World Recession - How likely is it to happen?

In the recent news, it is often the case to see financial experts or heads of organizations declaring that the risk of recession is now at its highest since 2008. Even David Malpass, head of the World Bank, seems to agree with this statement. Are we certain that this is going to happen? And if not, what is at stake for the economy?

🕑 4 min By Matthias Sciollintano

1. Timeline of Events

The last 4 years arguably represent the most sensitive economic period the world has known since the beginning of the 21st century, and surely will it have an important impact on the future of the world. The Covid crisis, which started in early 2020, has left wounds in the global economy that are still not perfectly healed. It slowed down global economic growth, decreased global trade, and caused a lot of families to fall into poverty. Moreover, it laid the foundation for other crises to appear, namely the raw material and energy crisis. For instance, the former started in 2021 following the major disturbances in the world supply chain caused by Covid and worsened later in the year due to several factors, such as: unfavorable climate in many countries, a drop in the value of the dollar, and tensions between nations. This caused the prices of wood, wheat, copper, etc. to increase drastically. The energy crisis followed and was created by the sharp increase in demand following the end of global lockdowns of Covid. The supply side of the market, such as Russia and the OPEC countries, could not keep up with the demand, which increased prices. When comparing these prices between early 2021 and early 2022, the prices of gas and oil respectively increased by +280% and +80% (in euros) during that timeframe. All in all, Covid had already done a lot of harm to the economy, and the world countries knew it would take a while for things to come back to the pre-covid phase, but then, 24th February 2022 arrived.

2. War Impacts

The war between Ukraine and Russia which started in late February 2022 did nothing but make the situation worse. Following the recent sanctions of the European Commission against Russia, the supply of oil in Europe decreased even further while the demand did not change.

Not only did it raise the price of oil beyond its high level, but it also contributed to the rise of the already increasing inflation that was appearing at the time. As a result, in May 2022, the inflation rate hit 8.1% in Europe and 8.3% in the US. This represents record values for both nations since the beginning of the century, which shows the gravity of the situation. Since then, central banks all around the world started increasing their interest rates in an attempt to slow down the expansion of the inflation rate. This sequence of events generated concerns in the head of many economists, as the signs of a global economic slowdown were clear. Therefore, a truly important question is: are these concerns legitimate, and is economic growth going to end?

3. Stagflation? Recession?

Two terms can often be seen when economists are asked this question: Stagflation and Recession. The former describes the situation where economic growth slows down, whereas the prices keep increasing (meaning inflation is still rising).

Similarly, the latter describes a significant decline in the aggregate economy, with inflation being low.

So which one of these two is the most likely to happen? The opinions are mixed. According to the World Bank, it is clear that “For many countries, a recession will be hard to avoid”. The organization fears a repetition of the 1970s situation, where a similar context caused serious crises in emerging countries. Their most recent Global Economic Prospects published in early June 2022 explains that economic growth rates are low in both developed and emerging markets, and that the global economic activity is forecasted to slow even further from 5.7% in 2021 to 2.9% before the end of the year. On the other hand, Simon Baptist, global chief economist at the Economist Intelligence Unit, declared that no global recession was to be expected, but that stagflation is surely going to stick around for the incoming year. He argues that even though the prices are going to stay high, the slow but active growth in different parts of the world linked with resisting job markets will prevent a recession from appearing.

4. What's next?

In conclusion, it is clear that the following years are going to be marked by the current and previous crises the world had to face, but the opinions diverge when it comes to the severity of what is coming. Stagflation is commonly considered by a lot of experts to be inevitable for the future, but its length can hardly be determined. Concerning recessions, some countries are very likely to encounter such negative economic growth, and it is seriously considered by the World Bank. However, not all economists share that opinion and some of them state that the economy will successfully recover from this series of shocks. Only the future will tell us who was right. Sources: The World Bank, CNBC, BBC News, Le Figaro

Written by Matthias Sciollintano

June 2022