The International Monetary Fund published an update to the April 2022 edition of its World Economic Outlook on July 26. The latest figures suggest that the global economy is likely to perform worse than expected in April. What is the bigger message in these numbers, both for the global economy and for India? Here are four charts that explain this in detail.
Advanced economies create major headwinds for global growth
Global GDP growth is expected to be 3.2% and 2.9% in 2022 and 2023, according to the latest IMF forecasts. In April, those numbers were forecast at 3.6% for both years. Even the April forecast included a downward revision of the numbers published in the January update. A closer look reveals that a key reason for the slowdown in global growth is the slowdown in advanced economies. The latest GDP growth forecasts for advanced economies were cut from the January projections by 1.4 and 1.2 percentage points for 2022 and 2023, respectively, while those for developing countries fell by 1.2 and 0.8 percentage points over the same period percentage points have declined.
How bad is the upcoming slowdown?
While the projected 2022 GDP growth forecast of 3.2% compared to 6.1% growth for 2021 looks like a sharp contraction in the global economy, there is a statistical illusion at play. With the global economy contracting 3.1% in 2020 due to pandemic disruptions, 6.1% growth in 2021 had a favorable base effect. Global GDP in 2021 was just 2.34% above 2019 levels. Notwithstanding this caveat, if the global economy grows 3.2% in 2022, it will be the slowest rate of expansion since 2009, when the global economy faltered due to the aftershocks of the global financial crisis of 2008 suffered a decline of 0.1%.
If 2009 growth numbers were excluded, the 2022 growth forecast would be the lowest since 2008. If the 2023 growth forecast of 2.9% comes true, it would be the lowest since 2002, after excluding 2009. For the US, the world’s largest economy, the 2.3% forecast for 2022 GDP growth will be the lowest since 2017. However, if the 1% forecast for 2023 holds, it would be the lowest growth for the US economy since 2001, after the recession years of 2008 (-0.1%) and 2009 (-2.6%).
What do the latest IMF forecasts say for India?
The latest outlook awaits the Indian economy grow by 7.4% in 2022-23 and by 6.1% in 2023-24. These forecasts are 0.8 percentage points below the April forecasts for both years. The April numbers were 0.8 and 0.2 percentage points lower than the January projections. The Monetary Policy Committee of the Reserve Bank of India in June estimated GDP growth at 7.2% over 2022-23. While the IMF has revised down India’s growth outlook and it remains to be seen whether the Rate Setting Committee will also make a downward revision at its August meeting, India will lose its reputation as the fastest growing major economy in 2022. 23 but will bounce back in 2023-24. Saudi Arabia will grow faster than India at 7.6% in 2022 but will slow to 3.7% in 2023.
Bringing inflation back within central bank limits should be the top priority.
Global inflation figures have consistently risen faster than IMF projections since January 2021. The latest global inflation forecast was 8.6% for the second quarter of 2022, up from 2.7% in the January 2021 update. These levels of inflation are seen as “a clear risk to current and future macroeconomic stability,” according to IMF Chief Economist Pierre-Oliver Gourinchas “ viewed. 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 delay will only exacerbate the hardship,” Gourinchas said. “Central banks that have started tightening should stay the course until inflation is tamed.”
These inflation concerns come at a time when government budgets around the world have been strained by the pandemic, reducing the scope for expansionary fiscal policy. Against this background, Gourinchas encouraged governments to offer “targeted fiscal support” to the most vulnerable populations, funding them with higher taxes or lower government spending so that such additional spending is not also fueled by rising inflation.
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