Global recession?

EDITORIAL: It’s not surprising that the World Trade Organisation (WTO) has also started worrying and warning about a possible global recession not long down the road. WTO Director-General Ngozi Okonjo-Iweala held “multiple colliding crises” responsible for an impending recession, including the Russian invasion of Ukraine, the worsening climate crisis, food and energy price shocks and the aftermath of the Covid-19 pandemic. Indeed, as countries across the world rush to raise rates to tame runaway inflation and the International Monetary Fund (IMF) and World Bank cut growth forecasts, markets are now pricing in an inevitable recession sometime around the turn of the year.

Yet it’s not as if this recession has crept up out of the blue. Unprecedented Covid shutdowns created a unique situation where almost all countries contracted and registered below-zero growth. That, in turn, forced central banks to cut rates very aggressively to keep a sudden recession from turning into a prolonged depression.

And once Covid pressures eased the world found itself flush in money which, coupled with supply shocks that persisted, pushed prices to 40-year highs in most advanced economies. Now the main focus is on controlling prices as they eat into people’s savings and various governments’ political capital.

In that way this is something of an induced recession, to keep the global economy from overheating and creating an inflation domino-effect that is already raising red flags all around. But since interest rates affect the economy with a time lag, the fear is squeezing money supply too much too fast, and turning what should be a mild recession into a proper depression from the other end of the rate cycle.

The WTO DG also very rightly pointed out that the emerging markets and developing countries will be hit particularly hard because they too are tightening interest rates. “What happens in developed countries affects their debt burdens, affects what they have to pay to service debt, affects the flight of capital from their economies back into the developed world,” she pointed out.

Pakistan has, in fact, appeared as the poster boy for poor countries devastated by climate change just when they are caught in the rush to raise interest rates even as it erodes growth and inflates the debt burden. To top it all, extremely hawkish outlook of the American central bank, the Federal Reserve, has pushed up the dollar to levels not seen in two decades and taken the life out of almost all other currencies, triggering a flight of hot money from emerging markets to the rising rates of the US market.

Going forward, the most important thing to determine is how much of the global inflationary cycle is demand-pull and how much of it owes to supply chain issues and sanctions on Russia driving up Europe’s energy prices. If it’s the former, prices will finally find equilibrium and the recession will most likely be mild and short-lived.

But if it turns out to be the latter, then no manner of monetary tightening will really do the job. For example, you can’t fix out-of-control prices because of sanctions by raising rates. And that means the recession will be more painful than it seems at the moment, with a very real risk of what is called too much tightening.

It’s this point that could make the difference between a more-or-less usual recession and an existential crisis for most poor countries; Pakistan included. That’s why it’s a good thing that his debate has started at the highest level. Sooner or later they will come to the subject of debt relief for the counties that are most at risk, which includes Pakistan. And they will help everybody by doing it now, when most emerging and frontier markets are struggling to stay above water, because it will be too late for a number of them soon enough.

Copyright Business Recorder, 2022