The US Federal Reserve has effected its biggest interest rate hike since 1994 in an effort to rein in runaway inflation. The 75 basis points increase in the benchmark rate came in the wake of consumer inflation touching a 40-year high of 8.6%. The bold action by the central bank has prompted several economists to join the chorus of doomsayers who feel that a global recession is just round the corner.
Their fears are not totally out of place. Like the Federal Reserve, most central banks in the world are behind the curve on inflation. The economists say they will follow the Fed lead to effect sharp interest rate hikes which will lead the global economy down the path of a recession, or at least a stagflation — an era marked by low growth and high inflation.
Annual world eye grabbing event Davos opened on a gloomy note this year with everyone having one burning question in mind — are we heading towards a global recession? Amid the coronavirus-razed world economy and the ongoing war between Russia and Ukraine, the gathering, which features the most influential people in the world, was primarily concerned with how real the threat of world recession is. In her opening remarks, Kristalina Georgieva, who is the Managing Director of the International Monetary Fund, said that since the IMF’s latest forecasts the “horizon has darkened” for the economy.
The IMF is not the only entity signalling a recession. It’s twin multilateral lender World Bank has also rung alarm bells regarding not just the already dreaded recession, but something even worse. Global economic growth is expected to slow down before the end of the year, and according to the latest report by the World Bank, most countries should begin preparing for the dreaded ‘R’ word.
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Why are people fearing a global recession?
While the IMF in its recent estimates said that the global growth in 2022 would be 4.4%, these calculations are likely to be revised downwards due to the ongoing Russia-Ukraine conflict and the fallout from sanctions. Further, the concerns regarding the global recession are also fuelled by food price shocks, the global anxiety over accessing affordable food, disrupted supply chains, hampered income growths, the climate crisis and the slump in digital money assets. Coronavirus pandemic has made matters worse for several countries. Not only are they yet to recover from the effects of the pandemic but now also have to find a way out of their reliance on imports from Russia for energy and food.
The last global recession in 2007-09, called the Great Recession, was the longest and deepest economic downturn in many countries including the United States since the Great Depression nearly a century ago. In fact, the word recession itself now evokes the scary images of the 2008 market crash even while economists agree that this recession will not be as hard as the previous one.
In 2008, wide job losses ensued and a reduced demand for products as a result of a dip in consumer confidence were among the results coupled with many more spiralling effects. Poverty rate shot up while tens of lakhs of people lost their jobs, savings, assets, and their homes. Many prestigious banks and investment firms were forced to apply for government bailouts, sought mergers with healthier firms, or declared bankruptcy. Even car companies such as General Motors too had to declare bankruptcy and were forced to accept partial government ownership through bailout programs.
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What’s going on around the globe?
Around the world, the signs are already here of a recession which is spooking investors. Amid rising interest rates, high inflation, the ensuing war in Ukraine and a slowdown in China, investors have been forced to reconsider what they’re willing to pay for a wide range of stocks ranging from tech companies to traditional automakers. The result: Wall Street slipped into bear market this week sustaining heavy losses.
Cryptocurrencies also slid with Bitcoin falling below $23,000 on Monday. The price for Bitcoin neared $68,000 late last year. Consumer prices are also at the highest level in four decades, and rose 8.6% in May compared with a year ago. It has become costlier for consumers to borrow money which in turn affects demand. The result is a vicious cycle- with lesser consumer demand, there is lesser purchasing which leads to a lesser cash flow to companies.
Investors may suddenly find themselves with an urge to sell everything but many advisers suggest that they should rather ride through the current ups and downs. Stocks in the long term provide returns and the current swings are the price of admission for the stronger returns. However, if an investor needs the money now or wants to lock in the losses, they may consider selling assets as it may also check bleeding. However, this also prevents any potential future gains.
For new buyers, there is a saying which goes as “the time to buy is when there’s blood in the streets.” This comes from Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family who made a fortune by investing at a time when the world was in the panic followed by the Battle of Waterloo against Napoleon.
The current global crisis has a string of causes — inflation, global food and energy shortages, asset bubbles in rich countries, debt crises in poor economies, supply chain bottlenecks, and the Russia-Ukraine war. This crisis may be far more serious than anything the world has witnessed since the Great Depression and could last more than 12 months.
Prachi Gupta is an Assistant Editor with Policy Circle. She is a post graduate in English Literature from Lady Shri Ram College For Women, Delhi University. Prachi started her career as a correspondent with financialexpress.com. She specialises in policy impact studies.