Kuala Lumpur, Malaysia – After beginning as a murmur early in the year, warnings of an incoming global recession are growing louder by the day.
During the past week, high-profile figures from the head of the World Trade Organization (WTO) to American Nobel Prize-winning economist Paul Krugman have sounded the alarm about the likelihood of a global downturn.
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In a survey released by the Switzerland-based World Economic Forum on Wednesday, seven out of 10 respondents in a sample of 22 leading private and public sector economists said they believed a global recession was at least somewhat likely in 2023.
Meanwhile, Ned Davis Research, a Florida-based research firm known for its Global Recession Probability Model, raised the likelihood of a global recession next year to 98.1 percent, the highest since the COVID-19 pandemic-related downturn of 2020 and the global financial crisis of 2008-2009.
While the war in Ukraine, China’s draconian pandemic policies, and runaway inflation are all clouding the economic outlook, investors are particularly concerned about the prospect of the United States Federal Reserve raising interest rates so aggressively that the world’s largest economy tips into recession — taking much of the rest of the world with it.
Historically, the US and other central banks have found it difficult to manage the task of raising rates — which raises the cost of borrowing and investment for businesses and households — without dealing a severe blow to economic growth. Past recessions, which are usually defined as two consecutive quarters of negative growth, have been blamed on the Fed’s efforts to cool high inflation, including back-to-back downturns in the early 1980s.
Critics, including renowned economists such as Jeremy Siegel, have accused the US Fed this time around of waiting too long to begin raising rates, only to resort to drastic hikes of late to make up for its prior inaction.
Despite holding out hope for a “soft landing” for the economy, US Fed Chair Jerome Powell acknowledged last week that central bank officials “don’t know” whether their efforts to rein in inflation will lead to a recession or how severe a recession would be.
“For the US, if inflation does not show signs of cooling in the last few months of 2022, and measures of inflation expectations start to climb, it would force the Federal Reserve to continue with aggressive rate hikes beyond 2022 into the spring of 2023 — in my opinion that’s when the economy will tip into a recession,” Pao-Lin Tien, an assistant professor of economics at George Washington University, told Al Jazeera.
“I think a similar situation would apply to other countries as well, if central banks are forced to increase rates aggressively and persistently, either to defend their currency or to tame inflation, then a recession is inevitable.”
Campbell R Harvey, a professor at Duke University’s Fuqua School of Business who pioneered the use of US bond market yields to predict recessions, said the Fed’s actions could “easily push the economy into recession — and a recession would be very effective in reducing inflation.”
“However, recessions are very painful,” Harvey told Al Jazeera. “No one wants to be laid off or be forced to collect government assistance for a prolonged period of time.”
Harvey said, however, that the yield curve indicator he has used to predict the last eight recessions did not indicate an imminent downturn, as the curve had yet to invert for a full quarter.
“When an inversion happens, it is very bad news and is associated with a recession,” he said.
Risks in Europe, Asia
Outside the US, economic headwinds offer little cause for optimism.
Germany, Italy and the United Kingdom, three of Europe’s largest economies, are expected to undergo lengthy recessions next year, largely due to the energy supply issues caused by Russia’s invasion of Ukraine, the Organisation for Economic Co-operation and Development (OECD) said on Monday.
The OECD expects the eurozone to grow just 0.3 percent in 2023, indicating that many of the bloc’s economies will be in recession throughout periods of the year.
While the Asia Pacific is expected to avoid contraction, China’s “zero-COVID” lockdowns and border restrictions are becoming a serious drag on the region’s growth potential.
On Tuesday, the World Bank slashed its economic forecast for the Asia Pacific to 3.2 percent, down from 5 percent in April, and nearly halved its forecast for China to 2.8 percent.
Trinh Nguyen, a senior economist for emerging Asia at Natixis in Hong Kong, said Asian economies would not be spared from the fallout of rising interest rates, although the region was looking at a “slowdown not a meltdown”.
“We think Asian growth will decelerate. For economies more exposed to the trade cycle, the impact of weakening external demand will feel worse, such as South Korea and Taiwan,” Nguyen told Al Jazeera.
“In emerging Asia excluding China, the tightening of financial conditions will push down investment. Consumption is expected to decelerate but remain sticky as they are mostly essentials in emerging Asia excluding China.”
Harvey, the Duke professor, said that although he had “much more confidence” that Europe would spend 2023 in recession than the US, the world was facing a precarious economic outlook.
“Inflation is a global phenomenon. Inflation surges are often associated with recessions,” he said. “Yes, if the US goes into recession, it would likely lead to a global recession — especially given that Europe is likely already in a recession.”