Global economy in 2022: The year of cooling down

CWA # 885

2022: The World This Year

Global economy in 2022: The year of cooling down

Ankit Singh
31 December 2022

Photo Source: The Economic Times

TWTW#196, 31 December 2022, Vol. 4, No. 45

What happened?

On 11 October, the International Monetary Fund (IMF) in its World Economic Outlook predicted that the world economy will contract and a slowdown may take the world into recession. The global economic output crossed USD 100 trillion in 2022. The post-pandemic recovery and military conflicts impacted supply-side constraints this year. The mismatch in the demand by increased labour force participation in the economies and supply created uncertainty which accumulated into double-digit inflation. The increased cost of living due to disruption in the supply side impacted the planning on price growth and debt vulnerabilities.

This pushed the central banks across major stakeholders to increase the lending rate to cool off demand. The interest rate hikes were the highest ever witnessed in the US and Europe. The US dollar, a global currency, is pegged in foreign investment and trade. The dollar became stronger due to risk hedged by Federal Bank in the US, as a result, other currencies depreciated vis-a-vis the dollar. The US Dollar index increased by 15 per cent from July 2021 to July 2022.

Developing economies became more vulnerable to economic shocks and liquidity space was further reduced for them. There was increased engagement with the IMF by various emerging economies like Sri Lanka, Ghana, Zambia, Argentina, Brazil, Cambodia and Indonesia. These economies had to approach the IMF for maintaining the fiscal and liquidity crunch to continue to support green shoots in their respective economies. Argentina, recorded a highest-ever loan programme, worth around USD 44 billion.

Parallelly, the US and various emerging economies passed laws for the indigenisation of production and manufacturing to avoid any major shock to their economies. The need to maintain national security and to continue crucial economic relationships remained the priorities while conflicts and supply-side constraints continued.

The sanctions against Russia due to the ongoing Russia-Ukraine conflict aggravated inflation speculation further. The shortage in fertilizer, natural gas, crude and grains disrupted the budgetary planning in many countries and induced price rise due to uncertainties. The developments damped the overall growth sentiments while divergences and unsubstantiated promises to developing economies at UN climate conferences further hurt the prospect of the charter of development and there were more uncertainties than guarantees.

What is the background?

The GDP growth of major economies slumped during the pandemic year and then increased substantially in 2021 due to innovation and pent-up demand in previous years. 2022 witnessed a cooling down or slow down in the post-pandemic period primarily due to the following reasons.

First, the food and energy crises induced inflation. The energy and non-durable commodity crisis induced by the Ukraine-Russia conflict pushed the European Union to look elsewhere for its energy needs. The higher affordability capacity of the EU disabled emerging economies to budget their energy needs. Natural gas, grains and fertilizers went to the highest bidders and aggravated the inflation trends.

Second, US preference to soft landing of the receding economic growth. The US federal reserve in its statements last year has preferred a soft landing to facilitate a slow-down in the economy. It has also witnessed a surging cost of living, and targeting inflation has remained the central argument of the federal reserve. However, the currency attractiveness of other emerging economies was damaged and there were fewer winners and more losers. The UK will enter a recession period in 2023 due to increased cost of living, inflation and weak economic growth. The US shares similar fears, as the government started 2022 with a raising debt ceiling to 146 per cent from 130 per cent of the GDP. The US contributes 21 per cent to the world GDP and any soft landing will create ripples across the world.

About the author

Ankit Singh is a Doctoral Scholar at the National Institute of Advanced Studies

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