WORLD ECONOMIC OUTLOOK: IMF

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Context: The central message of the International Monetary Fund’s latest World Economic Outlook (WEO) — it publishes two WEOs each year (in April and October) as well as two updates (January and July) — to policymakers around the globe: “The worst is yet to come” for the world economy.

Details:

• IMF does separately state that “more than a third of the global economy will contract this year or next, while the three largest economies—the United States, the European Union, and China—will continue to stall”.
• Persistently high inflation and stalling growth is possibly the toughest policy challenge available.

 

Outlook on growth:

• IMF has sharply cut the forecast for global growth — from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023.
• Barring the global financial crisis of 2008 and the sharp fall immediately after the Covid pandemic in 2020, this is the weakest growth profile for the world since 2001.

 

On inflation:

• Global inflation is now expected to peak at 9.5 per cent in late 2022.
• It is expected to remain elevated for longer than previously imagined and is likely to decrease to 4.1 per cent only by 2024.
• A particular worry here is the trajectory of core inflation — that is the inflation rate when prices of food and fuel are taken away. Core inflation typically rises and falls more gradually than inflation in food and fuel.

 

Downside risks in these projections:

• The first risk is that of policy miscalibration. Given the precarious situation facing most economies as well as massive uncertainty about what lies ahead, this is the biggest worry.
• Even when fiscal and monetary policies are aligned, there can be other mistakes. For instance, monetary policymakers can over-tighten their stance or do the opposite.
• Over-tightening risks stalling down growth while under-tightening risks inflation seeping through to core inflation and taking longer to contain.
• Another big cause of worry is financial stability and its interplay with a stronger US dollar.
• Lastly, there are geopolitical risks associated with the war in Ukraine. A worsening, or prolonging of the conflict can make all the above-mentioned pressures worse.

 

What it means for India?

• India’s GDP growth rate is better and inflation is not as high.
• But these metrics hide that in absolute terms, India is barely out of the contraction suffered in 2020, that it was home to the most people (5.6 crore, according to World Bank) pushed below abject poverty in 2020 or that crores are unemployed.
• Moreover, if RBI cuts its growth rate forecast in April (7.2 per cent) by the same measure as IMF has (1.4 per cent points), India’s growth in 2022-23 will be 5.8 per cent.
• The threat to India comes from at least four sources:
  1. higher crude oil and fertiliser prices will spike domestic inflation;
  2. global slowdown will hurt exports, dragging down domestic growth and worsening the trade deficit;
  3. a strong dollar will put pressure on the rupee’s exchange rate, which will likely result in reducing our forex reserves and
  4. reducing our capacity to import goods when the going gets tougher.
• Also, given the low demand among most Indians, the government might be forced to spend more towards providing basic relief in the form of food and fertiliser subsidies. This will worsen the government’s financial health.

https://indianexpress.com/article/business/imf-cuts-indias-economic-growth-forecast-to-6-8-pc-in-2022-8202878/