World Economic Outlook Report 2022

22 Oct 2022 World Economic Outlook Report 2022

Source: The Indian Express

News: Red flags for India after publish of IMF’s latest world economy report.

About World Economic Outlook Report

• Report is published by the International Monetary Fund.
• The IMF publishes two World Economic Outlook (WEO) reports (in April and October) and two updates (January and July) every year.
• The World Economic Outlook Report warned the policymakers around the globe: “The worst is yet to come” for the world economy.
• Report highlights the toughest economic  policy challenge that is persistent high inflation and stalling growth.
• Global economy continues to face steep challenges due to various scenarios around the world.

Reasons for steep challenges faced by global economy:

• Russian invasion of Ukraine.
• Cost-of-living crisis caused by persistent and broadening inflation pressures.
• Slowdown in China.
• Partially healed post-pandemic economic wounds got opened by this Overall, this year’s economic shocks.

Four sources of threat to India that will worsen the government’s financial health:

• Higher crude oil and fertiliser prices that  will spike domestic inflation.
• Global slowdown hurting exports, dragging down domestic growth and worsening the trade deficit.
• Strong dollar puts pressure on the rupee’s exchange rate that may reduce India’s forex reserves and capacity to import goods.
• Low Indian economic demand forcing the government to spend more towards basic relief such as food and fertiliser subsidies.

Key findings from the report:

• This year or next year more than a third of the global economy will contract.
• Growth of  three largest economies i.e the United States, the European Union and China will continue to stall.
• Immediate threat to current and future prosperity is “increasing price pressures as it will squeeze real incomes and undermine macroeconomic stability.
• Highlighted the policy makers’s dilemma: Generally, inflation containment drags down growth while policy measures to boost growth tend to spike inflation.
• WEO’s Economic Counsellor Pierre-Olivier Gourinchas stated that: “As storm clouds gather, policymakers need to keep a steady hand.”
• Growth Outlook: Current IMF’s growth forecast is the weakest growth profile for the world since 2001 barring the global financial crisis of 2008 and the sharp fall immediately after the Covid pandemic in 2020.IMF has drastically reduced its projection for global growth, from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023.
• Current predictions of peak global inflation in late 2022 is 9.5%. The inflation is anticipated to stay high for longer than previously imagined  and is projected to drop to 4.1% by 2024.
• Worrying trajectory of core inflation: Rise and fall in core inflation are more gradual than inflation in food and fuel.
• IMF statement on global core inflation is expected to be 6.6 per cent on a fourth-quarter-over-fourth-quarter basis. 
• Current global core inflation reflects the pass-through of energy prices, supply chain cost pressure, and tight labour markets especially in advanced economies.
• Core inflation will take more time to go away as food and fuel price inflation has spiked headline inflation that has now entered into core inflation.

Downside Risks in  IMF projections:

• Policy miscalibration: As there is massive uncertainty about the future and most economies are facing precarious situations.
• Chances of fiscal and monetary policies running against each other: When this happens there is high chances of mini-financial collapse. Example: Current mini-financial collapse in the UK  is due to  expansionary fiscal policy by Liz Truss government when Bank of England was trying to contain high inflation by raising interest rates.
• Other mistakes can also happen even in case of aligned fiscal and monetary policies: Over-tightening of monetary policy risks stalling down growth while under-tightening risks inflation.
• Worry about financial stability’s interplay with a stronger US dollar: Sharp revision of interest rates will likely expose the weakest links in the global credit chain.
• Geopolitical risks due to the Ukraine war: Prolonged conflict in Ukraine can make the economic pressures worse.

IMF Projections meaning for India:

• India appears to be better placed than others at first glance as GDP growth rate of India is better and without high inflation. 
• But these metrics hide the fact that  India is barely out of the contraction suffered in 2020 and World Bank data shows that India was home to the most people pushed below abject poverty in 2020 or are unemployed.
• India’s growth in 2022-23 will be 5.8 per cent if RBI cuts its growth rate forecast in April (7.2 percent) by the same measure as IMF has (1.4 percent points).

Article: IMF’s latest world economy report: Red flags for India

Article Link:

https://indianexpress.com/article/explained/explained-economics/imfs-latest-world-economy-report-red-flags-for-india-8205196/

sharad