Year 2023: The beginning of the 'new normal' for the global economy

Every year is unique. Events, discoveries, new technologies, innovations, ideas, dominant personalities and trends in public opinion during the year change our lives, and the global economy. While such changes are continuous, the doses are generally small. Consequently, the impact of most years on the collective humanity is too small to distinctly identify, but some years change the course of the global economy for posterity. Since 2020 the world is going through such a phase, and we would be embracing the new economic normal in full force during 2023.
 
Glasnost, perestroika and the fall of the Berlin Wall symbolically ended the era of the Cold War in the late 1980s. This started rapid globalisation. The global financial crisis of 2008 slowed the process but did not reverse it. In 2022, political developments, including the start of the Russia-Ukraine war, emergence of Xi Jinping as the permanent supreme leader of China and the new level of polarisation of global powers towards the American and Chinese camps as also open hostility between the West and Russia, have started a new Cold War. This is likely to start a new era of protectionism, which would be intense from 2023 onwards at the expense of multilateral trade arrangements.

 
The year 2022 would also be known as one that made the transition from very low to high inflation. While in the early part of 2023, inflation in most countries would continue to be higher than what prevailed before the pandemic, several factors, including the high base effect, would bring it down during the latter part of the year. Monetary tightening is also likely to come to an end in most countries during the first half of the new year.
 

That said, in the new normal, the global economy has entered a phase where the average policy rate and inflation would be significantly higher than the averages during the last two decades. In that sense, parts of 2023 would be a brief interlude from the high inflation phase that started in 2022. The lagged effect of aggressive monetary tightening and high interest rates can bring the global economy close to a recession during the second half of 2023.

 
Many strategists believe that the Russia-Ukraine war would intensify during 2023. Western countries are initiating more stringent sanctions against Russia and this is inflicting considerable cost on the country. More importantly, there are severe collateral damages. The war most certainly will take Europe to recession in 2023. The best hope is that the phase would be short-lived. This can result in disorderly corrections, including in the financial markets during the second half of 2023.
 
The pandemic and its aftermath have affected numerous behavioural changes with large economic implications. Three issues merit mentioning. First, consumer spending is moving increasingly from goods to services. Although such a trend was visible for decades, the normalisation in the aftermath of the pandemic seems to have given a major boost to this trend. Starting 2023, we expect a renewed focus on reskilling the workforce.

 
 
 
Second, the pandemic has given a major boost to digitalisation in general and digitisation in the financial sector in particular. The industry 4.0, i.e., cyber-physical interface has got expedited. We expect these forces to gather further momentum during the next year.
 
Third, while in 2022 there has been a mass retreat from the work-from-home mode, many companies have embraced hybrid work culture. Several studies have indicated that the process simultaneously increases employee productivity, satisfaction and allows a better work-life balance. The proportion of gig workers is rising, and the trend is likely to intensify further in 2023.

 
In the last 25 years, India has made rapid economic progress. From being the 16th largest economy in 1996, it has turned into the fifth largest in 2021. The global ranking of Indian agriculture, industry, services, savings, investment, and private consumption each has moved up several notches in the last 25 years. However, India's ascent has not remained limited to the economic sphere alone. The country has made rapid progress in other areas as well including infrastructure development, external sector robustness, and human development including education, healthcare, hygiene, gender parity, and financial inclusion.
 
Being a low-middle-income country and home to 17 per cent of the global population while having just 2 per cent of the global landmass, containing the infection was a major challenge for India, and the country lived up to it. In 2021, the bounce-back of the Indian economy from the world’s most stringent and prolonged lockdown measures impressed many. Vaccine diplomacy in 2021 further accelerated India’s rise in global perception.

 
Simultaneously, with the fastest growth among major economies in most years since 2015, India has emerged as the brightest spot in an otherwise gloomy global economic scenario. The country assuming the presidency of G20 in late 2022 is symbolic in more ways than one. As a cover story in the Economist argued in 2022, India's moment has arrived. In 2023, India’s global ascent is likely to be more prominent.
 
  
The author is Founder and Chairman, Anand Rathi Group