The concluding week of December 2022 brought forth an analytical storm from socio-economists and geo-strategists about what a country or institution or community needs to carefully monitor in the first quarter of 2023. The principal emphasis was on how the global economy is likely to evolve within the changing conditions.
There was very little hesitation in saying that in 2022 there was deterioration in terms of opportunities as well as an increase in the risks associated within the fiscal matrix.
Some have referred to the potential rise of interest rates and also the re-emergence of another mutation variety of Covid surfacing in Far East Asia (Japan, South Korea and China) casting anxiety over more lethal variants affecting public health. Both the print and the electronic media had been referring to China's control of the pandemic among its 1.4 billion people through strict pandemic curbs and hoping that the re-opening of their social economy would create a positive dimension in terms of support of the world economy but there has been a dent in this prospect.
Analyst John Power has particularly pointed out that "after nearly three years of punishing lockdowns, mass testing and border closures, China earlier this month began the process of unwinding its controversial "zero COVID" policy" after massive protests. With severe "restrictions inside the country a thing of the past", China decided to reopen its international borders. This led many to believe that reopening of the world's second-largest economy - which had slowed dramatically during the last year - would inject new momentum into the global recovery. This, in turn, was believed to enhance consumer demand and also give a boost to major exporters-- such as Indonesia, Malaysia, Thailand and Singapore. However, according to several authorities Beijing has stopped publishing COVID statistics even though hospitals across China have been flooded with the sick, while morgues and crematoriums have reported being overwhelmed with the influx of bodies. Some medical experts have estimated that China could see up to 2 million deaths in the coming months.
Economist Alicia Gracia-Herrero has in this context pointed out that one needs to monitor the emerging facets carefully. She has added that we need to "watch is if there's a major mutation, and mutations can be either less lethal but they could also be more lethal, and I think if the latter happens, and we start seeing closures of borders again, that would be traumatic for investor confidence."
The continuing imbroglio of the Ukraine conflict has also unrelentingly been casting a long shadow within the choppy waters. Food and energy markets are also playing their own roles in subverting potential growth within various dimensions related to global supply chains. All of these factors are injecting anxiety within the still fragile post Pandemic recovery that has been taking place in most parts of the world due to booster doses of Covid vaccines.
The next area that has been the subject of introspection by economists is inflation and interest rates. We have seen rising costs of energy and food products subverting living conditions all over the world, but more so, in least developed and developing countries. This scenario has seen unrest in many parts of the world, reflected in rising poverty rates and unemployment.
Economic strategists have also been following this chapter in our lives with care. Most of them now think that despite the continuing detrimental effects of climate variability and the Ukraine conflict and certain other political dimensions, inflation will gradually decline globally in 2023. However, it is unlikely that it will be reduced.
It may be mentioned here that the International Monetary Fund (IMF) has predicted that global inflation is likely to hit 6.5 per cent in 2023, down from 8.8 per cent in 2022. Such a scenario might not, on the other hand, take place in developing economies where there is expectation of less relief, with inflation projected to only ease to 8.1 per cent in 2023. That is not going to provide relief to countries like Bangladesh.
In this regard Alexander Tziamalis, another economist, has also observed that "energy and raw materials will remain expensive for some time. The partial reversal of globalisation means more expensive imports and shortages of labour in many Western countries. This is likely to lead to more expensive production." It is also being anticipated that expenditure required for required green transition measures to combat the threat of climate variability and protection of biodiversity will have a tough time taking place.
Such a scenario has alarming implications related to the slowing down of growth and the creation of recession.
As mentioned earlier, though the price growth is expected to ease in 2023 in some countries, economic growth is more or less certain to slow sharply alongside rising interest rates. The International Monetary Fund has in another of their estimates observed that the global economy is likely to grow around just 2.7 per cent in 2023. In other words, it will be less than the growth level of 3.2 per cent that took place in 2022. The OECD has also projected a less superior performance in terms of economic growth in 2023- 2.2 per cent compared with 3.1 per cent in 2022. Such pessimism has led many socio-economic strategists to observe that a global recession is likely in 2023, barely three years after the downturn caused by the pandemic. It may be noted that such a prospect has been dealt with recently by Z.M.Beddoes of The Economist in a column where a grim picture has been painted that is consistent with the article's unequivocal title: "Why a global recession is inevitable in 2023".
In this regard one needs to take cautious note of the latest warning given by the IMF's chief economist that "even if the global economy does not technically fall into recession - broadly defined as two consecutive quarters of negative growth -2023 may still feel like one for many people due to the combination of slowing growth, high prices and rising interest rates". It has been added that "the three largest economies, the US, China and the Euro area, will continue to stall and the worst is yet to come, and for many people, 2023 will feel like a recession."
Like many other financial experts, John Power has also drawn attention to another financial aspect that has created anxiety and affected directly and indirectly socio-economic stability. One needs to refer in this regard to the osmotic effect of bankruptcies.
Despite the economic devastation wrought by COVID-19 and lockdowns, bankruptcies in fact appear to have reduced in many countries in 2020 and 2021 due to a combination of out-of-court arrangements with creditors, arbitration and large government stimulus. Interestingly in the United States, 16,140 businesses filed for bankruptcy in 2021, and 22,391 businesses did so in 2020, compared with 22,910 in 2019. That trend is however expected to reverse in 2023 because of increasing energy prices and interest rates. Allianz Trade has in fact estimated that bankruptcies globally might rise to nearly 19 per cent in 2023, eclipsing pre-pandemic levels.
Economist Tziamalis has in fact remarked that "the COVID pandemic forced many businesses to take on substantial loans, worsening a situation of increasing dependence on cheap loans to make up for the loss of Western competitiveness due to globalisation." It has also been observed that "the survival of highly indebted businesses is now called into question as they face a perfect storm of higher interest rates, higher energy prices, more expensive raw materials and less consumption spending by consumers. In addition, it is also worth pointing out that the appetite of Western governments for any direct help to the private sector has been curbed by their increased deficits and prioritisation of support for households."
Another common denominator that has emerged from this fray is with regard to efforts to roll back globalisation and what is actually transpiring. Experts have observed that such measures to roll back globalisation accelerated in 2022 and are expected to continue into 2023. This has become the end-result of what started with the Trump Administration pertaining to the US-China trade and technology war and now appears to have gained momentum once again under the current Biden Administration. It is expected to have osmotic effects in different sectors in 2023. We have already seen how in August 2022, the US Administration signed the CHIPS and Science Act blocking the export of advanced chips and manufacturing equipment to China - a move aimed at stifling the development of the Chinese semiconductor industry and bolstering self-sufficiency in chip making. This measure has its own connotation.
The passage of such a legal measure is being interpreted by some economists as an example of a growing trend away from free trade and economic liberalisation towards protectionism and greater self-sufficiency, especially in critical industries linked to national security.
This has led economist Tziamalis to observe that "the West, and particularly the US, are increasingly threatened by China's economic trajectory" and appear to have decided to "respond with economic and military pressure against this emerging superpower." This scenario has also led some strategists to suggest that though any outright war over Taiwan is unlikely, more expensive imports and slower growth for other countries involved in the US-China trade war is almost certain. One can only observe that in 2023 it will be unlikely for the world to witness greater globalisation and higher free trade.
This scenario, to a great measure, might unfortunately affect developing countries and their approach towards globalisation relying on greater use of digitalisation.
Muhammad Zamir, a former Ambassador, is an analyst specialised in foreign affairs, right to information and good governance.