Global Economic Growth 2023: Managing food, energy and inflation

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The July 2022 IMF report on Global Economic Outlook July speaks about eminent risks in global economy viz. global supply chain disruptions, energy crisis and food crisis and contraction of global output resulting in subdued or below par growth in 2023. In this article we will breakdown of these threats and discuss the economic costs for the downsides.

The supply chain disturbance originates from the Zero-COVID-19 policy in China, the world’s factory. The resultant economic costs are impacting GDP forecast for China and wider economic implications for the world. The circular flow of income between households and firms must be restored to bring back consumption and spending to their levels pre-COVID19. China serves as a manufacturing hub for MNCS as well as a raw material and labor store. Contraction of Chinese production activities have led to halt in production and availability across the world. China accounts for 12% of the global trade, hence this standstill won’t go unnoticed in terms of economic activities especially after the ongoing war in the black sea region.

Restoration of the supply chain should be the foremost goal. Change in covid-19 responses to allow safe economic activity is the other to increase domestic production. This would require considerable amounts of investments from major firm owners and public spending although public spending would result in increase in public debt and heating up local economy.

Global food and energy crisis originate from a single cause i.e., the Russian invasion of Ukraine; the economic effects of which are felt all the across the world, especially in the EU region. The EU has pulled out of financing the transport of Russian oil exports, additionally the G7 has proposed a price ceiling on the same. Russia was one of the biggest exporters of fuel including oil and natural gas to EU and the world. The world bank expects an energy price increase of 50% on average, increasing the prices of commodities by 46% in 2023. This increase will be felt by households and firms. As for the food crisis, Russia and Ukraine corner around 12% of the world cereal trade. The war has led to an offset in the exports and a complete blockade over the region.

Food crisis can be stabilized by increasing agricultural productivity, incentivizing engagement in agricultural activities, checking mismanagement and bringing structural improvements to the food markets. The agricultural labor force has been contracting over the past decade. Reforms need to be introduced to keep the grain production going, backed up with technological innovation in the sector along with advanced educational institutions to supply further training over the subject. The WTO, IMF, World bank, UN have introduced schemes targeting food insecurity this year. One can only hope the governing bodies of individual countries do the same and look after the vulnerable population by providing them food security.

The on-going energy crisis has made it abundantly clear that it’s time for the world to make a fundamental shift towards renewable resources and advanced technologies. Climate change has already impacted the energy scene around us and its crippling effects will be difficult to reverse. Energy-efficient lifestyle is one of the options being explored by various groups of people today and will soon become a reality for the entire globe. All the countries have to introduce policies to restore and manage their fuel resources effectively.

With increasing inflation mainly caused by GVC disruptions, the foremost response of the central banks is to raise interest rates; however, such monetary operation also leads to reduction in output, consumption and spending activities across households, industries, and firms. Further, as all these factors are presently in decline, it creates a possibility of a recession or worse. Similarities are being drawn to the state of the global economy in 1970 and 1980, when to bring down inflation, interest rates were raised however it did not have the desired effect. The result was a recession with third world countries battling a foreign exchange imbalance, particularly Latin America who were met with a debt crisis. Concerns have been arising whether we are in for a similar phenomenon, as central banks around the world begin to increase the interest rates. The latest IMF report debunks concerns of the 1970s phenomenon being repeated this time, due to dissimilarities with the oil price changes and the timing of policy tightening. However, we cannot be sure, as the risk of increasing public debt prevails.

Post Pandemic, measure unleased to perk up growth have thrown up tough questions and at the micro levels, individual lifestyles changes are warranted. Energy and food concerns were due since years, the war may have sprung them on us, but they were in the making for years. Past three years have been unfortunate in every sense, the next coming year holds an uncertain future with rising inflation, food insecurity and energy concerns. One can only hope the governments act appropriately to deal with these problems keeping aside politics and individual profits at the same time individuals adjust their lifestyles to produce positive impact to economy.