Is the global economy heading into a recession?

If Leo Tolstoy was writing about business conditions today, he might have noticed that happy economies are all alike, but that every unhappy economy is unhappy in its own way.

China’s growth prospects have been hit by strict Covid-19 lockdowns in an effort to quell the Omicron outbreak; The US Federal Reserve risks turning American prosperity into bankruptcy; Families in Europe are suffering from the cost of living crisis. The situation is even worse in many of the poorer emerging markets, where food crises and even famines are emerging.

All four of these different, but imposed, problems are haunting the global economy as it recovers from the pandemic, and it’s no surprise that the mood has grown bleaker.

According to Robin Brooks, chief economist at the Institute of International Finance, the confluence of these shocks indicates that the global economy is already in trouble. “We’re in yet another horror of a global recession now, except this time we think it’s real,” he says.

A city worker disinfects a Covid testing site in Beijing.  China accounts for 19% of total global production, and is now so large that when it catches Covid, the rest of the world cannot ignore its pain.
A city worker disinfects a Covid testing site in Beijing. China now accounts for 19% of total global production, and is now so large that when it catches Covid, the rest of the world cannot ignore its pain © Kevin Frayer / Getty Images

Financial markets panicked. The MSCI World Stock Index has fallen more than 1.5 percent in the past week, more than 5 percent in May and more than 18 percent since its peak in early January. Dhaval Joshi, chief strategist at BCA Research, notes that in addition to the turbulent time for stocks, there have been sell-offs in bonds, inflation-protected bonds, industrial metals, gold and crypto assets.

The last time the ‘everything for sale’ star alignment occurred was in early 1981 when Paul Volcker’s Federal Reserve broke the back of inflation and turned stagflation into a full-blown stagnation, Joshi says.

Defining a global recession is no easy task. For individual countries, some economists define a “technical stagnation” as two consecutive quarters of contraction in GDP. The Financial Times prefers more flexibility Definition of As does the United States, where the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that spreads through the economy and lasts more than a few months.”

Line chart of annual % change showing Chinese data indicating lower production and consumer spending

Globally, tariffs are still more difficult. The International Monetary Fund And world bank A global recession is best described as a year in which the average global citizen experiences a decline in real income. It highlights 1975, 1982, 1991, 2009 and 2020 as the dates of the previous five global recessions.

While the official global growth forecast for 2022 is still far from that definition — in April, the International Monetary Fund projected 3.6 percent annual growth this year — that number correlates as much with the recovery in the second half of 2021 as it relates to the outlook for 2022. When does the fund consider the growth it expects through 2022, it has already lowered its forecast from 4.5 per cent in October last year to 2.5 per cent in April.

Brooks believes the news since that forecast was published has been bad enough to cut growth forecasts to just 0.5 percent through 2022, less than the expected increase in population. “The escalation of global recession risks is high on the minds of markets, and it has important implications for investor psychology,” Brooks says.


China is the big economy most economists are concerned about and last week saw fresh data adding to concerns about the outlook. China now accounts for 19 percent of total global production, and is now so large that when it catches Covid, the rest of the world cannot ignore its pain, especially because of its impact on global supply chains and its demand for goods and services from other countries.

A bar chart of inflation rates and expectations (%) showing that households in many advanced economies are facing a cost-of-living crisis

Severe strains appear. As lockdowns spread across the country, ships queued outside Chinese ports and the country’s manufacturing and retail sectors began to shrink. Retail He fell 11 percent year on year in April, while industrial production fell 3 percent. China’s home sales also fell more last month than in early 2020, when its economy reversed, despite the People’s Bank of China easing monetary policy to encourage borrowing and spending. Unemployment is on the rise.

Kevin Shih, chief Asia economist at the Commonwealth Bank of Australia, says China’s economic data in April has been consistently disappointing. Although the outlook depends critically on the spread of Covid, he adds, “decreased employment and weaker confidence among businesses and households will limit spending and bode ill for growth prospects.”

In the United States, the other global economic power, the economy is suffering from the legacy of the pandemic and, in particular, the excessive fiscal stimulus that arguably made the economy too hot and caused high inflation even with a modest rise in energy prices. Combined with a very tight labor market, the Fed had to admit its mistake and now act decisively in the phase of monetary tightening to slow growth and lower inflation.

People carrying shopping bags in San Francisco.  The United States is suffering from the legacy of Covid and excessive fiscal stimulus that has turned the economy into a very hot temperature and led to high inflation
People carrying shopping bags in San Francisco. The US suffers from the legacy of Covid and the excessive fiscal stimulus that has run the economy too far and soared inflation © David Paul Morris / Bloomberg

Federal Reserve Chairman Jay Powell was crystal clear this week that the central bank will keep raising interest rates until it sees “clear and convincing” evidence of inflation returning to its 2 per cent target. He was not worried about unemployment rising “a few points” from the current low of 3.6 percent.

Powell added that he was aiming for a soft landing for the economy, but many in the financial markets believe that may be difficult to achieve. Krishna Guha, vice president of Evercore ISI, warns that there is a much higher than usual risk that tough talk from officials, economists and market participants could become a self-fulfilling prophecy that triggers a downturn.

“Saying that a soft landing is possible does not mean that it is inevitable or particularly likely,” Guha says. Although he does not expect a recession in the United States, Guha says, “Controlling inflation without a recession and a big increase in unemployment . . . will be difficult.”


On the other side of the Atlantic, Europe’s difficult problem is just as different. Aside from the UK, inflation almost generally stems from rising energy prices rather than an overheating economy and can be traced directly back to the Russian invasion of Ukraine.

Line chart of the FAO Food Price Index (2014-2016 = 100) showing that the rapid rise in food prices is hitting poor countries

Unfortunately for the European Union, understanding the cause of Europe’s problems does not diminish their consequences. With inflation of 7.4 percent in April, eurozone prices are rising much faster than the incomes of its citizens, hitting living standards that will limit spending and recover from the pandemic. The new forecast from the European Commission this week Reducing Sharp and implicit recession in the second quarter of 2022.

The committee expects the economy to weather this difficult period and return to reasonable growth of about half a percent per quarter by summer, but many private-sector economists believe the income hit will have long-term effects. Christian Schulz, an economist at Citi, says the official outlook appears to be overly optimistic and that it is likely that “there will be virtually no growth for the rest of the year”.

If Europe’s difficulty is to adapt to much higher energy prices, poorer countries face an even more difficult task to deal with rapidly rising food prices, which account for more than 30 percent of spending in emerging economies.

Antonio Guterres in Irbin, Ukraine.  The UN chief said the Russian invasion was helping 'push tens of millions of people to the brink of food insecurity'.
Antonio Guterres in Irbin, Ukraine. The UN Secretary-General said the Russian invasion is helping to “push tens of millions of people to the brink of food insecurity” © John Moore / Getty Images

With the Black Sea ports that Ukraine uses to export grain closed, fears are growing of a food crisis later this year. On Wednesday, UN Secretary-General Antonio Guterres said the conflict in Ukraine, which comes on top of current pressures on food prices, “threatens to push tens of millions of people to the brink of food insecurity followed by malnutrition, mass starvation and famine.”

Although Sri Lanka has its own domestic political and economic crises, Sri Lanka epitomizes the difficult choices it faced in many of the world’s poorest countries when it decided this week default on its foreign debt for the first time. It said this was necessary to use its hard currency to import fuel, food and medicine.

Meanwhile, India has intensified problems in other emerging economies by reneging on its pledge not to ban grain exports this week. Wheat prices are on the rise again and are up more than 60 percent this year.

Line chart of re-established indices (in US dollar terms) showing markets pulling back due to recession and inflation fears

Of course, with recession risks rising, the best news for the global economy will be Russia’s withdrawal from Ukraine and an end to China’s zero-Covid strategy. This is not a gift from ministers and economic officials, so instead, they will have to once again adjust their responses to the difficult situations they face.

In Europe and emerging economies, this will involve mitigating the consequences of rising food and energy prices – increasing benefits and subsidizing food and energy in countries with sufficiently strong public finances. The United States and the United Kingdom can accelerate the monetary tightening cycle, while China will seek to limit the negative effects of the Omicron virus wave in China.

The majority of economists see the defense against a global recession continuing to win in 2022. But economists are increasingly hedging their bets in the face of relentless bad news.

There is little doubt that global economic expansion is nearing a peak, that it is slowing and policy makers will need to determine how much tightening is needed, says Ennis McPhee, chief global economist at Oxford Economics. But he says a recession is still unlikely for now because policymakers still have the tools to step back and spur if things go wrong.

“Recession risks are up next year, but they’re not quite that high at this time,” McVeigh says.

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