Year ender 2022 | Global inflation, interest rate hikes and the three Cs

The year 2022 has entered the record books for two reasons — interest rates and inflation. The United States saw the highest inflation in 40 years in 2022, while the Eurozone is seeing the highest inflation since the EU and the euro were created, both regions are several months of near or over 10 percent inflation in 2022.

Well, 2022 was the year of the two Is — inflation and interest rates, 2023 may be the year of recession - harsh or mild, but ultimately everything will depend on the three C's – Crude, COVID, and climate.

Since March 2020, the US Fed had expanded its balance sheet from $4 trillion to $8.97 trillion at its peak in March 2022. Likewise, the European Central Bank expanded its money supply from $5 trillion to $10 trillion over the same period.

This hugely excessive money supply was chasing fewer goods, thanks to COVID dislocations, and finally, the Russia-Ukraine war, which led to a drastic fall in the supply especially of wheat and gas for a while.

The Fed was the first to pivot on November 29, 2021, Jerome Powell for the first time dropped the word ‘transitory’ in his description of inflation. What followed was the first-ever rate hikes in the history of the United States, Europe, and indeed most countries.

The US Fed starting in March has raised rates by accumulative 425 basis points this year to 4.25 to 4.5 percent. By December, the European Central Bank (ECB) wasn't far behind in raising rates, it has raised rates four times by accumulative 250 basis points.

The Bank of England raised rates by 325 basis points, divided over eight hikes, although it began hiking in 2021 itself. 2022’s legacy in economic literature was the word ‘pivot’. Almost every central bank was caught napping on inflation and had to take a 180-degree change or a pivot from their dovish stance.

The US Fed pivoted in November 2021, the latest to pivot is probably the Bank of Japan, which raised its cap on the 10-year yields from 0.25 percent to 0.5

percent.

Back home, inflation was a headache, but not quite as ugly as it was in the developed Western economies. It stayed outside or above the mandated 2 to 6 percent zone in which CPI has to stay. So this forced the RBI to write to the government explaining why the mandate wasn't met. The letter unfortunately wasn't made public.

Inflation apart, the Indian economy had a good 2022, at likely 6.9 percent growth rate 2022 India was one of the fastest-growing large economies. Growth was reflected in the robust demand for credit growth. 7.50 percent to 17.50 percent over the year. The steady rise in GST collections and direct tax collections is another proof and now these taxes look set to surpass budget targets by a good measure.

The worries were the twin deficits, while the fiscal deficit at 6.4 percent for the central government and 2.6 percent for the states is the known devil. The one that sneaked up was the rising current account deficit triggered by a fall in exports thanks to the global slowdown, also crude prices were another reason. The rupee, therefore, fell around 10 percent in 2022.

Recession, shallow or deep is expected to hit the United States and Europe. The IMF forecasts global growth to slow from 6 percent in 2021, to 3.2 percent in 2022 and to 2.7 percent in 2023. At 2.7 it would be the weakest since 2001, except for the global financial crisis and the COVID-19 pandemic years.

As a result, India's growth is also seen slipping to around 6 percent in 2023, but it may still be one of the fastest-growing large economies.

Now that's the bright side, the dark side could be a continued weakness in rural demand, lethargic private sector capex and continued high fiscal deficit.