Home ›› 09 Oct 2022 ›› Editorial
The global economy may come under the grip of a recessionary syndrome in 2023. The World Economic Forum, the Switzerland-based international think tank in a report published in September 2022 expressed this concern. The objective assessment based on a survey on a few fundamental criteria such as the decline in the average growth of GDP, the increase in poverty, the increase in the cost of living, and the stark employment prospect predicts that the global economy may be heading towards recession though the report project a fair picture on the growth of South Asian economies. Divided into six chapters such as bleak outlook, the cost of living, deterioration of debt dynamic, deepening of global fragmentation, and looking ahead; the report provides a lively profile of major structural problems. The issues in the deepening of global fragmentation such as the effect of the heightened geopolitical risk on economic activity, corporate decision making, and global financial markets could propel the global economy into deep recession without any reversal. The current dubious relationship could significantly exacerbate geopolitical tensions and as a consequence fragmentation of global value chains. Indeed, “global macroeconomic developments are currently being shaped by geopolitical turbulence. The war in Ukraine is a proximate cause of many of the disruptions, including surging inflation, concerns around food and energy security, and the prospect of a sharp slowdown in economic activity in Europe.” The discordant relationship of the US-China and US-Russia has had important economic spillovers for years – but the return of war in Europe appears to be a tipping point of sorts for the way people think about geopolitical risk. The Chief Economists are unambiguous in assigning a prominent role to geopolitical factors across a broad range of macroeconomic and financial developments in the years ahead.
This corroborates the concern of both the World Bank and the International Monetary Fund on the world economic outlook. World trade is expected to lose momentum in the second half of 2022 and remain subdued in 2023 as multiple shocks weigh on the global economy; global merchandise trade volumes will grow by 3.5 percent in 2022—slightly better than the 3.0 percent forecast in April. For 2023, however, they foresee a 1.0 percent increase—down sharply from the previous estimate of 3.4 percent. Higher energy prices may cause uncertainty in growth in major European economies, squeeze household spending and cause manufacturing costs to rise above the breakeven level. Import demand is expected to soften as growth slows in major economies for different reasons. In Europe, high energy prices stemming from the supply chain disruption could hamstring GDP growth, and growing import bills for fuels, food, and fertilizers could lead to food insecurity and debt distress in developing countries. The present energy cost of $14 billion for four major categories of energy such as oil, LNG, coal, and electricity may exceed $ 25 billion in 2030 in Bangladesh.
A recession is a state when an economy experiences negative real growth for two consecutive quarters and results in a decline in the economic output, and consumer confidence owing to job loss. The recession represents the downward phase of the business cycle; the economy contracts after attaining the peak of the expansion phase and ending at the low point of the emerging downturn. There can be a brief pause in economic activity or sluggish growth or a convalescence period after an economic shock but such brief periods are not aligned with recession. A recession is a normal phase in the economy more frequent with major structural problems such as an aging population, oil shock, or an economy visited by natural calamities or mismanagement in the two major macroeconomic policies. Though recessions may persist for a period of six months the slow recovery can take a couple of months or even a year. The U.S economy experienced at least seven recessions during the last five decades, notably the recession in 1973 due to the Arab- Israeli conflict. The economy also witnessed unprecedented growth on two occasions; from June 2009 to the temporary pause in April 2020 after the onslaught of Covid-19. The other is the period of Great Moderation from the mid-1980s to 2007; a period of relative macroeconomic stability after the volatility of great inflation. However, the economy witnessed the Great Recession in the intervening period owing to the subprime mortgage and exuberance in the stock market. Japan, is another example of a country with frequent recession. Japan fell into recession for the first time since 2015, as its already weakened economy was dragged down by the coronavirus’s impact on businesses at home and abroad. Other major economies around the world are set to follow, joining Japan as well as Germany, and France in recession, as efforts to contain the outbreak ripple around the globe. The experiences of China, where the outbreak first emerged in December and January, predict the recovery will be long, painful, and difficult.
The depression is more severe than the recession. The 1930s Great Depression lasted for several years. Thanks to the prudence of John Maynard Keynes, whose fiscal intervention saved the world from the curse of depression. Indeed, the stimulus packages during the COVID-19 recovery program pursued by both the developing and the developed world are the manifestation of fiscal intervention to avoid another depression in the global economy. Fiscal intervention stimulates aggregate demand or effective demand but the loss in output due to supply shock could take more time to extricate the economy from the clutches of recession. The current crisis is due to the supply shock embedded in the infectious nature of COVID-19, the oil crisis, and the uncertainty in the Ukraine- Russia war. There is another binding in augmenting growth, the lull in migration and the acute labor shortage.
Policymakers are confronted with finding an optimal balance between tackling inflation, maintaining full employment, and advancing important policy goals such as transitioning to clean energy. Central banks are finding it difficult to tackle inflation through interest rate hikes and reducing demand. However, the approach implies a significant drag on global growth. Unfortunately, it is the shock in aggregate supply that the world leaders failed to appreciate. “ But even as interest rate rise, a recession can be avoided if policymakers recognize the bigger role that supply-side measures must play in restoring price stability.” Thus, on the issue of supply-side bottlenecks, the geopolitical matrix could be the most decisive factor in predicting the course of the global economy.
The writer, is a former Member, Directing Staff, Development and Economics Division, Bangladesh Public Administration Training Center at Savar, Dhaka. He may be contacted at mirobaidurr7@ gmail.com
