“Macroeconomists were created to make weather forecasters gain credibility” goes one joke. “Economists have successfully predicted 9 out of the last 5 recessions” is another dig at the predictive ability of the macroeconomics discipline. Beyond the humour, it points to the obvious complexity of interaction between hundreds of related variables in a complicated geopolitical scenario.
Despite the obvious risks involved in speculating about the future in the economic domain, many brave economists undertake foolhardy tasks of making year-end projections and this is one such attempt.
2023 In A Nutshell
Perhaps as a nod to the recession predicting joke, the global economy performed far better in 2023 than most predicted. The global economy is set to outperform the consensus forecast by nearly one percentage point, with the global GDP growth rate predicted to be in the range of 2.7 percent to 3 percent. This was led by strong growth in the United States, which outperformed consensus forecasts by nearly two percentage points, with GDP growth rate set to hit 2.4 percent.
The strong GDP growth rate corresponded with lowering of unemployment rate to below pre-pandemic levels in most countries. Inflation in most countries remained stubbornly high, though it is significantly lower than the decadal highs witnessed in 2022. This is partly due to falling commodity prices in 2023. Oil prices (brent crude) decreased from about $110/barrel in mid-2022 to around $75/barrel in Dec-2023. Core inflation (minus food and oil), however, has remained sticky.
In some sobering news, global trade is projected to end the year 5 percent down compared to 2022’s record level, shrinking by about $1.5 trillion to below $31 trillion, according to UNCTAD. Services, however, remained resilient and recorded 7 percent growth in 2023.
India’s economic performance has been better than expected. Its GDP growth rate for the July-Sep quarter of 2023 was an impressive 7.6 percent due to both global tailwinds and increased government investment in infrastructure, which compensated for the subdued consumer spending and private sector investment. Inflation is seemingly stabilising within RBI’s comfort zone towards the end of the year after reaching mildly alarming highs in mid-2023. Although headline inflation remained within the Reserve Bank of India's (RBI) tolerance range of 2-6 percent in September and October, it has now been above the medium-term target of 4 percent for 49 consecutive months. Correspondingly, RBI has left the prime lending rate (repo rate) at 6.5 percent since April 2023.
India’s trade performance has been mediocre in 2023 with widening commodity trade deficit and expected surplus in services trade. Forex reserves, after dipping sharply at the end of 2022, recovered well to reach around $598 billion. The rupee has remained flat for most of the year hovering around the Rs 82-83/$ mark, which is a significant increase from the level of Rs 78/$ seen in July 2022.
Looking Ahead
In 2021-22, almost everyone was convinced that the US will enter into a recessionary phase, given the aggressive monetary policy stance taken by the Federal Reserve to combat the high inflation rate. The debate was whether it would be a hard crash or a soft landing, but there was near consensus that there would be a slowdown. And when the US economy slows down, most of the world will feel its effect. However, despite many rate hikes by the Fed, the US economy remained remarkably resilient, and the job market has been incredibly robust.
The expectation for global GDP growth is between 2.6 percent (Goldman Sachs) to 2.9 percent (IMF) based on the assumption of strong US-led growth. Inflation in most parts of the world is expected to be past their peak and thus, policy rates will remain stable or be reduced. The Fed has indicated about 75 bps cut in the policy rate in 2024. Not to play spoilsport, but it is important to bear in mind the significant lag in macroeconomics between the interest rate hikes by the Fed and the corresponding slowdown. The US economy could yet be affected.
The Dragon In The Room
The big development of 2024 will be the performance of the Chinese economy and the economic implications of the Israel-Hamas war. On the latter, it is expected that the war will have a negative effect on global oil prices. In the worst-case scenario of an expanded war in the middle-east, oil prices can shoot up to $140-$170/barrel, according to World Bank and that can significantly harm the global economy. However, in a more realistic baseline scenario, oil prices are expected to rise to $90/barrel before falling again.
The Chinese economy has swung in the past few years, with growth ranging from 2.2 percent in 2020 to 8.4 percent in 2021 and 3 percent last year. But all of them were related to COVID and its aftermath of strict lockdowns. In 2023, China grew at 5.2 percent in the first three quarters. However, it is expected to slow down to 4.5 percent in 2024 and further to 4.1 percent in 2025, fuelled by a potential property crisis. The government will, no doubt, undertake an expansionary fiscal and monetary policy, which is factored into the projections.
A prolonged Chinese slowdown is bound to harm the global economy. Many Asian countries, Australia and parts of Africa which rely on exporting raw materials to the gargantuan industrial complex of China have already started seeing decline in their export volumes. Analysis by IMF shows that when China’s growth rate rises by 1 percentage point, global expansion is boosted by about 0.3 percentage points. Thus, a contraction will have ripple effects. Strong US growth had a countervailing effect on global economic growth in 2023 to China’s downward pressure. There is no certainty that this can continue in 2024.
As long as the Chinese slowdown is well contained and does not spread into a global contagion, India can afford to look at the bright spots. India’s China + 1 strategy of attracting companies seeking to exit China can get a boost. Further, a Chinese slowdown will put downward pressure on commodity prices – from oil to iron ore, which can be good for India. Fresh investments, both FDI and FII, will look at other emerging markets outside of China for investment opportunities and Indian equity markets are definitely an attractive proposition. Rate cuts in the US will only increase liquidity, which can result in higher FDI and FII flows into India in 2024.
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For India, as long as it continues to focus on the fundamentals – building infrastructure, undertaking liberalising reforms (including trade reforms, on which we have taken two steps back in 2023), and making it attractive for private capital, it should be in a good position to navigate through the uncertainty of 2024 and perhaps even dream to take a big step forward.
Anupam Manur is a Professor of Economics at the Takshashila Institution, an independent think tank and school of public policy. Views are personal, and do not represent the stance of this publication.
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