First came the pandemic, then came the supply chain bottlenecks and surging prices, and now the armed conflict between Russia and Ukraine is careening the global economy towards a likely recession.
Europe on the verge of a recession – other regions showing downward momentum
Europe is teetering on the brink of a recession and is bearing the brunt of investor confidence. “The Eurozone economy is being pushed into recession by the Ukraine conflict and the accompanying sanctions and uncertainties,” according to a new survey by Germany-based Sentix that polled over 1,200 investors on their outlook toward specific regions and countries in the first few days of April 2022. Sentix is recognized as the pioneer and the leading provider of sentiment analyses (behavioural finance) in Europe.
“No region is currently able to resist the negative momentum. The US economy is showing a downward momentum. Even the Asian region with the growth engine China is currently struggling with stagnation,” the survey wrote.
Investors surveyed by Sentix said that the outlook of the Ukraine war fuels uncertainty, which combined with inflationary pressures and imbalances in the logistics sectors are unsettling consumers and companies.
David Beasley, executive director of the United Nations World Food Programme, has warned that the war in Ukraine has created “a catastrophe on top of a catastrophe” and will have a global food impact “beyond anything we’ve seen since World War II.” This is particularly true for the Middle East, North and East Africa, which rely on Russian and Ukrainian vegetable oil and grain supplies and are being adversely affected because of the hold-up on food supplies coming from Russia and Ukraine. This will fuel food inflation at a time when the global food prices have already soared.
While Latin America’s direct economic exposure to Russia and Ukraine is limited, the soaring global energy prices and supply chain shocks resulting from the Ukraine war are accelerating fuel and food price increases in the region, worsening inflation and increasing the likelihood of continued monetary policy tightening. The Sentix survey delineates an economic downturn in Latin America.
Tightening cycles are followed by recession
Central banks around the world are focused on tightening monetary policy aggressively to tame inflation. While the world is experiencing a current tightening cycle (a cycle of interest rate hikes), Neil Shearing, group chief economist at Capital Economics, warned that 13 of the past 16 tightening cycles resulted in recession.
“The lessons from history are troubling. Since the late-1970s there have been eight tightening cycles in the US and five in the UK. The European Central Bank (ECB) only came into being in 1999 and since then has been through three tightening cycles. This makes 16 tightening cycles in total – 13 of which have ended in recession. Soft landings are hard to achieve,” wrote Shearing in a research note on March 21, 2022.
“There have been three reasons why tightening cycles have been followed by recession. The first is that economies have been hit by an exogenous shock. This was the case in 2020, when the pandemic (rather than the central bank tightening) caused a collapse in activity.
“The second reason is that policy tightening has been either too slow or too timid to prevent economies overheating and/or bubbles inflating. These bubbles have then burst, causing an economic downturn. This was true of the global financial crisis in 2007-08, and also the dot-com crash in the US in 2001.
“The final reason is that central banks allow inflation to spiral out of control – and then have to tighten policy aggressively, and drive the economy into recession, in order to bring it back down. This was the case in the late-70s and early-80s.
“It is the third of these concerns that is now motivating the actions of central banks,” explained Shearing in his research note.
Recession in the US likely
With inflation surging at its fastest pace in 40 years, and the US Federal Reserve (Fed) increasing interest rates that will lead to slower economic growth, a recession in the US is “virtually inevitable” wrote Bill Dudley, the former president of the Federal Reserve Bank of New York, in an op-ed published in Bloomberg last month.
Dudley admonished the Fed for being too slow to act to control the heightened inflation over the past year and believes that it won’t be able to engineer a “soft landing” for the US economy – containing inflation without tipping into a recession.
In March, Moody’s Analytics chief economist, Mark Zandi, told CNN that the US economy has at least a one-in-three chance of sinking into a recession over the next 12 months. Goldman Sachs is also of the view that the economic contraction risks are climbing.
Last month, Goldman Sachs downgraded its economic growth outlook for the United States and the European Union in 2022, as its economists believe that the US recession odds are as high as 35%.
As economic downturn looms over the US and Europe, Deutsche Bank economists, led by David Folkerts-Landau and Peter Hooper, wrote in a 68-page note to clients last week that “Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated US and European inflation, have caused us to revise down our forecast for global growth significantly.”
“We are now projecting a recession in the US and a growth recession in the euro area within the next two years.”
A slowdown in the US, the world’s largest economy, which last year grew at its fastest rate since 1984, will reverberate globally, threatening to send growth into reverse barely two years after the world economy shrank 4.3 percent due to the pandemic.
China’s rising COVID-19 infections and lockdowns pose significant risks to global growth
China’s battle with its biggest COVID wave yet, using mass testing, stringent lockdowns and border controls, is dampening domestic spending, restricting production and aggravating global supply shortages.
In Shanghai, which contains the world’s busiest container port and was in lockdown for more than two weeks before the authorities started easing up in some areas on Monday, shipping delays and the scarcity of truck drivers and other workers will mean longer delivery times and a possible rise in freight costs. This will be a setback for global supply chains already stretched by the Russia-Ukraine conflict and the COVID-19 pandemic.
China’s COVID lockdowns likely cost the country at least US$46 billion a month, or 3.1% of its GDP, in lost economic output, according to an estimate from an economist at the Chinese University of Hong Kong.
Last week, the World Bank slashed China’s 2022 growth forecast, estimating that the world's second largest economy will now grow at 5% this year, sharply down from last year’s 8.1%. This is lower than China’s official economic growth target of around 5.5%.
Russia’s invasion of Ukraine has added to inflation, particularly in food and energy prices, and rising COVID-19 infections (a record of 25,000 new cases reported in Shanghai, the country’s most populous city) accompanied with any further shutdowns in China could add to global economic instability.
The Russia-Ukraine conflict will be a drag on Asian economies. Disruptions to supplies of commodities, financial strains and higher prices are among the impacts of the war in Ukraine that will slow economies in Asia in the months ahead, according to a World Bank report released last week.
Amid warnings of major escalation in the second phase of the Ukraine war and the Western allies preparing to enforce more punitive sanctions against Russia, it is expected that metal, energy and food prices will continue to rise and push up inflation further. Such price shocks will have a substantial impact on the global economy and financial markets, with spillovers expected to reverberate around the world.
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