Is an inevitable global economic recession on the horizon or not? This question has no definitive answer due to the divergent positions and opinions out there. However, what is evident is that the global economy is still suffering, and the suggested remedies are either insufficient or the result of misdiagnosis.
In the United States, despite official assurances that the sector is healthy and robust, a murky economic picture is emerging due to continuing banking crises. The economy experienced a sharp 1.1 percent slowdown between January and March, while inflation remains above target despite gradual declines. Consequently, the Federal Reserve has raised interest rates by 25 basis points for the tenth consecutive time.
However, it appears that the Federal Reserve will ease its stance on future interest rate procedures given that signs of an economic slowdown are starting to emerge in the U.S. The central banking system has acknowledged that its hawkish policy is putting pressure on the economy and causing disruptions in the banking sector.
In addition, there is the prospect of a historic first for the U.S.: a default. Such an event would shock both the U.S. and the world.
Economists are concerned that if the catastrophic debt-ceiling-breach scenario materializes, the U.S. GDP could plummet by 6 percent, and financial markets could drop 45 percent in Q3 2023. They assert that a standoff between Republicans and Democrats over the debt ceiling could trigger a recession in the U.S. economy, even if it does not result in a default.
According to a recent report presented to Treasury Secretary Janet Yellen, the Treasury Borrowing Advisory Committee stated that “many private investors expect a recession next year.” Additionally, a March Federal Reserve poll revealed a 20 percent likelihood of a recession beginning in the first half of 2023, and over a 50 percent probability of a recession occurring by year-end.
In Europe, governments are still struggling to combat inflation, while the European Central Bank is continuously raising interest rates to tame it. The ECB recently raised interest rates by 25 basis points to 3.25 percent, as anticipated. Further monetary tightening may be required by the ECB to curb inflation.
Despite a significant drop in overall inflation in the European Union from readings of over 10 percent recorded last fall, accompanying price pressures are still mounting, indicating that inflation rates may stabilize above their targets if the ECB does not increase interest rates further. “We will not stop … This is very clear … We know we have more to go,” ECB President Christine Lagarde said.
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In contrast, China presents a completely different scenario, something the International Monetary Fund is relying on to bolster global economic growth this year. China’s economy had a robust beginning in 2023, with consumers going on a spending spree after three years of stringent pandemic-related social restrictions. As a result, its GDP grew by 4.5 percent in the first quarter of the year, surpassing previous projections of 4 percent growth. Furthermore, the current trade sanctions between the U.S. and China have raised concerns of an imminent global fragmentation that could have far-reaching consequences.
Are we in a recession?
While the possibility of a U.S. economic recession can be contained, the main concern is the timing of it. According to the Federal Reserve, the banking crisis could result in a moderate recession later this year. However, Bank of America expresses concern that a more severe recession in the U.S. could be on the horizon. “The risks are more balanced, as on the one hand there is still a chance to avoid negative growth, and on the other hand there is another chance of a deeper recession than we expected,” it says in a note.
Members of the U.S. National Association for Business Economics are evenly split on whether a recession may occur within the next twelve months.
Federal Reserve Chairman Jerome Powell believes that there is still a possibility that the central bank can slow down price growth without harming the economy, which would go against historical trends, and the Fed’s work may be reaching its conclusion.
For his part, U.S. President Joe Biden expresses confidence that the Federal Reserve can manage inflation without triggering an economic recession. Following the Fed’s recent action, he stated, “I still think it’s possible that this time will be really different … Avoiding a recession, in my opinion, is more likely than having one.”
In Europe, most economies narrowly evaded a recession this winter. Now, the continent faces the challenging task of sustaining the recovery, combating inflation, and preserving financial stability. The eurozone’s economic performance can be characterized as more resilient than anticipated, as it managed to evade what just a few months ago was likely the worst recession expected.
The IMF emphasizes that additional interest rate hikes are necessary in the Eurozone to curb inflation. The IMF also believes that central banks should not stop monetary tightening too early due to concerns that doing so may raise financial risks. The IMF acknowledges that achieving its inflation target may require a severe recession.
According to a 2023 forecast survey of top economists by the World Economic Forum, opinions are divided on whether a global recession will occur this year. Approximately 45 percent of economists expect the global economy to enter a recession, while an equal percentage believe that the economy will avoid such a scenario.
What about the Gulf?
Despite the ongoing global events, Gulf economies are seemingly insulated from the risks of a global recession. The IMF’s positive expectations for the region persist, as they have repeatedly stated that the Arab Gulf economies have the potential to navigate in a different direction than the current global trends.
Economists’ various expressions about the inevitability, immediacy, or unlikelihood of a recession highlight the uncertainty in predicting the global economy’s future. The question remains whether we will encounter a new landscape that places the global economy in an unexpected situation.
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