If you’ve been paying attention to business commentary lately then you’ve surely come across at least one reference to an impending global recession. Things certainly haven’t been looking good for some time now. It feels like we are starting to recover from the effects of covid-19, people are travelling, entertainment is open and many industries are back to near normal. The pandemic itself isn’t gone but we have some kind of normal levels of it around the globe, gone are the sharp rises in numbers. However the US reported its highest inflation in some time and when America sneezes, the world catches a cold. With this and other economic events unfolding we need to investigate if we are going to experience a global recession.
We need to start by identifying what constitutes a global recession to answer the question properly. Let’s first define a recession, a term many should be familiar with. A recession is defined academically as two consecutive quarters of economic decline as measured by GDP. So where an economy recedes or shrinks for two consecutive quarters you have a recession. In reality, recessions are a little more complicated than that with corresponding negative movements in inflation, employment, industrial production and sales volumes. Are sounds familiar doesn’t it? We also look at it in terms of GDP per capita (per person) rather than absolute GDP.
So when we speak of a global recession we take these considerations global, including the whole world. That’s a daunting task but somebody has to do it. According to the World Bank, we have experienced four recessions since 1950 in the years 1975, 1982, 1991 and 2009. The latter two are important years in Zimbabwe’s recent economic history as we certainly felt the shocks. Literature also indicates that the years 1975 and 1982 affected Zimbabwe as well. With the 2009 recession as our most recent example, we can see the effects of a global recession more clearly. Though Zimbabwe was at a turning point from its misfortunes at the time.
Every recession has a cause. Most recessions have more than one. If we look at the 2009 recession it was fueled by many factors but chief among them was a credit bubble centred around financing mortgage loans. To put it simply, lenders pushed more aggressively to sell loans. At the time things were going great. GDP per capita was rising and on average people could pay for bigger loans. Just because you can pay for something doesn’t mean you can afford it and when push came to shove many people’s inability to afford the loans that had been availed to them was revealed. The domino effect of so many people being exposed was major defaulting on loans, and many properties going up for sale which depressed property prices and valuations cutting further into the wealth of many. When such action happens production is scaled back in many things because your customers can’t afford the products. Production is cut by cutting jobs and that means few people have income and this amplifies the problem.
Our domino is of course the covid-19 pandemic. And covid 19 had a unique effect as activities were stopped to curb the risk of spreading the virus. Entertainment, travel and many normal activities were cut. Jobs in those sectors and other supporting or dependent sectors were lost pretty much overnight. It didn’t stop there. Productive industries such as manufacturing, farming and food processing were all affected. It’s also important to note that it wasn’t just hard lockdowns that affected production, the coronavirus itself affected production. Due to its contagious nature, many businesses would have to close for extended periods if one case was reported on their premises. So production was scaled back, incomes were cut and many industries suffered. Now the Russia-Ukraine crisis piled pressure on some important areas. So, do we have a recession?
For those who may be as tuned in to the global business news cycles there has been talking of an impending recession since at least the last recession but in earnest for about 2 years now. There is always someone, somewhere running around like a chicken little screaming “the sky is falling”. The current state of the global economy is certainly the worst it’s been but that doesn’t immediately spell recession. Perhaps at the centre of this is the recent downgrade by the International Monetary Fund of global GDP growth from an estimated 6.1% in 2021 down to 4.4%. Simply put the world grew slower than they initially expected it to. Nothing scary there, estimating these things is a complicated job. The new forecasts expected GDP growth to come in around 3.6% in 2022 and 2023 (down from an initial estimate of 4.9%). So the outlook is certainly pessimistic.
A global recession at this point seems unlikely though a lot hangs on America’s ability to deal with its domestic issues and resolution to the conflict in Ukraine. Commodity prices (and therefore inflation) are expected to peak in the second quarter of 2022 (now) and slow down thereafter. What economists firmly expect is a period of stagflation. Stagflation is a scenario where low growth (stagnation) is experienced together with high prices (inflation).