Last year was terrible for the global economy. By the time 2022 came to a close, observers across the world believed that several key economies would witness a recession in 2023.
.But by the time the most influential policymakers, CEOs and economists met at the World Economic Forum (WEF) in Davos earlier this month, the mood had started to shift.There is a growing sense that a global recession may not happen, and that some of the biggest economies, such as the US and the Euro-zone countries, may achieve a soft-landing.What was the picture before WEF?Between 2020 and 2021, governments and central banks across the world, especially in the richer developed countries, had used a loose fiscal policy (governments spending lots of money) and loose monetary policy (cheaper credit/loans) to contain the economic downturn during Covid. This policy prescription had not only set the world economy up for a period of elevated inflation, but also made it more vulnerable to unexpected supply shocks.This shock came early in 2022 when Russia invaded Ukraine. The invasion disrupted global supply chains, which had barely recovered from the Covid-induced lockdowns, and spiked commodity (crude oil, fertilisers and foodgrains) prices so sharply that the whole world witnessed historic surges of inflation.This, in turn, forced central banks to rapidly raise interest rates in a bid to contain inflation by dragging down overall demand. Governments, on their part, pulled back excess spending.But these policy u-turns essentially meant that economic growth would plummet across the board. With lower growth, it was expected that unemployment would also rise.Unsurprisingly, all manners of growth forecast were revised down right through 2022. The International Monetary Fund’s World Economic Outlook (WEO), the benchmark for such forecasts, downgraded global growth outlook thrice during 2022.In the last WEO published in October, the IMF warned the following: “More than a third of the global economy will contract this year or next, while the three largest economies—the United States, the European Union, and China—will continue to stall. In short, the worst is yet to come, and for many people 2023 will feel like a recession.”