For emerging market and developing economies, the 2022 shock will “reopen economic wounds that have only partially healed after the pandemic”
Post Date – 12:35 AM, Tue – 12/06/22
By Dr. Manoranjan Sharma
The current era is an era of change and transformation, and an era in which various elements are being critically fermented. The world is characterized by widespread turmoil, and the rapidity and changeability of events. This reminds me of an old Chinese saying: ‘May you live in interesting times’!
Innovation, Big Data, Artificial Intelligence, Machine Learning, Deep Learning, Robotics, Analytics, Internet and Entrepreneurship have come together. Issues such as volatility, uncertainty, complexity and ambiguity (VUCA), disruptive innovation and regulatory compliance are gaining prominence. But amidst this cacophony and angry cacophony, I sometimes think like TS Eliot did about a century ago:
‘Where is the wisdom we have lost in knowledge?
Where is the knowledge we lost in the information?
synchronous deceleration
The International Monetary Fund (IMF) forecast on October 11 that global economic growth will slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. This synchronized global deceleration stems from a contraction in US GDP in the first half of 2022 and a contraction in the Eurozone in the second half of 2022, continued contraction in real household income, increased demand, and higher mortgage rates.
The double whammy of rotating lockdowns following the coronavirus outbreak and a deepening crisis in the real estate sector has crippled the Chinese economy. Worse, the specter of a recession was added to by “the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and widening inflationary pressures, and a slowdown in China.”
The pernicious combination of spiraling inflation, soaring interest rates and a developing energy crisis validates the recession thesis. The depth and size of the recession will depend on upcoming changes in taxes, government spending, energy prices and global cues.
The trio of real and fraught concerns about the Russian invasion of Ukraine, the cost-of-living crisis, and China’s economic slowdown has led to a period of economic, geopolitical, and ecological “turmoil.” The grim situation in Europe is reminiscent of the “sick man of Europe”.
IMF First Deputy Managing Director Gita Gopinath stressed that geoeconomic fragmentation and protectionism are undermining economic growth, with some 30 countries restricting trade in food, energy and other commodities since the Ukraine war. All of these factors reducing the resilience of the real economy strongly suggest that things could get worse before they get better.
unsustainably high inflation
Kristalina Georgieva, MD of the International Monetary Fund, sums up this deeply troubling situation succinctly: “Inflation is at multi-decade highs, food and energy Prices are rising, supply chains are continuing to be disrupted, and debt vulnerabilities are mounting.”
With Russian deliveries now at less than 20% of 2021 levels, gas prices have more than quadrupled, food prices have risen and inflation has spiraled. As a result, global inflation could peak in late 2022, rising from 4.7% in 2021 to 8.8%; remaining “higher for longer than previously expected”.
Inflation in the euro zone rose as energy and food prices rose to 10.7% in October 2022 from 9.9% in September, adding to pressure on the ECB to stick with rate hikes amid a gloomy global outlook.
The IMF believes global inflation could fall to 6.5% in 2023 and 4.1% in 2024, as almost all central banks tighten monetary policy to contain inflation and the dollar appreciates “strongly” against other currencies.
The IMF’s Global Financial Stability Report also highlighted the deteriorating economic outlook. “The global environment is fragile and there are dark clouds on the horizon” because of the cumulative effect of China’s “zero epidemic policy” and the chaos in the real estate market. For emerging market and developing economies, the shock in 2022 will “reopen economic wounds that have only partially healed after the pandemic”.
the way of the future
The apparent policy dilemmas involved in testing the financial stability environment highlight the distinct possibility of further shocks triggering “market illiquidity, disorderly sell-offs or distress”. This unenviable situation will exacerbate poverty and deprivation, and exacerbate inequality in the distribution of income and wealth.
The IMF also stressed that the risk of “misalignment” in monetary, fiscal or financial policies had “escalated sharply”, while the world economy “remains historically fragile” and financial markets “show signs of stress”.
The “cumulative tightening of monetary policy” suggests that the upward trend in interest rates continues, but at a slower pace. Ultimately, fiscal policy should work in tandem with monetary policy to keep inflation under control amid an overall backdrop of rising interest rates, falling growth and a volatile environment.
Rising geopolitical tensions, war in Ukraine, volatile oil and gold prices, excessive leverage in the non-financial sector, i.e. exchange rate volatility; elevated levels of debt among governments, businesses and households; job and income losses hampering the global rebound and Raising concerns about risks to rising global debt, financial stability and a resilient financial system.
Looking ahead, the pursuit of disinflationary and prudent fiscal policy will require successfully navigating conflicting policy options and crafting trade-offs. The lurking fear of stagflation requires strong growth, a stronger macroeconomic framework, reducing financial vulnerabilities and providing a safety net for the vulnerable to mitigate the impact of rising food and fuel prices without exacerbating inflationary pressures or deviating from the A clear monetary policy line.
indian landscape
In a changing global order, which is sure to be characterized by a definite reset, India is likely to lead the way due to its growing size and size, making it the third largest economy by 2027 with a GDP growth of 1% over last year More than doubling the current $3.4 trillion to $8.5 trillion over the next ten years, with a focus on investment, exports and employment, GST, corporate tax cuts, production-related incentives (PLI) and growing formal economy.
India’s market capitalization is expected to surge from $3.4 trillion to $11 trillion by 2032, making it the third-largest in the world, driven by compelling domestic and global factors, namely a paradigm shift from redistribution to investment and job creation . Tailwinds include the introduction of a GST, corporate tax cuts, a rising middle class and PLIs to incentivize investment, boost employment into the formal sector and boost productivity growth, thereby creating a virtuous circle of continued growth.
(The author is Chief Economist, Infomerics Valuation and Rating Private Limited, Delhi)
