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Economic Update

World Economy looks Gloomy and Uncertain — International Monetary Fund

The Bumpy Roads for Global Economy 2022–23

World Economic Forecast — International Monetary Fund

Summary

  • The annual Inflation forecast is 6.6% for developed economies and 9.5% for developing and emerging economies.
  • GDP growth of 6.1% in 2021 is expected to be reduced to 3.2% and 2.9% in 2022 and 2023, respectively.

Based on a report issued by International Monetary Fund, the second half of 2022 and the whole of 2023 looks uncertain from an economic point of view.

The reason for this adverse economic forecast can be understood from 3 ends:

  1. Global inflation is rising, making basic necessities difficult to afford for people.
  2. Disruption is global production due to pandemic-induced lockdowns and restrictions (especially in China).
  3. Global impact of the Russia-Ukraine War

Let’s briefly understand the above problems and their overall impact on global economic health.

Agenda

I. Problems and Impact of Global Slow Down

  1. Rising Global Inflation
  2. Disruption in Global Output
  3. Global Impact of the Russia-Ukraine War
  4. Other Problems

II. What can policymakers do?

  1. Tighter Monetary Policies
  2. Preparing for Food and Energy Crisis
  3. Reducing pandemic risks without economic disruptions

III. Conclusion

I. Problems and Impact of Global Slow Down

1. Rising Global Inflation

Inflation in the first half of 2022 has been severely higher compared to the last four decades.

For Q2 of 2022, Inflation rates are as follows:

Based on this report, the Annual Inflation forecast for 2022 is:

  • 6.6% for developed economies,
  • 9.5% for emerging markets and developing economies

The apparent impact of rising inflation would be:

  • Higher food and energy prices
  • Erosion of household purchasing power
  • An aggressive rise in bank interest rates in emerging markets and developing economies
  • Increase in taxes or lower govt. spending
  • Lower consumer spendings

This would further lead to the following:

  • Debt distress in developing economies, as can already be seen in the case of Sri Lanka.
  • A crisis in the real estate sector has already been experienced in China.

2. Disruption in Global Output

The second major issue is the global Gross Domestic Product (GDP) fall.

  • In 2021 Global GDP was 6.1%
  • The 2022 forecast for Global GDP is 3.2%
  • The 2023 forecast for Global GDP is 2.9%

The primary reason for this slower growth has been pandemic-induced lockdowns, especially in Shanghai, China.

Shanghai serves as the global supply chain hub. The city has been strictly locked down for eight long weeks since April 2022.

This has led to significant issues such as:

  • Global Supply chain disruptions
  • Reduced spending in China

3. Global Impact of the Russia-Ukraine War

The ongoing war between Russia and Ukraine has massive humanitarian and economic costs.

  • Since the invasion of Ukraine by Russia, more than 9 million people have fled Ukraine.
  • There has been substantial destruction of physical capital and loss of life.

Russia is the biggest supplier of Natural gas in the world. And due to several global sanctions imposed on Russia, this supply is reducing daily.

Russian pipeline gas supply to Europe has been reduced by 60% since last year. It is leading to a steep rise in the price of natural gas.

Interestingly, the war is more expensive for Europe than for Russia.

4. Other Problems

Due to the above three issues, there are many other economic problems, such as:

  • Global food crisis

Many food grain exporters have imposed export restrictions to fulfil their local needs. This would lead to problems such as famine and malnutrition.

Low-income countries such as Sub-Saharan Africa are the ones which have been severely impacted by this.

  • In addition to the food crisis, there would be problems like:

a. Unemployment

b. Increase in Crime

c. Probability of upcoming recession

II. What can policymakers do?

Although there are very few options available for world policymakers, the following can be a few of them.

1. Tighter Monetary Policies

To control inflation, Govts. would need to

  • Increase taxes
  • Reduce govt. spending
  • Increase bank interest rates

2. Preparing for Food and Energy Crisis

The policymakers must prepare the nations for the upcoming food and energy crisis.

This would mean proper rationing and efficient use of these resources.

3. Reducing pandemic risks without economic disruptions

Nations must control the pandemic without inducing lockdowns or other economic restrictions.

This can mean increased vaccination rates and early detection of pandemic red zones.

III. Conclusion — World Economic Outlook July 2022

Therefore, based on the IMF report, the future does not look very promising. However, there are a few measures that, if taken seriously, can help us tread through these challenging times better.

From individual and national points of view, it is necessary to prepare for the impending crisis.

I hope this post was helpful to you. Let me know your feedback. You can read the full IMF report here.

I will see you in the next update. Till then, Ciao!

References

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Digant Chadha

Digant is a seasoned Blockchain and Cryptocurrency researcher. He is a Chartered Accountant and Lawyer with over 10 years of experience in the FinTech industry.