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World Economy heading towards Recession

General

The sharp decline in the GDP of top economies across the world indicate that the world is heading toward a recession. The main cause of the current recession could be excessive liquidity. The COVID-related fiscal and monetary stimulus poured money into consumers and the stock market, fuelling inflation and financial asset speculation. The rates of inflation are mounting at an exponential rate all over the world. Moreover, the war between Russia and Ukraine has further worsened the situation causing spikes in the prices of food and fuel. Russian invasion has directly impacted the price levels globally. Russia being the largest exporter of gas and oil and Ukraine being the largest exporter of food grains and iron has led to a notable rise in prices of fuel and food. As a result, there is a reduction in production and trade due to the war which has led to an increase in price levels. 

Ominous signs for emerging markets and economies

 

According to a new study by the World Bank, the world may be edging toward a global recession in 2023 and there could be a string of financial crises in emerging markets and developing economies. This is because central banks around the world are raising interest rates simultaneously in response to inflation.  

“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging markets and developing economies,” said World Bank Group President, David Malpass. 

Compared to the period leading up to previous global recessions, the loss in worldwide consumer confidence has already been much more severe. The three largest economies in the world, the US, China, and the Europe have all seen a significant slowdown. Given the situation, even a slight setback to the world economy over the course of the following year might send it into a recession. 

Factors hinting that the world economy is heading toward recession 

 

  • Rise in Federal Reserve’s interest rates has led to a rise in lending rates making it difficult for businesses to grow smoothly. 
  • US indices viz. S&P 500, Dow Jones Industrial Average, and Nasdaq Composite Index are down by 20% as of October 2022. 
  • Western countries have cut-off imports from Russia, due to which prices have reached peak levels and supply chains have dwindled. 
  • Economic turmoil in UK and EU created by Covid-19 and now followed by trade disruptions due to war has resulted in falling prices of the British pound and Euro when compared to Dollar. 
  • Even the bond markets are showing a negative descent indicating a gloomy economy. 

  Efforts required to contain inflation

Four global recessions—in 1975, 1982, 1991, and 2008—have affected the world economy in the past century. In each of these periods, the yearly real per capita global GDP shrank, and other important global economic activity indices saw significant deterioration. Several nations around the world experienced serious economic and financial disruptions as a result of these occurrences, which were well synchronised internationally. The fourth episode, the worldwide recession of 2009, was by far the most severe and coordinated. 

There is a need for central banks to continue with their efforts to contain the growing inflation along with efforts from other policymakers as follows: 

  • To implement policies effectively, central banks must act promptly. The cross-border spillover effects of monetary tightening in advanced economies should be considered by central banks. They should stiffen macroprudential rules and increase foreign exchange reserves in developing and emerging markets. 
  • Fiscal authorities must provide support while ensuring consistency with monetary policy objectives. 
  • Other steps involve taking strong measures to boost global supply. On the supply side, they need to put in place measures to ease the constraints that confront labor markets, energy markets, and trade networks. These include easing labor market constraints, boosting global supply, strengthening international trade, etc. 

As stated by Kristalina Georgieva, IMF Managing director, “The only effective remedy to these risks is international cooperation. It is our only hope for a fairer, more resilient future.” The world should stay united to face the challenges as the challenges are indivisible, and so should be the efforts to solve them. 

You can learn more about the causes and effects of global recession and solutions that help mitigate it by gaining insights into the world economy, international business, and market trends. If you’re someone interested in these aspects and looking to pursue a career in this domain, you can enroll for an online MBA with International Business as elective from Manipal University Jaipur (MUJ). The online degrees provided by MUJ are UGC-entitled and NAAC A+ accredited,

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