Global economy at a crossroads--

That the global economy now stands at a crossroads is no new news. In fact, the global economy is in turmoil after being hit by various shocks over the past few years. Policy makers are increasingly confronted with multitude of issues such as deglobalisation, climate change, aging population, rising income inequality, digital currency along with exceptional circumstances such as the pandemic and military conflict in Ukraine.
As 2023 begins, the Covid 19 pandemic is still lingering creating a profound and global medical crisis and the US led NATO war against Russia continues to escalate. Increasingly US geo-political strategists have been discussing the necessity of a direct conflict with Russia as a prelude to conflict with China.
There is no end to the US led NATO war against Russia in sight and with the possibility of nuclear weapon use at the battleground, the prospects for the global economy and peace remain very uncertain, rather bleak.
Global food and energy prices were already surging as the world emerged from the pandemic lockdowns of 2020 and spiked after the Ukraine-Russia conflict. According to European think tank Bruegel energy prices rose more in 2021 than in 2022 suggesting that the Ukraine- Russia conflict and sanctions were not the important drivers of energy price hikes.
The global economy is now afflicted with rising inflation and with a strong possibility of recession. We are also witnessing rising strikes and labour disputes around the world, in particular in the developed countries in the West resulting from a shift in people's thoughts on work and rising
price levels.
The New York Times in a piece recently pointed out that the elderly comprises a large proportion of the population around the world, and thus societies will have to make adjustments to meet their needs. While it is not a crisis, it definitely is a great challenge faced by societies around the world. This will impose a major burden on both governments and families. The ageing population problem is, however, exacerbated by the problems created by rising income inequality forcing many to continue to work late in life or when they are in bad health.
Former US Treasury Secretary Larry Summers argues that the biggest problem faced by the aging population is "secular stagnation" because the lack of demand will keep the economy operating below the potential level and unable to keep workers fully employed. Such a proposition has serious implications for raising tax revenues to meet the increasing healthcare expenditures.
The global economy is facing a time of significant change after being hit by various shocks over the past year. The biggest, however, was induced by the central banks as they stepped up their very aggressive fight against inflation. Going forward, this interplay between inflation and central bank intervention will be crucial in determining the global economic outlook for 2023.
Now there are many signs of declining output growth due to monetary tightening by central banks. Global purchasing manager indices are now in a declining territory, indicating a deepening downturn across different geographic regions and now there is a growing fear of a recession risk ahead. In fact, many indices are now below their levels a year ago.
Global trade volumes also declined by 3 per cent in 2022 compared to 2021. Such a downturn in trade volumes is always associated with the onset of recession. World trade typically falls far more than world GDP in a global downturn. According to the WTO, world trade in merchandise is projected to slow down sharply in 2023 due to high energy prices, rising interest rates-related disruptions raising the risk of a global recession. Total volume of merchandise trade is likely to grow by only 1 per cent in 2023.
The structures of the current multilateral system are weakening with increased and stronger emphasis on national sovereignty and increased economic protectionism are undermining the global cooperative regimes that have been put together since the end of the WWII.
In fact, economists are foretelling a weaker global growth akin to a short, possibly localised recession. The IMF projects global growth to fall from 3.4 per cent in 2022 to 2.9 per cent in 2023, and then rise to 3.1 per cent in 2024. The forecast growth rate for 2023 is much above the consensus forecast of 2.1 per cent based on a survey of independent economists conducted by Reuters in the very recent past.
However, there is a high level of uncertainty surrounding such a consensus forecasting for 2023. If central banks continue to tighten more than necessary, more widespread downturn may follow. Alternatively, if central banks reverse interest rates hikes before inflation is tamed, it could result in the global economy experiencing stagflation.
However, there was an air of optimism at this year's World Economic Forum in Davos. Many economists are also optimistic that advanced economies can avoid all-out recession and the Federal Reserve along with other leading central bank could be able to manage a soft landing for the global economy. .
It is to be noted that the term recession has more than one definition and needs to be understood the different ways it is viewed. For individual countries economists generally define recession as when an economy experiences two consecutive quarters of contraction in GDP. This definition is considered as the technical definition of a recession.
But many economists as well as the Financial Times prefer the definition used by the US National Bureau of Economic Research (NBER) which defines recession as "significant decline in economic activity that is spread across the economy and lasts more than a few months".
BANGLADESH SITUATION: On the back of rising inflation, most developed and many developing countries including Bangladesh have resorted to significant monetary tightening. The policy trade-off for most central banks is now particularly challenging at the prospect of slower growth with elevated, albeit declining inflation.
In Bangladesh, the stimulus package was discontinued as soon the worst phase of the pandemic was over. No central bank will want to lose its grip on inflationary expectation resulting in a drive towards monetary tightening to fight inflation over promoting growth. But in a country like Bangladesh policy rate needs to be carefully adjusted keeping in view its impact on the exchange rate and investment flows including portfolio investment. Rising interest rates in the US have caused massive outflows of capital from developing countries.
It can be seen that in Bangladesh inflation is the prime driver of cost of living. The significant contributors to inflationary surge in Bangladesh can be attributed to costs transmitted through supply chain disruptions and hoarding by business syndicates. Surging food and energy prices in Bangladesh are eating into the vast majority of people's income that in turn causes consumption to ease as savings dwindle. Families also have begun tightening their belts on the back of rising inflation.
Bangladesh has very limited policy space to manoeuvre and the situation has been further compounded by deeply entrenched vested interests to adopt appropriate policy responses. Therefore, import control and fiscal austerity that have been adopted so far may prove to be not as successful as expected. Bangladesh will have to balance its monetary and fiscal tightening to ensure that the economically vulnerable are well protected.
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