Are we on the brink of a global recession?

Since Covid-19 brought the world to a halt in 2020, life has been nothing short of a nightmare. We have already seen unprecedented national lockdowns, social distancing measures, overburdened hospitals, and mass casualties all over the world. However, with the introduction of vaccinations, we assumed the horror was finally over, but nothing could be farther from the truth. With inflation on the rise, widespread supply chain bottlenecks, and rising geopolitical tensions, governments face a monumental task in steering their countries away from a crisis. Looking at the current global situation, it is clear that we are in deep waters and may be on the verge of a global recession.

With economies all over the world reopening and consumers returning to markets, the main issue that central banks are dealing with is rising consumer prices. To combat inflation from rising any further, central banks started winding down their quantitative easing measures put in place at the onset of the coronavirus pandemic. However, these measures were rendered ineffective due to the conflict between Russia and Ukraine, which exacerbated global supply chains and drove commodity prices to historic highs, adding fuel to the already raging fire.

The Russia-Ukraine conflict has been detrimental to oil and gas prices, which have risen sharply. Furthermore, the two countries are large exporters of agricultural commodities, and account for nearly 14% of global wheat trade. Similarly, Russia and Ukraine account for nearly 19% of global barley exports and nearly 52% of global sunflower oil exports.

It is also important to note that, because Russia is a major fertiliser exporter, sanctions against the country could have a negative impact on fertiliser supply around the world, lowering crop yields. Russia is also a major supplier of valuable minerals such as palladium, titanium, nickel, and neon. Palladium, in particular, is a critical component in automobile manufacturing, and its price has increased astronomically since the war began. Supply disruptions in these commodities from Russia and Ukraine have driven up consumer prices even further.

Aside from the Russian-Ukrainian conflict, China’s zero-Covid policy is causing mayhem in commodity supplies all over the world. The imposition of strict lockdowns and travel restrictions is harming demand and economic growth in the world's second-largest economy. Shanghai, the world’s busiest container port, is closed due to an uptick in coronavirus infections in the region. As a result, hundreds of cargo ships have been stranded in the port.

Moving forward, China's return to a Covid-zero state is highly unlikely given the likelihood of new coronavirus variants emerging in the future. As a result, the global economy is predicted to stay under pressure, at least in the short term, and inflation is expected to continue its upward trend, forcing central banks to continue hiking interest rates until the global macroeconomic outlook stabilises.

Consequently, given the Russia-Ukraine war and the slowing down of China’s economy, policymakers around the world are considering the likelihood of the global economy entering into a recession. According to the World Trade Organisation (WTO), the growth of the global economy will drop to 2.8% in 2022. Earlier, it had predicted that the global economy would expand by nearly 4.1% before Russia declared war on Ukraine. Similarly, as per WoodMac, a research and consultancy company, the global economy is expected to grow by 2.5% in 2022 and 0.7% in 2023.

Investors around the world are already tweaking their strategies and becoming more cautious as uncertainty in global markets continues to rise. This is clear from the inversion of the American Treasury yield curve, which indicates that investors are shifting away from risky equities and towards short-term fixed income bonds in an attempt to protect themselves from the possibility of the global economy slowing down in the short term. Furthermore, fund managers around the world are also increasing the weightage of cash in their portfolios.

Considering the aforementioned warning signs such as rising inflation, inversion of the American treasury yield curve, and portfolio reallocation by global fund managers, the likelihood of the global economy entering a recession in the short term is high. Hence, countries are at a critical juncture where policymakers must be proactive in dealing with the looming issues, and governments should be actively seeking for ways to protect their respective countries from the implications of a global recession.