As per latest survey by IMF, inflation appears to have peaked in 2022, consumer spending remains robust and the energy crisis post Russia-Ukraine war has been less severe than initially feared. Though global economy still faces major headwinds in 2023, global growth is now expected to fall from 3.4% in 2022 to 2.9% in 2023 (vs 2.7% projected earlier). The road to full recovery with sustainable growth and stable prices has just begun and the risks appear to be more tilted towards downside.
On the back of some improvements in macro-economic conditions globally, stock markets continued their upward momentum in the last few months, delivering one of best openings to a calendar year since beginning of 2020 wherein almost all the global markets were in positive territory with many of the key indices in US and Europe delivering a return between 7-15% since the start of 2023.
Urban consumption led by higher discretionary spending in services like Travel and Tourism, healthy investment activity with bank credit expanding by 16.7% upto Jan 2023, governments enhanced focus on infra spend resulting in healthy capacity utilisation of ~75% across industries and normal monsoon + better crop prices which should result in improving rural demand are some of the major drivers which should support healthy economic activity in 2023-24.
The U.S. economy and stock market continued to struggle in the quarter gone by. Economic uncertainty may have peaked in 1st half of 2022 but it still remains high. US stock markets continue to feel the weight of Federal Reserve policy tightening, shrinking market liquidity and slower economic growth and were down by ~25% as of Sept 2022, their worst performance since 2002.
The world’s 2nd largest economy is facing a series of headwinds including protracted COVID curbs, global recession risks impacting exports and a property downturn. The effects are yet to be seen as the government tries to revive economy and give support to the struggling property sector.
Inflation, which is the center point of concern has started to decline with October data showing lowest inflation figures since Jan 2022. This has resulted in hopes of Fed reducing its aggressive tightening policy as early as Dec when the odds for a 0.5% rate hike have increased significantly.
As per Reuters, growth seems to have likely slowed to 6% in 3rd quarter vs 13.5% in 2nd quarter. However, India still continues to be the fastest growing economy in the world.
The first half of 2022 was historically dismal for global stock markets and there is still some way to go before the storm blows over. Facing a multi-decade high in inflation, aggressive monetary policy tightening by the Federal Reserve and the effects of the Russia-Ukraine war, the US markets were down more than 20% as of June 2022. However, better than expected earnings season and cool-off in commodity prices, resulted in a sharp 10% upmove in July 2022.
Further, the recent lockdowns in China have resulted in economic activity slowing significantly but with reopening as well as monetary and fiscal easing with government announcing a slew of measures, economic growth should slowly pick up pace.
At the beginning of the year, it was unclear how far inflation would surge and how aggressively would central banks respond. However, all these issues are well understood by the markets now. This along with sharp fall in stock markets globally provide some reassurance that markets have accounted for the bad news so far and could recover (as can be seen from the recent upmove) if inflation and growth turn out better than feared earlier.
Notwithstanding the impact of 3rd wave of COVID and high inflation impacting private consumption, we expect India to remain the fastest growing economy in the world (even as major economies brace for slowdown/recession) and grow at 7.5% in FY23.
Over the last 2 years, markets have been kind to investors globally mainly led by loose monetary policy. With worries cropping up on multiple fronts, there has been a reset in investors sentiments and liquidity. Some of the reasons for sharp fall in the last couple of months are as follows:-
1) Very high inflation leading to monetary tightening (US reported inflation of 8.4% in May 2022); 2) Oil prices have risen sharply on growing geopolitical tensions (~$120 per barrel); 3) No easing in Russia-Ukraine conflict; 4) COVID related lockdown in China worsening supply chain issues.
Indian Stock Markets
The Indian stock markets following the global cues have been in correction phase since start of 2022 on the back of continuous FII selling (continued for 8th consecutive month). Also, a bit of surprise of rate hike by RBI well before the next scheduled MPC meeting also impacted the market sentiment over concern of high inflation. However, we seem to have fared far better with 7-8% drawdown from highs vs all other major markets correcting more than 10%.
However, the same is not true for a lot of mid and small-caps companies which have fallen significantly (more than 25%) from highs. Another
The global economy enters 2022 in a weaker position than previously expected. As the new Omicron COVID-19 variant spreads, countries have reimposed mobility restrictions. Rising energy prices and supply disruptions have resulted in higher and more broad-based inflation than anticipated. Further, the ongoing retrenchment of China’s real estate sector and slower-than-expected recovery of private consumption should result in growth moderation from 5.9% in 2021 to 4.4% in 2022.
Additionally, there are several risks that are at the forefront of investors minds which has resulted in sharp correction over the last few months 1) Global bond yields have hardened on inflation concerns; 2) Oil prices have risen sharply on growing geopolitical tensions; 3) Escalation in Russia-Ukraine conflict; 4) Domestic inflation is proving sticky and may have upside risks and 5) Expensive valuations across sectors and stocks.
Notwithstanding a highly transmissible third wave driven by the Omicron variant of COVID-19, Indian economy is expected to grow at 9.2% for 2021-22 (highest amongst all large economies), slightly above the GDP level of 2019-20. Additionally, the growth-oriented focus of government, continuity in policy/strategic direction of economy and stability in taxation were the key positives of Budget-2022.