Developing economies struggling to recover from Covid-induced losses

There will be overall deceleration in Global GDP growth from an estimated 2.7% in 2023 to 2.4 % in 2024. This is bound to have a major impact on the economy and per capita income of both developing and developed nations, though of varying levels depending on the resilience prowess of a country. Either way, it will show that most countries, particularly developing economies, are struggling to recover from the Covid-induced losses.

Moreover the tight financial conditions resorted to by different central banks to control inflation, which are yet to be eased, will have a greater impact on high debt countries. In such financial conditions, countries depending upon external investments are also facing shortfalls. With sluggish trade, countries depending on exports will also suffer as a consequence.

International trade is one of the key drivers of growth for any country which in recent days is losing steam as a growth driver. The global trade growth has been weakest in 2023 at 0.6%. According to the report, it is likely to recover to 2.4% in 2024. The continuing geo political situation and tensions, leading to supply chain disruptions will hit free movement of goods. Moreover, after Covid-19, there has been a tendency to focus on protectionist policies, which according to the report, has also influenced trade dynamics, leading to reevaluation of global supply chains and trade agreements. There is a need to diversify markets; introduction of high value and unique products to international markets, instead of depending on a handful of countries; forging trade agreements with potential countries and strengthen regional trade agreements.

India has been taking these steps as a means to boost growth of exports and now this process needs to be duly expedited. There has been shift of consumer spending from goods to services, which has led to slump in merchandise exports whereas trade in services particularly tourism, continued to recover. The report states that the trends in tourism recovery, particularly in East Asia and West Asia are expected to help reach the pre-pandemic levels this year. Countries that were badly by Covid due to supply chains disruptions are opting for realignment in international trade relations, with countries seeking to secure supply chains closer home or from more resilient sources.

Quantitative tightening has replaced quantitative easing when it comes to all major developed central banks (barring Japan) and consequently the excess liquidity is taken out from the market. Central banks have stopped purchase of assets and are reducing the size of their balance sheets. Earlier the liquidity released had a global positive impact on investment and global growth.

The inflation tightening efforts and enhancing interest rates are being used to tame inflationary pressures, which has led to uncertainty in financial instability and fiscal concerns.

With the banking turmoil in the United States in March 2023 and government bond market stress in Great Britain and Northern Ireland in September 2022, forced both United States and Bank of England to rethink and recalibrate QT implementation strategies, points out the report.

Higher borrowing costs have led to high debt sustainability risk for developing countries. Strengthening of dollar has led to depreciation of currencies of emerging market economies, which collectively depreciated by about nine per cent against the US dollar. Moreover with lesser domestic economic growth and lesser inflow of foreign direct investment, lesser foreign exchange inflows due to lesser international trade, will find it difficult to provide funds for further investment. This situation is particularly true for less developed countries, which are also experiencing a decline in official development assistance (LDA) which according to the report, further exacerbating the financial squeeze. Hence, some of these LDC countries need debt restructuring from multilateral development institutions. Moreover, these multilateral development institutions are to be strengthened with more capital to enhance their capabilities to extend such assistance.

This matter received greater attention in G20 New Delhi Declaration.

Another important area stated in the report is that the global investment growth is likely to remain subdued. The report states further that real gross fixed capital formation grew by an estimated at 1.9% in 2023, down from 3.3% in 2022 and far below the average growth of four per cent during 2011-2019. In the background of high borrowing costs and economic uncertainty coupled with geo political tensions, has resulted in lesser domestic fresh investment. The report talks of residential investment weakened significantly in the developing economies, particularly in the United States, among the developing economies, Africa, western Asia, Latin America and the Caribbean continue to struggle with high borrowing costs and other challenges which hinder investment growth. Even in China, under property sector stress due to high debt, private investment has suffered even though infrastructure led investment is continuing.

In India, the Centre has been allocating more funds last budget Rs. 10 lakh for government led infrastructure growth which resulted in multiplier impact on investment. These infrastructure projects and scheme like PLI have also led to multinational investments. However the rate of investment accounted for 30.6% of its nominal GDP in June 2023, compared with a ratio of 33.2% in the previous year. There have been reports of private sector investment gaining traction in recent times. This is reflecting in higher GDP growth in India as compared to global peers.

Another area needing further investments are the alternative renewable energy sources which grew faster than total investment in 2023. The report states that notably, investment in clean energy has risen for the third consecutive year. In the light of Net Zero Emissions target and reducing more dependence on fossil fuels, the investment in clean energy will have to further gain and rate of such investment should be faster and higher which is need of the hour.

The report states that will the 2023 experienced extreme weather conditions, being the highest since 1880 leading to devastating wildfires, floods, and droughts worldwide, will have direct economic impacts such as damage to infrastructure, agriculture and livelihoods. Different estimates suggest that climate change may have an impact on global GDP losses, which could range between 10 and 23% lower by 2100. This also poses a greater challenge to less developed countries, as they are not able to finance adaptation and mitigation plans whereas they will suffer most due to temperature impact alone.

These global challenges will have different impact on global GDP growth. United States is expected to see a drop in GDP growth from 2.5% in 2023 to 1.4% in 2024. European Union GDP is projected to grow by 1.2% in 2024.The aggregate GDP of CIS and Georgia expanded by an estimated 3.3% in 2023 and is projected to grow by 2.3%.

According to the report, China's economic recovery was gradual with growth reaching 5.3% in 2023 but is expected to moderate to 4.7% in 2024.

Gobal economy will continue to face these challenges that which will bring the overall deceleration in global GDP growth. Each country has to find plans and strategies to lessen the burden and gear up all drivers of economic growth to further and enhance GDP growth as it is very important from the Sustainable Development Goals and overall improvement in living standards.

(The author is former Chairman & Managing Director of Indian Overseas Bank)