Certainly, uncertainty has declined

Over the past year, global macroeconomic stability has improved, which sets the stage for good growth from 2024

One year ago, there was unusual uncertainty in the world. Sustained developed-market (DM) inflation was hard to diagnose, the US Federal Reserve was going to raise rates to an unpredictable extent — an act that was going to inflict damage on unpredictable pockets of the world economy, Russian President Vladimir Putin had invaded Ukraine, and China had lost its way. Over the year, the radical uncertainty has subsided and a healing can now commence. This helps us interpret the immediate difficulties faced by many firms and individuals in India, and make a strategy from here.
 

By late 2021, some of us knew that the world economy was in for a torrid time. The foundations of price stability seemed to be under question and central banks globally would be raising rates dramatically if they were to protect the hard-won gains in credibility of the post-1983 period. But alongside this, we knew that sharp global tightening would trigger difficulties in as yet unknown aspects of the world economy.
 

In this difficult situation, we got two more problems: Russia attacked Ukraine and China followed the policy of zero Covid through repression.
 

There was radical uncertainty in this period as the pieces of the puzzle interacted with one another. The phenomena in front of us (Covid, inflation, Russia, and China) were not in the historical experience, so our models — the mental maps with which we navigate the world — were less reliable. February 2022 was a turning point in the data, where the Fed started hiking interest rates and Russia invaded Ukraine. It is striking to see how (appropriately measured) Indian export growth stalled at this point in time.

Illustration: Ajay Mohanty

We are now able to look back and decipher this year that uncertainty has declined greatly.
 

The DM central banks embarked on the project of conquering inflation. By and large, the inflation targeting paradigm worked well. Monetary tightening caused some trouble as it always does. Higher interest rates in the DMs are at the core of the difficulties of cryptocurrencies, start-ups in India, and the one-year price corrections in tech giants, e.g. Amazon (-35 per cent), Google (-25 per cent), Meta (-15 per cent), and Apple (-10 per cent).
 

The light is in the tunnel for the restoration of macroeconomic stability in the global economy. Supply chains have significantly healed, assisted by China’s return to production. The DM workforce is getting back to work. While more DM tightening is in store, we may expect that by 2024, we will have more normal values of inflation, interest rates, and asset prices.
 

Russia’s invasion of Ukraine looked dangerous at first because it was felt that the invader could readily win. If Ukraine could be conquered, this would pave the way for other such wars, ranging from Chinese attacks on India or Taiwan, or other Russian invasions. That radical uncertainty of February 2022 has subsided as the weakness of the Russian state has been revealed. It is one thing to flaunt military hardware in a parade, but a very different thing to organise men and materials into combat. The war has not ended and the possibilities range from a frozen conflict to something analogous to 1917. But this much is now clear: Russia’s failure in Ukraine has improved deterrence against would-be invaders the world over.
 

In China, President Xi Jinping swallowed his pride and stepped away from the lockdowns that attempted zero covid. China’s vaccine nationalism has harmed the legitimacy of the regime. Things are very difficult in China right now, but the light is at the end of the tunnel for a restoration of normalcy. While a weak Xi regime would continue to play the nationalism card in overcoming domestic unpopularity, the experience of Russia in Ukraine will shape and circumscribe the possibilities.
 

These three factors have helped calm financial markets. The VIX (a forward-looking measure of future equity-market volatility) today is lower than it was on 99 per cent of the days of the last year, and the MOVE (a forward-looking measure of future US interest rate volatility) is lower than it was on 93 per cent of these days. This restoration of macroeconomic stability should help set the stage for a period of sustained growth starting from 2024.
 

For the people directly affected by the macroeconomic adjustment, it has been hard, and I feel their pain. But this is how macroeconomic policy works. Supply and demand in the world were out of balance, and DM tightening has helped solve the problem. The reduction in demand through DM tightening does not take place uniformly: The pain is concentrated in some places. We now see saner prices in many important markets: Real estate, computer programmers, consultants, senior managers, and firm valuations.
 

For many of the previous years, many input prices were out of whack, the fundamental paying capacity of the customer was low, and a decent return on equity (ROE) was out of reach. Under these conditions, making a business plan work required a liberal dose of magical thinking in equity valuation. Everyone knew this could not last, which led to a jittery “take the money and run” behaviour. With all these price corrections, it is more feasible to make business plans where all the pieces coherently come together: The prices paid for these inputs, the ROE, and the valuation of the business.
 

Every bout of economic effervescence has its useful afterglow. In the wake of the Indian start-up frenzy, there is now a greater pervasive computer-engineering capability. There are more teenagers in India who know Google Flutter than anywhere else in the world. Business solutions that appeared exotic a decade ago (cloud-based dynamic sizing, API-based connections that cut across the boundaries of the firm, nice frontend UX that runs consistently in browser or phone, and statistical intelligence) are now routinely feasible for a broad range of companies in India. This is a good time for business building: Getting to world-class productivity with modest input prices in a way that makes decent operating-profit margins.

 The writer is a researcher at XKDR Forum