Why global recession looms large

Ursula von der Leyen

European Commission President Ursula von der Leyen (left), managing director of the IMF Kristalina Georgieva (centre) and director-general of the World Trade Organisation, Ngozi Okonjo-Iweala pose for a photo at a working session during the G7 Leaders’ Summit in Hiroshima on May 20, 2023. 

Photo credit: Susan Walsh | AFP

American businessman and politician Robert Foster Bennet Famously said “As sure as the spring will follow the winter, prosperity and economic growth will follow recession.” As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging further toward a global recession as the year 2023 continues.

“Should the economic strain continue, there could be a string of financial crises in emerging markets and developing economies that would do lasting harm” according to a comprehensive new study by the World Bank.

International Monetary Fund Chief Kristalina Georgieva mentioned at the start of 2023, it is their estimate that one-third of the global economy will experience a recession by the end of the year. The overall economic growth will turn out to be less than in the past year. The reason why the world’s growth is slowing is that the major economies across the globe are experiencing a decline in growth. In contrast, Kenya's economy is projected to grow by 5.5 percent during the year and above 6.0 percent over the medium term.

Developing nations including Kenya have been hit by the rising cost of living owing to multiple factors such as an imbalance between supply and demand, supply shocks, high prices due to imports affected by currency devaluation against foreign exchange, and many other factors.

This is not a situation unique to just developing nations as most developed economies are also facing inflation and recession. America and Great Britain have been in the headlines due to the increasing interest rates amidst inflation and recession. The new country on the list is Germany.

Germany is in recession. Revised figures for the first quarter of 2023 show the German economy shrank by 0.3 percent following another quarter of falling GDP at the end of last year, meeting the criteria for a technical recession. The original figure for the first quarter of 2023 suggested the German economy stagnated but new data released by the Federal Statistical Office of Germany shows that it was not the case. The major reason seems to be the failure of private consumption to support the economy in the face of high inflation rates.

During the first quarter of the year 2023, high prices in particular weighed in on the German economy. Demand in consumption declined, and the country is moving away from supply constraints towards demand constraints which is due to the high prices and due to the respective monetary policy which is important to bring inflation down. Inflation is still high and Germany is in a very challenging situation now having stagnation and at the same time high inflation. It is not yet clear how the government in particular will react.

Two consecutive quarters of negative growth is defined as a technical recession. The development of Germany being in a recession is a massive blow to the government, which only last month estimated a growth forecast. Germany is the world’s fourth-largest economy after the US, China, and Japan. Inflation in Germany has been consistently high for the past year. Inflation peaked that 8.8 percent in the month of October and November 2022 before cooling down to 8.1 percent in December 2022.

However, it increased to 8.7 percent in January and February 2023 before falling to 7.4 percent in March and 7.2 percent in April. High food and fuel prices have been driving up inflation. This has also resulted in lower consumer spending. Similarly, government spending has been on a decline. The Ukraine war has hit Germany hard due to rising oil prices. The country was heavily dependent upon Russian oil and energy. The crisis has hiked up electricity prices. The government has implemented power price gaps for subsectors, but this move could cost taxpayers approximately $32 billion by 2030.

Germany is Europe’s largest economy, and there are fears that neighbouring economies could catch the recession flu. The European Union is hugely reliant on its vast industry. The recession in Germany spells danger for the entire continent.

Europe is amid the most severe energy crisis since the oil price shock of 1973. Germany faced an energy and gas crisis in 2022. This situation is now under control. A megawatt hour of electricity currently costs around 130 Euros on the spot market. That is much cheaper than in September 2022, when prices were around 500 Euros. However, economists suggest, it is important to increase the supply of energy to bring inflation down. It is crucial that the European central bank manages soft lending without provoking strong recession with a very strict monetary policy, but at the same time not loosen too early which is of course a challenge in the situation because if inflation comes back, then the situation would be even worse.

The latest evaluation of indices such as the Business Climate Index for Germany, for instance, suggests that the economic mood may not brighten up any time soon. The index fell from 91 points in May to 93 points in April showing that there will be a period of stagnation and it is perhaps very important to accelerate investments and initiate investment incentives for industry and energy generation capacity and all other components that will contribute to bringing prices down. Nearly 40 percent of German companies are choosing not to invest in innovation at the moment due to the economic downturn and increased expenditures.

There are learnings from this scenario. According to IMF Chief “2023 continues to be a tough year as the main engines of global growth - the United States, Europe, and China all are experiencing weakening activity.”

Kenya too is facing increased cost of living amid inflation. For a country relying mostly on imports, the currency too has taken a beating as it has significantly weakened against the US Dollar over the past few months. Policies must be implemented to encourage foreign direct investment and internationals to inject money into the economy through various modes of investment.

US Debt ceiling deal has further complicated the world scenario inching towards recession.

Ritesh Barot is a business and financial analyst [email protected]