Will 2023 be any better?

All indicators point to a challenging year ahead for the world, including India

For the world’s economy and polity, 2022 has been a bad year. It had begun with promise, with Covid waning and fairly strong economic recoveries registered during 2021 in most large economies from the pandemic’s ravages in 2020, propelling global economic growth to a high of 5.8 per cent at market exchange rates. Early in 2022, inflation surged in the US and some European economies, triggering an almost synchronised tightening of monetary policies after many years of loose, accommodative stances. Inflation (and the associated monetary tightening) was aggravated by the Russian invasion of Ukraine towards the end of February, which sent energy, food and fertiliser prices soaring and spawned widespread supply disruptions, that were, in turn, compounded by unprecedented economic sanctions imposed on Russia by an increasingly united, US-led Western alliance. A few weeks later, supply chains were also hit by outbreaks of Omicron in China, triggering strong lockdowns in major cities. Higher interest rates and uncertainties of war sucked capital into the US, in a predictable “flight to safety”, leading to a sharp appreciation of the dollar, which heightened external financing problems and debt distress in a large number of developing nations.

As a result of these multiple shocks, global economic growth slumped below 3 per cent in 2022, as estimated by the October World Economic Outlook (WEO) of the IMF.  Economics aside, the most serious land war in Europe since 1945 greatly worsened global geopolitics, with countries pressured to choose between a Western alliance on one side and Russia and (somewhat reluctantly) China on the other, or remain neutral to the extent possible. International cooperation was severely challenged across a wide range of pressing issues, including climate change, nuclear disarmament, international trade, the world petroleum market, growing debt distress and cross-border digital data flows. Multilateralism suffered a heavy blow.

Illustration: Binay Sinha

Against this background what can we expect in 2023? Here are some speculations.

Global

With the widespread tightening of monetary policy across the world some improvement in rates of inflation may be expected, though the already elevated prices in oil, gas and food will continue to take their toll on consumers across most geographies.

• The trajectory of the Ukraine war is impossible to predict. Seasoned analysts expect a protracted low-intensity conflict, with sudden occasional surges of military action, especially after the winter. At some point there may be an uneasy ceasefire but no enduring peace, resulting in a “frozen conflict”. When and how normal economic activity (including serious economic reconstruction) can resume remains uncertain.

• The pandemic may have waned in most of the world, but the recent abandonment of China’s “zero covid” policy points to likely surges in infections and deaths among her 1.4 billion population, which could spill over into other parts of the world as normal transport and communications are restored. Epidemiologists also warn about the possible emergence and spread of new variants more deadly than Omicron, which could overcome existing immunity defences and wreak serious damage to health and economic activity.

• The three biggest economies, US, Europe and China, account for over 60 per cent of the $100 trillion world economy. Europe is already in recession and may not show any growth in 2023, especially given the growing weakness of Germany and the UK. Most analysts expect the US to enter a recession in the first half of 2023. Little change is expected in China’s sharp slowdown in 2022 to 3-4 per cent growth, though even a small recovery would make a difference to world growth. Unsurprisingly, the October WEO anticipates global growth at only 2.1 per cent, with risks more on the downside. Indeed, the head of the IMF stated last week that growth projections will be lowered in the January 2023 WEO Update. The head of the World Trade Organization expects world trade growth to be no more than a paltry 1 per cent.

• Amongst “known unknowns” is the danger of a major negative shock in the vast global financial market, still awash with many years of quantitative easing and the associated risky search for high yields and now confronted by synchronised financial tightening in the largest capital markets. We may yet have to learn new terms for some esoteric derivative instruments if such a shock hits.

• Although President Xi Jinping may be tempted, China is unlikely to undertake a risky invasion of Taiwan in the coming year. There is less assurance against another round of China-initiated skirmishes along the India-China border, as happened in 2020.

• The world’s 100 million or so refugees will almost certainly increase in number, with the associated pain, misery and loss of life. Climate risks will undoubtedly rise as the world’s governments continue to lag behind the timetable for necessary corrective action. And the mostly forgotten wars and droughts of Africa will take more lives and cause more misery and hunger.

India

• With the world economy teetering on the brink of recession, it will be a challenge for India to maintain a robust rate of economic growth. Given the parlous state of the global economy, the overhang of record high government debt and fiscal deficits, the recent drop in exports and the drag on aggregate consumption from the low national employment rate prevailing in recent years, my guesstimate for economic growth is 5-6 per cent in 2023. At the upper end of this range we may still hold our current status as “the fastest growing large economy in the world”. At the lower end, we may lose it to Indonesia…and perhaps even China. Either way, our currently dire employment record is unlikely to improve materially.

• Our external financing situation is likely to remain stressed in 2023, especially if the recent export slump continues.

• Since four large states will hold elections in 2023 and the next general election is only 16 months away, politicking will be at a high level during this period, with the Bharatiya Janata Party probably increasing its dominance over a frayed Congress party.

• Given the high level of geopolitical strains and stresses in the world, India’s government will be challenged to bring its presidency of the G20 to a successful conclusion by November 2023, with some clear progress in global economic issues that matter, specially to developing country members of G20.

To sum up, 2023 will be a worse year than 2022 for the world.

The writer is honorary professor at ICRIER, former chief economic advisor to the Government of India and author of An Economist at Home and Abroad (Harper Collins, 2021). The views are personal