Are We Heading for a Global Recession?

This disturbing question is being seriously discussed by experts. World Economic Forum (WEF) 2022 discussed the issue. Kristalina Georgieva, Managing Director, IMF, mentioned that the “horizon has darkened”; she felt concerned about food price shocks and how anxiety around the world over accessing affordable food was “hitting the roof”. 

The forum has also focused on extremely high uncertainty about geopolitical developments, the trajectory of global economy and the next steps for an economic policy.

The post-COVID-19 recovery of global economy has been upset by the continuing Russian attack on Ukraine, its associated geopolitical repercussions, snowballing impact of the sanctions, withdrawal of big business from Russia, new lockdowns in China and some other countries, etc. Combined effect of all the above, along with country-specific problems may sure topple the apple cart.

Forecasts by the World Economic Outlook April 2022, IMF has projected that world output growth rate to be reduced sharply from 6.1% in 2021 to 3.6% in 2022 and 2023. GDP growth rate for USA was 5.7% in 2021, a low 3.7% projected for 2022, and a disturbingly lower 2.3% in 2023.

These numbers for EU area are even lower: 5.3% in 2021, 2.8 in 2022 and 2,3% in 2023. Russia’s growth rates have been projected to decline from 4.7% in 2021 to a negative 8.5% in 2022 largely due to the severe impact of  the huge sanctions imposed by the USA, EU countries and the UK; however, its growth rate could somewhat improve to a negative 2.3% in 2023.

China grew at 8.1% in 2021, but its growth rate could almost be halved at 4.4% in 2022. In 2023, it is likely to grow at 5.1%.

Interestingly, the country to grow at the highest rate is India: 8.9% in 2021, 8.2% in 2022 and 6.9% in 2023.

These projected number are likely to be revised downwards as we go along.

The IMF outlook has pointed out that the war in Ukraine has triggered ‘a costly humanitarian crisis that demand a peaceful resolution’. Economic damages of the war are likely to contribute to a significant slowdown in 2023. Ukraine is expected to experience a double-digit drop in GDP.

The world economy has been experiencing big shock because of the long- drawn war in Ukraine, massive contraction of the Russian economy caused by sanctions, sharp fall in energy imports by EU from Russia, and the associated impact of all the above. The commodity markets, trade and financial market are likely to show a downward trend. Fuel and food prices are already high globally. There already is supply disruption, leading to high inflation.

Major central banks have raised interest rates for tightening monetary policy and “hawkish future stances.” Both the corporates and households are hard hit as investment and consumption are on the downside. Poor people have become vulnerable all over the world.

Annual inflation rate in the USA was a high 8.5% in March this year* as against 4.1% last year; it has slightly fallen to 8.3% in April 2022. Food prices jumped to 9.4%, the most since April 1981!

No one is sure yet whether inflation rate has already peaked in the USA or not. The rate of inflation is far above the Fed’s target rate of 2%. It is going to take a long time to cool down as food and energy prices would remain high for quite some time along with supply disruptions. This means Fed is likely to continue with its tight money policy for the time being. This in turn will mean slower growth.

In case of India, WPI has moved to a high 15.1%, while CPI has recorded 7.8% in April 2022. CPI is projected to peak at 8.7% by the fourth quarter of the fiscal year. Unemployment rate also has been running high at 8%.

India’s RBI has been managing the monetary policy in its traditional classical manner to contain inflation. Government also has announced certain measures for increasing supply. 

Eric Rosenbaum in Small Business Play Book says that on the ‘Main Street’ eight out of ten small businessmen are convinced that the US economy will enter a recession this year.

Jerome Powell, Fed Chair, recently stated diplomatically: “The question whether we can execute a soft landing or not--- it may actually depend on factors that we don’t control.” He further said: “There are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so.” (-- US News, AP, May 24 2022.)

In a way, he acknowledged that high inflation and economic weakness overseas could thwart his efforts to avoid causing a recession.  

To conclude, perhaps it would be sensible to keep our strategy ready for the worst-case scenario, i.e., the global recession; at the same time, let’s get going with our action plan to handle the sharp global slowdown, which has already started happening.

________________

*Incidentally, some experts used to make erudite comments on the pages of a leading weekly news magazine some decades ago that ‘Inflation is Dead.” They may have to eat their words now.

Jiban Mukhopadhyay

Mumbai

June 02, 2022