Just as the world economy appeared to be recovering from the impact of the COVID-19 pandemic, headline GDP growth has decelerated sharply or turned negative in several leading economies in 2022. And with annual inflation in many countries fast approaching double digits, it is not easy to see where global growth will come from.
A global recession is entirely avoidable.
True, the odds of a downturn are much higher than usual in Europe, which has been hit hard by reduced supplies of Russian natural gas; China, where COVID-19 lockdowns already turned growth negative in the second quarter; and other countries, including emerging-market economies with debt troubles.
Even the US economy is experiencing a slowdown. I still maintain that the two consecutive quarters of negative GDP growth reported by the Bureau of Economic Analysis do not signify that a US recession started in the first part of 2022.
There are three reasons for this. First-quarter GDP will be revised on September 29, and second-quarter GDP on August 25; other indicators like gross domestic income (GDI) and employment were positive; and the recession ruling is up to the National Bureau of Economic Research. But rising interest rates and the gloomy outlook among America’s trading partners do mean that a US recession is more likely than usual at some point over the next two years.
But a “global recession”? The US is not the only place where a negative growth rule is not an agreed criterion for defining recession.
Consider global GDP. It has been rare in the postwar period for global growth to fall below zero even for a single quarter, let alone two. Not even the severe downturns of 1974 and 1981 qualified. Even in times of apparent recession, negative growth in advanced economies is usually outweighed by still-positive growth among emerging-market and developing economies. (Two exceptions were the 2008 global financial crisis and the 2020 pandemic-induced recession.)
The International Monetary Fund now projects that global GDP growth will slow from 6.1 percent in 2021 to 3.2 percent in 2022 and 2.9 percent in 2023. That is a momentous deceleration. But it still leaves world growth unlikely to meet a two-negative-quarters threshold. Even by laxer criteria like GDP growth below 2.5 percent, global recession is very far from inevitable.
Anne O. Krueger
When the COVID-19 pandemic began, people cut their spending. Although unemployment rose and supplies fell sharply due to pandemic containment measures, much of the potential income loss was offset by government policies. In the United States, it even paid to be unemployed.
The result was that personal savings shot up. When COVID-related restrictions were later relaxed, demand increased rapidly. Supply-chain disruptions, the time needed to restart production, and continuing worker shortages resulted in significantly slower supply responses.
In the US, that surge in demand at first greatly outweighed supply increases, leading to inflationary pressures. Although the Federal Reserve has responded, there is clearly still excess demand in the economy, and its continued tightening puts a damper on it.
The Fed’s balancing act is difficult: Some, but not too much, dampening of demand is warranted. At the same time, inventories (increases in which partly reflected stockpiling during supply shortages and will inevitably be run down) are beginning to accumulate and retail sales are losing some momentum.
Whether the Fed’s policy tightening will check demand growth just enough as supply increases will determine whether inflationary or recessionary pressures dominate in the US. If policymakers’ judgment is correct, the US could re-attain the Fed’s target inflation rate and satisfactory growth without falling into recession.
What happens in the rest of the global economy is even more uncertain.
The effects of the war in Ukraine and the related European energy shortfall, China’s economic slowdown, and the prospective debt difficulties of some developing economies and emerging markets are all currently unclear.
Whether the balance of risks is toward inflation, recession, or a smooth landing from current turbulence depends on unknowns such as the duration of the Ukraine war as well as the factors listed above. But a global recession is certainly not inevitable.
In contrast to the common practice in Western economies, a global recession is not really defined as two consecutive quarters of negative GDP growth, because in many large emerging economies, such as India, such conditions rarely arise. Even if many Western economies are experiencing back-to-back quarters of negative growth, we can end up with a “global” recession in which world GDP growth averages around two percent.
Over the past 25 years, the US and China between them often have accounted for more than 80 percent of annual global GDP growth. So, if these two economies are both in their respective versions of recession, then that will virtually guarantee a global downturn. Given their current weaknesses and challenges, such a scenario is quite possible.
But I am less convinced of this than I probably was a few months ago. That is because there is creeping evidence that the inflationary surge has – at least so far – been transitory, with commodity prices easing and measures of long-term inflation expectations quite stable. If this continues, central banks will become less hawkish and will not have to weaken their economies further to stabilize prices.
All of this said, Russia’s unique influence on European natural gas prices means that a recession in Europe is quite likely without some major breakthrough in the war in Ukraine. Sadly, that currently does not look very probable.
Stephen S. Roach
Notwithstanding the pitfalls of forecasting anything these days, my cracked and worn crystal ball sees a global recession occurring in the next year.
For me, recession risk assessment has always been a two-step process: the stall-speed alert and the impacts of inevitable shocks. Economies – whether of single countries or the world as a whole – approaching the stall speed lack the resilience to withstand the blow of shocks.
For the global economy, the last five recessions have all occurred when world GDP growth fell below the 2.5 percent threshold. That represents a one-percentage-point shortfall from the post-1980 average of 3.5 percent. As such, when global growth falls into the 2.5 to 3.5 percent range, my rule is to sound a stall-speed alert. The lower half of that range, 2.5 to three percent, is especially ominous – a perfect predictor of global recession.
The last several forecast revisions in the IMF’s World Economic Outlook flash unmistakable signs of stall-speed alert. The Fund’s current global growth estimate for 2022 of 3.2 percent represents a stunning downward revision of 1.7 percentage points from its October 2021 assessment, and its latest estimate of 2.9 percent global growth for 2023 is in the lower half of the stall-speed danger zone.
More downward revisions are likely. The European economy – hit by energy shortages stemming from the Russo-Ukrainian war, higher inflation, and the European Central Bank’s monetary tightening – should lead the way.
The US economy is only just starting to feel the lagged effects of a far more restrictive shift in Fed policy. And the struggling Chinese economy, reeling from property-sector deleveraging and zero-COVID lockdowns, lacks the cushion that prevented global recessionary relapses during 2012-16.
Collectively, Europe, the US, and China make up about half of the world’s GDP on a purchasing-power-parity basis. With no other economy able to fill the void, I am afraid a global recession does indeed appear inevitable.
(Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard University. Anne O. Krueger is a Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies and Senior Fellow at the Center for International Development at Stanford University. Jim O’Neill is a member of the Pan-European Commission on Health and Sustainable Development. Stephen S. Roach is a faculty member at Yale University and former chairman of Morgan Stanley Asia.)
Contributed by By Jeffrey Frankel, Anne O. Krueger, Jim O’Neill, and Stephen S. Roach