Are we on the brink of a global recession?
Investors are already fine-tuning their strategies and becoming more cautious as market uncertainty continues to rise
Ever since Covid-19 brought the world to a standstill in 2020, life has been nothing short of a nightmare. We have already seen unprecedented national lockdowns, social distancing measures, overcrowded hospitals and mass casualties all over the world. However, with the introduction of vaccinations, we assumed the horror was finally over, but nothing could be further from the truth. With inflation on the rise, widespread bottlenecks in the supply chain and growing geopolitical tensions, governments face a monumental task to steer their countries away from a crisis. Looking at the current global situation, it is clear that we are in deep waters and may be on the brink of a global recession.
With economies around the world reopening and consumers returning to markets, the main issue facing central banks is rising consumer prices. To prevent inflation from continuing to rise, central banks began to scale back their quantitative easing measures put in place at the start of the coronavirus pandemic. However, these measures have been rendered ineffective by the conflict between Russia and Ukraine, which has exacerbated global supply chains and driven commodity prices to historic highs, adding oil to the fire that was already raging.
The Russian-Ukrainian conflict has been detrimental to oil and gas prices, which have risen sharply. In addition, the two countries are major exporters of agricultural products and account for almost 14% of the world wheat trade. Similarly, Russia and Ukraine account for nearly 19% of world barley exports and almost 52% world sunflower oil exports.
It is also important to note that since Russia is a major exporter of fertilizers, sanctions against the country could negatively impact the supply of fertilizers around the world, reducing crop yields. Russia is also a major supplier of precious minerals such as palladium, titanium, nickel and neon. Palladium, in particular, is an essential element in automobile construction, and its price has increased astronomically since the start of the war. Disruptions in the supply of these raw materials from Russia and Ukraine further pushed up consumer prices.
In addition to the Russian-Ukrainian conflict, China’s zero Covid policy is wreaking havoc on the supply of raw materials around the world. The imposition of strict lockdowns and travel restrictions is hurting demand and economic growth in the world’s second-largest economy. Shanghai, the world’s busiest container port, is closed due to a rise in coronavirus infections in the region. As a result, hundreds of freighters ran aground in the port.
Going forward, China’s return to a Covid-zero state is highly unlikely given the likelihood of new coronavirus variants emerging in the future. As a result, the global economy is likely to remain under pressure, at least in the near term, and inflation is expected to continue its upward trend, forcing central banks to keep raising interest rates until the outlook global macroeconomics are stabilizing.
Therefore, given the Russian-Ukrainian war and the slowdown in the Chinese economy, policymakers around the world are considering the likelihood of the global economy entering a recession. According to the World Trade Organization (WTO), growth in the world economy will drop to 2.8% in 2022. It previously predicted that the world economy would grow by almost 4.1% before Russia took over. declares war on Ukraine. Similarly, according to WoodMac, a research and advisory firm, the global economy is expected to grow by 2.5% in 2022 and 0.7% in 2023.
Investors around the world are already fine-tuning their strategies and becoming more cautious as uncertainty in global markets continues to rise. This is evident in the inversion of the US Treasury yield curve, which indicates that investors are moving away from risky stocks and towards short-term fixed income bonds in an attempt to hedge against the possibility of a slowing the global economy in the short term. . Additionally, fund managers around the world are also increasing the weighting of cash in their portfolios.
Given the aforementioned warning signs such as rising inflation, inverted U.S. Treasury yield curve, and reallocation of portfolios by global fund managers, the likelihood of the global economy entering in short-term recession is high. Therefore, countries are at a critical juncture where policy makers need to be proactive in dealing with impending issues, and governments should actively seek ways to protect their respective countries from the consequences of a global recession.