2022 In One Word: War
Arguably, the Year 2022 kicked off on an optimistic note as the pain and wounds caused by the COVID-19 pandemic, billed as the crisis of our lifetime, were waning and healing. The new found optimism about a post-COVID world was written all over in the commentaries in newspapers and talk-shows aired on satellite television channels across geographies.
One phrase that resonated and dominated the medias cape cutting across linguistic barriers that time of the year was the recurring reference to 'the new normal’, though the phrase remained ambiguous giving enough bandwidth for the self-styled experts and talking heads to tweak it according to their imaginations. However, it needs to be added that whatever the gentlemen or the ladies meant by it, the new normal', narrative was woven around the feel good’ factor, that fueled hope about a better world year ahead.
Hardly a month or two into 2022, the world discovered with much to its discomfort that the post COVID new normal’ was going to be chaotic and a very, very painful one. The tipping point was the Russian invasion of neighboring Ukraine in February which was much speculated by Western media for months.
Overnight the conversation around the new normal’ changed to a gloomy commentary; this time based on real world realities rather than self-fulfilling prophecies or wishful predictions. Besides the humanitarian crisis of this century, the immediate fallout of the Russian aggression was Western sanctions on Russia that disrupted global supply chains, gravely sending prices of everything - from food to fertilizer to crude oil to cooking oil - to the stratosphere.
This has prompted global agencies like the United Nations (UN) to flag an impending cost-of-living crisis more to be felt by the children of a lesser god living across continents irrespective of their color, religion, ethnicity or any other conceivable identity. The scourge of inflation or skyrocketing prices of essentials pushed millions more to poverty overnight. A report by the United Nations International Children's Emergency Fund. (Unicef) found that: Russia 's invasion of Ukraine and rising inflation have pushed some four million (40 lakh) children into poverty across Eastern Europe and Central Asia. The UN agency has left the incidence of rising misery among children in other parts of the world to imagination.
Another report by the United Nations Development Program (UNDP) gives a bigger picture. It found that a jaw dropping 71 million (7.1 crore) people - which translates into roughly 9% of the global population - around the world were in penury as a result of soaring prices following Russia 's invasion of Ukraine.
The International Monetary Fund (IMF) in its October edition of World Economic Outlook had this to say. “Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the (global economic) outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis (2007-2009) and at the peak phase of the COVID-19 pandemic (2019-2021).
It goes on to add: “Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy.”
Indeed, major central banks did stay their course’ in their policy response by declaring a no holds barred war on inflation. In other words, the return of sky-high prices of essentials triggered another war of a different kind which is adding to the growing misery for millions of people world over.& nbsp; What followed was the archetypal play of textbook economics with the US Federal Reserve (Fed) leading the charge closely followed by others including the Reserve Bank of India (RBI).
In no time central banks of advanced economies made a pivot to what is called a hawkish stance’ ditching their decades long easy money policy and sub-zero lending rates. In plain English this means that they stopped printing money in the pretext of financing economic growth overnight and, at the same time, started hiking interest rates at a never ever heard pace. Withdrawal of monetary accommodation and sucking out of excess money from the system also known as quantitative tightening or QT was a natural corollary. Needless to say, this volte-face from what is called quantitative easing or QE to QT in a span of months have roiled emerging market economies like India as these dollar dependent nations had their import bills bloating to uncomfortable levels.
In November alone, the central banks of the Group of Ten (G-10) nations had cumulatively delivered an interest rate increase of 350 basis points (bps) or 3.5 percent (1 bps is 1/100 th of a percentage point.). These include the US Fed, the Bank of England, the Reserve Bank of Australia, Norway's Norges Bank, Sweden's Riksbank and the Reserve Bank of New Zealand.
The European Central Bank, the Bank of Canada, the Swiss National Bank too followed suit in their respective meetings in December while Bank of Japan (BoJ) and The People's Bank of China (PoBC) remained as outliers. Back home, the rate setting committee of the RBI hiked benchmark lending rate - also known as repo rate or rate at which RBI lends money to banks and institutions in overnight market - by a cumulative 185 bps or 1.85%, from 4.40 in May to 6.25 percent in December.
This strategy seems to be working, at least for the time being, as price pressures started easing across major economies. The US inflation has fallen back-to-back for straight five months till November. The consumer price index (CPI) that tracks changes in essentials or daily consumables registered a fifth-straight monthly decline in November to 7.3%, its lowest reading since December 2021 and a significant decline from this year’s peak rate of 9.1% in June. Similarly, consumer prices in the Eurozone area moderated in November to 10 percent, down from 10.6 percent a month earlier, the first decline in 18 months. In the UK also cooling prices were visible with the CPI print showing a reading of 10.7% in November, down from 11.1%.
The Indian story was no different with key gauges that track prices at retail and wholesale ends falling back to the comfort zone (4% +/- 2%) of RBI in November. While the CPI that tracks retail prices fell to an 11-month low of 5.88 percent in November from 6.77 percent in October, WPI that tracks prices at the whole sale eased to a 21- month low of 5.85 percent in November from 8.39 percent in October.
However, the net effect of these wars with no ends in sight so far come with a cost with people at large paying a heavy price. The immediate fallout of these twin shocks is a slowing global economy. For the ordinary folks, a contraction in economic growth at this point of a time is the last thing they wanted because it means fewer jobs and lesser income while prices are still higher, landing them in a rock and a hard space situation.
To say the least, an insolent Putin’s war in Ukraine and the tunnel view of the central banks, especially of the advanced economies, in fighting higher price levels, are pushing the world towards the brink The worsening global situation has prompted many to call for an end of war in Ukraine and a course correction in major central banks aggressive stance. The United Nations Commission on Trade and Development (UNCTAD) in its latest Trade and Development Report,2022 said: “The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary (authorities) and fiscal tightening in advanced economies”.
Surprisingly, a la the recalcitrant Russia, monetary authorities of major economies seem to be unmindful of the rising risks their policies are posing for global economic recovery. Instead of taking a break to see how the economic situation is evolving, they are on the same page when it comes to future interest rate hikes. While some warn that the `worst is yet to come’ others say they are far from done with interest rate hikes even that means sacrificing economic growth, a mindset that defies common sense.
Indeed, saner minds may desist from making any predictions about the outcomes of these ongoing wars - one by Russia and the other by central bankers – the plight of the people caught in the thick of these wars are on the rise. While Russia is said to have won some battles only to lose some in Ukraine, monetary authorities steadfastly hold their ground saying that they are far from winning their war against inflation though, as data suggest, the pace of rise in price levels has slowed significantly of late.
There is also a growing concern that both Russian President Vladimir Putin and advanced economy central bankers are riding a tiger, a situation from which they may find it difficult to get out before the collateral damage is done. However, what is clear to the knowing minds and discerning eyes is the fact that life is going to be much harder for millions of people and a large chunk of the global population will have to bear the brunt of these ill-conceived actions for a longer time.
In sum, if you take a deep dive into the events that unfolded through the year that has gone by, 2022 will undoubtedly go down in the annals of modern history as the year of wars. And if the Russian invasion of Ukraine in February was the cause for a world divided by internecine strife, trigger happy central banks digging in their heels for a protracted war against persistent high inflation spinning a cost-of-living crisis world over is its lingering consequence. Since the belligerents are in no mood to step back and take stock of their actions, millions who are the victims of these wars could only add the legend of John Lennon to their daily prayers – “Give Peace a Chance”. May Putin and Powel(s) of financial firmament listen please
Any year end review of major events that shook the world in 2022 will go incomplete if it fails to mention three other unrelated episodes, at least fleetingly.
When Unicorns Come to Earth…
The first is the so-called `unicorns’ or start-ups with over $ 1 billion in valuation coming to earth after a gravity defying growth in 2021 thanks to what is fashionably called a funding winter. Funding winter refers to a period of correction in the private market when capital inflow tapers off lowering the probability of startups getting higher valuations till they start making profits. This spells bad news for companies that focus on customer acquisition instead of profitability with no clear business model. And how they reach there is anybody’s guess.
… Cryptos Crash & Spacs Bites Dust
The other two events that are worth a recap are the spectacular collapse of crypto currencies and the debacle of Spac’s or Special Purpose Acquisition Vehicles, also known as blank cheque companies including the one famously sponsored by Donald Trump, the former US President and election denier. The collapse of FTX run by the former poster boy of private digital currency Bankman-Fried literally fried the industry’s future.