The global economy remained resilient in 2023 despite the escalation of geo-political conflicts, higher-for-longer interest rates and demand slowdown. High interest rates have also speculated a period of recession in the major economies like the US and the EU, which have been outdone in CY2023. After projecting global economic growth of 3.1% in CY2023 in its Jan 2024 outlook, the IMF has upgraded its projection to 3.2% in its April 2024 outlook[1].
Global inflation is receding at a faster pace than anticipated. It declined from 8.7% in CY2022 to 6.8% in CY2023 and is expected to further decline to 5.9% in CY2024, according to IMF [1]. Though headline inflation witnessed a sustained decline from the unprecedented peaks, core inflation has maintained its sticky nature and required strict vigilance of the central banks to bring it down to the desired levels. Inflation levels in most of the countries remained above the target levels which compelled the central banks to maintain their stance on monetary tightening for the year. The global economy also dealt with the challenge of high borrowing costs due to the persistent high interest rates. However, the prospect of further relaxation of financial conditions has prompted an upswing in equity markets, although uncertainty persists regarding the timing of interest rate reductions. Financial market sentiments have been fluctuating, with evolving perspectives on an early pivot by central banks in advanced economies [10]. Central banks are exercising caution and have stalled the interest rates to fully transmit the impact of tight monetary policy. This has led to subdued commodity demand and a softening in prices in CY2023.
The global manufacturing industry focussed on the high tech and energy transition technology resulting from the policy push from the respective governments. As a result, the metal demand has been majorly driven by the energy transition activities and is expected to provide a cushion to the economic slowdown. The global Manufacturing PMI has been under contraction in CY2023 but has indicated stabilisation towards the start of CY2024. Additionally, commodity prices have remained relatively stable in CY2023 despite the ongoing economic slowdown in China and Europe and geo-political challenges in Europe and the Middle East. Global trade growth was nearly stagnant in CY2023 due to elevated inflation and a sluggish pace in global industrial production. Geoeconomic fragmentation is expected to exert continued pressure on global trade and cause additional price volatility. The IMF expects global trade to grow at 3.0%, Y-O-Y, in CY2024 before improving marginally to 3.3%, Y-O-Y, in CY2025. [1]
Apart from the ongoing Russia-Ukraine war, the intensifying conflict between Israel and Gaza has become an additional source of concern for the global economy. Furthermore, the trade disruption caused by the crisis in the Red Sea route, responsible for 12-15% of the global trade flow and 20% of the container trade, is leading to delays and heightened logistic costs [2]. The trade flow between the European and Asian counterparts has been impacted majorly by the significant hike in logistics costs. This has kept the commodity prices volatile in Q4 CY2023 and in Q1 CY2024.
The climate change has also impacted the supply chain. The Panama Canal route is witnessing a low water level. According to the United Nations, low water levels have caused a decrease of 36% in ship transits compared to a year ago and are almost 62% down from two years ago [2]. On top of that, the El Niño effect also poses a threat to agricultural commodities which can shoot up the inflation causing the interest rates to remain high for a longer period.
Despite the failed recovery of the real estate sector, Chinese economy has grown by 5.2% in CY2023 which was in line with the government’s target of 5%. As the rest of the world is dealing with high inflation, the Chinese economy has been experiencing a period of deflation. After the unfolding of the property sector status, the dwindling consumer sentiments persisted in CY2023. The People’s Bank of China has reduced the interest rates lower with additional support to the vulnerable sectors.
China’s property sector has continued with its downward trend in CY2023. While the construction activity has remained subdued, the real estate prices have remained elevated and did not decline much [3]. The Chinese government has extended the support like expanding the financial support to the property developers, relaxation of the loan defaults by the home buyers, relaxation of the rules to boost the home purchase, and so on. However, the stimulus packages announced by the government are yet to reflect on the indicators.
On top of the domestic consumption, the slowdown in the export market has also impacted the Chinese economy’s growth. Chinese domestic demand has also witnessed a shift from conventional infrastructure-related demand to energy transition demand. The growth of renewable energy capacity, EV production and sales and other structural changes have initiated a structural change in the economy.
The IMF has projected the Chinese economy is expected to witness a slowdown and grow at 4.6% in CY2024 and 4.1% in CY2025 [1]. China’s central banks announced cutting the reserve requirement ratio (RRR) for all banks by 50 basis points (bps) as part of a slew of measures to support the fragile economy.
The US economy has performed better than expected in CY2023 amid a high level of uncertainty and high interest rates maintained by the US Federal Reserve. A tight labour market and healthy consumer spending have supported the economic growth. Retail inflation also came down considerably from its CY2022 peak but remained under observation as it witnessed a slight upward trend towards the end of CY2023.
The stickiness of the core inflation has kept the interest rate high and impacted the business investment and the real estate sector’s performance in CY2023. The US economy was previously expected to face challenges due to the impact of the prolonged high interest rate, but the economy has been responding with resilience. The Fed has kept the interest rate unchanged after the increase in July 2023. The market had anticipated aggressive rate cuts post December 2023 announcements, but that expectation was diffused after the Fed Chair’s comments to keep the decision longer for the need of the economy around the ongoing global uncetainty. After growing at the rate of 2.5% in CY2023, IMF projects that the US economy will further grow by 2.7% in CY2024 before slowing down to 1.9% in CY2025. [1]
The European Union managed to avoid the recession in CY2023, but the block is struggling to attract growth due to the contraction of Germany, Austria, Estonia, Finland, Hungary, Ireland, Netherlands, and Sweden. The hike in energy prices in CY2022 led to the closure of the manufacturing units across Europe which continue to suffer due to the slowdown in demand. Among the major economies, Germany has witnessed a setback as the GDP growth on a Y-O-Y basis contracted in three consecutive quarters in CY2023 from Q2 to Q4. Moreover, the European Central Bank has kept the interest rates high and is expected to maintain the monetary tightening to control the inflation level. Core inflation has been coming down, but the geopolitical and supply chain uncertainty is expected to keep consumer sentiments restricted. Despite challenges, the European economy has resisted the recession supported by falling inflation levels with a tight labour market supporting private consumption.
The expectations in CY2024 from the European economy are better than that of CY2023 as the worst impact is likely to be over. After witnessing a marginal growth of 0.4% in CY2023, the IMF projects that the Euro Area will grow at 0.8% in CY2024 and 1.5% in CY2025. Germany which is expected to have contracted by 0.3% in CY2023 will grow by 0.2% in CY2024 and 1.3% in CY2025 [1].
The global economy is expected to sustain its resilience in 2024. However, the economic outlook for CY2024 will be impacted by the heightened geopolitical unrest which could raise the risks of supply disruptions, elevate energy and commodity prices, and pose downside risks to the global economy. Moreover, the performance of the Chinese economy has also been a major concern. The Chinese government’s efforts to support the property sector and financial market and encourage consumer spending might need more time to indicate any significant improvement.
The slowdown in inflation has raised the anticipation of interest rate cuts but most of the central banks are expected to hold it till H2 2024. After successful economic performance, it is expected that the impact of high inflation rates will not be reflected in CY2023 and CY2024 might witness its completion. Global headline inflation is projected to decrease to 5.9% in CY2024 and further to 4.5% in CY2025 [1].
The IMF has upgraded the global GDP forecast for CY2024 to 3.2% from the earlier projection backed by the better-than expected performance of the US and other large emerging markets and developing economies in CY2023 [1].
Indian economy came out as a top performer in FY 2023‑24 despite the domestic challenges of high inflation and subsequent monetary tightening, and setbacks in the export market due to the global slowdown. As per the second advance estimates released by the National Statistical Office (NSO), real GDP is expected to grow by 7.6% in FY 2023‑24 as against 7.0% in FY 2022-23 [11], driven by robust domestic demand, moderate inflation, a stable interest rate environment, and strong investment activities. Furthermore, India also concluded a successful presidency of G20, showcasing India’s capability to cater to global needs and providing a platform to address global concerns.
Globally, high inflation and interest rates, coupled with supply surplus, have exerted significant pressure on demand. However, India’s robust government spending on infrastructure development and positive consumer sentiments have not only provided a cushion but also boosted economic growth. Despite the persistent monetary tightening by the RBI, the domestic demand has remained resilient and supportive.
India’s manufacturing sector has maintained its expansionary state in CY2023 with consistent positive levels of new orders, according to the PMI survey. At the start of CY2024, international sales have also witnessed a pickup creating a positive sentiment towards the export market. The positive response of domestic and a hint of global demand expansion have fuelled the expectations from CY2024. The Index of Industrial Production (IIP) shows that the output of India's industry grew by 6.1% in the first three quarters of FY 2023‑24 compared to 5.5% in the corresponding period of last year. The performance in January 2024 and February 2024 has also been moderate with Y-O-Y growth of 4.1% and 5.7%, respectively [11]. From April 2023 to February 2024, mining and quarrying activity has contributed to 8.2%, Y-O-Y, followed by electricity which grew by 7.5%, Y-O-Y, and manufacturing which grew by 5.01%, Y-O-Y.
India’s foreign trade has witnessed a contraction in FY 2023-24. India’s overall exports including merchandise and services in FY 2023-24 are estimated to be US$ 776.68 billion, which is US$ 0.28 billion higher than 2022-23. Overall imports in FY 2023-24 are estimated to be US$ 854.8 billion, witnessing a drop of -4.8% over FY 2022-23 [12]. India’s POL product import has witnessed a drop of -14.2% in FY 2023-24 as compared to FY 2022-23 [5]. India’s crude oil consumption has been robust in CY2023, OPEC has indicated that India’s crude oil import in CY2023 will reach to record high of 4.7 mbpd from 4.6 mbpd in CY2022 [6]. The drop in crude oil prices in CY2023 as compared to the CY2022 level is indicating a contraction in the import value. India’s non‑POL export has also witnessed a drop of -1.7% in FY 2023-24 from FY 2022-23 levels [5].
On the brighter side, the gross GST collection witnessed a healthy 11.8% Y-O-Y growth, reaching ₹ 120.18 lakh crore during the FY 2023-24 period as against ₹ 18.06 lakh crore collected in the same period of the previous year (FY 2022‑23) [13].
Despite repetitive food price shocks and volatility in fuel prices, CPI inflation is on a downward trajectory and eased to 4.85% in March 2024 from 5.09% in February 2024 [11]. Core inflation which has remained sticky in CY2022 has come down to the RBI’s tolerance limit. The RBI keeps the policy repo rate unchanged at 6.50% and retains the CPI inflation forecast at 5.4% in FY 2023-24 and expects to drop down to 4.5% in FY 2024-25[10].
A conducive domestic policy environment will continue to improve the business environment, promote industrial activity, accelerate manufacturing, create economies of scale, and make India an integral part of the global value chain. With the rollout of schemes like PLI and FAME and the government’s push for infrastructure development, India is now one of the attractive destinations for foreign investments. Bilateral agreement to facilitate trade opportunities has expanded the markets for Indian MSMEs and businesses. The India-Middle East-Europe Economic Corridor announced at the G20 Summit has not only brought focus to India’s importance in the global economy but has also provided an opportunity to diversify the logistic constraints.
In the interim budget of FY 2024-25, the Government of India continued with its robust spending on capital expenditure, which grew by 11.1% to ₹ 11.1 lakh crore for FY 2024-25. The primary focus of the government has been to further strengthen the infrastructure of the country. Implementation of the economic railway corridor programmes under the PM Gati Shakti scheme will further strengthen the connectivity and logistic capabilities. Efforts towards green energy by supporting the installation of renewable energy capacity and reducing high carbon intensity fuel have also been made.
The RBI has been vigilantly monitoring India’s economic conditions under the influence of global upturns and has successfully provided stability in the monetary environment of the country. Amid the volatility of the US Dollar Index, the RBI has successfully steered the monetary policy to maintain stability in the economy and reduced the risk associated with external factors.
India’s economic outlook remains positive and it is poised to become the third largest economy in the world, with a GDP of US$ 5 trillion by FY 2027-28. The support of infrastructure spending, efforts to build a manufacturing ecosystem, and strong consumer and business sentiments have become the fundamental drivers of the growth. The global concerns related to the supply chain disruption, high logistics cost, escalation of the geo-political crisis and volatility in global financial markets pose a downside risk, however, the Indian economy is well-positioned to navigate forthcoming uncertainties due to its robust domestic demand. The RBI is expecting inflation to moderate to an average of 4.5% in FY 2024-25, under the upper tolerance limit of 6% but still above the comfort level of 4%. The IMF expects India’s GDP to grow at 7.8% in FY 2023-24 in April 2024 World Economic Outlook, an upward revision from the 6.7% projected in the January 2024 economic outlook [1]. The GDP growth outlook for FY 2024-25 and FY 2025-26 is expected to be 6.8% and 6.5%, respectively [1].
References 1. IMF, WEO, April 2024 | 2. https://news.un.org/en/story/2024/01/1145902 3. https://www.imf.org/en/News/Articles/2024/02/02/cf-chinas-real-estate-sector-managing-the-medium-termslowdown#:~:text=With%20 the%20property%20downturn%20in,in%20the%20last%20three%20decades. 4. CEIC | 5. CMIE | 6. OPEC | 7. S&P Global | 8. World Bank, The Pink Sheet | 9. CMIE | 10. RBI, Monetary Policy Committee 11. MOSPI | 12. Ministry of Commerce & Industry | 13. Ministry of Finance
