It’s the time when international agencies refresh their outlooks for the world economy, identify the problems it confronts, and offer advice on relevant policy issues. The holistic examination covers the world’s major regions, individual countries, and country groups. These perspectives attract significant attention, provoking discussion and debate. This year’s economic environment, which is suffused with past overhang and newer, unprecedented risks and challenges, elicits more interest. Important amongst these are the progress in recoveries from the pandemic, elevated debt and weakened public finances, high inflation and interest rates, a continuing war and sharpened political conflicts causing geoeconomic fragmentations, fundamental changes owing to demographics, climate adaptation and energy transitions, and related resource scarcities. What do economic prospects look like under such circumstances?
The International Monetary Fund’s flagship World Economic Outlook has described the global economy as resilient but limping. World output growth is seen to be chugging along at 3% this year; the figure is slower than the previous one (3.5%) and an estimated 3.4% below what the IMF had foreseen before the pandemic for this year. This indicates the magnitude of the output that remains to be recovered or the catching up to be done ahead. Next year too, global growth will slow more — to 2.9%. Overall, the average pace of world output in this period is significantly below the pre-pandemic average of 3.8% over two decades (2000-2019). Therefore, the world economy isn’t exactly racing but is still holding on. Despite a pandemic, war, higher cost of living and interest rates, economic activity has not stalled or fallen into recession even as inflation continues to decelerate.
This mixed picture gets more sobering in the medium-term when output growth is expected to be mediocre. Beyond the immediate period, the world economy is predicted to grow at 3.1%, the lowest in decades. The damages from multiple economic shocks in recent years linger, with enlarged gaps between the rich and the poorer regions. The strongest recovery from the pandemic has been by the United States of America, followed by the euro area. China’s output is much weakened, including that from its property sector crisis, while India’s growth for this year is marked up to 6.3%. The severest impact is upon the low-income economies whose combined output losses are an average 6.5% compared to those before the pandemic.
Past inequalities — specific to this instance is the capacity to respond to economic shocks or the support provided during the pandemic — have expanded the differences in recoveries across the advanced and emerging market and developing country groups. Most of this divergence stems from continuing shortfalls in consumption and employment. Closing this distance — reaching similar levels of income and development or economic convergence — could now take more than a century. If the poor-income nations were expected to close half the gap in per capita income vis-à-vis the high-income country group in 80 years back in April 2008, 15 years later, that is estimated to have lengthened to about 130 years.
The period ahead will likely see increased frequency of multiple and wide-ranging shocks of the kind seen in the past few years. Climate and geopolitical disruptions, which have been more common and unexpected than in the past, are a high risk. Apart from the pandemic and war effects, such disturbances have already contributed to increases in poverty, commodity and food price spikes, and food insecurity. Inflation persistence, financial volatility, debt-related distress, geoeconomic fragmentation, and social unrest are the other, if not more, challenging risks in the forthcoming period.
It is well known that the world isn’t the same anymore — politically, economically or, for that matter, financially. Macroeconomic settings have turned adverse — from ultra-low to higher-for-longer interest rates — and raised the levels of debt, especially public debt, uncertainties, and volatility. It follows that these conditions will bear upon future growth. The breaking up of trade supply chains and their reshaping, for example, will be costly for the world in general, according to calculations, and costlier for the emerging and the developing countries.
At the same time, spending needs and the pressures upon resources have mounted; for example, to finance energy transitions, defence, and national security and cope with ageing populations as well as the expansion of subsidy-heavy, supply-side agendas of interventionist governments to stimulate growth and productivity. Some of these financing needs are expected to be met by making the multilateral development banks bigger, bolder and better: this means augmenting their capital base, stretching it more than it was done in the past for increased risk exposure, and greater efficient lending, including climate change along with poverty and development. Roping in the private sector is a complementary strategy — as much as two-fifths of the energy transition finance required by the emerging and developing countries is to come from this source.
The near-term consequences or aftereffects of recent shocks in the past are not surprising; these were probably imaginable. However, the uncertainties propagated by the rising incidence of numerous disturbances that are wide-ranging and unprecedented underline why growth prospects beyond this period are expected to be mediocre. This extends to India, which is foreseen to be growing at 6.3% in the medium-term. Earlier this month, the World Bank forecast a similar growth path in the next two years. The middling performance, which is at variance with its own ambitions or requirements, incorporates the transformed world economic scenario from which India is not spared.
Though the primacy amongst cross-country growth rates — the ‘fastest growing economy’ tag — may bolster spirits, what must not be lost sight of is the fact that India needs to grow faster than this to realise the employment needs of its workforce bulge or the demographic dividend. How to achieve this under difficult global economic settings is a major challenge. It becomes more demanding when we see that manufacturing, the traditional source of mass production and employment, is the most susceptible to overall uncertainty and geoeconomic fragmentation. The global manufacturing slowdown, also emphasised by the World Trade Organization, is underpinned by the weakness in world trade. In turn, both are closely connected to investment, the fall of which has been uniform across the world this year.
Renu Kohli is an economist with the Centre for Social and Economic Progress, New Delhi
