“A global recession”, this is what awaits us in the coming months, according to the director general of the WTO, the World Trade Organization. According to forecasts by the National Bank, this recession might arrive in Belgium as early as next quarter, with a drop of 0.2% in GDP from October to December. Worse than the recession, Belgium is plunging into ‘stagflation’, ie an economic slowdown (= recession) combined with rising prices (= inflation).
But what are the causes of this recession? For Oscar Bernal, professor of finance in the management department of the University of Namur, it is the situation we are currently facing that is “quite special”. He explains: “On the one hand, there is a supply shock, ie companies that slow down their activity because they are faced with a very significant increase in their production costs due to energy prices. And on the other hand, we have a demand shock, that is to say that households consume less because they are faced with a reduction in their purchasing power due to the recession. It is the combination of these two shocks that leads to a slowdown in economic activity and therefore to a period of recession.
What consequences?
The short-term consequences of this recession are that companies will initially postpone non-urgent investments in order to increase their production. They are also likely to continue to reduce their production, to reduce energy-related costs. Under current conditions, the risk of bankruptcies is also increasing.
In the medium term, if activity continues to shrink, production is slowed and energy costs are still rising, companies might consider reducing labor costs, which means a hiring freeze even layoffs. If there are job losses, households, already affected by a loss of purchasing power, might then be tempted to further reduce their consumption, in anticipation of bad weather. Their consumption would then decrease, which would lead to a drop in demand… It’s a vicious circle for companies.
The Belgian State also affected
Companies and households are not the only ones affected by this recession. The State also loses on two levels: on the one hand, it loses tax revenue since economic activity and consumption slow down. But it must also face an increase in its social expenditure since there are more families to help.
While usually, in a recession, prices tend to decrease, this is not the case here. Why ? “Pbecause much of the inflation we face is imported inflation through our energy spending. The difficulty here is precisely having to deal with a slowdown in economic activity combined with a sharp increase in prices. This is obviously the inflationary phenomenon that we have been facing for several months now, and which leaves the authorities in a lot of difficulty as to how they must react in order to be able to deal with it”develops Oscar Bernal.
All this makes the situation considered worse than a recession, it is “stagflation”.
