We are already in a world recession
The latest data suggests that GDP in China contracted, perhaps by as much as 3%, in the weeks after Chinese New Year. We heard on Thursday that Q1 GDP fell at an annual rate of 1.4% in the US as well. Cebr’s scenario analysis of the impact of the Ukraine invasion suggested that UK GDP would drop in both Q2 and Q3 of this year, meeting the technical requirements to be described as recession. And key European countries such as France and Germany are already showing business survey results that indicate a slowdown at best. So is the world economy already in recession? And is there a risk, as an experienced think tanker from China suggested in a remarkably frank meeting this week between Western and Eastern foreign policy experts, of a world downturn greater than during the great financial crisis?
Essentially the answer to the first question is yes. World growth has slowed and is probably currently negative on a monthly basis. The answer to the second question is hopefully not.
Three factors have led to falling GDP – the invasion of Ukraine, soaring energy and commodity prices around the world squeezing living standards and the resurgence of Covid in a China which has very limited immunity. These have all triggered sharp falls in consumer and business confidence. Meanwhile, the supply problems from the economy emerging from the pandemic have been exacerbated by the Covid related returns to lockdowns in China. And economic policy makers like the UK Treasury, who are often behind the curve, are still fighting the battle against inflation, reducing deficits and the rates of monetary growth in many countries quite sharply.
Some of what we are seeing will be temporary. The Chinese Covid situation will probably be resolved either by success in beating back the pandemic or by a change in policy. The fact that supply shortages are one of the driving forces behind inflation means that there is scope for a boost in output as the supply problems are resolved (though this will almost certainly take longer than the conventional wisdom expects – it took till mid 1975 before the supply crisis of 1972/73 was resolved).
One also expects that the fiscal and monetary tightening that each country has carried out, assuming that other countries would not do the same, will probably be eased eventually, if a bit late in the new economic cycle that is emerging.
But the key factor that might change the prospects would be a resolution of the war in Ukraine. Here the increasingly conventional wisdom is that the war may grind to a stalemate for 5-10 years with no resolution and the continuation of sanctions. If this happens, weaker demand will eventually bring down the price of oil, while the price of gas might rise less than is commonly expected. But food shortages will continue to keep inflation high.
Cebr’s UK GDP forecast on this assumption is that the UK economy would stagnate or decline in the quarters to early 2023 but would start to grow modestly thereafter. Because of our international exposure we are quite a good litmus test of what might be going on at a world level.
But it is possible that the conventional wisdom could be wrong. If the Chinese decided to intervene in the Ukraine dispute and pressured the Russians to do a deal (possibly by threatening not to buy their oil or commodities), sanctions could be deescalated and the prices of many commodities would fall back after a few months.
It was probably over-optimistic to have expected that the world could have managed to cope with both a pandemic and a fairly major war and escape unscathed. The aftereffects of both could remain with major economies for a long time. So even if the Ukraine problem is settled more quickly than is expected, we are assuming a period of economic stagnation for quite a few years thereafter.
Douglas McWilliams is founder and deputy chairman of Cebr, the economics think tank.