed following the pandemic”
By Dr Manoranjan Sharma
The present era is an era of change and transformation, an era in which all elements are critically in ferment. This world is characterised by widespread turbulence, and rapidity and volatility of events. This reminds me of an old Chinese proverb: ‘may you live in interesting times’!
There has been a confluence of innovation, big data, artificial intelligence, machine learning, deep learning, robotics, analytics, internet and entrepreneurship. The issues of volatility, uncertainty, complexity and ambiguity (VUCA), disruptive innovations and regulatory compliances have increasingly come to the fore. But in this cacophony of sound and fury, I sometimes wonder as TS Eliot did about a century ago:
‘Where is the wisdom we have lost in knowledge?
Where is the knowledge we have lost in information?’
Synchronised Deceleration
The International Monetary Fund (IMF) on October 11 forecasted global growth to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. This globally synchronised deceleration stems from a contraction of GDP in the US in the first half of 2022, a Eurozone contraction in the second half, persistent real income squeeze on households and demand together with higher mortgage rates.
The Chinese economy has been debilitated by the double whammy of rolling lockdowns post-Covid outbreaks and a rising property sector crisis. What makes matters worse is “the lingering effect of three powerful forces: Russian invasion of Ukraine, cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China”, thereby raising the spectre of a recession.
The toxic mix of spiralling inflation, surging interest rates and the unfolding energy crisis substantiates the recessionary thesis. The magnitude and scale of the recession would be a function of imminent changes to taxes, government spending, energy prices and global cues.
The real and worrisome concerns triggered by the triad of Russia’s invasion of Ukraine, cost-of-living crisis and China’s economic slowdown make for an economically, geopolitically and ecologically ‘volatile’ period. The grim situation in Europe is reminiscent of ‘the sick man of Europe’.
Gita Gopinath, IMF’s first Deputy Managing Director, stressed that geo-economic fragmentation and protectionism were undermining economic growth, with some 30 countries restricting trade in food, energy, and other commodities since the Ukraine war. All these factors, which deplete the resilience of the real economy, strongly suggest that things could get worse before they get any better.
Unsustainably High Inflation
Kristalina Georgieva, MD, IMF, succinctly summed up the greatly disconcerting situation as follows: “inflation is at multi-decade highs with rising food and energy prices, persistent supply chain disruptions and mounting debt vulnerabilities”.
With Russia now delivering less than 20% of 2021 levels, the price of natural gas rose over four-fold and food prices escalated, marked by an inflationary spiral. Hence, global inflation could peak in late 2022, increasing from 4.7% in 2021 to 8.8%; remaining ‘elevated for longer than previously expected.’
Eurozone’s inflation rose inter-alia because of higher energy and food prices to 10.7% year-on-year in October 2022 from 9.9% in September exacerbating pressure on the European Central Bank to persist with rate hikes despite a diminishing global outlook.
The IMF maintains that global inflation is likely to decrease to 6.5% in 2023 and to 4.1% by 2024 because of tightening monetary policy by almost all central banks to check inflation and the “powerful appreciation” of the US dollar against other currencies.
The IMF’s ‘Global Financial Stability Report’ also stressed a deteriorating economic outlook. “The global environment is fragile with storm clouds on the horizon” because of the cumulative effects of China’s debilitating “zero-Covid policy” and the disarray in the property market. For emerging markets and developing economies, the shocks of 2022 will “re-open economic wounds that were only partially healed following the pandemic”.
Pathway to Future
Cognisable policy dilemmas involved in testing the financial stability environment bring to the fore the distinct possibility of further shocks triggering “market illiquidity, disorderly sell-offs, or distress”. This unenviable situation would exacerbate poverty and deprivation and accentuate inequalities in the distribution of income and wealth.
The IMF also highlighted that the risk of monetary, fiscal or financial policy “miscalibration” had “risen sharply,” while the world economy “remains historically fragile” and financial markets are “showing signs of stress”.
“The cumulative tightening of monetary policy” suggests a continued higher upward bias on interest rates though at a slower rate. In the ultimate analysis, fiscal policy should work in tandem with monetary policy to contain inflation within manageable proportion in the overarching context of rising interest rates, sliding growth and a volatile environment.
Heightened geopolitical tensions, Ukraine war, volatile prices of oil and gold, overleveraged non-financial sectors, viz, exchange rate volatility; elevated debt levels among governments, businesses and households; losses of jobs and incomes hamper global rebound and raise worrisome concerns of mounting global debt, risks to financial stability and resilient financial system.
Going forward, the pursuit of reduced inflation and a prudent fiscal policy requires successfully straddling conflicting policy choices and adroitly managing trade-offs. The lurking fear of stagflation necessitates robust growth, stronger macroeconomic frameworks, reduced financial vulnerabilities and provision of safety nets to vulnerable groups to alleviate the impact of rising food and fuel prices without aggravating inflationary pressures and swerving away from the well-defined course of monetary policy.
Indian Landscape
In the evolving global order, which is certain to be characterised by a clear re-set, India is likely to surge ahead because of its rising size and scale making it the third-largest economy by 2027, with its GDP more than doubling from the current $3.4 trillion now to $8.5 trillion over the next decade, an accent on investment, exports and employment, GST, corporate tax cuts, production-linked incentives (PLIs) and progressively rising formal economy.
India’s market capitalisation is expected to surge from $3.4 trillion to $ 11 trillion by 2032, the third largest globally because of compelling domestic and global factors, viz, a paradigm shift from redistribution to investment and job creation. Tailwinds include rolling out of the GST, corporate tax cuts, ascendant middle class and PLIs to incentivise investment, catalysing employment into the formal sector and enhancing productivity growth, thereby creating a virtuous cycle of sustained growth.