Macrovariable projections in uncertain times


The US Fed has raised its benchmark interest rate again by 0.75%. Reserve Bank of India (RBI) has also been forced to raise interest rates. The macroeconomic variables of India and the world are not only currently unstable, but are also difficult to predict.

Macro-variables in Economics :

Macroeconomic variables are indicators or main signposts signaling the current trends in the economy and overall economic health.

Some major macroeconomic variables are (measures of) Balance of Payments, Inflation, Economic Growth and Unemployment.

Factors for global uncertainty in macro variable predictions :

1. Stagflation and disease

  • Since early 2020, the SARS-COV-2 virus has caused global uncertainty. Waves of COVID-19 have curtailed human activity with a consequent loss of production. Different countries have implemented lockdowns of varying severity leading to supply bottlenecks.
  • In a globalised interdependent world, production was hit resulting in price rise (inflation) and loss of real incomes. This has resulted in decline in demand and, in a vicious cycle, a further slowing down of the economy.
  • Predicting these declines has been difficult because forecasting when another wave would strike and how much disruption would occur has been difficult. As prices have risen globally and economies slowed down, many countries have faced stagflation.
  • The uncertainty due to the novel coronavirus has declined in spite of waves of attack persisting because the impact of new virus mutants of the virus is milder and there is also immunity due to vaccination. Countries are not implementing lockdowns so vigorously now, in turn reducing adverse economic impact.

The Chinese exception:

However, China is an exception with its zero-COVID policy. It has been implementing strict lockdowns in the last six months, even when only a few cases of the disease have been detected. Since China is now the manufacturing hub of the world, any disruption impacts supplies globally and causes bottlenecks to persist.

Spread of other zoonotic:

Monkeypox virus has suddenly spread rapidly in the last few months to more than 80 countries where it is not endemic. The World Health Organization (WHO) has declared it Public Health Emergency of International Concern (PHEIC). It has added to the uncertainty.

2. The Ukraine conflict

  • The war in Ukraine and western sanctions on Russia have caused huge uncertainty since February 2022 and displaced the disease-related uncertainty. The sanctions against Russia are being used to weaken it economically.
  • The war and the sanctions have already affected the world economy. The U.S. economy has entered technical recession with two quarters of GDP decline. Sri Lanka has been devastated and many other developing economies such as Pakistan and Nepal are in trouble. As supplies of critical items supplied by Russia and Ukraine have been hit, prices have soared. Europe, USA and India have experienced or are experiencing high inflation.
  • The biggest disruption is in energy supplies from Russia, impacting production. The availability of food, fertilizers, metals, etc., have been hit as Ukraine and Russia are important sources.

A new Cold War:

  • A new Cold War between two big blocs has started, i.e., Russia and China on the one hand and the western nations led by NATO on the other. To weaken Russia, sanctions may be imposed on countries that carry out trade with it. Many Indian entities may face the heat since India has increased its imports from Russia, which undermines sanctions. China may also face sanctions since it has increased trade with Russia and is backing it.

3. Data-related worries

  • Indian policymakers also face data-related issues. It is not only available with a big lag on most macroeconomic variables but for many variables, data are either not available or has huge errors.
  • Policymakers rely on high frequency data to proxy for actual data. For example, very little data is available for quarterly GDP data which is used to calculate the growth rate of the economy.
    • Except for agriculture, unorganised sector data is not available.
    • For the organised sector, very limited data are available.
    • Projections from the previous year or proxies are used — both these introduce errors when there are repeated shocks to the economy, such as the pandemic and now the war.

Price data:

Prices of many services have risen and expenditures on them have increased dramatically, thus changing their weight in the consumption basket. For instance, health and education expenditures went up during the pandemic. Also, the impact of the black economy has not been factored in.

Consumer price index (CPI):

Further, the CPI is common for the upper classes and the poor. The former consume a small proportion of their income, so they hardly feel the pinch of inflation. The poor consume almost their entire income and have no cushion to increase expenditures commensurate with price rise. Thus, they have to reduce their consumption. Earlier, there was a different index for various categories of people, which reflected the differential impact of inflation on people. This gave a truer picture of the economy and peoples’ distress.

Unorganised sector data:

  • The unorganised sector, which employs 94% of the workforce, has been hit hard by a decline in incomes and a rise in prices in the last few years. It does not have the bargaining power to get its wages increased as prices rise and, therefore, loses purchasing power. The data does not reflect this and the unorganised sector becomes ‘invisibilised’.
  • Policymakers using such faulty data end up making wrong projections (as has happened in recent times) when they predicted an economic turnaround and lower inflation. Even faulty official data does not bear this out.

Conclusion :

Global factors of uncertainty makes projections of macro variables etc more difficult. We need better statistical and economic models to understand and predict the future growth of global economy.


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