16 Aug

INTRODUCTION

The US economy is reported to have contracted for a second straight quarter; GDP growth declined by 0.9 percent on an annualized basis during April-June 2022, after a 1.6 percent contraction (or negative growth) reported during January-March 2022. A recession has not been formally declared (or forecasted) for the US economy, but fears of a recession continue to grow because two consecutive quarters of decline in the gross domestic product (GDP) is the ‘practical’ if no longer ‘official’ definition of a recession. Negative supply shocks – which should lead to massive and abrupt declines in spending, known as adverse demand shocks which usually signify the beginning of a recession – are painfully evident. US labour statistics also seem to indicate that the US economy did not fall into a recession in 2022. This, however, must be couched in the notion that the Biden administration has redefined the term ‘recession’ to avoid blame and avert losses in the upcoming US midterm elections. 

All this is taking place in the third year of a global pandemic, in the midst of a worldwide economic slowdown due to disrupted supply chains and rising energy prices for developed as well as developing economies. GDP growth rates that were tenuous due to the pandemic have decreased in magnitude or reported negative growth (i.e. an economic contraction). Trade shocks, supply shortfalls and financial defaults continue to threaten economic stability around the world. Rising inflation, growing unemployment, and falling GDP levels indicate that a recession (or something worse, like stagflation) could already be here. 

RECESSIONARY TRENDS AND TRAJECTORIES

According to mainstream economics, a recession is determined by a substantial decline in the magnitude of five core indicators: real GDP, employment levels, real incomes, industrial production, and product sales (both wholesale and retail). A recession is bad because the economy undergoes a period of slow growth or contraction for more than six months. The decline in real income through unemployment also means a loss of income tax for the government, which thereafter loses the financial capability to ensure social welfare and social safety nets. In simple terms, a recession is a period of economic decline, typified by reductions in both industrial outputs and trade activity, which can last a few months, and sometimes even years.

Global inflation is skyrocketing, not merely as a consequence of quantitative easing and enormous money supplies, but also due to higher demand and lower-than-anticipated supply of goods and commodities: implying that the global economy could also already be in a ‘commodity super-cycle’. Sustained high demand for goods and products which continues to exceed those goods’ availability and supply, as well as strong commodity price gains, indicate that the global economy is either heading towards – or already in – a commodity super-cycle. Super-cycles are responsible for sustaining strong demand for raw materials and production inputs, thus driving core inflation along with fuel prices.

Global inflationary tendencies became evident in 2021, but the shrinkage of global GDP started as early as 2020. Debt stresses and fiscal shortcomings are also to blame for high commodity prices and lower levels of supply. Currency fluctuations and devaluation against the US dollar have also intensified current account deficits. Middle-income countries around the world need essential goods and commodities such as fuel and energy supplies, medicines, basic food items, raw materials for value-added production, and many more: but they are increasingly unable to afford them. The latest geo-economic shock has come from the Russia-Ukraine conflict, which has indirectly increased energy and food import costs for middle- and low-income countries.

Expectations of a recession are as deadly as an actual recession, if not more – since these negative expectations ‘infect’ the choices and actions of economic actors. This adds pressure on the many factors and indicators outlined above, thereby transforming an expected recession into a real one. 

Another important factor in this equation is the persistence of supply chain disruptions due to new COVID variants, as well as an inefficient or suboptimal recovery of economic units and logistical elements from the original COVID lockdowns of 2020. In that sense, economies have yet to fully or holistically recover from COVID-related disruptions that started (and have somewhat continued) since March 2020. The sub-optimal operation of global supply chains is also responsible for surreptitious price increases in all goods and products which have a regional or international production process. 

Indebted nation-states are overwrought with worsening market conditions at home, as well as stricter requirements from international financial institutions (IFIs) to obtain critical financial support to sustain basic economic management functions. Creditor confidence across core financial markets is also dwindling, as investors withdraw capital from speculative enterprises and businesses with volatile cash flows. Additional financial stresses and limited credit availability – due to rising interest rates – could also create unemployment in the medium-term, as an unhelpful byproduct of trying to reduce the money supply.  

CONDITIONS INDICATE MORE ECONOMIC DECLINE AHEAD

The coronavirus pandemic created the initial conditions for a global economic slowdown. Global supply chain problems, exposed almost fully by the pandemic, are not sustainably resolved yet. China’s insistence on a zero-COVID policy has created shortfalls in global supply and heightened fears of worldwide inflation, while supply chain disruptions are already causing delays in product delivery. China’s continued reliance on its zero-COVID strategies to limit any potential stress on its national healthcare system – despite having multiple homegrown vaccines against COVID – continues to hamper global economic normalization and post-COVID restoration of international supply chains. Energy prices spurred inflationary trends as early as 2021, which is now exacerbated by high demand in a commodity super-cycle. 

The Russia-Ukraine crisis further aggravated global energy supply shortages, pushing up fuel prices, food costs, and the overall inflationary impact on consumers. The conflict is depriving the global economy, particularly famine-hit countries in Africa, of critical food supplies which, having already been weakened by pre-existing supply chain disruptions, is exacerbating food scarcity in those areas. 

Even though many have shifted to minor investments in ‘passive income’ schemes, any new shocks to primary markets may cause losses in real disposable income, since remuneration in many occupations is becoming insufficient for basic survival – known as a ‘cost of living’ crisis in economies across the world. 

In a macroeconomic sense, GDP growth retardation and fiscal stresses reported in the past few years have also been triggered by several other factors. Overdependence on government sources of finance such as tourism, value-added trade, transportation, logistics, public event management, and other economic sectors which could not sustain the negative ramifications imposed by COVID, prompted financial insolvency in the short to medium term. Lower-than-expected returns on infrastructure investment may also be cited. But the most common underlying phenomena appears to be a degree of macroeconomic irrationality: economies suffering from shocks are found to have inefficient market structures (often with unequal rules), under-reliance on import substitution, little to no localization or indigenization of salient products and useful commodities, non-economic barriers to innovation and technological progress, and a general lack of modern freedoms and democratic values. 

A recession would create the eventual conditions for a reconfiguration of the global economy. It could also reshape global alignments and political realities for many states, organizations and people around the world. This is, however, an optimistic outcome in the long term. As of July 2022, it appears that many economies are already experiencing stagflation – a condition where both recession and inflation are present along with high unemployment – and more developing countries are expected to be hit by the phenomenon. 

AVOIDING, AVERTING AND MITIGATING A GLOBAL RECESSION

Whether declared or not, a recession will cause widespread panic in the markets and encourage negative speculation because more people will expect economies to crash. Any ‘bank run’ in times of liquidity crisis will only exacerbate money supply issues and uncertainty over the future would spiral out of control

A global recession means that nearly all significant national economies around the world will be suffering from low (or negative) growth and high inflation; none will be in a position to potentially rescue anyone else, much less the world as a whole. An integrated global approach – beyond ideologies and interests – is highly unlikely to be formed anytime soon, as alliances and blocs seem to be forming in anticipation of a new Cold War. 

To avoid a recession, or overcome one, it is necessary to ensure positive levels of GDP growth and to facilitate industries and markets in raising supply levels, in the hopes of achieving near-full employment – in theory. High demand levels (created by years of the high money supply) can only be met by equivalent supply levels, or price competition with near substitutes, otherwise inflation will only grow in the presence of super-cycles. As all economies are painfully aware, inflation is particularly dangerous when it is driven by lower supplies of critical commodities that have inelastic demand and/or zero substitutes (such as fuel and energy inputs, food items, etc.). 

Recovering from economic downturns during 2022 and 2023 will require:

1. Energy price stabilization and increasing supplies of fuel and energy inputs, along with a renewed and holistic emphasis on transition to renewables; 

2. Improved supplies of essential commodities, such as basic food items and essential household items (which are factored into sensitive pricing indices around the world);  

3. Improving transportation infrastructure and logistics efficiency, without increasing costs (including social costs) wherever possible; 

4. Creating employment opportunities in sustainable economic functions such as renewable energy, technology, innovation, recycling, AI&ML, communication, health, education, and other sectors – designed as investments in human capital and/or social welfare; 

5. Formalizing an international post-COVID socioeconomic framework to deal with common scenarios as well as past experiences (including dealing with new pandemic variants) till such time that everyone can be reliably inoculated; and 

6. Ensuring accuracy and transparency regarding the economic and financial health of any relevant organization or polity, to accurately understand the present conditions and estimate potential future outcomes. 

In effect, the entire global trade and supply infrastructure need revitalization: artificial intelligence, machines and robotics must be incorporated into the solution matrix wherever the goal is to limit human contact and prevent the spread of communicable diseases. 

The success of remote, wireless and internet-based communication platforms during COVID lockdowns is a testament to the efficacy of innovative thinking and the importance of predicting potential problems to prepare contingencies in advance. It allowed various sectors of the economy and society to continue their essential functions without being in close physical proximity. Businesses for tangible commodities were obliged to develop their delivery services or outsource them so that their product reaches the consumer. Therefore, even at times when economies show bad indicators, innovative thinking and scalable problem-solving approaches will continue to yield positive results from within the same economies. 

Instead of a global financial or market intervention by the US, or by major IFIs, it would require a cessation of hostilities between Russia and Ukraine – in a scenario where Russian energy supplies are reintegrated with European markets – as well as China phasing out or ending its zero-COVID strategy, to stabilize energy prices and jumpstart economic activity at the rate that functional supply chains and economic interconnectivity allow. Unfortunately, none of those global-impact actions seems to be happening anytime soon. 

CAN LOCALIZED ANTI-RECESSIONARY APPROACHES WORK? 

National economies with financial resources and fiscal space will have to provide subsidies on goods that have higher prices and inelastic demand, such as fuel, gas, essential food items, medicines, and other products in order to mitigate inflationary impacts. Runaway inflation and persistent supply problems should encourage indigenous production of substitutes, especially in terms of raw material supplies wherever possible. 

Economies experiencing turbulence since the heyday of the COVID pandemic, or at any time since will continue to undergo massive socioeconomic and political shocks. Every economic decision that yielded unfavourable financial outcomes will drain the political capital of incumbent governments. If price controls are not enforced efficiently, and tax collections are not diversified, all inflationary impacts will continue to be passed on to consumers whose purchasing power is declining every month. Cash transfers as financial support from the government have, once again, proven to be a temporary solution that addresses some recessionary symptoms without rectifying the underlying causes. 

No matter how big an economy is, a national solution to a global problem can only go so far. Governments will have to evolve their rationale and processes to cope with emergent scenarios. Like climate change, any anticipated global recession would not be sustainably resolved by any single country or economy: it will require an integrated global approach, and it could require serious compromises from all parties on all sides. And quite, unfortunately, the prevailing geopolitical acrimony between global powers precludes that from happening. All of this increases the probability of a recession or worse, stagflation, on a global scale. 

CONCLUSION

Strategic miscalculations between the US and China in East Asia, and/or between NATO and Russia in Eastern Europe, are more likely today than ever before. Localized conflicts in areas like the Middle East, the Persian Gulf, North Africa, and others could conflagrate from great power confrontation into great power conflict. Financial interests and geo-economic goals may drive regional powers to recalibrate – or act upon – their geo-strategic targets, or vice versa. Recent history shows that the exercise of ‘hard power, such as military force or unilateral violence on large scale, has been guided by geo-strategic objectives at the expense of geo-economic interests. In that sense, we should all hope and pray that the 2020s don’t rhyme like the 1930s: particularly since April 2022, global geopolitics has essentially driven these post-COVID geo-economic trends of uncertainty and recession, which by then had existed for over two years already. The poorest of the poor, up to the middle classes, are suffering around the world. And so far, the indicators show that it is expected to get worse before it gets better. 

Shemrez Nauman Afzal

Shemrez Nauman Afzal is a Senior Associate at Midstone Centre for International Affairs. He is an academic, researcher and policy analyst. From 2017 to 2020, he served as an intelligence officer at the National Counter Terrorism Authority (NACTA) of the Government of Pakistan. His specialization is in political economy, public policy, national security and counter-extremism. He can be found on Twitter (@shemrez).