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In the halls of Davos, the hot topic of the moment is whether or not a global recession is looming.
This was confirmed by Faisal Islam, BBC economics editor, who covered the World Economic Forum which is held once a year in Davos, Switzerland.
In recent weeks, the warnings of the leaders of the largest investment funds in the world have accumulated one following the other, but with nuances.
Some more pessimistic than others, those responsible for the management of billions of dollars and politicians have publicly analyzed the issue, confirming the fact that in the highest circles of power it is a relevant concern.
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At a trade event a few days ago, World Bank Director David Malpass warned that it was difficult to see “how to avoid a recession” with rising prices for energy, commodities food and fertilizers.
“The thought of energy prices doubling is enough to trigger a recession on its own,” he said.
“Potential Confluence of Calamities”
On a more discreet but also worrying note, the director of the International Monetary Fund (IMF), Kristalina Georgieva, affirmed that “the horizon has darkened”.
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Along with the scars left by the covid-19 pandemic, financial market turmoil and the lingering threat of climate change, the war in Ukraine and the current food crisis constitute a “potential confluence of calamities”, Ms Georgieva added.
Clarifying the meaning of her remarks, she said that while she does not expect a recession for the world’s major economies, she cannot rule it out either.
“No, not at the moment, (but) that doesn’t mean it’s out of the question,” she explained during the Davos opening session.
Meanwhile, US President Joe Biden has said a US recession “is not inevitable”.
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The war in Ukraine has caused food prices to rise far beyond the Black Sea.
A threat which, among other things, is fueled by high inflation (the highest in four decades), shortages due to bottlenecks in supply chains and the geopolitical earthquake caused by the invasion of Ukraine by Russia.
The economic and political elite are hungry for new pieces to put the jigsaw together, while the war in Ukraine continues to drive up inflation.
What is a recession?
Amid this debate, the question of what a recession really is is once once more gaining traction.
Many economists speak of a “technical recession” when gross domestic product (GDP) growth contracts for two consecutive quarters.
Talk of avoiding economic contraction, while seeking to provide an injection of optimism, nevertheless implies that there is a latent threat.
GDP trends help businesses judge when to expand and hire more workers or invest less and downsize.
Governments also use it to make decisions ranging from taxation to spending.
It is a key indicator for central banks, along with inflation, when considering whether to raise or lower interest rates.
Others, on the other hand, take a softer view and define it as “a significant decline in economic activity, generalized to the whole economy and lasting for more than a few months”.
International bodies such as the World Bank and IMF consider a global recession to be a year in which the average global citizen experiences a decline in real income.
Among the deep global economic contractions of recent decades, those of 1975, 1982, 1991, 2009 and the pandemic recession of 2020 stand out.
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Ironically, during the last recession, when people were struggling, markets did incredibly well.
This latest pandemic recession, considered the toughest since World War II, shook the foundations of globalization and left scars that were only just beginning to heal when Russia invaded Ukraine in late February.
With a geopolitical shift of such magnitude, all economic growth estimates for this year are revised.
The Chinese Factor
China has become the great unknown.
The Asian giant, which accounts for 19% of all global production, is in the crosshairs of analysts because a slowdown in its economy would have a direct impact on the rest of the world, both because of its importance as a buyer of goods and services from other countries than its key role in the supply chains that drive international trade.
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The latest covid-19 outbreak has caused severe lockdowns in parts of the country, creating bottlenecks in Chinese ports and negatively affecting sectors such as trade, manufacturing and real estate.
David Malpass said he was concerned regarding the shutdowns in some major Chinese cities, given that they “still have ramifications or slowing down effects on the world”.
“China was already experiencing a real estate contraction, so China’s growth forecast before the Russian invasion was already down sharply by 2022,” the World Bank representative said.
“Then waves of covid triggered lockdowns that further reduced growth forecasts for China,” he added.
A brake on economic growth
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In the United States, Jerome Powell, chairman of the Federal Reserve – the equivalent of the US central bank – said the body will continue to raise interest rates until inflation is brought under control, while Europe is trying to cope with a huge increase in fuel prices linked to the crisis in Ukraine.
Outside the major centers of power, the less developed countries have experienced a dramatic rise in food prices and, among them, the poorest are on the brink of starvation.
Among economists and bankers, opinions are divided on whether the world is heading for a recession or just an economic slowdown.
Meanwhile, the cost of living continues to rise and central banks continue to raise interest rates to stem inflationary pressures.
The problem is that the rise in interest rates, if it helps to control inflation, makes it more expensive to borrow and to repay debts, which constitutes a brake on economic growth.
Additionally, the outlook has deteriorated in recent weeks due to the latest COVID-19 outbreak in China.
Investors and bankers are worried.
One of them, Robin Brooks, chief economist of the Institute of International Finance, the global association of the financial industry, tweeted that “the global recession is coming”.
Whether it’s coming or not, we won’t know until the months have passed and the indicators have delivered their own verdict.
