A global recession is an extended period of economic decline around the world. It involves more or less synchronized recessions across many national economies, as trade relations and international financial systems transmit economic shocks and the impact of recession from one country to another.
Is a Global Recession likely in 2022?
The International Monetary Fund defines a global recession as "a decline in annual percapita real World GDP (purchasing power parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: Industrial production, trade, capital flows, oil consumption, unemployment rate, percapita investment, and percapita consumption".
At the Annual Meeting of the World Economic Forum in May this year, Kristalina Georgieva, Managing Director of the International Monetary Fund, opened with a cautious note, explaining that since the IMF’s latest forecasts, the “horizon has darkened.” She was particularly concerned about food price shocks and how anxiety around the world over accessing affordable food was “hitting the roof.” The IMF forecasts global growth in 2022 at 4.4%, but these projections are being revised downwards due to conflict and the fallout from sanctions.
The fallout from the COVID – 19 pandemic and the ongoing war in Ukraine has led to a significant economic slump in 2022. Prices for some common commodities are reaching record levels, economic growth is slowing and inflation is rising. As a result “recession will be hard to avoid” for many countries, World Bank President David Malpass said in June this year.
Rising borrowing costs, inflation, and debt are all contributing to fears of an economic collapse. According to analysts, Belarus is on the verge of defaulting on its debt, as are at least a dozen additional countries—including Russia, Suriname, Zambia, Pakistan, and Lebanon. The economic collapse of Sri Lanka portends the worst fears of some economists.
In 2022, according to leading economists, the catalyst for a recession is not debt but excess liquidity. The primary drivers here are the extreme levels of COVID-related monetary and fiscal stimulus pumped into the investment and household market. Thus, justifying the spiking inflation worldwide.
And trends dictate that inflation-driven recessions tend to be more lenient on corporate earnings. Other than the historic trends, the following factors in developed economies are also highlighting a less severe recession in 2022, if one comes to pass:
⦁ Balance sheets are in the best shape in decades
⦁ The housing and auto industries are strong
⦁ Labour-market dynamics remain robust
⦁ Corporate revenues may be more durable
However, the stock market’s bearish trend may still be 5 to 10% away. Investor’s from developed countries should exercise caution and rebalance their portfolios on a need basis. For international investor’s it is necessary to assess the country level default risk.
Impact on India
The IMF has forecast a 7.5% growth rate for the Indian economy. This is higher than the growth rates in developed and developing economies. In fact, it is the fastest growing economy as per IMF forecasts. The Indian economy has shown a robust recovery from the pandemic-related set-backs and many economic parameters show an uptick. As such there is a low risk of the Indian economy entering into a recession.
Nevertheless the Indian economy faces high prices and a higher rate of inflation at close to 7.5%. This rate of inflation is lower than that faced by many developing economies around the world which only adds to the confidence that there is a low risk of recession in the Indian economy.
The government is confident of controlling the inflation and high prices through monetary policy management. On the fiscal side, there is robust collection of taxes and healthy growth of revenues for companies. Yet the Indian economy is closely integrated with the global economy in terms of trade in goods and services. Recession in the economy of its trading partners is bound to have an impact on the Indian economy in terms of slowing the growth rate further. But the impact is unlikely to send the Indian economy into recession.