The battle against inflation will hurt the global economy in 2023  – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/the-battle-against-inflation-will-hurt-the-global-economy-in-2023/article66271260.ece

The aggressive rate hikes by western central banks is bad news for India’s merchandise and services trade

Federal Reserve Chair Jerome Powell at a news conference in Washington | Photo Credit: EVELYN HOCKSTEIN

Global equity markets turned extremely nervous this week with market benchmarks declining sharply, the primary reason behind this sell-off being the gloomy growth outlook for 2023 projected by the central banks of the US, UK and the European Union, and their resolve to continue aggressive monetary tightening next year. The overarching concern of the three central banks appeared to be pulling inflation down towards their long-term targets and all of them indicated that further monetary tightening was warranted until price stability was restored.

The US Federal Reserve hiked the Federal Funds Rate by 50 basis points to 4.25-4.50 per cent and has indicated that the pace of rate hikes will not slacken next year despite inflation moving lower in November. It has also indicated that the terminal rate could be 5.1 per cent, instead of 4.5 per cent projected in September 2022 and that rates will not begin moving lower until 2024. The Bank of England and the European Central Bank too hiked their policy rates by 50 basis points, in a bid to tame raging inflation. Both the US Fed and the ECB used the term ‘restrictive’ to describe the policy stance which they intend to adopt to curb demand. The attempt appears to be to move demand lower to address the demand-supply mismatch. 

Of concern is the fact that all three central banks appear to be willing to sacrifice near-term growth to ensure price stability. This monetary tightening so far in 2022, is already beginning to impact growth in these regions. The Chairman of the Federal Reserve Jerome Powell pointed out that consumer spending has slowed reflecting lower disposable income, prices in the housing segment have cooled due to rising mortgage rates and investments by businesses are coming down. Given the delay in transmission of the rate hikes, demand is expected to further dampen next year, leading to lower growth rates for 2023. The Federal Reserve Board members are now projecting the real GDP growth at 0.5 per cent in 2023, down from the earlier projection of 1.2 per cent. The Bank of England retained the projections given in its November policy meeting — that GDP will continue to decline throughout 2023 and in the first half of 2024 as well due to the impact of high energy prices and rising interest rates. The Euro system staff projections for euro area have also been revised lower for 2023 to 0.5 per cent and they expect a shallow and short-lived recession ahead. 

This gloomy prognosis for growth in the world’s leading economies does not bode well for India’s merchandise and services trade. The difficult external environment will challenge growth in the domestic IT services industry which is currently fuelling domestic consumption. External finance for Indian corporates will also be difficult due to tightening liquidity, rising interest rates and weakening rupee. While India’s growth projections for next year are among the highest, the economy can not remain insulated from slowing global growth. RBI will have to be mindful of these factors which deciding on its future policy actions. 

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