Cassandras among economists are merrily broadcasting stories of a coming global recession. These stories are built on the theory of weakening growth in developed nations. But, in itself, the theory is not firm enough to support hasty prognoses. There are reasons aplenty to prove the Cassandras wrong. Though growth in developed nations has slowed down, it is nowhere near developing crash symptoms.
Yet, continuing alarms from global economists are making people edgy. Nevertheless, here are the facts. Economy experts may wave red flags over rising inflation and rate hikes by US Fed. But, courtesy Chicago University, a lone American macroeconomist among the 49 surveyed thinks a recession will be due this year. What more, a mere 30 per cent of these economists believe a contraction will not be before 2024. https://fortune.com/2022/06/13/recession-economists-survey-2023-inflation-interest-rates/.
Colluding Factors
Despite such learned opinions, naysayers continue to blow their doomsday trumpets louder on social media. Following them closely, self-styled ‘crisis doctors’ are dishing out recession-advices. Naturally, the ‘recession’ word is breaking search records on the Google search engine. Sociologists may cite these as indicators of rising concern among the hoi polloi, but sane economists want to allay the recession-fears. These do-good economists have enough logic and rationale to support their intentions.
First of all, a host of factors have colluded for over a year now to cast gloom on the global economy. Post-pandemic, many developed nations, particularly America, went overboard to revive their economies. These excesses have ended up lighting the fires of inflation at home and abroad. Such overzealous revival spirit pushed consumer demand over the edge and made suppliers gasp. Then, making matters worse, came China’s suicidal zero-Covid strategy and Russia’s Ukraine invasion.
Fears of Further Hikes
The interplay of these dampening factors led to supply chain disruptions, shortages, price rises, inflation and finally fears of a recession-in-waiting. Pushed by rising inflation, central banks in most leading economies hiked interest rates by an average of 1.5 percentage points till date. In turn, this fuelled inflation further and frustrated stock markets which went into tailspins. More than this interest rate hike, the fear of Fed and other central banks launching a series of further hikes is now shaking major economies and sending panic ripples to the outer global rim. https://www.pbs.org/newshour/economy/as-inflation-soars-the-federal-reserve-is-set-to-announce-another-interest-rate-hike
Yet, productivity metrics look strong in many major economies. In total disregard to these firm fundamentals, recession-hooting pessimists are blaming higher rates and their attendant risks (rising consumer prices and labour costs) for the ominous prophesy. These pessimists may have a point when they say whenever rates were hiked this high, recession has tiptoed in.
Not a Regular Occurrence
Again, leading economies indeed have slowed down, but not to a point of crisis. Many growth indicators, including those from Goldman Sachs and OECD, indicate GDP and growth rates of the developed world will slow to crawl. However, Goldman Sachs says a recession will be dodged. The investment banker goes on to add: “Pandemic-linked drivers of inflation should soon fade, helping the Fed in its task of cooling prices.” https://www.businessinsider.in/stock-market/news/goldman-sachs-says-the-us-economy-will-slow-to-a-crawl-as-the-fed-hikes-rates-but-will-dodge-a-recession/articleshow/92039623.cms
Moreover, diehard optimists forward many theories to prove all these are red flags which refuse to fly. According to them, this slowdown is not a regular occurrence since the economic fundamentals are strong. Plus, the Ukraine war-inflicted injuries are temporary and once the war ends, these damages can be easily repaired. If at all, tightening by Fed will take much longer time to inflict serious recessionary damages to the global economy.
Consolation to the Fear-Hit
These theories sound convincing when other economy metrics, including industrial production and household consumption, are looked at. They continue to be strong. Why, American companies continue to hire and consumers continue to spend. The American economy created 372,000 jobs in June 2022, against an estimated 250,000. https://www.forbes.com/advisor/investing/is-a-recession-coming/
This statistics offers consolation to the fear-hit. So, the question left unanswered now is: when will this temporary slowdown take a U turn? Thanks to the household and the corporate sectors, which are displaying their intrinsic strengths now, the U-turn may not take much time. Households are not panicking over servicing their loans and meeting other financial commitments. Only the economies of the world need to take quick remedial measures for taming the monsters of inflation, deficit financing, rising interest rates, bloated government spending and reckless doling out of populist vote-catching freebies.
Alleviate and Educate
In today’s context, these may not be enough. Governments in developed economies need to withdraw fiscal supports extended during the pandemic and alleviate inflation-pains of the poor. In tandem, they should ensure their industrial and corporate sectors remain healthy with active hiring plans, undisrupted production patterns and enthusiastic capital expenditure programmes.
These governments need to educate their people more on the real state of affairs. They should tell them about how global cost of logistics, commodity prices and purchase managers’ outlook are easing in many economies. Nationals need to be asked not to pluck out an isolated instance, magnify it and apply to the entire global economy.
In Conclusion
Great, these arguments make good sense. But, warning again, an immediate fall in inflation is unlikely. Rightly, economists of many asset management companies are expecting inflation to settle down at 8 per cent in December 2022. Recession-mongers point fingers at labour costs which are expected to remain stubborn. Remember, history shows such pessimism does not have a long shelf life.
Bolstering this theory, analysts say Standard & Poor’s 500 companies will report growth of over 4 per cent in earnings and over 10 per cent in revenues in the second quarter ending 30 September this year. This is the reason why most economists argue the warning signs of a global recession are misleading today. Will these warning signs turn out to be The Great False Alarm of 2022?
