Is a Recession Looming over the World Economy?
By Afreen Shafeeque
You don’t have to read the news to know that the world economy has been experiencing shocks. On your trip to the grocery store or your favourite restaurant, you may have noticed that prices have risen. The global economy can’t seem to catch a break- from the initial COVID outbreak in 2020, the Russia-Ukraine conflict and China going into lockdown yet again, sending global supply chains into chaos. Economists and leaders have been ringing alarm bells. The IMF has decreased the growth predictions for several countries, which together account for 80% of the world’s output. At the World Economic Forum’s panel in Davos, leaders shared a grim outlook on the world economy. What are the core issues? And how concerned should we be?
Many had hoped for a stable recovery period, after what the economy had endured when the pandemic was rampant. As countries started to ease restrictions, things seemed to look up for the world economy. Then, came the Russia-Ukraine conflict. With key exports such as oil and food being impacted, prices have skyrocketed. The Food and Agriculture Organization (FAO) reported the highest level of its Food Price Index (FPI) since it was created in 1990. The two nations account for 11% of global exports of oil and 30% of the world’s wheat exports. Although companies and consumers alike are impacted by high energy prices, leaders are more concerned about food prices.
With several hundred millions of people already suffering from world hunger, this increase in food prices may be a major threat to food security. Europe has been vulnerable due to its proximity to the conflict, with costs of living increasing and standards of living potentially decreasing. But even more vulnerable are developing countries in Africa and the Middle East that rely on the region’s food exports. Ukraine’s Black Sea port was key for exporting grains to these countries, but operations have been majorly shut since the conflict. Further exacerbating the inflation, is China returning to strict lockdown due to another outbreak of COVID. China’s dominant position as an exporter has caused massive setbacks to global supply chains. Additionally, all the fiscal stimulus that governments were offering during the pandemic had led to a large amount of money circulating in the world economy, also contributing to inflation.
Consumers and companies are likely to hold back on economic activities since prices have risen. Governments seem focused on reducing inflation, even though it will dampen economic growth. The Governor of The Central Bank of France stated that “In the short run, our priority is clear- fighting inflation”. The US is also facing high inflation, especially due to the fiscal stimulus and billions that were spent on bonds during the pandemic. US growth sharply declined between the last quarter of 2021 and the first quarter of 2022. The US federal reserve is now also focused on taming inflation by increasing interest rates. Net oil-exporting countries on the other hand may have experienced some benefit from the oil price increase.
Unlike a national recession, a global recession is difficult to define. The World Bank and IMF define a recession as a year where the real income of the average world citizen drops. Whereas the US National Bureau of Economic Research has a vaguer definition- “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” However, it is safe to say that the amalgamation of all these global events has weakened the global economy. Some believe that the situation is not bad enough yet, to predict a recession. The Bank of America reported that since these events happened sequentially rather than all at once, the economy is unlikely to be thrown into a major recession but rather a period of “extended weakness”. Things may start to ease as China has been slowly decreasing restrictions. Ukraine has been pressing to remove the Black Sea Port blockade, highlighting the threat of world food shortage, but not much has changed regarding the port. It may be too early to call a recession, but the alarm bells have been ringing. Now, we must see whether policymakers and governments will respond in time.
Bibliography
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