World Economic Outlook

Subject : Economy

Context:

The central message of the International Monetary Fund’s World Economic Outlook is that ‘the worst is yet to come’.

About the Report:

More than a third of the global economy will contract this year or next, along the three largest economies—the United States, the European Union, and China.
- It has cut the forecast for global growth — from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023
- India’s growth in 2022-23 will be 5.8 per cent.
Increasing price pressures remain the most immediate threat to current and future prosperity.
- Global inflation is now expected to peak at 9.5 per cent in late 2022 and could remain elevated for longer than previously imagined and is likely to decrease to 4.1 per cent only by 2024.
- Global core inflation, expected to be 6.6 per cent. In other words, food and fuel price inflation, which has typically spiked headline inflation, has now seeped through to core inflation and, as such, will take more time to go away.
Downside risks
- Policy miscalibration
- Financial stability and appreciation of dollar
- War in Ukraine

Concept:

Core inflation

It is the inflation rate when prices of food and fuel are not accounted for.
Core inflation typically rises and falls more gradually than inflation in food and fuel.
Conventionally, core inflation is calculated by excluding ‘food and beverages’ and ‘fuel and light’ groups from overall inflation (CPI-C).

Reports by IMF:

World Economic Outlook

It is a survey by the IMF that is usually published twice a year in the months of April and October.
It analyzes and predicts global economic developments during the near and medium term.
In response to the growing demand for more frequent forecast updates, the WEO Update is published in January and July, between the two main WEO publications released usually in April and October.

Policy Miscalibration

It is a situation when fiscal and monetary policies run against each other.
Example-What recently happened in the UK where the Liz Truss government resorted to an expansionary fiscal policy (tax cuts and unfunded hikes in expenditures) even as the Bank of England was trying to raise interest rates to contain historically high inflation.
- The result was a mini-financial collapse with investors losing confidence in the policymakers and selling off British assets.
It can also occur when fiscal and monetary policies are aligned, if there are other mistakes.
- For instance, monetary policymakers can over-tighten their stance (that is, raise interest rates more than required) or do the opposite.
  - Over-tightening risk- cost of borrowing rises thus reducing investment and growth while under-tightening risks -inflation seeping through to core inflation and taking longer to contain.

Stagflation

It is said to happen when an economy faces stagnant growth as well as persistently high inflation.
That’s because with stalled economic growth, unemployment tends to rise and existing incomes do not rise fast enough and yet, people have to contend with rising inflation.
Higher prices will reduce this demand. Fewer goods and services being demanded will then disincentive businesses from investing in new capacities, which, in turn, will exacerbate the unemployment crisis and lead to even lower incomes. Thus leading to Stagflation.