Are we out of the woods: An economic perspective

While we all can take comfort in the fact that the current wave (let’s call it the Omicron surge) is not as deadly as its previous avatars it does beg a question…are we really out of the woods? While it’s very hard to predict (with due respect to Covid soothsayers) when and how the pandemic will culminate but there are certain facts that are very clear and out in public domain.

The January 2022 released World Bank report titled Global Economic Prospects lays the groundwork of the past two of socio-economic progress (or the lack of) and what can be expected in the near future. In 2021, global growth grew to 5.5% but the same is expected to decelerate markedly to 4.1% in 2022. This might seem contradictory since we all feel that the worst of the pandemic is behind us. But the reason for the global deceleration is in the continued COVID-19 flare-ups, diminished fiscal support, and supply chain disruptions. Global growth is projected to slow further to 3.2% in 2023, as pent-up demand wanes and supportive macroeconomic policies continue to be un- wound.

But this is not uniform worldwide. The output and investment in advanced economies are projected to return to pre-pandemic trends in 2023, in emerging market and developing economies (EMDEs)— particularly in small states and fragile and conflict -afflicted countries—they will remain markedly below, owing to lower vaccination rates, fiscal and monetary policies, and more persistent scarring from the pandemic (businesses shutting down permanently, higher unemployment and ebbing of consumer spending sentiment).

Growth in South Asia (India and it’s neighbours) is projected to accelerate to 7.6% in 2022, as pandemic-related disruptions fade, before slowing to 6.0 percent in 2023. India’s economy is expected to expand by 8.3 percent in financial year 2021-22. The economy should benefit from the resumption of contact-intensive services, and ongoing but narrowing monetary and fiscal policy support. In FY2022/23 and FY2023/24 growth has been upgraded, to 8.7 and 6.8 percent respectively, to reflect an improving investment outlook with private investment, particularly manufacturing, benefiting from the Government’s Production-Linked Incentive (PLI) Scheme, and increases in infrastructure investment.

Commodity prices soared in 2021 following their decline in early 2020, with prices of several commodities reaching all-time highs. Example: crude oil in April 2020 averaged around US$ 18-20 a barrel and in December 2021 was up at XXX a barrel. In part, this reflected the strong rebound of demand from the 2020 global recession. Energy and metal prices generally move in line with global economic activity. A direct impact is on retail prices of everyday durables like air conditioners (relying on copper prices) and jewellery (on gold and silver). This leads to inflation which already picked up 2021 (4.35% as compared to 3.18% in 2020). In December 2021, a WEF report published that a survey of over 20,000 people in 30 countries and found that at least half reported increases in the cost of clothing and shoes, housing, healthcare and entertainment. Two-fifths of respondents expected prices to continue rising for at least the next three months. Around the world, seven out of 10 people in the survey said they had experienced rising prices for vehicle fuel, car payments, maintenance, parking and public transport, as well as groceries, meals and restaurants.

This, finally, leads to a socio-economic angle – global economic inequality. Over the past two decades, between-country income inequality declined, and at a particularly rapid clip until the global financial crisis (2007-08). Differentials in median incomes in advanced economies and emerging economies arrowed dramatically. The severe impact of the pandemic is clearly seen in the numbers: more than 5.6 million deaths and rising & over 120 million people pushed into extreme poverty. With the data available in public domain from credible sources, it is now known that global income equality has widely increased. One way to understand these inequalities is to focus on the gap between the net wealth of governments and net wealth of the private sector. Over the past 40 years, countries have become significantly richer, but their governments have become significantly poorer. This trend has been magnified by the Covid crisis, during which governments borrowed the equivalent of 10-20% of GDP, essentially from the private sector. The rise in private wealth has also been unequal within countries and at the world level. The wealth of richest individuals on earth has grown at 6 to 9% per year since 1995, whereas average wealth has grown at 3.2% per year. Since 1995, the share of global wealth possessed by billionaires has risen from 1% to over 3%. This increase was exacerbated during the pandemic. In fact, 2020 marked the steepest increase in global billionaires’ share of wealth on record. Whichever way one cuts the pie, the coming years are not at all going to be easy. Deceleration in global economic growth, high commodity prices leading to inflation, governments borrowing money for variety of different reasons and rise in global income inequality are all prime factors in making life uncertain and uncomfortable for the short to mid-term.

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