Uncertain outlook

IMF warns of geopolitical risks to world economy

The International Monetary Fund (IMF) has released its World Economic Outlook (WEO), which warns that despite a post-pandemic rebound in the early part of 2023, there are signs that growth momentum is being lost in large parts of the world. Global growth, according to the IMF, will fall to 3 per cent over the course of calendar year 2023, as against 3.5 per cent in the previous year. It is worth noting that this is well below the long-term average for global growth in the past two decades — of 3.8 per cent. Some of this is due to the slow-moving real estate crisis in China. But another large part is almost certainly a consequence of scarring from the pandemic being more persistent than expected. The WEO points to several examples of such scarring, including in manufacturing. On the latter, the WEO warns that consumption has shifted towards services. Tighter macroeconomic conditions — the withdrawal of pandemic support and tighter credit — have also put a cap on consumption-driven growth. Many countries have also seen savings diminish after they grew during the pandemic. While headline inflation has halved globally since last year, it is more concerning that the pace of decline in core inflation is much lower. And inflation remains above target for most countries whose central banks have official targets — indicating that tough monetary conditions will continue to affect demand.

The projections for Indian growth in 2023, however, have been revised upwards by 20 basis points to 6.3 per cent, which, the IMF says, is thanks to “stronger than expected consumption during [the] April-June [quarter]”. The Indian economy is in some ways insulated from a larger downturn, including in consumption, because of its dependence on commodity imports, its relative independence from the Chinese market, and the comparatively limited contribution of exports earnings. But it is not completely decoupled from the world, either. In particular, some of the downside risks identified by the WEO for global growth might have a disproportionate impact on India. These include volatile commodity prices. Global crude oil prices are already spiking and the price of a barrel going above $95 for a sustained period will put severe pressure on Indian finances. This is also an El Niño year, and the WEO points out that this typically raises food prices by more than 6 per cent. Pressure on food supply chains will thus be exacerbated.

Attacks on Israel by Palestinian militant group Hamas have underlined the geopolitical risks to growth in India and the world. A major conflagration in West Asia would create turbulence in the oil market and may also cut off important supply chains and remittance earnings. Risk-off sentiment in the financial centres of the global North might further raise the cost of capital in developing countries like India at a time when the dollar is already strong and rates are high. The WEO points out that the medium-term outlook for global growth is lower than it has been for a very long time. This gloomy prognostication matters to India as well. But the geopolitical downside risks might be even more immediate and direct.