The last three years have seen the global economy endure a health crisis and a debilitating conflict in Europe. Governments and central banks of advanced and emerging market economies responded with stimulus measures in 2020 followed by restrictive monetary policies in 2022.
Broadly, 2020 was about fiscal and monetary expansion to limit/recover the loss of output induced by the pandemic.
The following year, 2021, was about the fiscal/monetary expansion of the previous year, powering demand and recovering loss of output as governments showed lesser restraint on cross-border trade. The year 2022 witnessed a reversal of policies as the monetary/fiscal policies tightened to rein in prices that had spiked up with the outbreak of the European war.
The rapidity with which monetary policy changed direction and sharply turned restrictive compounded global economic uncertainties already rife with anxieties about the European conflict and the persistence of the pandemic in some countries.
The rise in economic uncertainties is reflected in the unevenness of performance of the global economy across quarters in 2022. The output growth in the January-March quarter exceeded expectations as fiscally strengthened global demand continued to induce supply. Output growth in the April-June quarter slowed as the war caused an economic downturn in Russia, and zero tolerance for the re-emerging pandemic slowed output in China. Despite these headwinds, the July-September quarter witnessed resilience in economic activity.
The United States, Japan, and major emerging markets and developing economies (EMDEs) registered higher-than-expected growth. In these countries, private consumption was continuing to rise with the release of pent-up demand, particularly for services. This rising consumption demand has sufficiently induced businesses to increase their investment activity amid tight labour markets. Further, easing supply chain bottlenecks and lower transportation costs reduced the pressures on input prices. Also, energy markets adjusted faster than expected to the shock triggered by the conflict.
In the October-December quarter of 2022, economic activity again slowed due to ongoing monetary tightening efforts. Most high-frequency activity indicators (such as business and consumer sentiment, purchasing manager surveys, and mobility indicators) point towards a slowdown in general. As per IMF's estimates, growth in global output fell from 6.2 per cent in 2021 to 3.4 per cent in 2022.
Going ahead, global growth is forecasted to decline in 2023.
This is mainly on account of the continued uncertainties emanating from the lingering pandemic and relentless conflict in Europe. Further, the likelihood of a delayed impact of monetary tightening by major central banks is also expected to impact global economic activity. In its January 2023 update of the World Economic Outlook (WEO), the IMF forecasts global output growth to decline from 3.4 per cent in 2022 to 2.9 per cent in 2023. The World Bank, in its January 2023 edition of Global Economic Prospects (GEP), estimates global growth to decelerate from 2.9 per cent in 2022 to 1.7 per cent in 2023. The anticipated slowdown in Advanced Economies drives the decline in growth in 2023. IMF estimates that about 90 per cent of advanced economies are projected to see a decline in growth in 2023. Economic growth in AE is projected to decline sharply from 2.7 per cent in 2022 to 1.2 per cent
In EMDEs, growth is estimated to have bottomed out in 2022. EMDEs growth is projected to increase from 3.9 per cent in 2022 to 4.0 per cent in 2023 aided by the reopening of the Chinese economy. About half of the EMDEs have been estimated to grow faster in 2023 than in 2022.
The IMF and the World Bank project India to be the fastest-growing major economy in 2023. This is despite the likelihood of India's exports showing tepid growth as the output of advanced economies - the major export markets of India - are forecast to decline sharply in 2023.
With a slowdown in global growth giving rise to concerns about global recession, most commodity prices have been easing since June 2022. In January 2023, however, they remained elevated compared to pre-pandemic levels, prolonging energy and food insecurity challenges. Crude oil prices have steadily declined from their mid-2022 peak but remain higher than prepandemic level. However, natural gas prices in Europe which soared to an all-time high in August, have since fallen back to pre-war levels. Non-energy prices, particularly metal prices, have declined alongside weak demand but remain elevated.
Food prices have eased from earlier peaks, but inflation remains high in some EMDEs. Overall, global headline inflation peaked in the third quarter of 2022 and has been declining since then, notably in the United States, the euro area, and Latin America. Headline inflation has also been consistently declining in India.
Source-RBI Report
