Global recessions often take everyone by surprise

The world’s leading economists spent most of 2022 convincing themselves that, if the global economy was not already in a recession, it was about to fall into one. But with the year’s end, the global slump has been postponed to 2023. Clearly, the reports that the US was in recession during the first half of the year were premature. Two thousand twenty two is defined as an extended period of instability and insecurity, it is an ugly portmanteau that accurately encapsulates today’s world as 2023 dawns.

Vladimir Putin’s invasion of Ukraine has led to the biggest land war in Europe since 1945, the most serious risk of nuclear escalation since the Cuban missile crisis and the most far-reaching sanctions regime since the 1930s. Soaring food and energy costs have fuelled the highest rates of inflation since the 1980s in many countries and the biggest macroeconomic challenge in the modern era of central banking.

Assumptions that have held for decades that borders should be inviolable, nuclear weapons won’t be used, inflation will be low and the lights in rich countries will stay on have all been simultaneously shaken. Three shocks have combined to cause this turmoil. The biggest is geopolitical. The American-led post-war world order is being challenged, most obviously by Mr Putin, and most profoundly by the persistently worsening relationship between America and Xi Jinping’s China. The resolve with which America and European countries responded to Russia’s aggression may have revitalised the idea of the West, particularly the transatlantic alliance. But it has widened the gap between the West and the rest. The majority of people in the world live in countries that do not support Western sanctions on Russia.

The study relies on insights from previous global recessions to analyze the recent evolution of economic activity and presents scenarios for 2022-24. A slowdown such that the one now underway typically calls for countercyclical policy to support activity. However, the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply. The experience of the 1970s, the policy responses to the 1975 global recession, the subsequent period of stagflation, and the global recession of 1982 illustrate the risk of allowing inflation to remain elevated for long while growth is weak.

The 1982 global recession coincided with the second-lowest growth rate in developing economies over the past five decades, second only to 2020. GWhile next year will be rough for the world economy, the coming slump probably should not qualify as a recession, even considering that the two-consecutive-quarters criterion is too narrow. Global growth in the postwar period has seldom fallen below zero for a single quarter, let alone two. By that measure, the severe oil-shock-induced downturns of 1974 and 1981 do not qualify as global recessions. Even in times of apparent recession, positive growth among emerging and developing economies tends to outweigh advanced economies’ negative growth, the two notable exceptions being the 2008 global financial crisis and the 2020 Covid-19 crisis. While the Organisation for Economic Co-operation and Development and International Monetary Fund expect global growth to plunge to 2.2-2.7 per cent in 2023, from 6.1 per cent in 2021, that still leaves the world economy unlikely to shrink for consecutive quarters.

While most Americans are bracing for a recession next year, institutional investors who control mutual funds, pensions, and insurance companies see a bigger threat looming on the horizon. About 65 per cent of investors believe stagflation is a bigger risk than a recession, according to the 2023 Natixis Outlook Survey that surveys global institutional investors who oversee a combined $20.1 trillion in assets under management. Given the vast investment portfolios these big-time money managers generally control, they tend to be keyed into the markets and potential risks at a greater rate than the average investor. 

Stagflation is typically defined as an economic cycle where there’s persistently high inflation as well as high unemployment and slow economic growth compared to a recession where there’s economic decline and generally high unemployment, but inflation is not so much an issue.In the U.S., the best example of stagflation occurred in 1970s due, in large part, to the oil crisis. While high inflation is challenging for central banks like the Federal Reserve to tamp down, stagflation is much more difficult to control because correcting one aspect of the problem, like unemployment, could make another aspect like inflation, worse. With the U.S. Federal Reserve attempting to lower sky-high inflation through interest rate hikes designed to quell consumer spending, investors concerns about stagflation are not misplaced.  The World Economic Forum (WEF) said in a survey recently that high inflation, loan repayment crisis and rising cost of living are the biggest threats for the next two years.

Especially, as the developed countries are raising interest rates to rein in inflation, recession is assumed to be inevitable. All are predicting that the global economic crisis would not go away in the next year. Bangladesh will also take heat from the crisis. The prices of fuel oil, coal and LNG in the world market will not decrease soon and the crisis in the power sector will not fade away. Rather, the crisis is reducing production in the private sector.

The consumer demand subsided in the market due to the high inflation, so did the sale. Some big companies are counting losses. The economy, on the whole, has slowed down.In such a situation, the IMF delegation is now in Dhaka to discuss the terms for a proposed USD 4.5 billion loan.

The fate of the loan depends on what conditions the lender places and how far Bangladesh complies with it.

While inflation is likely to remain somewhat elevated through the end of next year, we see signs that moderation is already underway and that this cooling will become more prominent over time. The PCE price data, the Federal Reserve’s preferred inflation metric, should similarly moderate. We expect higher interest rates will cause demand to soften into next year, and we expect the now-tight labor market to loosen, which should translate into lower wage growth. Labor market conditions will be an important driver of inflation both in the near term and further into the future.

The writer is UK researcher and columnist. He can be contacted at [email protected]