Is a Global Recession Imminent?
Growth in world economic activity has slowed considerably in recent months. A multitude of factors have hurt growth: the ongoing fallout from Russia’s invasion of Ukraine and new COVID outbreaks have damaged confidence and pushed food & energy prices higher, and macroeconomic policy has become much less stimulatory in the major economies. Tighter financial conditions in most major economies, triggered by elevated inflation, are heightening concerns about the global outlook. Policymakers in most economies currently face major challenges: they are having to manage high levels of inflation in an environment of sharply slowing (and even negative) growth. Inflation has surged, as supply problems add to a surge in energy prices due the fallout from the Russian invasion of Ukraine. The supply problems are both a remnant of the Downside risks are substantial. These include: Russia cutting off gas exports to Europe; inflation proving harder to reduce than expected: tighter global financial conditions inducing debt distress in emerging market and developing economies; renewed COVID-19 outbreaks and lingering problems in the Chinese property sector.
Whether the global economy experiences a hard or soft landing remains in the balance. Labour markets are extremely tight in some advanced economies, especially the US and the UK, raising nominal wage growth. But real wages have mostly fallen, eroding household purchasing power and consumer sentiment. Households in advanced economies are servicing historically high debt levels, in part by drawing down savings built up during the pandemic. How labour markets perform will be critical as business investment and household spending respond to tighter financial conditions over the coming quarters. The IMF believes a worse scenario is plausible. In this scenario, inflation rises further, and global growth declines to about 2.6 percent and 2.0 percent in 2022 and 2023, respectively, putting growth in the bottom 10 percent of outcomes since 1970
Banks in most economies have lifted policy rates and begun to reduce holdings of assets purchased under quantitative easing programs. Global financial conditions have generally tightened, due to expectations of further tightening of monetary policy, and, along with the Russia/Ukraine conflict and related sanctions, lowered investors’ appetite for risk. The US Fed lifted rates at its September meeting, the fifth time this year, for a cumulative increase in its benchmark overnight interest rate of 300 points. The European Central Bank raised its deposit facility rate by 75 basis points in September following a 50 basis points increase in July, the first increase in over a decade. Most central banks have signaled further increases in policy rates, and market expectations are that rates will peak around mid-2023.
Global Manufacturing PMI fell to a 28-month low of 49.4 in October and remained below the neutral 50.0 mark for the second successive month. Two of the five PMI components - new orders and output -had greater negative effects on its level. Although indices tracking trends in employment and supplier lead times had a positive influence overall, these were to lesser extents than in the prior survey month. October PMI signaled a third successive monthly contraction in global manufacturing production. The latest decline in output was driven by weaker intakes of new business, deteriorating international trade flows and lower business confidence.
China Purchasing Managers’ Index posted below the 50.0 no-change mark in October to signal a third successive deterioration in manufacturing sector conditions across China. However at 49.2, this was up from 48.1 in September and indicative of only a marginal decline.
Eurozone Manufacturing PMI recorded in sub-50.0 territory for a fourth month in a row in October, signaling a sustained downturn in manufacturing sector conditions. At 46.4, the headline index fell from 48.4 in September to its lowest level since May 2020. The downturn in Germany’s manufacturing sector gather pace at the start of the fourth quarter. Goods producers reported the steepest drop in output since May 2020, whilst also noting a deepening decline in new orders, as conditions across the sector worsened amid growing concerns about the economic outlook and high energy costs. Italy's goods producing sector remained firmly on a contraction footing in October. In fact, the downturn gathered pace amid the fastest falls in factory production and order books since the height of the pandemic in the spring of 2020, respectively. Weak demand was also reflected in a further uplift in stocks of finished goods. In response, firms cut their input buying at the fastest pace for over two-years. Reduced demand led to a further cooling of inflationary pressures. The Spanish manufacturing sector experienced a torrid month in October, with both output and new orders declining at rates not seen since the height of pandemic related lockdowns in the spring of 2020.
India Manufacturing Purchasing Managers’ Index was up from 55.1 in September to 55.3 in October, above its long-run average (53.7) and indicating a stronger improvement in the health of the sector. The upward movement in the headline figure largely reflected stronger increases in employment and stocks of purchases.
US Manufacturing Purchasing Managers’ Index posted 50.4 in October, down from 52.0 in September. Nonetheless, the latest index reading indicated the least marked improvement in the health of the US manufacturing sector in the current 28-month sequence of growth.
Japan Manufacturing Purchasing Managers’ Index fell to 50.7 in October, down from 50.8 in September signaling a weak overall improvement in the health of Japan's manufacturing sector. The latest headline figure was the lowest reading for 21 months.
World Bank in a brief on 15 September “Is a Global Recession Imminent?” has warned about possibility of a global recession. It had said “Since the beginning of the year, a rapid deterioration of growth prospects coupled with rising inflation and tightening financing conditions, has ignited a debate about the possibility of a global recession, contraction in global per capita GDP. From earlier recessions suggests that at least two developments, which have already materialized in recent months or may be underway, heighten the likelihood of a global recession in the near future. First, every global recession since 1970 was preceded by a significant weakening of global growth in the previous year, as has happened recently. Second, all previous global recessions coincided with sharp slowdowns or outright recessions in several major economies. This synchronous policy tightening contrasts with the policies adopted around the 1975 global recession but is similar to those implemented ahead of the 1982 recession. If the ongoing global slowdown turns into a recession, the global economy could end up experiencing large permanent output losses relative to its pre-pandemic trend. This would have severe consequences for the long-term growth prospects of emerging market and developing economies that were already hit hard by the pandemic-induced global recession of 2020.”