The global economic outlook, released by the IMF, projects global GDP growth in 2022 to reach 3.2% as compared to the 6% achieved in 2021. This represents a decline in growth rate by 46% from 2021. The growth is projected to further decline by 16% to reach 2.7% in 2023. Growth projection of advanced economies declines from 5.2% in 2021 to 2.4% in 2022 and 1.1% in 2023, a drop of 53.8% in 2022 from 2021 and 54% in 2023 from 2022. Emerging markets and developing economies’ outlook also predicts a similar trend. Projected growth rates have declined from 6.6% to 3.7% from 2021 to 2022 but would remain stable at 3.7% in 2023.
The steep reduction in global growth solidifies the anxiety of looming recession in the global economy. Post-pandemic period witnessed a commodity super-cycle trend that exacerbated global inflation. The Russia-Ukraine War happened to become another nail in the coffin as it multiplied negative shocks to world commodity supply. The world entered into the high inflation era which prompted the central banks of major economies to raise policy rates. The US consumer price index (CPI) data for September indicate a month-on-month rise of 0.4% and 8.2% over the last 12 months. The US Federal Reserve is expected to make another hike in the policy rate and as per market pundits, the policy rate may reach 4 to 4.75% by early next year. Bank of England has indicated a raise in its policy rate to 5.8% in the next 12 months along with the European Central Bank’s another projected hike of 75 basis points. Aggressive policy deportments taken by central banks are hitting hard on global growth and world trade.
Being part of the global world with linkages across the global value chain, Pakistan may experience output volatility. As per the State Bank of Pakistan in FY22, total exports grew by 27% which contributed to LSM growth. The exports to GDP ratio also improved to 10% as compared to the 9% achieved in FY21. Geographically, the US and Europe contributed 55% to Pakistan’s total exports. Growth in exports to the US and the EU was recorded to the tune of 35% and 22% respectively. However, it is cognizant of the fact that the progression in exports was achieved at a time when global growth was at 6%, including the GDP growth of 5.7% in the US and 5.2% in the Euro Area.
Pakistan’s dependency on a few countries and little or no geographical export diversification poses a dire risk of economic volatility. Simulating the US and EU’s projected decline in growth rates to analyse the impact on Pakistan’s economy envisages a drop of 8.5% in exports and 3.65% in imports. Textile and apparel exports which constitute 50% of our export basket may decline to 16%. The textile and apparel manufacturing index may also decline by 5% which would bring down the growth in the industry output by 1%. Therefore, the real GDP is projected to decline by 0.1%. However, there is also a bright side to the upcoming global recession. The simulation further projected a decline in global commodity prices which would bring down domestic prices by 7%. IMF has projected Pakistan’s GDP growth to be around 3.5% in 2022 without considering the flood impact. The government has projected GDP growth in FY23 to be around 2% after incorporating infrastructure and agriculture production losses. Nevertheless, by taking into account the impact of the global recession, Pakistan’s GDP in FY23 is projected to remain within a range of 2.2% to 1.8%.
The second half of FY23 would be challenging for the economy as our exporters may face dwindling demand in the West. The government should facilitate exporters to explore new markets and negotiate free trade agreements which would generate market diversification. The government should work with the business community to enhance regional trade by creating interconnectivity through land routes. In the wake of the devastating floods, the government should start the process of reconstruction which may revive the construction industry and many allied industries.
Published in The Express Tribune, October 31st, 2022.
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