The hope is for a world recession, if it happens, to grow slowly rather than a sharp contraction. Perhaps inflation will remain above the normal average.
By
ARI KUNCORO
·6 minutes read
SALOMO TOBING
Ari Kuncoro
Recently the International Monetary Fund has revised its global growth forecast from cautiously pessimistic to positive-conservative. The prediction for world economic growth in 2023 raised the growth forecast for 2023 to 2.9 percent from the previous 2.67 percent.
The IMF remains conservative, shown by smoothing growth predictions in 2023, but it will remain conservative in 2024 at 3.1 percent. In addition, inflation in 84 percent of the countries in the world is expected to fall from 8.8 percent in 2022 to 6.6 percent in 2023 and 4.1 percent in 2024.
Several factors influenced the change in predictions. The first is the surprising positive growth in the United States in the third and fourth quarters of 2022 of 3.2 and 2.9 percent, respectively. Another important factor is the relaxation of the zero Covid-19 policy in China.
The last factor is the relatively "warm" winter in Europe so several ski resorts in the Alps were forced to close because there was almost no snow. As a consequence, global energy prices, especially world natural gas, tend to fall because the demand for energy for home heating will also fall.
Facing the prospect of a global recession in 2023, the IMF acts like an air traffic control officer who guides the landing of planes toward a safe airway (approach and landing phase of flight). Thus, the plane can have a soft landing.
What the IMF is doing reminds us of the concept of alignment of expectations. They realize that the effect of the announcement was quite significant so that global players would not be too pessimistic about the prospect of a world recession.
A third of the world's countries will experience a recession, signaling the other two thirds with the right policies to avoid a recession.
The credible idea of guiding the soft landing of the global economy and the suggestion of moderation in increasing global interest rates to fight inflation began to appear in the article by Maurice Obsfeld, a former IMF chief economist. He wrote an article titled Central Banks Are Raising Interest Rates Nearly Everywhere, Risking a Global Recession.
This out-of-the-box perspective also appeared in the narrative at a conference for the pre-Group of 20 Summit in Bali. An IMF source proposed a balanced position in taking policy and controlling inflation expectations without disrupting growth, because the world was in the process of recovering from the world recession due to the Covid-19 pandemic.
A more explicit statement was announced in the October 2022 World Economic Outlook. A third of the world's countries will experience a recession, signaling the other two thirds with the right policies to avoid a recession.
Finally, the positive conservative World Economic 2023 publication revises growth upwards. However, the global community is reminded that risk factors still exist such as the Russia-Ukraine conflict, which is still raging and affecting world supply chains including energy and food.
Global impact and the Fed
The US central bank (the Fed) also seems to pay attention to the signals given by the IMF. Observations on US production data show that the previous hikes in US interest rates of 75 and 50 basis points not only had an impact on the demand side, but also on the production side. This was demonstrated by the manufacturing sector procurement managers' index (PMI), which fell significantly from an expansion zone of 50.2 in October 2022 to a contraction zone of 46.2 in December 2022.
At its January 31 to February 1, 2023 meeting, the Fed decided to moderate its rate hikes to 25 basis points. This increase is to maintain the reputation of the Fed by maintaining a hawk posture, but at the same time the lower increase also shows potential for moderation in the future. This decision was also based on reduced inflationary pressure in the US, which fell to 6.5 percent in December 2022 from 7.1 percent in November 2022.
As predicted by the Exchange Rate Overshooting model (Dornbusch; 1976), the US dollar is the most affected. Previously, the US dollar was considered too strong, but without having to lower interest rates the signal of a softening of the Fed's interest rate increase was enough to bring the US dollar index down.
The dollar index declined sharply from a high of around 114 in late September 2022 to approach parity at 101 to 102 in early February 2023. For the US itself, a weaker dollar will help export competitiveness. At the same time, it will also lower import costs for other countries that use dollar denominations.
This development had an impact on the exchange rate of the rupiah against the US dollar. Future expectations start to bring the middle rate of the rupiah against the US dollar away from Rp 15,700 in early September 2022 to then approach Rp 15,000 in mid-January 2023. During the most recent Fed meeting, the rupiah's middle rate was at Rp 14,800 to Rp 14,900 per US dollar.
Although slower, the production side has responded to the better prospects for global growth, showing that producers in the global supply chain are also forward looking. The world PMI index, although still in the contraction zone (below 50), increased from 48.2 in December 2022, approaching the expansion zone of 49.8 in January 2023.
The US PMI index is still in the contraction zone, but it started creeping up to 46.9 in January 2023, moving up from 46.2 in the previous month. During the same period, China's PMI figure also improved slightly from 49 to 49.3.
The movement of the world PMI index is also shown by Indonesia's exports. After the pandemic subsided, Indonesia's exports have consistently experienced double-digit growth since March 2021. When the world PMI index began to decline, annual growth in exports began to slow down and even then entered the single-digit zone of 5.47 percent in November 2022. Improvement in the world PMI index in December 2022, although still in the contraction zone, increased the export growth again to 6.58 percent.
The hope is for a world recession, if it happens, to grow slowly rather than a sharp contraction.
The lessons that can be drawn from the description above show the potential for signaling games in policy design in the face of economic uncertainty (Drazen; 1998 and Melosi; 2016). The IMF world financial institution has provided examples of implementation which are then fully or partially replicated in other countries including the Fed in the US, the Central Bank of Canada and others.
The hope is for a world recession, if it happens, to grow slowly rather than a sharp contraction. Perhaps inflation will remain above the normal average. In this regard, public discourse in the US and Europe on the topic of avoiding a recession toward moderate growth has also begun. This is in accordance with the concept of self-fulfilling expectations (Hetherrington; 1996 and Petalas et.al; 2017) where public expectations and behavior will affect economic performance.
ARI KUNCORO, Rector at the University of Indonesia.
(This article was translated by Hendarsyah Tarmizi)
