Global Economy on the brink of a Recession?

Hello everyone, this week I will be analysing the possibility of the global economy falling into a recession in 2023, as the World Bank gives dire warnings on the economic forecast for the world.

Two days ago the world bank warned that the world economy may be on the brink of a global recession as it cut the economic growth forecast for many nations around the world. In June last year, the institution forecasted the world economy to grow by 3% in 2023, however, the forecast has now been cut down to just 1.7%. The two major factors that are being closely looked at as a cause of this forecast are the impact of the pandemic on the global economy and the volatility the markets have faced due to Russia's invasion of Ukraine, which is showing no signs of stopping as it completes one year in February. Another factor that the policymakers will have to tackle is the rise in interest rates by banks around the world which is expected to slow the economic growth in many nations. The world bank stated that all three major economies of the world- the United States, the Eurozone and China are seeing a fall in economic growth leading to a downturn in the global economy.

What is a Recession?

A recession is defined as the drop in economic activity of an economy and a fall in GDP for two consecutive quarters. During this period a country faces rising unemployment, falling sales for a business, stagnant economic growth, fall in manufacturing activities over a long period of time. There are several reasons behind a recession taking place in an economy, one of them is the rising cost for the economy, for example, if an economy that is highly dependent on oil imports experiences the heat of a rise in oil prices in the global markets, the economy could be pushed into a recession due to the higher cost of production it faces. During a recession the economic output, and consumer spending decline resulting in an overall decline in the GDP. During a recession, the nation's budget deficit may also experience a rise as the tax collections will reduce as a result of low consumer spending, on the other hand, government spending may rise due increase in unemployment allowances and social programs.

Impact of the Ukraine War and pandemic on Economic Growth

Higher inflation is one of the main reasons the global economy may be falling into a recession and this is partly aided by the Ukraine war and partly by the post-pandemic demand. Russia and Ukraine are both big wheat exporters and export a third of the global wheat supply however since the war started last year, the global markets have seen a rise in food prices which has mainly had an effect on the northern African nations which import a lot of wheat from the two countries. Not only the food markets, but the energy markets have also been hard hit by the war. There have been significant supply chain problems in the western markets since Russia imposed an oil export ban on the West and the west has moved away from Russian fossil fuels. As the supply of oil and gas reduces, the cost of production goes higher in these countries resulting in stagnant growth.

The impact of the pandemic has also been massive on the global economy. The supply constraints that many economies faced during the pandemic and post-pandemic resulted in a recession in many economies. The low demand in many nations resulted in job cuts and higher unemployment rates. The GDPs contracted and economies fell into recession.

Effect of Interest rate hikes

Banks around the world have been raising interest rates in order to control the spirraling inflation, however it is having a negative effect on the economic growth. The rise in cost of borrowing and higher interest rates is prompting more people to save money, which has led to lower consumer spending in the economy. The cost of borrowing is also being raised for businesses, which is stifling business investments and many firms are dealing with high debts. This has led firms laying off employees leading to higher unemployment in economies.

Analysis

The higher oil and gas prices due to Russia's oil embargo on the west as well as Europe planning to phase out Russian fossil fuels is putting a lot of pressure on the world markets. It has resulted in higher energy prices all across the globe adding to the burden on businesses in nations and thus affecting their business investments. The rise in interets rates is also raising cost of borrowing for businesses affecting their investments and forcing them to layoff workers in order to cut costs. This has led to lower growth of businesses as the manufacturing is slowing down in the economies, a major sign towards 'global recession'. Not only rising cost of borrowing affecting businesses but also common citizens in the economy. They are prompted to save more money than spend because of the incentive they receive form rise in interest rates, this has resulted in lower consumer spending. The combined lower investment as well as consumer spending is contracting economic around the globe by reducing the GDP.

There could also even be a higher risk of stagflation to the global economy if the inflation is not brought under control by the monetary policy and the economic growth keeps sinking. These forecasts by financial institutions and economists around the world thus show that 2023 is going to be a difficult year for the global economy and that economies should brace themselves for the 'rocky road' ahead.

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References:

What is a recession? all you need to know - outlook. (n.d.). Retrieved January 13, 2023, from https://www.outlookindia.com/business/what-is-a-recession-all-you-need-to-know-news-213759

Lora Jones, D. P. & D. B. (2021, January 24). Coronavirus: How the pandemic has changed the World Economy. BBC News. Retrieved January 14, 2023, from https://www.bbc.com/news/business-51706225

Josephs, J. (2023, January 10). Global recession warning as World Bank Cuts Economic Forecast. BBC News. Retrieved January 14, 2023, from https://www.bbc.com/news/business-64213830