Is global recession inevitable? What 4 economists think

More and more economists see a global recession as imminent.

The profusion of economic stimulus during the pandemic, supply chain bottlenecks stemming from restrictions in China and Russia’s invasion of Ukraine, among other factors, have driven global inflation to levels not seen in decades.

To contain it, central banks raise interest rates, while equity markets react with prolonged declines, reflecting investors’ low faith in what lies ahead.

And what awaits us is, according to several experts, a recession: a depression in economic activities that translates into a drop in GDP (Gross Domestic Product, sum of goods and services).

In general, after two consecutive quarters of GDP contraction, economists consider the economy to be in a “technical recession”.

Seven in 10 economists in the United States believe that this will happen this year or next, according to a recent survey by the British newspaper Financial Times and the Booth Business School at the University of Chicago (USA).

The survey was carried out in early June, before the last week of a sharp drop in stocks (between June 6th and 10th) and the new interest rate hike by the world’s central banks, so this proportion is likely to have increased.

Entering a recession has bitter consequences: the collapse of investment, consumption and transactions causes business closures, massive job losses and an inability to pay debts that can lead many to bankruptcy.

BBC News Mundo, the BBC’s Spanish-language news service, asked four leading economists if they believe there will be a recession in the US and worldwide in the near future. Check out what they said.

David Wessel, director of the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution (Washington DC)

“Predicting recessions is a difficult exercise. They often result from unexpected shocks, and sometimes economic depressions that experts predict with complete certainty later don’t happen.

However, I see a significant chance of a recession in the United States, with about a 65% probability, in 2023.

The reason? Federal Reserve Chairman Jerome Powell does not want his legacy to destroy the progress his predecessors made in reducing US inflation and keeping it at low levels.

For now, the Fed clearly needs to raise interest rates to slow demand, ease upward pressure on prices, and prevent inflationary psychology from [estado mental que leva consumidores a antecipar compras, prevendo aumento dos preços] settle down.

However, at some point the Fed will be faced with much tougher decisions, whether to keep raising rates or freeze them as the economy slows and inflation declines, but not reaching the 2% target.

There will be good arguments for either option. I predict that the Powell Fed will err on the side of over-tightening rather than easing, and therefore a recession is likely, but moderate.

I hope I’m wrong, that all the problems in the global supply chains are resolved, that the lingering economic effects of covid-19 wear off, and that we (and the Fed) get the good fortune we need.

But I don’t think that’s the most likely outcome.”

‘Beginning of next year’

Gabriel Gasave, Research Associate at the Independent Institute’s Center for Global Prosperity and Director of elindependent.org (Oakland, California)

“I dare say that at some point, possibly at the beginning of 2023, we will face a major recession, both in Europe and in the United States.

It won’t be because of the pandemic, disruptions to supply chains, the Russian invasion of Ukraine, food shortages and rising energy prices.

It will basically be because of the fact that, to put it in terms of the Austrian School of Economics [linha de pensamento econômico liberal surgida em Viena, no século 19], the process of excess liquidity driven by governments through strong monetary expansion will come to an end. Or the ‘boom‘ will end and depression will come

The Northern Hemisphere, with the arrival of summer and the holidays, will continue for the time being with a reasonable level of activity.

People will travel, spend, and many will enjoy financial benefits distributed by governments on the left and right during the pandemic and election campaigns.

But parties don’t last forever, just as no elite athlete can continually perform under the influence of doping.

At some point, things must return to the way they were before, to reality, what many economists call depression, when, in fact, it is a return to the natural order of things.

It is also true that as US debt yields are now rising [devido à alta de juros pelo Fed]international capital will have a greater attraction to return to the United States.

So we have to see to what extent the incoming global capital flows, along with the appreciation of the dollar and the depreciation of the rest of the currencies, affect the level of domestic activity. [dos EUA].”

‘Probably later this year’

Lindsey Piegza, Chief Economist and Executive Director, Stifel Financial (Chicago)

“The Federal Reserve renewed and increased its commitment to controlling inflation, raising interest rates by 0.75 percentage points in June and putting on the table a possible further increase of another 0.75 points for July.

Although US President Joe Biden recently declared that the Fed is not trying to induce a recession, this rapid rate hike will almost certainly produce, likely by the end of this year, a GDP drop at best, or stagflation. [combinação de estagnação econômica ou recessão com inflação alta] at worst.

Consumers still suffer from high prices as supply chains continue to be affected and conflicts abroad persist. And, now that the Fed is raising rates at a proposed pace of around 4%, or maybe more, they must also deal with the effects of a weaker economy.

The strategy of accelerating rate increases will result in a significant cost to the average citizen and to the US economy more broadly, with limited impact on pressures [inflacionárias] on the supply side.

At the end of the day, raising the cost of capital reduces consumption and investment, which alleviates pressures on the demand side — this already happens and manifests itself in a decreasing pace of sales — but it is hardly able to correct the constraints on the supply side as a result. the consequences of Covid-19 or an international conflict.”

‘It might not happen’

Andrés Moreno Jaramillo, economist, independent financial advisor and stock market analyst (Bogotá, Colombia)

“Some economists see that interest rates are rising, that we are coming out of a very strong recession with recession, and they believe that this cycle will return. Of course it’s possible, but as long as geopolitics doesn’t get worse with more conflicts, more wars, more scarcity, more covid, there may not be a recession.

It is not yet known. Precisely, the United States took a long time to raise its interest rates in order not to cause a recession. These rising interest rates at a time when the economy is very heated could lead to a small recession.

If a recession were to happen, it would be very mild and I believe that they will put in place all the mechanisms to prevent this from happening. There are many events, many geopolitical facts that can change any economic forecast, so you have to be very cautious.

The economies of countries move in cycles. Both interest rates and economic recessions are part of these cycles, which is not serious as long as there is little volatility.

That’s what central banks and economic policy are for: so that all these cycles happen and the economy doesn’t grow too much because it can generate inflation, or fall too much because it may generate unemployment, depression and other consequences.

What we have just experienced with Covid-19 is something new in the world. Almost all countries experienced economic downturns and the recovery brings strong ups and downs; it is volatility that we are talking about, but it has gradually decreased.

I believe the worst is over and the US is facing, like everyone else, inflation, and [o combate a] this inflation has to put a brake on growth and slow it down a bit, even if with that the GDP registers negative figures. That’s not so bad.”

Source: BBC News Brazil