The current economic outlook from a global perspective
The global economic forecast for the foreseeable future seems rather bleak. What can we do to soften the blow of this economic downturn?
The International Monetary Fund's World Economic Outlook 2022: Countering the Cost-of-Living Crisis, released in October 2022, warns all countries, including Bangladesh, of an impending economic downturn. According to the report, as pandemic-era expansionary monetary and fiscal policies are gradually phased out, the economies of an increasing number of countries are contracting or slowing down.
Record inflation, tightening monetary and fiscal policies, Russia's invasion of Ukraine, and the seemingly never-ending Covid-19 pandemic have all contributed to hunger and want in developing countries and a cost-of-living crisis in developed ones.
According to the IMF Report, our economy faces several challenges; crude prices are expected to average US$98.20 per barrel in 2022, up from $69.42 per barrel in 2021, resulting in abnormally high petroleum, fertiliser, and food prices, runaway inflation, and an unmanageable current account deficit.
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If the trend of the dollar strengthening against the taka continues, inflation may worsen. Growth and employment will ultimately suffer with more people receiving welfare and the government having to spend enormous sums on food subsidies.
The IMF Report warns that the worst is yet to come: the world economy, which is projected to grow at 3.2 % in 2022, would slow to 2.7 % in 2023, which is 0.2 percentage points lower than the July 2022 forecast, with a 25% probability that growth could fall below 2%.
The three largest economies—the United States, the European Union, and China—will continue to stagnate. Over one-third of the global economy will contract this year or the following year. Global inflation would increase to 4.1% by the end of 2022, driven by an increasing dollar, rising commodity prices, and supply-side disruptions brought on by the pandemic in China.
The Ukraine conflict would also lead to severe energy shortages in Europe and excessive food price increases, which would be extremely difficult for low-income households worldwide, especially for the disadvantaged in low-income countries.
Because persistent inflation harms future macroeconomic stability, central banks worldwide are currently sharply tightening the money supply to restore price stability. The unenviable task for central banks would be maintaining a tight monetary policy, even as economies begin to slow and the public calls for a loose monetary policy.
To control inflation, central banks must strike a delicate balance between not tightening enough and tightening too much, which could send the world economy into a recession and cause havoc in the financial markets. However, for best results, central banks must coordinate their efforts.
By taking prompt action in 2009, governments and central banks were able to prevent a global economic meltdown, but the crisis left several governments in a nearly bankrupt state. The ensuing recession reduced tax revenues and increased government spending on unemployment benefits. Still, it did not cause a corresponding decline in many other expenditure items, placing significant pressure on government budgets. Governments had to spend a lot of money to keep the financial system from collapsing during the financial crisis of 2009.
In the EU and the US, support for the financial sector reached up to a quarter of GDP, including recapitalisation, guarantees, dealing with toxic assets, and other measures. In this regard, 2022 and 2009 are comparable because governments spent similarly on loan guarantee programs, employment retention plans, tax relief, and subsidies.
The unprecedented deterioration in public finances and rising government debt in the advanced economies of the Euro area, the US, and Japan posed the most significant challenges following the 2009 crisis. In response to the financial crisis, central banks maintained their medium-to-long-term strategy of maintaining price stability. By implementing a credible medium-term fiscal consolidation strategy, upholding government fiscal integrity, providing reasonable exit strategies, and embracing significant financial sector reform, governments emerged from the 2009 financial crisis.
These wise moves strengthened their economies and repaired public finances. The majority of developed economies had to build up their financial reserves to deal with unforeseen and unavoidable events. The orderly and determined medium-term fiscal consolidation had increased the confidence of households, businesses, and savers. Central banks and governments ventured into uncharted territory in 2009.
By applying the lessons from 2009, a severe downturn can be prevented in 2022. The current challenge is for all nations to develop sound fiscal policies that would address the interconnected crises in the cost of living, energy, and food, with larger economies also being required to play a supporting role.
Fortunately, despite rapidly rising prices and wages, a wage-price spiral has yet to occur in many nations, including Bangladesh, the United States, the United Kingdom, and the Euro area. These nations are experiencing historically low unemployment rates and high levels of vacancies.
First and foremost, fiscal buffers must be rebuilt in nations where the Covid-19 pandemic is abating. Secondly, to control inflation, fiscal policy must cooperate with the monetary policy adopted by central banks.
The fight against inflation would be prolonged by an imbalance between fiscal and monetary policies, which would cause short-term economic shocks that would sabotage long-term inflation expectations, raise funding costs, and exacerbate financial instability.
Although the close collaboration between Bangladesh Bank and the Ministry of Finance bodes well for us, both parties must be more proactive.
Thirdly, the most vulnerable members of society must be protected through targeted and temporary transfers. At the same time, governments must send price signals, i.e., take proactive action on the price front to reduce demand and stimulate supply.
Authorities should use fiscal policy instead of expensive administrative measures resulting in rationing, misallocation, undersupply, and excess demand, such as price controls, untargeted subsidies, or export bans.
Fourthly, fiscal policy should prioritise investments in boosting productive capacity because supply chain diversification, digitalisation, green energy, and human capital can make economies more resilient to the next crisis.
Unfortunately, as the current debate over subsidies shows, these straightforward guidelines are not being upheld in India, where the government frequently offers oversized, poorly targeted, broadly stimulative fiscal packages, and poor social sector spending prevents the rise of human capital.
The strengthening dollar drives up the price of imported goods, feeds inflation, and worsens financial conditions in many emerging economies like Bangladesh.
The tightening of monetary policy in the United States and the global energy crisis are two fundamental factors pushing the dollar to its all-time high. Bangladesh Bank should modify its monetary policy to keep prices stable while allowing exchange rates to fluctuate. This will preserve valuable foreign exchange reserves when economic conditions deteriorate due to financial unrest.
Progress toward orderly debt restructuring may be urgently required to prevent a wave of debt crises for developing nations. The world must also implement climate policies to prevent catastrophic climate change. A timely and credible transition is essential for the future of our planet. It would also support macroeconomic stability, even though it may initially have some adverse effects on society and the economy.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
