“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” is how the World Bank President David Malpass has summed up the crisis of the present world economy. The World Bank’s June 2022 Global Economic Prospects report has warned that the world economy has been devastated by the fallout of geopolitical conflict, which threatens to disrupt the global recovery that was slowly making its way through multiple waves of the coronavirus pandemic and its numerous mutations.

The global GDP growth is projected to sharply decelerate from 5.7% in 2021 to 2.9% in 2022 – 1.2 percentage points lower than the projection of 4.1%, made by the bank last January. Growth in advanced economies is feared to be lower by a huge 2.5 percentage points in 2022 from 5.1% in 2021 to 2.6% now. In the January 2022 World Bank report, the GDP growth of advanced economies for 2022 was estimated at 3.8%. GDP growth is expected to further moderate to 2.2% in 2023, largely reflecting the unwinding of the fiscal and monetary policy support provided during the pandemic.

The economic growth of the emerging markets and developing economies is projected to fall from 6.6% in 2021 to 3.4% in 2022 — well below the annual average of 4.8% over the 2011-2019 period. This growth slowdown is a price of war which will be paid through lower incomes and fewer job opportunities. The growth will be further affected by high price rise causing demand deceleration and disruption in economic activities. High food and energy prices and the continued worsening of supply-chain problems imply that consumer price inflation will peak later and at higher levels than previously fore.

Citing war in Ukraine as the villain, the International Monetary Fund too has painted an equally gloomy picture of the global economy. The IMF's  Global Economic Outlook report of last July projected global growth to decelerate from 6.1% in 2021 to 3.2% in 2022 – 0.4 percentage point lower than that of its April projection. Growth in advanced economies is projected to be lower by a huge 2.7 percentage points in 2022 from 5.2% in 2021 to 2.5%. The GDP growth of the emerging markets and developing economies is projected to fall from 6.8% in 2021 to 3.2% in 2022

However, like the World Bank, the IMF too has projected India to grow by over 7% in 2022. World Bank predicted India to grow by 7.5% in 2022 and now IMF predicted it to grow by 7.4%

The new OECD projections show the large and global impact the war is having on inflation, which has already reached 40-year highs in Germany, the United Kingdom and the United States. The annual rate of inflation worldwide as compiled by ILO and measured by the consumer price index (CPI), accelerated to 9.2% in March 2022 – up from 7.5% in February 2022, 6.8% in January 2022 and 6.4% in December 2021.

The inflation rate in March 2022 was more than twice the rate of 3.7% recorded in March 2021. Wheat and oil are currently both about 50% more expensive than they were a year ago. The prices of other cereal grains are also rising. For importing countries, these price increases present a significant obstacle to economic growth and livelihood, potentially raising social and political tensions.

Advanced nations lead the growth deceleration

Significantly, unlike in the past, the present growth deceleration has impacted the advanced countries the most. The US, for example, which accounted for about 16% of the global GDP after adjusting for purchasing power parity in 2021, was among the worst sufferers in the present economic adversity.

The World Bank’s June 2022 report has projected the US economic growth to decline from 5.7% in 2021 to 2.5% in 2022 – about 1.2 percentage point lower than the projection made in the bank’s January 2022 report.

The Conference Board, a global independent research association, headquartered in New York and does in-depth research on the US economic indicators, was less optimistic and predicted the real GDP growth even lower at1.7% year-over-year in 2022. This outlook is associated with persistent inflation and rising hawkishness by the Federal Reserve.

The inflation rate was estimated at 9.1% for the 12 months ended June 2022, the largest annual increase since November 1981 and after rising 8.6% previously, according to U.S. Labor Department data published last month. 

The International Monetary Fund has warned that avoiding recession in the United States will be "increasingly challenging" as it again cut its 2022 U.S. growth forecast to 2.3% from 2.9% in late June as recent data showed weakening consumer spending.

Sharp rise in energy prices at the other end, has driven the inflation rate in the Euro area to 8.6% in June 2022 over the year as the fallout of the war in Ukraine and the economic conflict that has disrupted the supply line of energy. According to Eurostat, the European Union’s statistics agency, about half the 19 countries in the eurozone reached double-digit annual inflation last June. The inflation rate reached the record high since the creation of the euro in 1999.

Many Euro area countries depend heavily on Russia as a source of fossil fuels to heat homes and power their economies. But the amount of energy, especially natural gas, flowing to Europe from Russia has been reduced by more than half since Russia’s invasion of Ukraine driving prices to record levels and leaving European governments scrambling for alternative sources.

The record inflation amidst fear of decelerating economic growth has compounded the risk quotient of recovery. The World Bank has projected the Euro area’s GDP growth to slide down from 5.4% to 2.5%. IMF too has projected almost the same growth deceleration – down from 5.4% in 2021 to 2.6% in 2022.

The Eurozone's biggest economy, Germany, seems to be facing one of the worst years in 2022. The Deutsche Bundesbank, Germany's central bank, has lowered its growth forecast for the country's gross domestic product (GDP) to 1.9% in 2022 from its previous projection of 4.2% in December last year. In the first quarter of 2022, Germany's economy barely grew by 0.2% quarter-on-quarter, according to the Federal Statistical Office. Worse, the inflation in Germany hit 7.9% in May, the highest since the first oil crisis in the winter of 1973-1974, according to Destatis.The main reasons for the high inflation still are price rises for energy products.

Prospects for the euro area’s second-largest economy, France too, have worsened significantly since the war in Ukraine. The government now expects economic growth of 2.5% in 2022 after forecasting 4% at the start of the year, 

France’s inflation rate will keep climbing to stabilize between 6.5% and 7% as wages and services interact to drive prices higher, the country’s statistics agency Insee said. In its yearly economic outlook “War and Prices”, Insee said it expects services to become the main contributor to, taking over from energy prices that jumped following Russia’s invasion of Ukraine. 

World’s second biggest economy China has recorded its worst quarterly performance in over two years, after months of harsh lockdowns wreaked havoc across the country. Gross domestic product increased by just 0.4% in the three months to June 30, 2022 compared with the same period last year, according to the National Bureau of Statistics (NBS) of China. That was sharply lower than the 4.8% increase it registered in the previous quarter. For the first half of this year, the economy grew 2.5%, way below the 5.5% annual target set by the government.

China's annual inflation rate climbed to 2.5% in June 2022 from 2.1% in May and above market forecasts of 2.4%. This was the highest inflation rate since July 2020, with food prices increasing the most as consumption strengthened further following an improvement in Covid-19 situation

Chinese officials and academics have attributed the divergence of inflation rate between the world and China to stimulus measures, notably the unprecedented money printing used in other countries to save economies battered by the coronavirus pandemic.

The US Federal Reserve’s balance sheet has more than doubled in the past two years to US$8.9 trillion, while Beijing, which was cautious about an all-out stimulus, has refrained from excessive loosening. Another reason also comes down to the weighting of goods and services that make up China’s CPI basket.

India’s growth counts

Like other emerging market economies the Russia-Ukraine war has deepened existing vulnerabilities in the Indian economy by compounding existing financial problems — supply-demand gaps in the availability of essential daily goods to the consumers. In addition the rising commodity inflation has dented the economy. The war has underlined that the Indian economy is not immune to international shocks -- India’s market economy is closely integrated with the world market, indicating complex interdependencies. The surge in crude prices, caused largely by the war, has led to an increase in logistics cost thereby affecting the prices of food items, especially perishable ones.

Spillovers in the form of large and sudden swings in financial markets, portfolio capital outflows and supply chain disruptions resulting in shortages of key intermediates, are clouding India’s growth outlook. The World Bank has cut India’s economic growth forecast for the current fiscal to 7.5% last June as rising inflation, supply chain disruptions and geopolitical tensions taper recovery. The IMF too has lowered India’s growth projection for 2022 from 8.2% in its April projection to 7.4% in July.

Prior to the World Bank and IMF, global rating agencies too had slashed India’s economic growth forecast. Moody’s Investors Service trimmed the GDP projection to 8.8% for the calendar year 2022 from 9.1% earlier, citing high inflation. S&P Global Ratings too had cut India’s growth projection for 2022-23 to 7.3% from 7.8% earlier, on rising inflation and longer-than-expected Russia-Ukraine conflict.

The Reserve Bank too has slashed economic growth projection to 7.2% for the current fiscal from 7.8% estimated earlier amid volatile crude oil prices and supply chain disruptions due to the ongoing Russia-Ukraine war. The RBI governor, however, has appeared hopeful of a rebound following a boost in rural consumption on the back of normal monsoon. He added that rebound in contact intensive services will sustain urban consumption too.

In its India's economic outlook - July 2022 report, leading consultancy Deloitte India has appeared optimistic and said that although rising commodity prices, surging inflation, supply shortages, and shifting geopolitical realities across the world weigh on the growth outlook, India will likely reign as the world's fastest-growing economy. The report noted that "India is expected to grow by 7.1–7.6 per cent in 2022–23 and 6–6.7 per cent in 2023–24. This will ensure that India reigns as the world's fastest-growing economy over the next few years, driving world growth”.

That is, even though the World Bank, the IMF, the RBI and the rating agencies have slashed India’s growth projections for the current year, the revised figures still stood higher than those of other major economies keeping India’s ‘fastest growing economy’ tag unchanged.  

Challenges before India

Unchecked price rise is probably one of the important adversaries of India’s growth rebound. Although the retail inflation in last June eased marginally to 7.01% from 7.04% in May, it remained more than one percentage point above RBI's upper target range of 6%. The RBI has raised the key repo rate by 90 basis points so far this year to check inflationary pressures.  

One of the major impact of rising inflation in an economy is the general slowdown of growth parameters. When it happens, the unemployment rates rise, the purchasing power of the consumer decreases and credit becomes expensive raising capital cost of investment. The rising prices also make factors of production like labour and raw materials more expensive that discourages investment.

Another challenge is the continuing outflow of foreign capital. For the past nine months, foreign portfolio investors (FPIs) have been on a heavy selling spree in the Indian financial markets. According to data compiled by the National Securities Depository Limited, FPIs have pulled out a whopping Rs 255,879 crore ($33.5 billion) from equity and Rs 16,621 crore ($2.1 billion) from debt segments of Indian financial markets, for a total net outflow of Rs 2,71,950 crore ($35.6 billion) over the period October 2021 to June 2022. Between January and June, 2022, the total net outflows were estimated at Rs.2,27,290 crore ($29.7 billion).

One of the adverse consequences of the capital outflows is the continuous weakening of the Indian rupee. The rupee has lost more than 7% against the US dollar in 2022. As per RBI reference rate, the rupee hit an all-time low of 79.98 On July 21, against the US dollar.

The continuous decline in Indian currency has also adversely affected the country’s foreign exchange reserves. In the year between Mid-July 2021 and now, the forex reserves have fallen by about 6.5% from $ 612.23 billion to $ 572.71 billion.

Another cause of concern is the increase in the current account deficit. Although India’s merchandise exports have stayed above US$ 30 billion over the past 15 months, there has been a moderation in pace in May 2022, reflecting the renewed supply chain disruptions in the wake of the war. The trade deficit in June 2022 was $ 25.63 billion against $ 9.61 in June 2021. The cumulative trade deficit during April-June 2022 was $ 70.25 billion compared with $ 31.42 billion in the same period a year ago.

Improving macro fundamentals

Despite challenges the resilience of the Indian economy is seen in its better macro fundamentals. A number of bright spots including the prospect of a better farm sector performance, improved tax collections and higher industrial growth are keeping the hope of a recovery alive. With foodgrains production touching a record level for the sixth consecutive year in 2021-22, food security has been bolstered amidst widespread global shortages. As of May 31, 2022 the stock of rice and wheat stood at 3.7 and 4.2 times the quarterly buffer norms.

In the industrial sector, the headline manufacturing purchasing managers’ index (PMI) maintained its improvement in May 2022, turning out to be among the highest in the world. The manufacturing output has grown by over 20% in the first two months of the current fiscal against the same period last year. India’s services activity expanded at the fastest pace in eleven years in June 2022; rising from 58.9 in May to 59.2 in June, 2022.

Reflecting the buoyancy of the economy, the net direct tax collections increased to Rs 3,39,225 crore by mid-June, 2022 compared to Rs 2,33,651 crore in the corresponding period of 2021 – up by 45%. The gross GST collections during the first three months of the current year have increased by over 36% from Rs 3.32 lakh crore during April-June 2021 to Rs 4.53 lakh crore during the same period in 2022.