The Looming Global recession 

By Jonathan Itamah

Since the strike of the covid-19 pandemic, the global economies have come under severe strains as many countries went into lockdown to prevent the further spread of the disease. Although those dark days are behind us, it is vital to recognize the situation’s impacts and the significant effects on the economy, which are still largely being felt to date. 

The world is opening up, and the economic system is gradually falling into place but not without the fear of a looming recession. Since the beginning of the year, there have been a lot of uncertainties and signs of unhealthy economies worldwide which have prompted governments to act speedily to control the situation. 

For instance, inflation rates in Canada stood at 6.9% in October while that of the US stood at 7.7%, according to data published by the U.S. Labor Department on 10 November. At the start of the year, the International Monetary Fund predicted that the global inflation rate would get to 8.8%, with developing economies getting hit hardest at an inflation rate of about 9.9% mark. 

The Pandemic Recession 

The U.S. economy contracted due to the COVID-19 shutdown in March 2020. Real GDP declined 5.1% in the first quarter of 2020 The cause of the 2020 recession was a “black swan event 1 ” as the global COVID-19 pandemic required most businesses to shut down to avoid spreading the coronavirus. 

It took 29 months for the U.S. jobs market to fully recover from the impact of COVID-19, which was faster than any other recession in the last 40 years. 

What is inflation? 

Inflation is the gradual increase in prices which is often expressed as a percentage. An increase in prices translates to a decline in people’s purchasing power, thereby leading people to only purchase necessary goods. In addition, inflation is attached to the devaluation of the currency. 

Types of Inflation 

There are three major types of inflation:

Cost-push inflation 

This type of inflation is rare but when it occurs, it will be due to drastic changes in supply but a constant demand. The inflation happens as a result of unbalanced factors of production which are labor, raw materials, land, and capital. 

Demand-pull inflation 

This is the reverse of cost-push inflation and happens when there is a huge demand for products but very little supply. 

Hyperinflation 

It is characterized by a rapid rise of prices that is often out of control and measures more than 50% monthly. 

What are some of the well-known recessions? 

Recessions are not anything. In fact, the world has plunged into quite a few of them, with the US having experienced 14 so far. 

The great depression 

The greatest is a term that is used in reference to the longest recession in history in the modern world. It lasted between 1929 and 1941 which coincided with World War II. 

The great depression was largely characterized by a crash of the stock market in 1929 and a number of economic contractions that ensued such as the downfall of the most significant bank in Austria, Boden-Kredit Ansalt. 

The Oil Embargo recession 

The oil Embargo recession happened between 1973 and 1975 as a result of the start of the Arabian oil Embargo. The act greatly affected the US as it tipped off its economy and with the Dollar devaluation amidst huge budget deficits and high trade costs. 

The dot-bomb recession 

The recession began in March 2001 and ended in November 2001 lasting for only 8 months. The causes of the recession were said to be the bursting of the dot com bubble. It was one of the mildest recessions in US history, whose recovery was hastened by the Feds by cutting their funds rate. 

The great recession 

This recession happened between 2007 and 2009 and was triggered by the mortgage market in the US. The unemployment rate peaked at 9.5 percent, and the oil prices rose drastically but then crashed, resulting in economic stress on the US oil markets. 

From the trends preceding each recession, it can be argued that recessions originate from the US and other major economies. But what are the major causes of recessions? 

Market speculation 

Market speculation begins when investors start buying a product en masse to sell it off at a higher price due to speculations, overconfidence in the product, or market trends. However, a tip toward a negative report will trigger a ripple effect in the market and an oversupply of the product as investors rush to dispose of them. A perfect modern case study is the 2008 recession. 

Uncertainties 

Uncertainties are often due to external factors which are beyond a business’s control. When investors aren’t sure of what will happen next or deem a business decision riskier, they may halt or slow down investments. 

Further, as uncertainties often happen during times of war and pandemics, the consumer price index increases, people have little disposable income, and the cost of production is low meaning little economic activity is going on. 

Poor management practices 

Poor management practices on the government and private regulatory bodies have previously resulted in recessions. For instance, questionable activities, loans, and land flips. Also, President Richard Nixon’s decision to impose wages and price control in 1971 saw companies lay off workers, leading to the 1973 recession. 

What are the indicators of a recession? 

It is important to note that a recession doesn’t happen overnight but takes time to happen. Some signs of inflation include: 

• Increase in unemployment levels 
• A decrease in corporate revenue 
• A decrease in consumption

Currently, these signs have led economists to believe that we will have a looming recession over our heads. Consumer spending has gone down, and the consumer price index soars while the governments have adjusted prices to fit inflation.
According to a survey conducted by Bankrate in February, 3 in 4 respondents revealed that they had to cut down on their spending and dip into their savings to get by.
Though the US government creates nearly over 500,000 jobs monthly, it is still not enough. More Americans are applying for and continue to claim unemployment benefits, which signifies the disparity between the available jobs and those demanded. 

New job openings are also declining at an alarming rate. For instance, employees laid off 1.1 million workers in August alone, a speed record saves for the coronavirus pandemic period. 

Further, corporations are tightening belts as inflation eats into their profits. The global giant FedEx, for instance, surprised investors when it revised its outlook and warned of decreasing demand. 

The company speculated a 40% decline in its revenue through its CEO. Moreover, Apple’s stock declined following a report by Bloomberg that the company was planning to increase the production of iPhone 14 after they fell short of the expected demand. 

Final thoughts 

In conclusion, all signs point toward a recession, but it is still difficult to predict what will happen as it will likely be mild beginning in late 2023 or early 2024. However, businesses should take all the cautionary measures and prepare themselves for it in case it happens to avoid serious financial strains or, better yet, being phased out. 

Do contact us to learn how we at SZC can assist you.  

[1] Nassim Taleb’s three properties of black swans suggest:  

1. They are outliers because their likelihood of occurrence is far outside the range of normal expectations.  

1. When they do occur, they produce significant impacts.  

1. We tend to see clear explanations for them after the fact—what we call retrospective predictability.