It’s hard to be down on the second day of the new year. There is “something in the air”. So, I will part with my fellow practitioners of “dark science,” most of whom predict 2023 for the world economy.
I’ll stick my neck out and bet we’ll see a global economy ending 2023 in far better shape than 2022. And a domestic economy building on the achievements of three decades of reform, particularly the recent rampant pace of digitization reaching an inflection point to deliver one of the fastest growth rates in recent memory.
Inflation and growth will be the yin and yang of 2023. The good news is that governments and central banks are finally united in realizing that controlling inflation is the only way to sustain economic growth. And since the slogan – coined by James Carville, who spurred Bill Clinton’s victory in the 1992 US presidential election – is “It’s the economy, fool,” we’ll both get a grip.
2023 will be a year in which the state of the economy, global and national, will decide us. It will be a year spent fighting the downside of the war on inflation – the resulting economic slowdown. But now that policymakers recognize the need to balance growth and inflation, we will come out on top.
A rising tide lifts all boats. So growing economies will make people and their leaders happy. Many pressing issues, including socioeconomic and geopolitical tensions, are being swept under the rug and becoming a sure recipe for peace and prosperity.
Not if you believe the naysayers led by Nouriel Roubini aka Dr. Doom, of New York University’s Stern School of Business, who recently wrote: “We are inundated with new mega-threats (polycrises?). The world has entered what I call a geopolitical depression, with (at least) four dangerous revisionist powers (China, Russia, Iran and North Korea) challenging the economic, financial, security and geopolitical order that the US and their allies created after World War II.
There is a sharply increasing risk not only of war between great powers, but also of nuclear conflict… As Chinese President Xi Jinping continues to consolidate his authoritarian rule and the US tightens trade restrictions on China, the new Sino-US Cold War begins colder by the day.… Meanwhile, nuclear-armed North Korea has attracted renewed attention by firing missiles over Japan and South Korea. Even discounting the threat of nuclear conflict, the risk of an environmental apocalypse in the future is growing. … Greenflation is already in full swing, as it shows that the accumulation of the metals needed for the energy transition requires a lot of expensive energy. There is also a growing risk of new pandemics.’
Roubini can read excessively depressed. But he’s not the only one looking at 2023 with trepidation. Multilateral institutions and many respected economists, including the normally optimistic Swaminathan Aiyar, have also sounded cautious.
The first few months will be tough. 2022 was the year central banks became (belatedly) aware of the dangers of rising inflation. But the inevitable and economic slowdown that will result from their actions (read: monetary tightening) will finally rein in inflation and lay the foundation for sustained growth. US inflation has already fallen to 7.1%; 10.77% in the UK. In India, retail inflation fell to an 11-month low of 5.9%.
So the good news as we start the new year is that inflation is trending lower and growth trending higher. Slowly at first and then gain momentum as the year progresses. Joe Biden will be weaker, so US foreign policy will be more pragmatic, although the US-China economic war will continue with its negative impact on oil prices. The war in Ukraine will continue as a protracted, low-key struggle, long enough to keep the US arms industry happy but low-key enough not to seriously threaten world peace and prosperity.
We won’t see much progress on climate change. Targets will be missed and promises broken even as climate change continues with its catastrophic consequences. But there will be greater acceptance of the reality of climate change instead of the earlier denial. This is progress in every respect.
A lot will change. The realization that Big Tech isn’t that big after all is a new realization, as is the disillusionment with cryptos. Decoupling is an idea whose time has expired. It is nothing but the wishful thinking of a few who refuse to accept that the world is one, even as many try to break it into fragments “through thin domestic walls.”
India’s motto for its 2023 G20 presidency, “One Earth, One Family, One Future,” may sound fanciful, if not idealistic. But in the end, the global economy will end 2023 in far better shape than it is today. Maybe I sound like a dreamer. But I’m not the only one.
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