What does the latest IMF forecast mean for the world and India?
The International Monetary Fund on July 26 released an update to the April 2022 edition of its World Economic Outlook
The International Monetary Fund on July 26 released an update to the April 2022 edition of its World Economic Outlook. The latest numbers suggest the global economy is likely to do worse than what was expected in April. What is the larger message in these numbers, both for the global economy as well as India? Here are four charts that explain this in detail.
Advanced economies are generating main headwinds to global growth
Global GDP growth, according to the IMF’s latest projections, is expected to be 3.2% and 2.9% in 2022 and 2023, respectively. In April, these numbers were projected to be 3.6% for both of the years. Even the April forecasts involved a downward revision from numbers released in the January update. A closer look shows that a big reason for the slowdown in global growth is the slowdown in advanced economies. The latest GDP growth projections for advanced economies have been lowered by 1.4 and 1.2 percentage points for 2022 and 2023, respectively, from January projections, while for developing economies, the projections are down by 1.2 and 0.8 percentage points, respectively, over the same period.
How bad is the forthcoming slowdown?
While the 3.2% GDP growth forecast for 2022 looks like a sharp fall for the global economy compared to the 6.1% growth for 2021, there is a statistical illusion at play. Since the global economy contracted by 3.1% in 2020 due to pandemic disruptions, the 6.1% growth in 2021 had an element of favourable base effect. The 2021 global GDP was just 2.34% over its 2019 level. This caveat notwithstanding, if the global economy does grow at 3.2% in 2022, it will be the slowest expansion rate since 2009, when the global economy suffered a contraction of 0.1% because of the aftershocks of the 2008 global financial crisis.
If 2009 growth number were to be excluded, the 2022 growth projection is the lowest since 2008. If the 2023 growth projection of 2.9% were to materialise, it will be the lowest since 2002 after excluding 2009. For the US, the world’s largest economy, the 2.3% projection for 2022 GDP growth will be the lowest since 2017. However, if the 1% projection for 2023 were to hold, it will be the lowest growth for the US economy since 2001, after excluding the recessionary years of 2008 (0.1%) and 2009 (minus 2.6%).
What do the latest IMF projections say for India?
The latest outlook expects the Indian economy to grow at 7.4% in 2022-23 and 6.1% in 2023-24. These projections are 0.8 percentage point lower than the April projections for both of the years. The April numbers were 0.8 and 0.2 percentage point lower than January projections. The monetary policy committee of the Reserve Bank of India in June estimated GDP growth to be 7.2% in 2022-23. While the IMF has made a downward revision to India’s growth prospects, and it remains to be seen whether the rate-setting committee also makes a downward revision when it meets in August, India will lose its tag as the fastest growing major economy in 2022-23, but will bounce back in 2023-24. Saudi Arabia will grow faster than India in 2022 at 7.6%, but will slow down to 3.7% in 2023.
Bringing back inflation to central bank limits should be the top priority.
Global inflation numbers have consistently risen faster than the IMF’s projections since January 2021. The latest global inflation projection was 8.6% for the second quarter of 2022, up from 2.7% in the January 2021 update. These inflationary levels are considered to be a “a clear risk for current and future macroeconomic stability,” according to IMF chief economist Pierre-Oliver Gourinchas. Policymakers must bring it back to central bank targets as a top priority, he urged (https://bit.ly/3zA1EAh). “Tighter monetary policy will inevitably have real economic costs, but delaying it will only exacerbate the hardship,” Gourinchas said. “Central banks that have started tightening should stay the course until inflation is tamed.”
These inflationary worries have come at a time when government budgets across the world have been stretched by the pandemic, reducing the space to undertake expansionary fiscal policies. On this backdrop, Gourinchas encouraged governments to offer “targeted fiscal support” to the most vulnerable sections, and finance them with higher taxes or lower government spending so that such extra spending does not feed on rising inflation as well.