2023: A hopeful start but no bets
Anxiety about a downturn was the state of mind entering 2023. Two months down the road, evidence suggests the year could turn out better than expected. Don't count on it because the indicators are topsy turvy. Some global activity indicators have recently stabilised, but others are noisy. Even a pause in Dollar and Euro interest rates hike seems like a big deal after the most rapid global tightening in a generation. A course correction by systemically important central banks looks improbable. Geopolitics, extreme weather, debt distress and deficits in international policy coordination are not helping. These global phenomena spillover into economies such as that of Bangladesh is raising the premium on agile policies.
Missed indications so far
The global economy faces the inflation all can experience, and a recession not so easily fathomed. The indicator for inflation is slowing price growth happening still erratically in the advanced economies. No single data point is conclusive on any economy having entered a recession. A softer than expected landing – disinflation without deep recession – looked achievable until the rise in US inflation in January pricked the bubble. The strength of the downturn in Europe moderated for a second successive month in January, tentatively pointing to a contraction milder than anticipated before last winter. The unemployment rate is close to the lowest seen this century in six of the G7 countries.
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The industrial performance is mixed in emerging markets. China abruptly ended nearly three years of severe zero-Covid restrictions, easing the crackdown on tech and the real estate sector. India is growing strong. Growth in the East Asia and Pacific region, excluding China, is struggling from the sharpest contraction of investment growth of the past two decades. Investment is not projected to return to the pre-2020 trend until halfway through the current decade. Advanced economies faced with extremely high government debt levels and rising interest rates are still eating up global capital.
There are grounds for cautious optimism. Financial conditions eased in early 2023. Risk appetite appears to be reviving. Many are pinning their hopes for a global recovery on Chinese "revenge spending" to boost growth. They may at the same time push oil prices back to $100 a barrel. Some stabilisation of goods trade is evident in the sharp decline in inventory accumulation for finished goods. A shallow and short recession in the US may be handy for the rest of the globe.
Downsides are flashy
Even if rich economies avert a recession in 2023, growth will slow significantly. Over the medium term, sustained slower growth (secular stagnation) is looming any way for most advanced economies, China, and many emerging markets and developing economies. Ageing populations, slowbalisation – changes in the global economy slowing down the process of the internationalisation of economic activity, climate change, rising inequality, and excessive debt are poised to outweigh the potential of younger, dynamic countries and productivity-boosting technologies.
Any new adverse development such as escalating geopolitical tensions could push the global economy into abyss. The Ukraine war, in both its military and economic manifestations, is a stagflationary force that could easily persist beyond 2023. The Taiwan conflict could disrupt systemically important supply chains by itself and the consequent economic and financial sanctions on China.
More and more countries find themselves engulfed in debt crises. Several (Lebanon, Sri Lanka, Russia, Suriname, and Zambia) are already in default, and scores others need debt relief to stave off economic collapse. Even in the best of circumstances, growth in these countries' is likely to be slower and more domestically oriented.
The landscape is constantly changing. India, for instance, has risen in hype to become the "new China" even though it did not benefit the most from US-China trade tensions. Better integrated countries such as Malaysia and Vietnam stand better chances to export and prosper. Multilateralism in trade is in retreat. Renewed interest in using regional and plurilateral agreements to foster trade among like-minded countries comes with its own risks of throwing the baby with bathwater. Long and variable lags in international macroeconomic policy coordination have exacerbated market volatilities.
The menace of overvalued dollar
The US dollar has soared in recent years due to the relative strength of the US economy, generally higher interest rates in the US and the dollar's perceived safe-haven status. It reached a two-decade high against other major currencies in September 2022 before declining markedly in early February 2023 as the Fed decelerated its pace of interest rate increases. Expectations that borrowing costs will not rise significantly higher in 2023 and rapid rate hikes in the Eurozone and the UK strengthened their currencies by reversing monetary policy differential.
The Dollar Index at its (114) recent peak level was overvalued, hurting trade between non-dollar economies while blessing inflation persistence. With most commodities priced in US dollars, countries with a high reliance on imports of energy, industrial and agricultural products face additional inflationary pressures due to the dollar surge. Higher import prices and rising costs for payments to service dollar-denominated debt quickly deplete US dollar reserves in EMDEs. With prices in dollars sticky, countries face tightening demand for their goods in markets outside the US.
Indications that the dollar has past its peak are blurred by it snapping a four-month losing streak in February. High macroeconomic uncertainty with ongoing global recession risks, as well as persistent US inflation, could result in higher interest rates for longer. Both developments would renew investor demand for US assets, thus boosting dollar strength. All eyes are on the Fed. If it stops raising rates, the stage could be set for a lasting correction of the dollar overvaluation.
Tighter for longer
Regrettably, the idea of rate cuts remains off table. Traders of futures tied to the Fed's policy rate added to bets on March 1 that the Fed will raise its benchmark rate to a range of 5.5-5.75% from the current 4.5-4.75% by September. Quantitative Tightening is likely to continue well into 2023.
The economy and the inflation rate have not weakened enough to warrant a change in the Fed's plans in the US. The ECB chief warned the eurozone in December to brace for more rate hikes in 2023 "until they are at a level which ensures a timely return of inflation to our two-percent medium-term target." The Bank of England stressed the uncertainty of the outlook in February, a week after suggesting its run of rate hikes might be peaking.
Over 85% of monetary authorities worldwide hiked rates in 2022 with a degree of uncoordinated synchronicity not seen in the past five decades. There is an effective lower bound on the policy rate when the central bank wishes to boost aggregate demand and inflation. There is no similar binding interest-rate constraint when it comes to lowering the inflation rate. Tolerating secular stagflation is not a choice monetary authorities who matter globally will make. Unless supply disruptions and labour-market pressures subside, those interest-rate increases could still leave the global core (excluding energy) inflation too high for comfort.
Rapid monetary tightening by the world's major central banks has generated significant negative spillover effects on the global economy. This could be avoided if rate increases by individual central banks consider the reciprocal impacts of similar rate hikes by others. The current inflation crisis presents an opportunity to rewire multilateral global mechanisms for macroeconomic policy coordination.
Which way Bangladesh?
Global economy matters for Bangladesh through its international trade and financing, perhaps, more than meets the eye from the low trade and finance GDP ratios. The Wall Street Journal has recently coined the term "richcession" to describe an expected recession hitting the richest harder than those at the bottom in the US. Recent layoffs across the tech industry and the state of the stock market underpin such a narrative. This is akin to the inversion of the K-shaped recovery globally in 2021 when rich grew wealthier while the poor languished.
If this were true, Bangladeshi exporters may be somewhat cushioned in the chain of domino effects. Unfortunately, other evidence does not support the WSJ view. The two top retailers (Walmart and Home Depot) in the US issued cautious consumer outlooks for 2023 last week. Companies are expected to dole out smaller raises this year. Since April 2022, UK consumers have spent less each month on retail than the same month last year. The Economic Optimism Index in the European Union was significantly lower in February 2023, compared with January 2022. Real wage growth has weakened in many countries.
Bangladesh is facing several headwinds. These include energy shortages, power outages, regulatory mood swings, import restrictions, illicit capital outflows, reserve depletion, prospect of exchange rate volatility. downgraded financial stability and cancerous corruption. Monetised budget deficit, misdirected ADP revisions, import compression and gas and electricity price increases will push inflation. This could be at least partially outweighed by decline in global energy prices (gas, coal, and petroleum) and stable agricultural commodity prices if the macroeconomic and microeconomic policies allow passthrough.
This is not a time to live dangerously with economic policies and institutions. Policy shapes the transmission of global changes domestically. Going forward, we have to introspect where the particular response chosen has gone awry giving inertia to the fragile macroeconomic conditions. Official statistics hide more than they reveal. An across the board reading of the macroeconomic data so far suggests a deeper and longer financing gap that will elicit response somewhere depending on how policies adjust.
It is hard to see how a turnaround in trade and financial flows will happen without time befitting changes in the operative monetary, financial, fiscal, and structural policy stance. The premium on internal macroeconomic policy coordination reached new heights since the pandemic. There must be a readiness to face both the foreseen and the unforeseen. Failures in the latter may be unfortunate at best while the former inexcusable. Overconfident economic narratives on autonomous turnaround often mislead more than enlighten and provide bottomless comfort in an elusive space that you could call the economic worry-free zone. No such thing outside the havens!
Zahid Hussain is the former lead economist of The World Bank, Dhaka Office
