Global recession is the most feared villain in the fairy tale of global economy and finance. All bulls on the Wall Street are wary of the harsh recessionary talk as it ensues painful layoffs and cumbersome corporate shutdowns.
I personally think that the fear of recession is even more harmful than the actual recession as imagination is always more hurtful than reality. But this reality is somehow kicking in.
The first and foremost global indicator of this receding activity is the dilly-dally wave of uncertainty in oil markets. Crude price increased by 25% since June to reach a peak of around $97 a barrel after OPEC+ announced extension in production cuts.
After scaling this peak, it receded to $77 and is currently oscillating in a narrow range of $80-82 primarily dictated by fears of diminishing demand. All sentiment in the oil market is bearish and if OPEC+ doesn’t resort to further cuts, oil is expected to fall into the $70s.
This is just a symptom; the underlying effects are also reflating in economic models of global economic players.
As per the Global Economic Outlook of the IMF, world real gross domestic product (GDP) growth is expected to moderate to 3% in 2023 after reaching 3.5% in 2022. Further outlook is also bearish with a 2.9% projection for 2024.
Read Oil stabilises after slump on OPEC+ cuts
This decline in growth has many reasons. The primary reason is the tightening cycle employed by global central banks.
After reaching an all-time low of nearly 0% in Covid times, the US Fed has increased its rate to 5.25-5.50% in 2023. This has resulted in mortgage rates to shoot over and above 7%, which is not sustainable.
A couple of global banks melted under this scorching heat of high rates but the cycle is not ending soon. The background behind this elongated cycle is the painful story of global inflation.
Global inflation, which was ignited by commodity price shock, scaled a high of 9.2% in 2022, which is way above inflation targets of around 2% set by major economies including the US. This rate has significantly declined recently and projection for 2023 is around 5.9% following through with an even lower number of 4.8% in 2024.
However, a steep decline as it seems will still be impotent as the rate is expected to remain much above the target rates of all major economies. Hence, sticky inflation and stickier tight monetary policy are here to stay.
Another contributor to this gloomy story of global recession is the lacklustre economic activity in China.
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China has been the engine of growth for the past 40 years. The tentacles of its trade have engulfed trading activity of the globe and its exports are considered to be the most representative proxy of international trade. These exports are not picking the expected pace and hence the overall sentiment is sombre.
Another issue with China is the problems in its real state sector. Big companies with accumulated debts higher than sovereign countries are in the limelight. These companies appear to be failing big time and the growth formula of credit-based real estate income is not working. This has also soured the mood in China.
Ironically and surprisingly, the outlier in this doom and gloom scenario is the buoyancy of US economy. Data of the US job market is very resilient with unemployment rate expected to tick marginally up from 3.6% to 3.9% by 2025.
The US is also pumping in record high oil into the international energy game with October being the historic high month for its oil production as they injected 13.2 million barrels per day (bpd) into the veins of global crude.
All the signals coming from the statue of liberty are not good. The US jobs are resilient but as a country they have also seen the melting down of Silicon Valley Bank. Furthermore, bankruptcies in the US have also increased by 20% on YoY basis.
Read Economic revival, CPEC and Agenda 2024 – I
The activity in Europe is not promising. Just like China, Germany is also a global manufacturing hub and activity there is also docile. Costs in Europe have multiplied as they are devoid of cheap Russian oil and these costs are reflecting in the erosion of buying power.
The overall global balance sheet is under stress as well. The fiscal space is shrinking with high debt levels and ever rising financing costs. The fiscal buffers are fast eroding and countries are breaching their debt ceilings.
The writer is a banker and teaches economics
Published in The Express Tribune, December 4th, 2023.
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