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Since the beginning of the year, a rapid deterioration of growth prospects, coupled with rising inflation and tightening financing conditions, has ignited a debate about the possibility of a global recession and a contraction in global per capita GDP. They are drawing on insights gained from previous global recessions. After beginning as a murmur early in the year, warnings of an incoming global recession are growing louder by the day. During the past week, high-profile figures from the head of the World Trade Organization to American Nobel Prize-winning economist Paul Krugman have sounded the alarm about the likelihood of a global downturn.
In a survey released by Switzerland-based World Economic Forum, seven out of 10 respondents in a sample of 22 leading private and public sector economists said they believed a global recession was at least somewhat likely in 2023. Despite the current slowdown in global growth, inflation has risen to multi-decade highs in many countries. Many countries are withdrawing monetary and fiscal support to stem risks from persistently high inflation and in the context of limited fiscal space.
As a result, the global economy is amid one of the most internationally synchronous episodes of monetary and fiscal policy tightening over the past five decades. These policy actions are necessary to contain inflationary pressures. Still, their mutually compounding effects could produce more significant impacts than intended, both in tightening financial conditions and steepening the growth slowdown. This synchronous policy contrasts with the policies adopted around the 1975 global recession but is similar to those implemented ahead of the 1982 recession.
A major lesson from these two episodes is that making necessary policy adjustments timely is essential to containing inflationary pressures and reducing the output costs of policy interventions. The outlook for the global economy has darkened significantly in recent months, the head of the IMF has warned, and the world faces an increasing risk of recession in the next 12 months. The commodity price shock from the war in Ukraine had exacerbated the cost-of-living crisis for hundreds of millions of people, and it was only getting worse. Missed meals and constant stress: New Zealand’s cost-of-living crisis hits home Inflation was also higher than expected, she said in a blog post that came on the same day as the latest figures showed that prices in the US rose at a 40-year high of 9.1% in June. Economists and investors now think the US Federal Reserve could hike interest rates by a historical 1% when its board meets in two weeks.
The Bank of Canada shocked markets recently by raising its base rate by an entire percentage point, while the Reserve Bank of New Zealand increased its benchmark rate by 0.5% this week, as did the Bank of Korea. Singapore’s central bank also tightened its monetary policy.
Another expected move higher by the Fed keeps heaping pressure on other central banks to follow suit to bring inflation under control. We're worried by the continuing inflationary trend, which seems poised to hit a boiling point, with data released by the Bangladesh Bureau of Statistics (BBS) saying that inflation hit a 10-year high in August. Overall, inflation surged to 9.52 per cent in August, and then dropped to 9.10 per cent in September. Ordinary people, however, don't need BBS figures to know how badly prices have been spiralling out of control in recent months. Their daily suffering stands as living proof of that.
Inflation, which has been on-going since the outbreak of the pandemic in Bangladesh, has been out of control for the past several months due to higher food prices amid global supply chain disruptions and trade uncertainties arising from the Russia-Ukraine war. Data shows that food inflation soared to 9.94 per cent in August, the highest since April 2012, and decreased slightly to 9.08 per cent in September. Non-food inflation, on the other hand, was 8.85 per cent in August but jumped to 9.13 per cent in September, indicating that the inflationary momentum is yet to dissipate.
Another primary concern is that inflation in rural areas has been worse than in urban areas, 9.70 per cent in August, as opposed to 9.18 per cent in urban areas during the same month. Food inflation in rural areas was similarly higher since markets there tend to be more volatile than those in urban areas. But equally importantly, it indicates that the assistance needs to be better targeted, with food assistance for people living in rural areas becoming more urgent.
Additionally, while external shocks are significant factors driving inflation, the recent fuel price hike in the country has, as anticipated, only made things worse. Therefore, we again urge the government to consider lowering fuel prices at the earliest possible time since it has had a cascading effect on the prices of all other commodities. The government also urgently needs to curb corruption and wastage in the energy sector, which have gone totally out of control, leading to the return of frequent load-shedding that is only increasing production costs and commodity prices for end consumers. Because no single policy intervention can solve the current crisis, the government needs to try and tackle it on multiple fronts.
The government needs to scale up its subsidized food assistance programme for the poor. It needs to reduce corruption and mismanagement across all sectors, which seems to have become synonymous with governance. And finally, it needs to actively monitor the supply of essential commodities, such as different food items, and make sure that it is proactive in addressing any artificial supply shortage. Regular market monitoring by relevant government agencies is vital to root out any collusive practices by powerful trade syndicates.
Meanwhile, Ned Davis Research, a Florida-based research firm known for its Global Recession Probability Model, raised the likelihood of a global recession next year to 98.1 per cent, the highest since the Covid-19 pandemic-related downturn of 2020 and the global financial crisis of 2008-2009. While the war in Ukraine, China’s draconian pandemic policies, and runaway inflation are all clouding the economic outlook. Investors are particularly concerned about the prospect of the United States Federal Reserve raising interest rates so aggressively that the world’s most important economy tips into recession, taking much of the rest of the world with it. Historically, the US and other central banks have found it challenging to manage the task of raising rates which raises the cost of borrowing and investment for businesses and households without dealing a severe blow to economic growth.
Past recessions, usually defined as two consecutive quarters of negative growth, have been blamed on the Fed’s efforts to cool high inflation, including back-to-back downturns in the early 1980s. Critics, including renowned economists such as Jeremy Siegel, have accused the US Fed of waiting too long to raise rates, only to resort to drastic hikes of late to make up for its prior inaction.
For the US, if inflation does not show signs of cooling in the last few months of 2022, and measures of inflation expectations start to climb, it will force the Federal Reserve to continue with aggressive rate hikes beyond 2022 into the spring of 2023. In my opinion, that’s when the economy will tip into a recession, Pao-Lin Tien, an assistant professor of economics at George Washington University. A similar situation would also apply to other countries; if central banks are forced to increase rates aggressively and persistently, either to defend their currency or to tame inflation, then a recession is inevitable.
Campbell R Harvey, a professor at Duke University’s Fuqua School of Business, said the Fed’s actions could quickly push the economy into recession, and a recession would be very effective in reducing inflation. Germany, Italy and the United Kingdom--three of Europe’s largest economies, are expected to undergo lengthy recessions next year. Mainly due to the energy supply issues caused by Russia’s invasion of Ukraine, the Organisation for Economic Co-operation and Development (OECD) The OECD expects the Eurozone to grow just 0.3 per cent in 2023, indicating that many of the bloc’s economies will be in recession throughout periods of the year. While the Asia Pacific is expected to avoid contraction, China’s zero-Covid lockdowns and border restrictions seriously drag on the region’s growth potential.
The World Bank slashed its economic forecast for the Asia Pacific to 3.2 per cent, down from 5 per cent in April, and nearly halved its forecast for China to 2.8 per cent. We think Asian growth will decelerate. For economies more exposed to the trade cycle, the impact of weakening external demand will feel worse, such as in South Korea and Taiwan.
Now world policymakers must navigate a narrow path that requires a comprehensive set of demand-and supply-side measures. On the demand side, monetary policy must be employed consistently to restore, promptly, price stability. Fiscal policy must prioritize medium-term debt sustainability while providing targeted support to vulnerable groups. Policymakers must stand ready to manage the potential spillovers from the globally synchronous withdrawal of policies supporting growth. On the supply side, they must implement measures to ease the constraints confronting labor markets, energy markets, and trade networks.
The writer is a UK based researcher. He can be contacted at raihan567@yahoo.com
