The managing director of the International Monetary Fund, Kristalina Georgieva, has recently claimed that 2023 is likely to be a worse year for the world economy than 2022 was. She has indicated that one-third of the world economy would face recessionary pressures this year, triggered by the Ukraine crisis, persistent and high inflation with the consequent spike in interest rates, and lingering supply-chain disruptions from the pandemic. The global growth rate is projected to slow down from 3.2% in 2022 to 2.7% in 2023. Global inflation will soften a bit, moving down to 6.5% in 2023 from 8.8% in 2022. However, this rate will still be quite high compared to the targets of most central banks. The growth rate of the economy of the United States of America is supposed to decline from 1.6% in 2022 to 1.1% in 2023. The euro zone will contract sharply, from 3.1% in 2022 to 0.5% this year. Russia will recover a little, but that country would still be in a contractionary mode with growth rates rising from negative 3.4% in 2022 to a negative 2.3% in 2023. India is expected to slow down too, with the growth rate decelerating to 6.1% in 2023 from 6.8% in 2022.
The pandemic saw a massive injection of liquidity across the world with reduced interest rates. With supply chains still not functioning at pre-Covid levels and some pent-up demand for goods and services coming up after the ebbing of the pandemic, prices began to rise inevitably. It is important to note that the current inflation being experienced across countries has a mix of demand and supply-side factors. Central banks have attributed most of the inflationary pressures to demand-side factors. Hence, cutting interest rates significantly has not brought down prices. On the supply side, the repairing of supply chains would require low interest rates. If production and distribution channels are not eased, they would have adverse effects on growth rates. Hence, the mix of decelerating growth is being observed simultaneously with persistent and high inflation rates. What is needed is a more granular strategy of identifying which are the most important supply-side constraints and ensuring they are reduced as quickly as possible. This will require a coordination of fiscal and monetary policies. India is a step ahead in terms of projected growth rates compared to most nations of the world. Policy makers would do well to keep it that way in 2023.