These are parlous times for global economy, buffeted by shock after shock, as cause and effect, often overlapping each other. Governments with their fiscal policies and central banks with monetary instruments are struggling to keep their economies on an even keel. Major players in global economy like World Bank, International Monetary Fund (IMF), World Trade Organization (WTO), besides making forecasts on outlook for the near and medium terms, are doing precious little to mitigate the malaise that threatens to become entrenched while neophytes IDB, BRICS, AIIB are impishly testing waters. Policy co-ordination at global level by forums like G-7 and G-20 has been paralysed by geopolitical interests of conflicting nature rather than by economic considerations. The only co-ordinated response has been in respect of sanctions by major powers and their allies weopaonising it for political purposes. Even when economic issues are mooted, like trade of high tech products and cross-border investments, they are guided by security concerns of the protagonists. Being at sixes and sevens, it seems the global economy has never been at graver dire straits than at present.
The state of the global economy appears by fits and starts through news and data that can be gleaned from electronic and print media. Stitching together, the scenario that emerges is anything but heart-warming. Here is a jumble of news that gives some insight into what is going on in the global economy at this critical juncture. This overview may be overtaken by skittish developments before the ink is dry. Economic analysis, parsing daily news, has become journalistic exercise of ephemeral kind.
Black smoke soared high from various parts of Canada, spreading far and wide, blanketing the sky over New York and Florida for days and travelled as far as Europe, casting its pall in the month of May. In June parts of India, Afghanistan and Pakistan had devastating floods for the first time in their history. In Pakistan floods having visited another part last year. Unprecedented heat wave caused wildfires in California and western Canada last year and now vast swaths of America and Europe are writhing under temperatures of fifty year high in some places breaking all time record. The average global temperature in June this year was 1.47C above the typical June in pre- industrial age. Since 1934, each year has been warmer than the pre- industrial average. According to the UN, dangerous heat waves sweeping across Europe could break further records. These catastrophes, along with on-going ones caused by climate change in various parts of the world, have taken a heavy toll in terms of economic costs of reduced growth, unemployment, hunger and diseases. The present conflagration in Greece, whose economic mainstay is tourism, has led to evacuation of tourists en masse from the island of Rhodes and in mainland Greece has inflicted a severe blow to its already fragile economy.
The ripple effect of the war raging in Ukraine for over one year continues to wreak havoc on supply chains, affecting vital items like grain, edible oil and fertiliser. As the war has intensified Russia has now stopped allowing food shipments (33 million tonnes) from Ukraine through the black sea threatening food security in Europe, Africa and Asia. As a precaution, India has now temporarily banned export of rice that will badly affect countries like Bangladesh. The Food and Agricultural Organisation (FAO) and the World Food Organisation have already made grim forecasts of food shortages in large number of countries as a result of climate change, war in Ukraine and civil wars in Syria, Yemen, Sudan and Nigeria. The overall economic costs of these wars in terms of lost production are staggering while costs of alleviating humanitarian disasters are rising by the day.
The global economy took a sudden beating from the unforeseen Covid pandemic in 2020-2021, sending economic forecasts and normal policy regimes haywire. No sooner the apocalyptic disaster was overcome with high costs in medical treatments and lost productivity, than came the war in Ukraine with even more destabilising impact for near, medium and long terms on the global economy,a phenomenon unknown since the second world war. As energy prices rose immediately in the heels of the war, costs of production rose across the board. Inflation rose higher by the months, entering two digits territory in developed, emerging and developing economies. In America, inflation having reached a peak of around 10 per cent has recently come down to 6 per cent, leading the Federal Reserve to take a pause in interest rate hike at the present 4.5 per cent. It may rise again in September by 25 basis points if the inflation rate does not decrease further. At present the US economy is growing slightly above 3 per cent with low unemployment rate at 15 per cent.
In the UK, the Bank of England has not been so favoured by the beast of inflation, remaining stubbornly above 8 per cent, forcing the interest rate to rise to 5.5 per cent. The British economy is also slowing sharply according to a Purchasing Manager’s Index (PMI) survey published on 20 July that showed the PMI falling to a seven month low. Meanwhile inflation above 8 per cent has led to demands from various quarters for pay rise to meet increasing cost of living. The British economy is anything but healthy and has been kept in intensive care.
According to a recent report published in Financial Times, the economic downturn in the Eurozone deepened at the start of the third quarter that suggested the region’s economy shrinking. The report showed the Eurozone PMI falling to an eight- month low after a sharper than expected slowdown in services and a steeper decline in manufacturing. But the current stable rate of inflation may allow the European Central Bank (ECB) to hold the interest rate at the present level, some observers believe. But the ECB has said that high wages and rising service prices could keep inflation above the targeted 2 per cent forcing it to raise interest rate in future.
As regards the second largest economy in the world, China, the latest data in mid-July showed an economy struggling for momentum in the second quarter of the year. The post- covid recovery is faltering, with exports declining due to cooling demand abroad and a prolonged property market downturn. The grim reading has raised the spectre of China missing its modest 5 per cent growth target for 2023. This has spurred expectations of strong stimulus measures in the coming months.
With 3.3 per cent inflation the Bank of Japan (BOJ) sees no need to raise its interest rate now or any time soon. But the Japanese economy’s health is not in its robust best since exports have not picked up in a global economy that is skirting around recession. So, in all likelihood, BOJ may continue its policy of stimulating the economy with either lower interest rate or injecting money through quantitative easing.
Global trade, a powerful driver of global economic growth, took a battering during Covid pandemic. The fragmentation of the globalised world set in motion by former President Trump through his aggressive protectionist policy has been continued under the Biden administration through restrictive measures against China on security grounds. Charges of protectionism have also been made by its allies after the passage of Inflation Reduction Bill and Chips and Science Act last August along with Infrastructure Investment Act passed in late 2021. Thirty years after America signed the North America Free Trade Agreement (NAFTA) and paved the way for China to join WTO, the Biden Administration has taken a stand against liberalisation of global trade on the ground of revisiting industrialisation in America. This has become a thorny issue in America’s relation with its European and Asian allies and has been a severe blow to the WTO in as much as the Bill and the Acts undermine the subsidy- free trade among member countries.
In April this year, the IMF projected global growth at 2.8 per cent for 2023, down from 3.4 per cent in 2022. But recent indicators paint a mixed picture: weak manufacturing sector contrasting with resilient service sector in countries across the board. At the same time, financial fragilities, unleashed by tight monetary policy, have made economies crawl. According to IMF, global inflation has peaked with core inflation easing in some countries but in most countries, especially with advanced economies, inflation remains well above central banks’ target. The IMF has cautioned that lessons from previous inflationary episodes show that easing policy too early can undo progress on inflation. In fact, IMF on last week projected that global growth is set to fall from an estimated 3.5 per cent in 2022 to 3.0 per cent in both 2023 and 2024. While the forecast for 2023 is modestly higher than predicted in the April 2023 World Economic Outlook (WEO), it remains weak by historical standards.
When the heads of states/governments meet in India next month, the global community will be looking for consensus on major problems confronting the global economy. They will expect resolutions for joint action to address rising fragmentation of the global economy, anaemic economic growth and high inflation. Support from leaders of developed countries is vital for stopping wars, and addressing issues of climate change, debt vulnerabilities of least developed countries and food security. Towards these ends they should strengthen multilateral bodies like World Bank, IMF and WTO. Expeditious completion of the quota review, increasing the overall size of IMF’s quota resources will strengthen the global financial safety net. This should be complemented by decisions to replenish the Fund’s concessionary resources for vulnerable countries. Will these time- worn expectations be fulfilled by the powers that are in the global arena? Will the next G-20 summit rise to the occasion, belying sceptics’ view of a dystopian future?
In mediaeval age, a damsel in distress could expect a chivalrous knight in shining armour to rescue her. But chivalry disappeared long before the novelist Miguel Cervantes made a mockery of it in his book Don Quixote. Now in the dog- eat- dog days of modern age the rich and mighty, the Lord of the Rings, may not deign to shed a tear, not to speak of a drop of blood, in attempting to help the hapless victims of the economic consequences of the various policies made by them. In an increasingly de-globalised world every country has to fend for itself, working for the worst possible scenario and hoping for the best. The planet earth has entered the Anthropocene Age with a bang. The best hope that can be nurtured now is that it will not end with more than a whimper.