Is the global economy headed for recession?

“The last time the ‘sell it all out’ star alignment happened was in early 1981, when Paul Volcker’s Fed broke its back on inflation and turned stagflation into an outright recession“, says Joshi.

Defining a global recession is not an easy task. For each country, some economists define a “technical recession” as two consecutive quarters of contraction in gross domestic product. The Financial Times prefers a looser definition, as does the United States, where the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that extends throughout the economy and lasts longer 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 decline in real income. They highlight 1975, 1982, 1991, 2009 and 2020 as the dates of the five previous global recessions.

While official global growth forecasts for 2022 still seem a long way from this definition – in April, the IMF predicted annual growth of 3.6% this year – this figure is as much about the recovery in the second half of 2021 as it is about expectations for 2022. When the fund reviews the growth it expects in 2022, it has already cut its forecast from 4.5% in October last year to 2.5% in April.

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

Brooks believes the news since that forecast was released has been bad enough to lower the growth projection to just 0.5% in 2022, less than the projected population increase. “Global recession risk is a priority for markets, which has significant implications for investor psychology,” Brooks said.

China is the big economy that worries most economists, and last week new data heightened concerns about its outlook. Representing 19% of total world production, China is now so big that when it catches COVID-19, the rest of the world cannot ignore its painnot least because of its impact on global supply chains and its demand for goods and services from other countries.

Severe tensions arise. With lockdowns spreading across the country, ships are queuing outside Chinese ports and the country’s manufacturing and retail sectors have begun to contract. Retail sales fell 11% year-on-year in April, while industrial production fell 3%. Home sales in China also fell more last month than at the start of 2020, when its economy turned around, despite the People’s Bank of China easing monetary policy to encourage borrowing and spending. Unemployment increases.

Kevin Xie, senior economist for Asia at the Commonwealth Bank of Australia, said economic data from China in April was consistently disappointing. Although the outlook depends crucially on the spread of COVID-19, he adds, “decline in employment and weaker business and household confidence will dampen spending and bode poorly for the outlook for the economy.” growth”.

In the United States, the world’s other economic power, the economy is suffering from the legacy of the pandemic and, in particular, from excessive fiscal stimulus which has arguably overheated the economy and generated high inflation even with modest increases in energy prices. Along with a very tight labor market, the Fed was forced to concede a mistake and has now moved decisively into a phase of monetary policy tightening to slow growth and lower inflation.

A Russian soldier guards a destroyed steel mill in the Ukrainian port city of Mariupol. PA

Fed Chairman Jay Powell was very clear last week that the central bank would continue to raise interest rates until it sees “clear and convincing” evidence that inflation returned to the 2% target. He was not worried about unemployment rising “a few ticks” from the current low of 3.6%.

Powell added that he was aiming for a soft landing for the economy, but many in financial markets believe that could be difficult to achieve. Krishna Guha, vice president of Evercore ISI, warns that there is a much higher than normal risk that harsh rhetoric from officials, economists and market participants will become a self-fulfilling prophecy and generate a downturn.

“Saying a soft landing is possible doesn’t mean it’s inevitable or even particularly likely,” Guha says. Although he does not predict a recession in the United States, says Guha, “by controlling inflation without recession or a sharp increase in unemployment. . . will be difficult”.

‘No growth’

On the other side of the Atlantic, the equally difficult problem of Europe is different. With the exception of the UK, inflation is almost universally the result of rising energy prices rather than an overheated economy and can be directly attributed to Russia’s invasion of Ukraine.

Unfortunately for the EU, understanding the cause of Europe’s woes does not lessen its consequences. With inflation at 7.4% in April, prices in the euro zone are rising much faster than the incomes of its citizens, dealing a blow to living standards that will limit spending and recovery from the pandemic. New forecasts from the European Commission this week have been revised sharply downwards and implied stagnation in the second quarter of 2022.

The commission expects the economy to overcome this difficult period and return to reasonable growth of around 0.5% per quarter by the summer, but many private sector economists believe that the impact on income will have more lasting effects.

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

If Europe’s difficulty is to adapt to much higher energy prices, the poorest countries have the even more difficult task of coping with rapidly rising food prices, which represent more 30% of spending in emerging economies.

With the closure of Black Sea ports that Ukraine uses to export grain, fears of a food crisis later this year are growing. António Guterres, UN secretary-general, said on Wednesday that the conflict in Ukraine, which adds to existing pressures on food prices, “threatens to push tens of millions of people into food insecurity malnutrition, mass hunger and starvation”.

Though it has its own domestic political and economic crises, Sri Lanka epitomizes the tough choices facing many of the world’s poorest countries when it decided this week to default on its external debt for the first time. . This, he said, was necessary to use its hard currency to import fuel, food and medicine.

India, meanwhile, has escalated problems in other emerging economies by reneging on its pledge not to ban grain exports this week. Wheat prices have risen again and are up more than 60% this year.

Refine answers

Naturally, as recession risks rise, 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 in the gift of ministers and those responsible for the economy, so they will again have to fine-tune their response to the difficult situations they face.

In Europe and emerging economies, this will mean mitigating the consequences of rising food and energy prices, by increasing benefits and subsidizing food and energy in countries whose public finances are strong enough. The US and UK could accelerate the monetary policy tightening cycle, while China will seek to limit the negative effects of the omicron wave.

The majority view among economists is that global recession defense will win again in 2022. But economists are increasingly hedging their bets in the face of relentless bad news.

Innes McFee, chief global economist at Oxford Economics, says there is no doubt that the global economic expansion is nearing a peak, is slowing and policymakers will need to determine how much tightening is needed. But, he says, a recession is unlikely just now because policymakers still have the tools to back off and boost if things get worse.

“The risks of recession are increasing next year, but they’re not that high right now,” McFee says.

FinancialTimes

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