The global economy, first hit by the pandemic and then the conflict in Ukraine, has experienced a significant slowdown. With sharp deceleration across the developed world as central banks hike interest rates to tackle inflation, the International Monetary Fund (IMF) has projected the global economy to slow from an estimated growth of 3.4% in 2022 to 2.9% in 2023, before recovering marginally to 3.1% in 2024.
Even though it is the weakest growth profile since 2001, barring the deceleration witnessed due to global financial crisis and the pandemic, the growth estimate for the current year has been scaled up by 20 basis points since the October 2022 forecast. The multilateral agency expects the slowdown to be less pronounced than previously anticipated, due to the ‘surprisingly resilient’ demand in the US and Europe, easing of energy costs and the reopening of China.
Growth prospects in the major economies have improved. As per IMF, the emerging markets and developing economies are projected to grow by 4.0% in 2023, a tad higher than 3.9% noted last year. However, advanced economies are expected to bear the brunt as they aggressively pursued monetary tightening in 2022. Unsurprisingly, for advanced economies, growth is projected to moderate to 1.2% in 2023 from 2.7% last year.
Nine out of ten advanced economies are likely to witness a deceleration, with the US growth expected to slow to 1.4% in 2023 as the lagged impact of Federal Reserve rate hikes works through. Although the US economy is showing signs of slowing, its labour market remains resilient despite high interest rates. Its unemployment rate fell to 3.4% in January, the lowest in 54 years and it added around 517 thousand jobs into the economy during the month.
The slew of high-frequency global indicators also points in the direction of an improvement noted in the outlook of global growth in the recent months, with signs of growth bottoming out. The latest data available for the J.P. Morgan Global Composite Output Index shows that the index rose to 52.1 in February 2023, as the global economic activity and new orders expanded for the first time in seven months. The renewed upturn in the output was led by the services sector and reinforced by first expansion of manufacturing production since last July.
Inflation, which emerged as a big risk post the Ukraine crisis last year, has started exhibiting some softening from the elevated levels, prompting central banks across the globe to moderate the size and pace of rate hikes. IMF expects global inflation to fall from 8.8% in 2022 to 6.6% in 2023 and to 4.3% In 2024.
It is noteworthy that the US Dollar index, which is widely affected by the trend in inflation and monetary policy as well as geopolitical stability, has come off its recent peak and is witnessing a downtrend. The global equity markets have also inched higher.
On the external side, exports have started to lose momentum as the global economy has sustained multiple shocks such as ripple effects from the conflict in Europe and the related food & energy crisis. Import demand too started to soften as growth slowed in major economies. As per the latest report of the World Trade Organisation (WTO), the growth of global merchandise trade is expected to slow to 1.0% in 2023 from 3.5% in 2022.
Alongside slowing economic growth, the world faces many other challenges. In the recent meeting of the G20 finance ministers and central bank governors, the issue of unsustainable debt levels in low and middle-income countries emerged as a critical issue, which needs to be resolved. As per the joint debt sustainability assessment by the IMF and the World Bank published in November 2022, more than half of the 70 low-income countries (LICs) are either in debt distress or face a high risk of experiencing that condition. The average debt burden of countries in distress was a staggering 90% of GDP in 2019, increasing further by almost ten percentage points of GDP in 2021.
This high level of debt is clearly unsustainable as it threatens the macroeconomic stability of the economies and needs to be brought down within the ambit of the “The Common Framework for Debt Treatments”, agreed upon by the G20 in November 2020. There is a concerted need to find ways to retire the current stock of debt, while simultaneously ensuring that future debt is raised in responsible ways.
The tight global financial markets due to the near synchronized monetary policy tightening pursued by the key global economies and protracted geopolitical hostilities are a few other lingering concerns on the horizon this year.
While the road ahead does not look easy, as the global economy still faces few headwinds, there are multiple opportunities for global firms to invest in mature markets, given their wealth and need for innovation and physical & digital infrastructure to support their sizable and young labour forces.
Companies and countries have been looking at a resilient supply chain strategy, which involves diversifying their operations to places providing a competitive edge. The operations range from creating a resilient supply chain to strengthening logistics.
Going forward, with consumer demand expected to revert from the energy shocks of 2022 and the pandemic situation largely overcome, the global economy is likely to see stronger rebound in years to come, provided that the polycrisis-like situation is overcome, and geopolitical conditions remain stable.
This article was first published in Partnership Summit: Collaborative Frameworks.