(ORDO NEWS) — Experts predict the risk of a recession for the global economy, writes the Financial Times. Analysts say the outlook is clouded by the coronavirus outbreak in China, rising interest rates in the US and a cost-of-living crisis in Europe.
If Leo Tolstoy had a chance to describe today’s market conditions, he would have noted that all happy economies are alike, and each unhappy economy is unhappy in its own way.
China’s economic growth prospects have been undermined by strict quarantine measures in an attempt to suppress the rise in cases of the omicron strain of COVID-19 coronavirus; The US Federal Reserve is in danger of turning prosperity into recession; European households are experiencing a cost-of-living crisis; and in many poor developing countries the situation is even worse, because they face the threat of a food crisis and even mass starvation.
Each of these four serious problems is poisoning the global economy as it recovers from the pandemic, and it is not surprising that the atmosphere is getting worse.
According to Robin Brooks, chief economist at the Institute of International Finance, the combination of these shocks already speaks volumes about the distress of the global economy. “Now we are again afraid of a global recession, only this time everything is more than real,” he says.
The financial markets are restless. Over the past week, the MSCI global stock index has fallen by more than 1.5%, in May – by more than 5%, and since the peak in January – by more than 18%. BCAResearch chief strategist Dhaval Joshi notes that in addition to the problems with stocks, there was a sell-off of bonds, including those protected from inflation, as well as industrial metals, gold and crypto assets.
“The last time the stars aligned in this way was in early 1981, when, under Paul Volcker, the Fed reversed inflation and turned stagflation into a real recession,” says Joshi.
Defining a global recession is not an easy task. For individual countries, some economists define a “technical recession” as a reduction in gross domestic product for two consecutive quarters. The Financial Times is more flexible, as is the US National Bureau of Economic Research, which calls a recession “a significant slowdown in economic activity that affects the entire economy and lasts more than a few months.”
In a global context, it is even more difficult to define. The IMF and the World Bank prefer to characterize the global recession as a fall in the real income of the average citizen of the world during the year. The list of five previous global recessions includes 1975, 1982, 1991, 2009 and 2020. Official global growth forecasts for 2022 fall far short of that definition—in April, the IMF had expected 3.6% growth, but that figure refers to both the recovery in the second half of 2021 and expectations for 2022. In assessing the growth expected over the current year, the IMF lowered its forecast from October’s 4.5% to 2.5% in April. Brooks believes that the unfavorable events that followed the publication of this forecast led to a decline as much as 0.5%, which is less than the expected population growth. “The growing risk of a global recession is a priority for markets.
There is serious tension. With the lockdown sweeping the country, queues of ships formed at Chinese ports, and the manufacturing and retail sectors began to shrink. April saw an 11% year-on-year decline in retail sales, while industrial production fell 3%. Home sales in China fell more than they did in early 2020, when the country’s economy rebounded despite the People’s Bank of China easing monetary policy to encourage lending and spending. Unemployment is on the rise. Kevin Xie, senior Asia economist at the Commonwealth Bank of Australia, says China’s April numbers were nothing but disappointing. And although in many ways future prospects depend on the spread of coronavirus,” from excessive fiscal stimulus, which overheated the economy and caused high inflation even with modest increases in energy prices.
There is strong demand in the labor market, and the Fed, forced to admit its mistake, moved decisively to tighten monetary policy. This was done in order to slow down economic growth and reduce inflation. from excessive fiscal stimulus, which overheated the economy and caused high inflation even with modest increases in energy prices. There is strong demand in the labor market, and the Fed, forced to admit its mistake, moved decisively to tighten monetary policy. This was done in order to slow down economic growth and reduce inflation.
Fed Chairman Jerome Powell has made it clear that the central bank will continue to raise interest rates until it sees “clear and convincing” evidence of inflation returning to the 2% target. The increase in unemployment “a few points” from the current low level of 3.6% does not bother him. Powell added that he was aiming for a smooth decline for the economy, but many financial market participants believe that this may be difficult to achieve. Evercore Vice Chairman Krishna Guha warns of a high risk of recession fears expressed by officials, economists and market participants. “To say that a gradual decline is possible does not mean to convince others of its inevitability or at least a high probability,” says Gurkha. He himself does not predict a US recession, but emphasizes that “getting inflation under control without a recession and a significant increase in unemployment … will not be easy.” On the other side of the Atlantic, Europe is experiencing equally difficult problems, albeit of a different nature. With the exception of the UK, inflation is almost universally caused by rising energy prices, not an overheating economy, and can be directly linked to the Russian operation in Ukraine.
Unfortunately for the EU, understanding the causes of Europe’s troubles does not lessen their consequences. With inflation at 7.4% in April, prices in the euro area are rising much faster than household incomes, and this is hitting living standards hard, as well as forcing spending limits and hindering the recovery from the pandemic. The European Commission’s new forecasts are extremely pessimistic and suggest stagnation in the second quarter of 2022. The EC expects the economy to weather the rough patch and return to adequate growth of around half a percentage point a quarter by summer, but many private sector economists believe the hit to revenues will have a longer-term impact. Christian Schulz, an economist at Citi Bank, says the official forecasts seem overly optimistic and growth is more likely to be out of the question.
In connection with the closure of the Black Sea ports, which Ukraine uses to export grain, fears are growing about a possible food crisis at the end of this year. UN Secretary-General António Guterres said on Wednesday that the conflict in Ukraine, coupled with existing pressures on food prices, could “put tens of millions of people on the brink of food insecurity, followed by malnutrition, massive hunger and food shortages.”
This week, Sri Lanka came to a difficult decision, which hangs over many other poor countries, namely, it defaulted on its external debt amid, among other things, its own domestic political and economic crises. This was led to a lack of foreign exchange for the import of fuel, food and medicine.
India, meanwhile, exacerbated the difficulties of other emerging economies by reneging on a promise to ban grain exports. Wheat prices have risen more than 60% this year.
Naturally, as recession risks rise, the best news for the global economy will be the withdrawal of Russian troops from Ukraine and the end of China’s “zero covid” strategy. Economy ministers and officials will again have to use all their skill in responding to difficult situations.
In Europe and emerging market economies, the focus will be on mitigating the effects of higher food and energy prices. This can be achieved by increasing incentives and subsidizing the food and energy industries in countries with sufficient budgets. The US and UK could accelerate the monetary tightening cycle, and China should strive to limit the negative impact of the wave of micro-strain coronavirus.
Most economists are of the opinion that in 2022 the world will weather the global recession. But in such a negative information field, they began to play it safe more and more often.
According to Innes McFee, managing director of macroeconomic and investment services at Oxford Economics, there is no doubt that global economic growth is close to peaking and slowing, and the authorities will have to determine the extent of monetary tightening. However, at the moment, a recession is unlikely, because in case the situation worsens, the governments of the countries still have the necessary tools.
“The risks of a recession will increase next year, and at present they are not so high,” says McPhee.
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