By Ghulam Haider
The outlook for the global economy has “darkened” and the world is at a point of “significant economic danger” and the year 2022 will be remembered as one of the worst years for global poverty since the turn of the century – second only to 2020, which was spent in the grip of the coronavirus pandemic.
According to the World Economic Forum survey report, citing the World Bank predictions, COVID-19 continues to impact economies’ growth and the war in Ukraine is causing significant global economic disruption, fuelling stubbornly high inflation.
In its latest report, Moody’s Analytics have predicted the global economy to grow at 2.7 per cent in 2022 and slow to 2.3 per cent in 2023. It said the global environment is more fragile as record high inflation in the US and Europe continues to gain momentum while growth decelerates.
Stagflation risks have risen worldwide, but a stagflationary environment would take months to be realised. Business sentiment remains muted and is consistent with a global economy that is just avoiding recession, Moody’s Analytics said.
The report says that the global economy is at a crossroads, as the nascent post-pandemic recovery has quickly morphed into a darker and more fragile environment. Record-high inflation in the US and Europe from supply shortages and surging commodity prices following Russia’s invasion of Ukraine are weighing on the global expansion and are compounded by an aggressive monetary policy response.
At the same time, China’s economy is facing challenges on multiple fronts, including a cooling property market and a buildup of risks in the financial sector.
“As a result, global growth fell in the second quarter on an annualised basis for the first time since the depths of the virus outbreak in early 2020, driven by contractions in the US, the UK and China,” Moody’s Analytics said.
The performance remains uneven among the world’s major economies — the US, China, Japan, India, and the five largest economies in Western Europe. Outcomes will continue to diverge through 2023 due to differing trade and investment linkages to Russia and Ukraine, particularly in relation to energy products.
As global recession risks rise, both developing and developed market economies have also seen their currencies depreciate against the US dollar in a flight to quality, which has meant higher import inflation.
The International Monetary Fund (IMF) has said that the three largest economies will ‘continue to stall’, ‘the worst is yet to come’ and for many people 2023 will feel like a recession.
The IMF has cut its global growth forecast for 2023 as economic pressures collide, from the war in Ukraine, high energy and food prices and sharply higher interest rates, issuing warning that the conditions could worsen significantly next year as more than a third of the world’s economy is expected to contract.
“The three largest economies – the US, China and the euro area – will continue to stall,” IMF chief economist Pierre-Olivier Gourinchas said. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession.”
Eurozone growth will fall to 0.5 percent next year as high energy prices slam output, the IMF predicted, with some key economies, including Germany and Italy, entering technical recessions. Gourinchas said geopolitical shifts in the continent’s energy supplies will be “broad and permanent,” keeping prices high for a long time.
Regarding market turmoil in Britain after financial markets rebuked the new government’s proposed tax cuts, Gourinchas said UK fiscal policy needed to be in step with central bank inflation goals.
Downside scenario and dollar pressures
A “plausible combination of shocks”, including a 30 percent spike in oil prices from current levels, could darken the outlook considerably, the IMF said, pushing global growth down to 1 percent next year, a level associated with widely falling real incomes.
Other components of this “downside scenario” include a steep drop-off in Chinese property sector investment, a sharp tightening of financial conditions brought on by emerging market currency depreciations and labour markets remaining overheated.
The IMF put a 25 percent probability of global growth falling below 2 percent next year, a phenomenon that has occurred only five times since 1970. It said there is a more than a 10 percent chance of a global GDP contraction.
These shocks could keep inflation elevated for longer, which in turn could keep upward pressure on the US dollar, now at its strongest since the early 2000s. The IMF said the dollar’s strength is pressuring emerging markets and could increase the likelihood of debt distress for some countries.
But Gourinchas said the dollar’s strength is currently the result of fundamental economic forces, including the more aggressive monetary tightening in the US, rather than unruly markets.
Fears of a global recession grow
According to the World Economic Forum survey report, the expectations for economic growth have been scaled back across the world, with 64% of respondents considering a global recession to be at least “somewhat likely”, the report says.
Almost 90% of those surveyed expect growth in Europe to be either weak or very weak, due to the war in Ukraine, high inflation and threats to energy supplies. And growth projections are expected to be worse next year, across the continent.
In 2022, weak or very weak growth in China is expected by 67% of those surveyed, with COVID-19 restrictions and concerns about its real-estate sector weighing this down. However, more respondents expect its economy to pick up in 2023, with 66% anticipating moderate or strong growth.
Although almost 65% of those surveyed expect moderate growth or better in the US in 2022, optimistic projections drop to 37% when it comes to 2023. The likelihood of ongoing monetary tightening is considered to be a key factor in this.
Four in 10 economists expect growth to be weak in Central Asia in 2023, twice as many as in 2022. While in sub-Saharan Africa, 43% are predicting weak growth in 2022, with a much higher 60% of respondents predicting the same for 2023.
However, the picture is looking less grim in other parts of the world. The report says 71% expect growth in the Middle East and North Africa (MENA) region to be moderate or better. This is reflected in a strong year enjoyed by the region’s energy exporters.
In South Asia, the vast majority of economists expect moderate growth in both 2022 and 2023. More people expect moderate growth in Latin America’s next year than they do for the rest of 2022 – 56% (rising from 50%).
The fight against soaring inflation
The survey indicates very high rates of inflation are a key contributor to the weak outlook for global growth. Most respondents (93%) say they expect inflation to remain high in the US and Europe. With the exception of China and the MENA region, the survey predicts “elevated rates of inflation” in most areas of the world for the rest of the year.
Monetary tightening by the US Federal Reserve and the European Central Bank appears to have influenced chief economists’ predictions for next year. Of those surveyed, 57% expect inflation to be either moderate or low next year in the US and 52% when it comes to Europe. Nearly 80% of respondents said they believed higher interest rates would be “effective” or “highly effective”.
But there appears to be less optimism elsewhere: “In most of the rest of the world, only a very small proportion of our respondents expect low inflation next year, but there is a clear shift from ‘high’ to ‘moderate’ expectations between 2022 and 2023,” the authors say.
There is however a drawback of the current tightening of monetary policy highlighted in the report. The report notes that this could increase public debt burdens, which have risen significantly over the past decade. The survey is almost unanimous (95%) about the risks of defaults in low-income countries.
Food and energy security at risk
In July 2022, more than 125 countries experienced food price inflation in excess of 5% according to the World Bank data cited in the report. This was felt in 90% of low and middle-income countries and in more than 80% of high-income countries.
There is also pessimism about global food security, which respondents believe could be at risk across large areas of the world in the next three years. They say Sub-Saharan Africa and the MENA region are particularly vulnerable. However, large minorities of respondents also expect food security to be an issue in parts of South and Central Asia.
The World Food Programme reported acute food insecurity in 53 countries in 2021, accounting for around 193 million people. This is expected to rise to over 205 million people by the end of 2022.
The worst global rates of inflation are expected in the US and Europe, while food insecurity is predicted to be highest in Sub-Saharan Africa.
On energy security, the report authors say: “Natural gas prices hit record highs for the fourth consecutive month in August 2022, up 130% from the start of the year and by almost 250% year on year.”
Governments, especially in Europe, have been spending billions on support measures for households and businesses. However, this risks adding to levels of public borrowing that are already high after significant levels of state spending on previous crises, the authors add.
The Chief Economists surveyed are “near-unanimous” that wages won’t be able to keep up with rising prices in 2022 and 2023, with real wages expected to decline in low- and high-income economies during that period.
Real wages fell across the Eurozone by 1.7% year-on-year in the first quarter of 2022. Beyond “the economic shock from the outbreak of COVID-19 in 2020, this represents the worst hit to inflation-adjusted wages since before the global financial crisis,” the report’s authors said.
The survey suggests that the threat to basic living standards is likely to increase the risk of societal disruption. Almost 80% of respondents say they expect social unrest to be triggered in low-income countries by rising costs. The report points out that global political instability is now at its highest since the financial crisis in 2008, according to the 2022 Global Peace Index.
Floods weigh down Pakistan’s economic outlook for FY23
The Asian Development Bank (ADB) has said that Pakistan’s economic outlook for the fiscal year ending in June 2023 has “deteriorated under heavy flooding” while the “economy was already struggling to regain macroeconomic and fiscal stability”.
In the supplement report titled ‘Asian Development Outlook 2022 Supplement’, ADB said flood disruption and damage in the country are “expected to slow real Gross Domestic Product (GDP) growth in combination with a tight monetary stance, high inflation and an un-conducive global environment”.
The report said catastrophic floods this year have “dampened economic activity” in Pakistan, which was already affected by “stabilisation efforts to tackle sizeable fiscal and external imbalances and double-digit inflation”.
Growth and inflation
Moreover, the ADB report highlighted that flood damage in Pakistan threatened the agricultural season, particularly wheat sowing which is planted from mid-October. The report added that the floods had adversely affected cotton, rice and other important crops that are grown in the country.
It said the flooding is expected to have spillover effects on industry — notably textiles and food processing — and on services, in particular wholesale trade and transportation.
The ADB has revised the fiscal year 2023 forecast for Pakistan to reflect a “weaker currency [and] higher domestic energy prices” along with flood-related crop and livestock losses and supply disruption, which have caused transitory food shortages and price spikes.
The report further explained that transportation difficulties had “exacerbated these shortages and disrupted other domestic supply chains, broadening inflationary pressures and imposing production challenges”.
Growth, inflation & risks outlook in South Asia
According to the ADB, South Asia is on track to meet the growth forecast of 6.5pc in 2022 but the forecast for 2023 has been downgraded slightly from 6.5pc to 6.3pc.
It further said sub-regional revision for 2023 largely reflected “lower forecasts for Bangladesh and Pakistan” as recovery in Bangladesh was also “hampered by external imbalances and unexpectedly high inflation”.
The report said that the sub-regional revision for 2023 largely reflects higher inflation forecasts for Bangladesh, Nepal, Pakistan and Sri Lanka. However, the estimated inflation figures for the year 2023 had a more substantial increment from 7.4pc to 7.9pc.
The supplement report highlighted three main headwinds continued to hamper recovery in the ‘developing Asia’ region — recurrent lockdowns in China, the Russian invasion of Ukraine, and slowing global growth.
Growth forecasts for the region — consisting of 46 developing members of the ADB — were revised down from 4.3pc to 4.2pc in 2022 and from 4.9pc to 4.6pc in 2023. It also said major advanced economies would expand slightly more than previously anticipated this year but are expected to endure sharp deceleration in 2023.
Regarding economic activity in the US and Europe, the report said tightening monetary conditions — when interest rates are increased to limit the amount of money that people and companies can borrow — along with financial conditions would drag the economic activity next year with the Euro area likely to fall into a technical recession.
However, the update highlighted that inflation is expected to continue to exceed central bank targets in both the US and Euro area in 2023. It would also necessitate continued tightening while oil prices are projected to remain elevated.
The ADB report warned “stubbornly high inflation in the US and other advanced economies” could prolong the current monetary tightening cycle.
It further cautioned that the synchronised nature of the squeeze may bring “overly restrictive monetary stances and unnecessary output and employment losses”.
Further growth deceleration in China caused by the Covid-19 pandemic or property market issues also threatened to “jeopardise regional economic prospects”, the report added.
The ADB has also warned that a “dangerous situation in the Russian Federation and Ukraine could renew surges in commodity prices, stoking global inflation and inducing further monetary tightening”.
It listed additional challenges to the Asian economy as well: geopolitical tensions, notably worsening China–US relations, and climate-related risks.
Challenges for Pakistan
The following two paragraphs from the World Economic Outlook, October 2022, neatly sum up the challenges facing the global economy: “Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades.
The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering Covid-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the Covid-19 pandemic.
Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy.
Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.”
This is a fairly grim assessment of what is in store in the rest of the year. Loss of nearly half of the growth (to be continued next year also) and fiercely rising and doubling inflation (predicted to ease off next year) constitute the most dreadful scenario. Notice that there is no precipitous crisis of the type like the international financial crisis of 2008-09. If anything of this type does come to pass we can well imagine how destructive it would be.
In the short run, there is hardly a chance that these conditions would be improved. The decline in growth would have implications for poverty as many economies would be showing outright contraction. Higher interest rates and a strong dollar would have adverse effects on capital flows for the emerging markets and developing economies, with consequences for debt burden and repayment capacities. Furthermore, this would have implications for value of imports and thus add to inflationary pressures as well. Under the circumstances, Pakistan is facing unenviable challenges.
As expected after floods, the Federal Committee on Agriculture (FAC) has noted that the production of sugarcane decreased by 7.9 percent (81.6 million tonnes from 88.7 million tonnes), rice by 40.6 percent (5.5 million tons over last year’s production of 9.3 million tonnes), maize by 3.0 percent (9.2 million tons versus 9.5 million tons).
The cotton production declined by 24.6 percent (6.3 million bales from 8.3 million bales last year. The wheat production is likely to affected also as wheat production target for upcoming Rabi 2022-23 is fixed to the tune of 28.370 million tonnes from an area of 9.3 million acres.
On the other hand, the LSM data has showed a decline of 0.4% percent during Jul-Aug. More concerning is the tractors production and sales which declined by 36.2 percent (7,991) and 30.3 percent (8,379), respectively, in July-September FY2023. During Kharif 2022 (Apr-Sep), urea and DAP off-take was 3,137 thousand tonnes (3.7 percent less than Kharif 2021) and 491 thousand tonnes (44.8 percent less than Kharif 2021).
However, the credit to private sector has taken a big hit. Against a credit flow of Rs.227 billion during 1 July to 21 October 22, the flow for the same period this year was negative Rs.86 billion or registered a decline of 138%. This is again consistent with austerity measures limiting imports and consequently domestic production. Inevitably, employment and poverty levels would be affected. Keeping slowing agriculture, manufacturing and credit it is clear that the economy is slowing down.
Another concerning development is the persistence of high inflation. The CPI inflation for October 2022 versus same month last year has increased to 26.6%, with urban inflation at 24.6% and rural at 29.5% showing. When in September inflation had come down to 23.2% from a high of 27.3% in August, it was hoped that it would moderate in coming months. However, this hope was short lived.
The slowdown was due to waiving of fuel price adjustment (FPA), which is yet to be recovered. But now another FPA has been imposed which is the basic reason of resurgence in inflation. A new rent survey has further fueled inflation.
What is more worrying is the trend in core inflation. Based on non-food, non-oil, it was 14.9% in urban and 18.2% in rural areas. The weighted average of core inflations with weights of 55% and 45% for urban and rural areas gives a core inflation of 18.25. This level of inflation would put pressure on the policy rate at 15%.
There are few more problems. The OMO (open market operation) injection has jumped in two weeks from Rs 5.2 trillion to Rs 5.8 trillion, an increase of Rs 600 billion. The inverted yield curve is persisting. Clearly, there is a major shift in short-term maturities, as few would be interested in buying low-yielding long-term bonds when T-Bills offer higher returns. The dollar has halted its descend and mostly trading in or around Rs 220/$ while open market difference is again quite high.
The budget numbers for first quarter would not be available for another month. However, an official report of finance division shows that the deficit for first two months was recorded at Rs 672 billion compared to Rs 462 billion.
The primary deficit was Rs 90 billion compared to Rs 37 billion. It may be pointed out that the Fund programme has envisaged steep fiscal adjustment targets which would be difficult to achieve if this pattern is not altered soon. There are significant expenditures on account of flood support which were incurred in subsequent months. Besides, many new proposals for subsidies have been approved, which would add to expenditure pressures. Tax revenues increased by 17% and would face an uphill task going forward as the required overall growth is 23%. The economic slowdown would make this task quite challenging.
Evidently, economic management has to balance competing demands on public resources and ensure that the choices so made are not in conflict with the demands of the lenders whose support is critical for continued stability.
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