The International Monetary Fund (IMF), in its latest July 2022 World Economic Outlook (WEO) Update, foretells a story of a gloomy and more uncertain outlook for the global economy. While the global growth was projected at 3.6 per cent in April 2022, as per the latest July 2022 projections, it is 3.2 per cent, a 0.4 percentage point downward revision within three months.

Having been revised to 8.3 per cent in July 2022 from 7.4 per cent in April 2022, the projection for global inflation in 2022 also turned out to be more pessimistic. With all-around dollar appreciation with respect to most of the currencies, global trade is also projected to slow down. Do these projections reflect a cynical bias? Or are these indicative of some sort of Western view of the impact of the war?

The basic arithmetic

Among the countries going through significant downward revisions in their growth projections in 2022, three big economies of the world — the US, China, and Germany (accounting for more than one-third of global GDP) seem to be the major contributors. Specifically, consider the following.

First, the US tops the list with a 1.4 percentage point downward revision, reflecting two major factors, viz., (a) reduced household purchasing power; and (b) a tighter monetary policy.

Second, with growth being downwardly revised by 1.1 percentage points, China has the dubious distinction of occupying the second place.

Third, driven by a curtailment of gas imports from Russia, higher energy prices, and scarcity of key intermediate inputs, growth in Germany has been revised downward by 0.9 percentage points. Notably, IMF has projected India’s growth rate for 2022-23 to be 6.1 per cent, however, on August 5, the Reserve Bank of India, in its Monetary Policy Statement, retained its growth forecast for 2022-23 at 7.2 per cent.

The China factor

The Chinese story is all the more important as it is, possibly, for the first time that an emerging market economy seems to have such a deep negative spillover on global growth.

After all, in the 21st century, China is primarily recognised as a growth pole supporting global growth even in a bad year. In fact, in the second quarter of 2022, mainland China faced its worst Covid outbreak since the peak of the pandemic in early 2020, leading to further lockdowns.

Another contributory factor is the deepening real estate crisis in China. According to S&P Global Ratings, China’s property sales are likely to fall by about 30 per cent this year; this is worse than in 2008, when property sales dropped by roughly 20 per cent. Moreover, China’s economic slowdown has added to the global supply chain worries.

Food crisis

While these are matters of concern, a key element of the Russia-Ukraine war is the possibility of a food crisis, with higher food prices and export restrictions of food in a number of countries, looming large. Ukraine is a major exporter of sunflower oil (as well as meal and seed), corn, and wheat, and Europe is going to be hit badly with attendant global spillovers.

The Chief Economist of the UN’s Food and Agricultural Organization (FAO) has mentioned that wheat and fertiliser supply shortage could have pushed 1.6 billion people “at the risk of going hungry”.

Risks to the outlook

The recent WEO update has categorically stated, “The risks to the outlook are overwhelmingly tilted to the downside”. The following dimensions of heightened risks have been emphasised in particular. First, the Russia-Ukraine war could lead to a sudden stop of European gas imports from Russia.

Second, higher inflationary expectations could lead to wage pressures in labour markets. Third, with governments all over the world on a borrowing spree, tight global financial conditions could lead to debt distress in emerging market economies.

Fourth, the possibility of renewed Covid-19 outbreaks and lockdowns could complicate the growth scenario. Fifth, an escalation of the property sector crisis in China could further depress Chinese growth. Sixth, “geopolitical fragmentation” could impede global trade and cooperation.

The IMF has also worked on a plausible alternative scenario in which “risks materialize, inflation rises further, and global growth declines to about 2.6 per cent and 2.0 per cent in 2022 and 2023, respectively, would put growth in the bottom 10 per cent of outcomes since 1970”.

The IMF stated categorically, “Such shocks could, if sufficiently severe, cause a combination of recession accompanied by high and rising inflation (“stagflation”), although this is not part of the baseline scenario”.

The world has not seen the scourge of stagflation in developed countries since the 1970s. It is worth remembering that in the 1970s, stagflation in developed countries was followed by a spate of financial crises in many developing countries as increased interest rates in developed countries pushed up the debt burden in many poorer developing countries.

Currently, some developing countries are already facing debt servicing problems, and it is up to the global community to ensure that we do not see a repeat of the 1970s and the Latin American debt crisis that followed.

Local solutions, global problems

What is the way ahead? Given the enormity and complexity of the problem and the limited effectiveness of the Bretton Woods institutions, the solution package has to be much more nuanced, and it needs to be linked to local circumstances.

After all, in the post-pandemic world, the fiscal and monetary space seems somewhat narrow. Consequently, the traditional fiscal and monetary policies could be of limited usage. Countries are trying to be innovative.

Illustratively, Germany is looking for coal power for its power scarcity in the winter. Indian authorities have introduced settlement in rupees and increased oil trade with Russia. Policymakers will have to use more such policies to mitigate some of the global shocks at a national level.

Pal is a Professor of Economics at the Indian Institute of Management Calcutta, and Ray is Director of the National Institute of Bank Management Pune. Views expressed are personal