Headwinds Around the World, but Different Economic Challenges in Different Countries.
Serial recessions are to be expected.
For many weeks now, a nagging question has been coming back with insistence: is the world heading for a recession?
In their forecasts published at the end of July 2022, the IMF experts explain that a fall in activity is not their central scenario (despite the decline recorded in the spring of 2022) before affirming that “the risk of recession is particularly prominent in 2023”. The rating agency Fitch mentions “increasing probabilities of recession”.
It all depends on what you call a recession. At one time, forecasters spoke of a global recession when annual GDP growth fell below 3%. With this overly broad definition, a global recession now seems inevitable this year, next year at the latest. In recent months, most forecasters have lowered their 2022 and 2023 numbers below this mark.
Different headwinds
The most common definition of a recession is a decline in production over a year. Contrary to what happened in 2009 due to the financial crisis “Made in USA” and in 2020 due to the virus coming from China, world activity should still grow. More than the population.
But at a much slower pace than in the last two decades, when the average was close to 4% per year.
The comparison with 2009 and 2020 is enlightening here. For in both of these crises, the fall was caused by the same cause, at the same time, all over the world. The panic triggered by the collapse of Lehman Brothers caused a credit crunch and a drop in trade around the world. The coronavirus outbreak brutally closed borders and seized global supply chains. This time, nothing like that.
After the synchronous fall in 2020, which reached 3%, and the equally general rebound in 2022, which exceeded 6%, the dynamics diverge. The three major economic regions of the world (60% of global GDP) are all subject to headwinds, but different ones.
Hence the fact that the forecast is “extraordinarily uncertain,” as the IMF acknowledges.
Save massively
In China, first of all, the strongest winds are Covid and real estate. The virus has returned to China this year, especially in the highly industrialized Shanghai region. Beijing is persisting with its much-vaunted zero-COVID policy, which is known to be economically very costly when the virus becomes more contagious - which is the case with the recent variants.
Real estate is in deep crisis in China. After years of unbridled construction, many property developers are in financial distress. Housing sales have fallen by a quarter since the beginning of the year. Yet real estate in the broadest sense (including furniture, household appliances, etc.) accounts for nearly a third of China's GDP. Both winds have the same effect: they push the Chinese to save massively to protect themselves. All the more so as unemployment is rising, now affecting one young person in five.
In the US, real estate is also suffering, as interest rates on home loans have doubled in a year. But this is only a small part of the American story. The big part is inflation. With prices rising more than 8% year-over-year and wages rising more than 6%, monetary policy is becoming seriously restrictive, with interest rates likely to rise much higher than investors anticipate.
Technical recession
Washington is also tightening the budget after having conducted an extraordinarily generous policy during the epidemic (deficit of 15% of GDP in 2020!). American economic forecasters are no longer debating the arrival of a so-called technical recession (two consecutive quarters of decline in GDP) but rather the timing of this technical recession.
The Conference Board, an American employers' organization, estimates, for example, that the fall will take place at the end of 2022-beginning of 2023 before accelerating next summer.
Capital flight
Europe is pursuing a very different policy. Monetary tightening to fight inflation is less advanced. And above all, fiscal policies seek to compensate for the loss of purchasing power. The result: activity is sustained but inflation is likely to persist and bite even harder on purchasing power than in the US.
The other headwind blowing through Europe comes from Russia, of course. Moscow is depriving the Old Continent of gas, in reaction to the sanctions implemented by Europe following the invasion of Ukraine. And with less energy, there is bound to be less production, at least in the short term.
The other countries, those that account for 40% of the world's GDP, are a priori less threatened. But many of them could be hit by food shortages. The same or other countries could also be hit by capital flight after the rise in US interest rates. Not all countries are seeing their growth die. But all are being hit by headwinds.
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