Are We Heading To A Global Economy Recession?

Are We Heading To A Global Economy Recession?

It’s right to ask if the world is heading to economic recession, given that 2021 witnessed some significant outbreaks, events, and policies that threatened the world economy.

Since the turn of 2022, some factors have even increased the likelihood of a global recession.

Stay tuned to see why you may witness a global recession sooner than later.

Here are why you may see a global economy recession in 2023:

  • Strict Covid-19 lockdowns are hampering China’s growth prospects as it aims to contain the Omicron outbreak.
  • The US Federal Reserve is risking turning the American boom into a bust.
  • Europeans are enduring and witnessing a cost of living crisis.
  • Food crises and famines are threatening emerging markets.

These four major factors are threatening the world economy as it recovers from the Covid-19 pandemic.

The world is currently in a global recession scare. Many financial markets are in fright. The world index of equities fell by 1.5% over the past week, by 5% in May, and more than 18% since its peak in January.

Apart from the scorching time for stocks, sell-offs have been seen in bonds, gold, crypto assets, and industrial metals.

The last time everything sold off was in 1981 when the Fed of Paul Volcker broke inflation back and turned stagflation into an outright recession.

Presently, there’s mounting global recession risk on markets, and it’s having significant repercussions on investor psychology.

Should we expect a global recession?

Starting with China, analysts are worried about the country over the past week as new data reinforce concerns about its prospects.

China accounts for 19% of the global total output. It’s so important that the rest of the world was affected by its covid-19 imbroglio. The Asian giant also has a big impact on world supply chains.

Some parts of China are on lockdown as severe strains spread. Ships are queueing outside Chinese ports while the nation’s production and retail sectors are contracting.

In April 2022, retail sales went down to 11% year on year and industrial production fell by 3%. Also, the country’s home sales reduced more in April than in early 2020 at the time the nation’s economy went into reverse. In addition, the unemployment rate has increased.

Confirming this, the senior Asia economist, Kevin Xie, expressed that the economic data of China in April was disappointing. 

The economist added, “Falling employment and weakened confidence among business and households will curb spending and bode poorly for the growth outlook”.

For the US, its economy suffers from the covid-19 pandemic’s legacy and excessive fiscal stimulus that ran the economy too hot which generated high inflation with average energy cost rises.

With a tight labor market, the US Fed is forced to concede an error, and it has moved to tighten monetary policy to reduce growth and cut inflation.

Jay Powell, the Fed chair, made it clear that the central bank will always raise the interest rates until it sees convincing evidence that inflation returns to 2%.

Powell doesn’t care about unemployment rising “a few ticks” from the present low level of 3.6%.

The Fed chair said he’s aiming for an economic soft landing. However, many analysts believe achieving a soft landing may be hard, especially during this period.

Specifically, Krishna Guha, vice-chair of Evercore ISI, disclosed there’s a higher than normal risk. And that the recession talk from analysts, officials, and market participants might come to fruition.

The raising of interest rates by 0.75% by the Federal Reserve, uncertainty from the covid-19 pandemic, and the Ukraine-Russia conflict are all adding to the recession risk in the US.

In Europe, the recession signs are gaining ground. Bar the UK, inflation is showing its signs via higher energy prices. This can be traced to the Ukraine-Russia war.

With the April 7.4% inflation rate, eurozone prices are increasing quicker than its populace’s incomes, affecting the living standards that would restrict spending and pandemic recovery.

This week’s European Commission fresh forecast was scaled back sharply, implying stagnation in the 2022 second quarter.

The European Commission is expecting the economy to move past this hard time and go back to considerable growth of  half% per quarter by Summer.

However, several private-sector analysts believe the effect, especially on incomes, would have long impacts.

The Citi economist, Christian Schulz, thinks that the official forecasts are too optimistic. And there would likely be “virtually no growth for the rest of the year.”

As Europe found it hard to adjust to higher energy prices, emerging and poorer nations have a more difficult task of handling quick increases in food prices, which account for over 30% of expenditure.

What’s more, the Black Sea ports that Ukraine utilizes to export grains are currently shut, creating a fear of a food crisis later in the year, evidently witnessed in Egypt.

António Guterres, UN secretary-general, has on different occasions emphasized the food crisis the war is creating. 

He said on Wednesday that the war comes at the back of existing high food prices. For him, “The conflict threatens to tip tens of millions of people over the edge into food insecurity followed by malnutrition, mass hunger, and famine.”

With its domestic economic and political crises, Sri Lanka exemplifies a needing country when it defaulted on its foreign debt for the first time this week. 

According to the country, it’s important to use its hard currency to import food, fuel, and medicine.

In the meantime, India has intensified the issues in other emerging countries by no longer banning grain export this week as wheat prices climbed again, up more than 60% this year.

How can the global recession risk be curtailed?

As recession risks increase, a good measure is for Putin and Russia to withdraw from Ukraine. And to see an end to China’s zero-Covid strategy while creating a concrete response to hard situations emerging and developing countries face.

For Europe and emerging economies, it’s about eliminating the effects of higher energy and food prices, increasing benefits, and subsidizing energy and food in economies with strong public finances.

The UK and US can facilitate and tighten their cycle of monetary policies. At the same time, China should aspire to restrict the negative impacts of the Omicron coronavirus wave.

While many economists think that a good defense against global recession is still possible in 2022, others believe that a global recession is coming.

And with the above factors it’s showing that we may witness a global economic recession.

Recession risk may show its face by 2023. No wonder Mark Zandi, chief economist at Moody’s Analytics, said, “Recession risks are high, uncomfortably high, and rising.” 

Time will tell! 

Image by Oleg Gamulinski from Pixabay