Recession in the Global Economy
We recently started witnessing the signs of recovery from the Pandemic that started in 2019. And now, here we are, where businesses and economies around the world are looming over a downturn phase. This article explores the surroundings of the recessionary phenomenon in the global economy.
A global recession is an extended period of economic decline around the world. A global recession involves more or less synchronized recessions across many national economies, as trade relations and international financial systems transmit economic shocks and the impact of recession from one country to another.
The International Monetary Fund (IMF) uses a broad set of criteria to identify global recessions, including a decrease in per capita gross domestic product (GDP) worldwide. Two consecutive quarters of economic contraction or declining real GDP that’s the general rule to identify a recession.
According to the IMF’s definition, this drop in global output must coincide with a weakening of other macroeconomic indicators, such as trade, capital flows, and employment.
Indicators of recession
Gross Domestic Product (GDP) and Growth Rate
The release of US’s GDP data subsequently showed a second consecutive quarter of negative growth, which has been dubbed a “technical recession” as the jobs markets are still robust. The US GDP fell 1.6% on an annualized basis in the first quarter of 2022 (calendar year), followed by a 0.9% fall in the second quarter.
According to the International Monetary Fund’s (IMF) predictions, in the United States, reduced household purchasing power and tighter monetary policy will drive growth down to 2.3% this year and 1% next year. In China, further lockdowns, and the deepening real estate crisis pushed growth down to 3.3% this year—the slowest in more than four decades, excluding the pandemic. And in the euro area, growth is revised down to 2.6% this year and 1.2% in 2023, reflecting spillovers from the war in Ukraine and tighter monetary policy.
The value of global trade rose to a record $7.7 trillion in Q1 2022, an increase of about $1 trillion relative to Q1 2021, according to UNCTAD’s Global Trade Update published in 2022, 7th July. The growth, which represents a rise of about $250 million relative to Q4 2021, is fuelled by rising commodity prices, as trade volumes have increased to a much lower extent.
Though expected to remain positive, trade growth has continued to slow during Q2 2022. The value of merchandise exports from developing countries was about 25% higher in Q1 2022 than in Q1 2021. In comparison, this figure is about 14% for developed countries. The report says the evolution of world trade for the remainder of 2022 is likely to be affected by slower-than-expected economic growth due to rising interest rates, inflationary pressures, and concerns over debt sustainability in many economies.
Capital flows can be grouped into three broad categories: foreign direct investment, portfolio investment, and bank and other investment. The rise in US interest rates has revived perennial concerns about emerging economy foreign debt. As rates rise and the US dollar strengthens, the debt burden becomes greater and riskier. In this environment, destabilizing capital outflows are more likely.
Flows of foreign direct investment (FDI) recovered to pre-pandemic levels last year, hitting nearly $1.6 trillion but the prospects for this year are grimmer the latest United Nations Conference on Trade And Development (UNCTAD) World Investment Report said.
This year, in 2022, the business and investment climate has changed dramatically. Factors clouding the FDI horizon include renewed pandemic impacts, the likelihood of more interest rate rises in major economies, negative sentiment in financial markets, and a potential recession.
Despite high profits, investments by multinational companies in new projects overseas were still one-fifth below pre-pandemic levels last year. For developing countries, the value of Greenfield announcements stayed flat.
Preliminary data for the first quarter shows Greenfield project announcements down 21% globally, cross-border M&A activity down 13%, and international project finance deals down 4%.
“UNCTAD foresees that the growth momentum of 2021 cannot be sustained and that global FDI flows in 2022 will likely move on a downward trajectory, at best remaining flat,” the report underlines. “However, even if flows should remain relatively stable in value terms, new project activity is likely to suffer more from investor uncertainty.”
The report of Global Employment Trends for Youth 2022 by the International Labour Organization (ILO) says that the pandemic has exacerbated the numerous labour market challenges facing those aged between 15 and 24 years, who have experienced a much higher percentage loss in employment than adults since early 2020. The total global number of unemployed youths is estimated to reach 73 million in 2022, a slight improvement from 2021 (75 million) but still six million above the pre-pandemic level of 2019, the report says.
An increase in the unemployment rate isn’t worrying in the short term, economists said. The job market is hot, characterized by steady job growth and ample openings, meaning workers aren’t likely to stay unemployed for long. It’s also good news for businesses that are having trouble hiring since they have a bigger supply of workers to choose from.
Over the past six months, jobs have been created in the US at the rate of nearly half a million a month. There is no historical precedent for a recessionary economy to produce 528,000 jobs in a month as the US economy did in July and at 3.5%, the unemployment rate is the lowest since 1970.
Additional Indicators to consider
In another indication of a possible economic slowdown across the globe, freight shipping rates continue to decline with a faltering demand for goods, reported S&P Global Market Intelligence. While freight rates have remained elevated since the pandemic struck due to global logistical and supply chain issues, the precipitous decline in freight rates can be attributed to both, the easing availability of containers as well as falling global trade volumes.
The gauge, which tracks the spot price of metals including copper, nickel, and aluminum, is down 17% in 2022, having been up by more than a quarter at its peak in the wake of Russia’s full-scale invasion of Ukraine.
The renewed selling of metals that are used to make a wide range of products such as car parts, steel, and electric wires highlights how concerns about global demand are again coming to the fore as economists worry that a surge in energy prices will weigh heavily on the industry.
Copper, a barometer for global economic health, has fallen about 6% to $7,650 a tonne in just over a week. Steelmaking ingredient iron ore has dropped below $100 a tonne, from a high of more than $160 per tonne earlier this year.
Adding to the gloomy outlook, China, the world’s largest consumer of raw materials continues to put areas under Covid-19 lockdowns and this would give further rise to the supply-side constraints.
Recession and Inflation
Despite the slowing activity, global inflation has been revised up, in part due to rising food and energy prices. A prolonged conflict between Russia and Ukraine could cause prices of food and energy to escalate. The Supply-side dominates the inflation in this scenario.
Inflation this year is anticipated to reach 6.6% in advanced economies and 9.5% in emerging market and developing economies with upward revisions of 0.9% and 0.8% points respectively and is projected to remain elevated longer.
In the US, the Federal Reserve sent a strong message last month on its determination to tame surging inflation by boosting interest rates, which has helped to power the US dollar to a 20-year-high against a basket of major currencies. Commodity prices, mostly traded in the US dollar, tend to fall as a strengthening US currency makes them more expensive.
A steady weakening of China’s renminbi against the dollar had further fueled the commodity slump since it made raw material imports more expensive for China.
Meanwhile, the European Central Bank raised interest rates by 50 basis points at its July policy meeting to tackle Eurozone inflation that has spiked to 8.9%. This move represents the first tightening since 2011. It occurred even though consumer confidence has fallen to a record low and the EU economy is vulnerable to cutbacks in natural gas supplies from Russia.
Impact of Recession
Responding to the situation, central banks in advanced economies are withdrawing monetary support faster than expected, while many in emerging markets and developing economies began raising interest rates last year.
The resulting synchronized monetary tightening across countries is historically unprecedented, and its effects are expected to bite, with global growth slowing next year and inflation decelerating.
With rising consumer inflation across the world, many economists are concerned about a global recession due to decreased consumer spending.
Export-oriented sectors would get impacted by an advanced economic recession. Also, a recession will mean commodity prices crashing, oil prices coming down and several industries here which use crude and related derivatives in their inputs whether it is auto, paints, fertilizer, FMCG goods, and food prices.