Global economic outlook grows murkier

Sushma Ramachandran
Senior Financial Journalist

THE outlook for the global economy is gloomy, with dark clouds clearly visible on the horizon. The possibility of recession overwhelming many regions is growing by the day. The geopolitical scenario is not showing any improvement as the Russia-Ukraine war looks unlikely to end anytime soon, even as its ramifications are being felt around the globe.

Disasters due to climate change are occurring with increasing frequency, causing harm to many emerging economies. Fragility and uncertainty are the words being used to describe the planet’s economy by International Monetary Fund’s Managing Director Kristalina Georgieva, even as global growth projections were downgraded for the third time to 3.2 per cent for 2022.

Just last year, as she pointed out recently, the world was looking forward to a rapid recovery from a post-pandemic scenario. The situation has altered radically with countries facing soaring inflation, rising interest rates, unaffordable fuel prices and the prospect of a food crisis in many poorer countries. Her solution is that the countries must work together to resolve the imminent crisis.

The fact is that far from working together, geopolitical strife has been the trigger for the current situation. This is a far cry from the unity displayed during the pandemic when countries sought to ease each other’s pain by sharing supplies of medicines, equipment and vaccines. Though even then, there was enormous inequity when people in the developed world were easily able to access vaccines, while there was none available for those in many African countries. The situation is far worse now with the world split into multiple divisions over the conflict in Ukraine. Western countries have launched widespread sanctions against Russia, in a bid to isolate it economically. The result has ironically been a blowback against these very countries as Russia has suspended gas supplies to Europe, while oil prices have remained volatile since February. Energy shortages and high prices have thus hit the Global North as hard as they rocked the South in the past.

The oil cartel, OPEC Plus, continues to march to the beat of its own drum. In spite of high energy prices having created an economic crisis in both developed and developing economies, it has decided to cut production yet again by 2 million barrels per day from November in a bid to push up prices. It must be recalled that oil prices had shot up to $130 per barrel immediately after the Russian invasion of Ukraine. These then hovered for several months around $100-110 per barrel, causing serious concern for emerging economies like India for whom oil imports comprise 85 per cent of their consumption. But world prices moderated over the past two months to $84-90 per barrel owing to fears of recession and lowered demand along with sizable releases from the US strategic reserves. The relief on this front was short-lived, however, with the latest output cut announcement by OPEC Plus.

Compounding global economic woes has been the slowdown in China owing to stringent curbs linked to the zero-Covid policy. Growth in this economic titan is expected to slow to less than 3 per cent this year, creating a ripple effect in the rest of the world. The strengthening of the dollar and the resulting depreciation of other world currencies must also be mentioned in this context. Like the Reserve Bank of India, many other countries have been drawing on foreign exchange reserves to defend their currencies with varying degrees of impact. Yet, the dollar has relentlessly continued to rise and will do so till investors continue to flock for greater returns to the US.

In this grim external backdrop, the Indian economy is being seen as an outlier in many ways, even though global developments have cast a shadow on its recovery. The World Bank has just downgraded its growth forecast for the current year to 6.5 per cent, though the government is still confident of touching 7 per cent. At this level, it still remains among the fastest-growing economies in the world. The plus points for higher growth are the buoyant inflows of both direct and indirect taxes and effective inflation management. The ability to buy oil at discounted rates from Russia has also played no mean role, despite the hectoring by western countries to join the plan to put a price cap on such purchases. This, despite the fact that Russian oil or gas supplied via pipelines to Europe is not attracting any such action in order to maintain energy security of western nations.

On the minus side is a depreciating rupee along with hardening oil prices that will hit efforts to contain the fiscal deficit within budgetary targets. Better corporate results and recovery of large industry may be continuing, but small and medium enterprises are feeling the pain of high energy prices and costs imposed by disruption of global supply chains. A critical element of weakness remains low investment levels, a factor flagged recently by Finance Minister Nirmala Sitharaman. Exports have also plateaued owing to demand falling in key western markets. Unemployment levels are reported to be improving compared to the two years of pandemic, but high prices are hurting those at the bottom of the pyramid. No wonder then the government thought it politic to continue the free foodgrain scheme for a few more months.

In the face of adverse external headwinds, however, there is no doubt that India has been able to weather the crisis much better than most others. The question is will it continue to buck international trends in a medium or long-term perspective. Already financial agencies such as Nomura have warned that the growth in the next fiscal, 2023-24, may end up dipping to 5.2 per cent. At this stage, geopolitical developments remain in a state of flux given the fact that the Ukraine conflict is continuing to rage on ceaselessly. In such a situation of volatility, it is difficult to make a forecast even for next year. But one thing is certain: investments will have to pick up substantially to enable this year’s growth to be sustained over a longer period. Otherwise global headwinds may overwhelm even this outlier in the crisis-hit world economy.