Losing momentum | Business Standard News

Clipped from: https://www.business-standard.com/article/international/losing-momentum-122072601472_1.html

Growth is likely to moderate further

The global economic recovery from the pandemic-induced disruption is rapidly losing strength. According to the International Monetary Fund’s (IMF’s) July update of the World Economic Outlook, the global economy is now expected to expand by 3.2 per cent in 2022 and 2.9 per cent in 2023. The multilateral agency has lowered its growth forecast by 0.4 and 0.7 percentage points for 2022 and 2023, respectively, compared to its April projections. The global economy is estimated to have expanded by 6.1 per cent in 2021. Growth in both advanced and developing economies is expected to moderate. The US, for instance, is now expected to grow by 2.3 per cent in the ongoing year — 1.4 percentage points lower than the IMF’s April projection. Similarly, the growth projection for China has been pared by 1.1 percentage points to 3.3 per cent, which would be the lowest growth rate for the country in more than four decades barring the Covid year of 2020. The growth projection for India has also been revised down by 0.8 percentage points each for the current fiscal year and the next to 7.4 and 6.1 per cent, respectively.

The global economy is losing momentum because of a variety of reasons and it is likely that growth estimates would have to be revised further because some of the baseline assumptions may not hold. The ongoing Ukraine war is affecting the global economy partly through higher fuel and food prices. The supply of Russian gas to Europe has fallen to about 40 per cent of last year’s level. A complete halt in supply could increase global inflation significantly. The global economy is anyway struggling with higher inflation. The inflation rate in some of the advanced economies is at a level not seen in decades and central banks are tightening monetary policy. Tightening global financial conditions would affect output. In fact, global output is expected to have contracted in the second quarter of 2022. In the US, according to the Federal Reserve Bank of Atlanta, a technical recession may have already started. Aside from the developed world, a significant slowdown in China, which has been a major driver of global growth in recent decades, will also have implications. While its zero-Covid policy is affecting output at the moment, potential dislocations in real estate and financial markets could significantly dampen medium-term growth prospects.

A slowdown in the global economy and a possible recession in major advanced economies would affect growth prospects for India as well. While the IMF has lowered its growth projection, further correction may be warranted. Headline growth in the current fiscal year would look higher, largely because of the base effect in the April-June quarter. Recovery was disrupted by the second wave of Covid-19 during this period in 2021. Growth in the second half of the current fiscal year, according to the Reserve Bank of India’s projections, is likely to slip to about 4 per cent. Given that global economic and financial conditions would not be supportive, it is likely that growth would remain under pressure in the following quarters. It is worth noting that interest rates would have to be raised significantly to contain inflation and a higher debt-to-gross domestic product ratio would restrict the government from supporting growth. Attaining higher growth in the medium term would thus be a big challenge.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s