IMF ECONOMY REPORT

Source: indianexpress

1.CONTEXT

The IMF message in the World Economic Outlook is that the worst is yet to come. Economies going through a bad phase. It states more than a third of the global economy will contract this year or next.The increased price pressures remain the most immediate threat.

2. GROWTH OUTLOOK

The IMF has sharply cut the global growth forecast from 6.0% in 2021 to 3.2 % in 2022 and 2.7 % in 2023. This is the weakest growth profile for the world since 2001.

2.1.CAUSES OF GLOBAL ECONOMY CHALLENGES

• The Russian invasion of Ukraine
• A cost of a living crisis caused by persistent and broadening inflation pressures
• Slowdown in China

3.INFLATION

• Global inflation is now expected to peak at 9.5% in late 2022. It is likely to decrease to 4.1 % 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.
• Global core inflation, measured by excluding food and energy prices, is expected to be 6.6 % on a fourth-quarter over-fourth-quarter basis, reflecting the pass-through of energy prices, supply chain cost pressure, and tight labour markets, especially in advanced economies
• Food and fuel price inflation, which has typically spiked headline inflation, has now seeped through to core inflation and as such will take more time to go away.

4.DOWNSIDE RISKS

• 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.
• Fiscal and monetary policies should not run against each other.
• In Ukraine, the Liz Truss government to an expansionary fiscal policy (tax cuts and unfunded hikes in expenditures) even as the Bank of England was trying to raise interest rates to contain historically high inflation.
• The result was a mini-financial collapse with investors losing confidence in the policymakers and selling off British assets.
• When fiscal and monetary policies are aligned, there can be other mistakes. For instance, monetary policymakers can over-tighten their stance (that is, raise interest rates more than required) or do the opposite.
• Over-tightening risks stalling 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. Be it the pension funds in the UK or over-leveraged countries and firms elsewhere, sharp revision of interest rates will likely expose the weakest links in the global credit chain.
• 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.

5.INDIA POSITION

1. At first glance, India appears better placed India‘s GDP growth rate is better and inflation is not as high.
2. But India is barely out of the contraction suffered in 2020, as it was home to most people pushed below abject poverty in 2020 and crores are unemployed.
3. India‘s growth in 2022 -23 will be 5.8%

5.1..THREATS TO INDIA

• Higher crude oil and fertilizers prices will spike domestic inflation
• The global slowdown will hurt exports dragging down domestic  growth and worsening the trade deficit
• A strong dollar will put pressure on the rupee’s exchange rate, which will likely result in reducing our capacity to import goods when the going gets tougher.
• 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 fertilizer subsidies. This will worsen the government’s financial hub