Is the world economy heading for a recession?

The last time the sell-out star alignment happened was in early 1981, when Paul Volcker’s Fed broke inflation and stagflation in an outright recession‘ says Joshi.

Defining a global recession is not an easy task. For individual countries, some economists define a “technical recession” as two consecutive quarters of gross domestic product contraction. The Financial Times prefers a more flexible definition, as does the US, where the National Bureau of Economic Research defines a recession as “a significant decline in economic activity spread across the economy and lasting more than a few months.”

On a global scale, definitions become even more difficult. The IMF and World Bank prefer to characterize a global recession as a year in which the average global citizen experiences a drop in real income. They mark 1975, 1982, 1991, 2009 and 2020 as the dates of the previous five global recessions.

While official global growth forecasts for 2022 still seem far removed from this definition – in April the IMF projected annual growth of 3.6 percent this year – this figure refers both to the recovery in the second half of the year. 2021 as on expectations for 2022. Looking at expected growth in 2022, the fund has already lowered its forecast from 4.5 percent in October last year to 2.5 percent in April.

A delivery man hands over an order over a fence during a lockdown in Shanghai. Bloomberg

Brooks thinks the news since the publication of this forecast has been bad enough to lower the growth forecast to just 0.5 percent by 2022, less than expected population growth. “Setting up global recession risk is top-of-mind for markets, which has important implications for investor psychology,” Brooks says.

China is the major economy most economists worry about, and new data last week has fueled concerns about the outlook. Accounting for 19 percent of total world production, China is now so big that when it gets COVID-19, the rest of the world can’t ignore the painmainly because of the impact on global supply chains and demand for goods and services from other countries.

Serious tensions are visible. As lockdowns ripple through the country, ships are queuing outside Chinese ports and the country’s manufacturing and retail sectors are beginning to shrink. Retail sales fell 11 percent year-on-year in April, while industrial production fell 3 percent. Home sales in China also fell more last month than at the start of 2020, when the economy turned, despite the People’s Bank of China easing monetary policy to encourage borrowing and spending. Unemployment is rising.

Kevin Xie, senior Asia economist at the Commonwealth Bank of Australia, said China’s economic data continued to be disappointing in April. While the outlook depends to a large extent on the spread of COVID-19, he adds: “falling employment and weakened corporate and household confidence will curb spending and bode poorly for the growth outlook”.

In the US, the other global economic powerhouse, the economy is suffering from the legacy of the pandemic and, in particular, excessive fiscal stimulus that has arguably overheated the economy and generated high inflation, even with modest increases in energy prices. In addition to a very tight labor market, the Fed has been forced to admit a mistake and has now resolutely entered a phase of tightening monetary policy to slow growth and curb inflation.

A Russian soldier guards a destroyed steel factory in the Ukrainian port city of Mariupol. AP

Fed Chairman Jay Powell was crystal clear last week that the central bank would continue to raise interest rates until it saw “clear and convincing” evidence that inflation was returning to its 2 percent target. He was not concerned about the unemployment rate rising “a few taps” from its current low of 3.6 percent.

Powell added that he was aiming for a soft landing for the economy, but many in the financial markets think that is difficult to achieve. Krishna Guha, vice president of Evercore ISI, warns that there is a much greater risk than usual that the harsh talk of officials, economists and market participants will become a self-fulfilling prophecy and cause a downturn.

“Saying a soft landing is possible doesn’t mean it’s inevitable or even particularly likely,” Guha says. While he doesn’t predict a recession in the US, Guha says, “Getting inflation under control without a recession and a big rise in unemployment. † † will be a challenge.”

‘No growth’

On the other side of the Atlantic, Europe’s equally difficult problem is different. Aside from the UK, inflation stems almost everywhere from higher energy prices, not from an overheated economy, and is directly traceable to the Russian invasion of Ukraine.

Unfortunately for the EU, understanding the cause of Europe’s misery does not diminish its consequences. With inflation of 7.4 percent in April, prices in the eurozone are rising much faster than citizens’ incomes, putting pressure on living standards and limiting spending and the recovery from the pandemic. New forecasts from the European Commission this week were scaled back sharply and implied stagnation in the second quarter of 2022.

The commission expects the economy to survive this difficult period and return to reasonable growth of about half a percent per quarter by the summer, but many private sector economists believe the blow to incomes will have longer lasting effects.

Christian Schulz, an economist at Citi, says the official forecasts seem too optimistic and it is more likely that there will be “virtually no growth for the rest of the year.”

If Europe is having a hard time adapting to much higher energy prices, poorer countries will have the even harder task of coping with the rapid rise in food prices, which account for more than 30% of spending in emerging economies.

With the closure of the Black Sea ports used by Ukraine for grain exports, fears of a food crisis are mounting later this year. UN Secretary-General António Guterres said on Wednesday that the conflict in Ukraine, on top of existing pressures on food prices, threatens to plunge tens of millions of people over the edge into food insecurity, followed by malnutrition, mass starvation and famine.”

While experiencing its own domestic political and economic crises, Sri Lanka embodies the tough choices faced by many of the world’s poorest countries when it decided this week to default on its foreign debt for the first time. This, it said, was needed to use its hard currency to import fuel, food and medicine.

India, meanwhile, exacerbated problems in other emerging economies by abandoning a pledge not to ban grain exports this week. Wheat prices have risen again and are up more than 60 percent this year.

Refine comments

Of course, as recession risk mounts, the best news for the global economy would be a Russian withdrawal from Ukraine and an end to the zero-COVID strategy in China. This is not the gift of economic ministers and officials, so instead they will have to re-fine their response to the difficult situations they face.

In Europe and emerging economies, this means mitigating the impact of higher food and energy prices – increasing benefits and subsidizing food and energy in countries with sufficiently strong public finances. The US and UK could accelerate the monetary policy tightening cycle, while China will try to mitigate the negative effects of the ommicron wave.

The majority of economists believe that defenses against the global recession will still win in 2022. But economists are increasingly hedging their bets against relentlessly bad news.

Innes McFee, chief economist at Oxford Economics, says there is no doubt that global economic expansion is close to a peak, that it is slowing and policymakers will have to figure out how much tightening is needed. But, he says, a recession is unlikely for now, as policymakers still have the tools to pull back and boost if things get worse.

“The risk of a recession is rising into next year, but right now they’re not that high,” McFee says.

Financial times

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