scorecardresearchWorries about the next recession intensifying each day; retail investors must take note
Inflation in the UK touched a 40-year high in September on the back of rising food and energy prices. The annual rate of inflation rose to 10.1% in September, up from 9.9% in the 12 months to August, exceeding economic expectations of 10%.

Worries about the next recession intensifying each day; retail investors must take note

Updated: 20 Oct 2022, 11:23 AM IST
TL;DR.
A new Bloomberg Economics model projects a 100% probability of a recession in the US by October 2023. The IMF, on the other hand, lowered its global GDP forecast three times so far this year. The IMF now projects that global real GDP growth will slow to 3.2% in 2022, from 3.6%.

The world's major economies are staring at a recession, and analysts warn that the global economy may plunge into a severe contraction in the next 12 months. At the beginning of 2022, when major economies were softly recovering from the three consecutive Covid waves, the Russian-Ukraine war erupted, sending commodity and food prices to record highs. As the battle wore on, economists warned of the possibility of a recession.

Despite global uncertainties, the equity markets continued to rise, with speculation serving as the main engine of the rally. Investment bankers and fund managers are increasing their investments in equities in the hope of profiting from higher prices when the recession hits.

Meanwhile, a new Bloomberg Economics model projects a 100% probability of a recession in the US by October 2023. That compares with a 65% probability in Bloomberg’s prior forecast. The increased probability arises as the economic and financial indicators that Bloomberg Economics considers have worsened.

Adding to that, JPMorgan Chase CEO Jamie Dimon said to the Associated Press that there's a "very, very serious" mix of concerns that could lead to a recession in the next six to nine months.

While rating agency firm Fitch also warns that high inflation and the US Fed's continuous rate hikes will drive the US economy into a 1990-style mild recession starting in the spring, Mint reported.

On October 03, the United Nations warned that the policies of rich nations are pushing the world towards a recession that will cause worse damage than Covid-19. Similar projections were also issued by the Organisation for Economic Co-operation and Development (OECD). The group reduced its global economic growth forecast for 2023 to 2.2%, down from 2.8% in June, representing around USD 2.8 trillion in lost global output in 2023.

The IMF, on the other hand, lowered its global GDP forecast three times so far this year. The IMF now projects that global real GDP growth will slow to 3.2% in 2022, from an earlier forecast of 3.6% in April. IMF chief Kristalina Georgieva has said that the global economy is moving from a world of relative predictability to one of greater uncertainty. She added that countries accounting for about one-third of the world economy will experience at least two consecutive quarters of contraction this year or next.

"Overall, we expect a global output loss of about $4 trillion between now and 2026. This is the size of the German economy — a massive setback for the world economy. And it is more likely to get worse than to get better, "she said.

The world bank warned about the global recession. The bank said the global economy was in its steepest slowdown following a post-recession recovery since 1970. The World Bank said a study found that "the world's three largest economies—the US, China, and the euro area—have been slowing sharply."

Major economies are on the verge of collapse?

The Russian-Ukraine conflict has pushed global crude oil and natural gas prices to record levels, with crude oil hitting a high of $140 in March. The surge in energy prices sent electricity prices in Europe and the UK area to their highest levels, driving inflation to multi-decade highs.

Gas scarcity has pushed European countries towards the edge of a recession. The EU27 region is almost fully dependent on gas imports, said SBI Research in its latest report, with more than 90% of the gas consumed in the euro area being imported. Unlike petroleum products, gas is the primary energy source most consumed in the industrial sector and accounts for a high proportion of household final consumption.

On September 02, Russian state energy giant Gazprom said it would not resume flows through the pipeline as planned as it had detected an oil leak at its Portovaya compressor station, news of the extended shutdown comes on the same day as the West’s biggest economies agreed to impose a price cap on Russian oil.

If Russia extends the supply cuts, natural gas prices will rise more in the coming days. According to Bloomberg data, natural gas prices have surged more than 300% this year.

The UK's cost of living increased to previously unheard-of heights as food and energy prices soar. The Inflation in the country touched a 40-year high in September. The annual rate of inflation rose to 10.1% in September, up from 9.9% in the 12 months to August, exceeding expectations of 10%,  according to media reports.

The annual inflation rate in the United States slowed for the third month in a row in September 2022, to 8.2%, the lowest in seven months, compared to 8.3% in August, but it remains well above the Federal Reserve's target inflation rate of 2%.

Adding to the challenges, earlier this month, OPEC+ members agreed to cut oil production by 2 million barrels per day, the largest reduction since the pandemic began. The reduction is roughly equivalent to 2% of global oil demand.

Central banks were forced to raise interest rates

As food and fuel prices skyrocketed, central banks around the world were forced to raise interest rates. The world's largest economy, the United States, began raising interest rates in March. The US Fed delivered five consecutive rate hikes in 2022.

The Bank of England at its September meeting raised its key interest rate by 50 basis points to 2.25%, marking the seventh consecutive rate hike and pushing borrowing costs to their highest level since 2008. The ECB, on the other hand, lifts interest rates for the first time in its July 2022 meeting, which is the first increase since 2011, ending eight years of negative rates.

The RBI raised interest rates by 50 basis points (bps) at its September 30, 2022, meeting, representing the fourth consecutive rate hike. The repo rate now stands at 5.90%, up from 5.40%. The RBI has raised interest rates by 190 basis points (bps) so far in 2022.

Can India escape the effects of a global recession?

In an interview with PTI on October 15, state bank chairman Dinesh Khara stated that India is doing well with a projected growth rate of 6.8%, so the impact of a global recession is unlikely to be as pronounced in India as compared to other countries.

Earlier, global rating agency S&P said that even though the US and the Eurozone are headed into recession, India is unlikely to face the impact given the "not so coupled" nature of its economy with the global economy.

"The Indian economy is a lot more decoupled from the global economy than we normally think of, given its large domestic demand, even though you (India) are a net importer of energy." "But you have enough forex reserves on one hand and your companies have managed to maintain healthy balance sheets," Paul F. Gruenwald, S&P global chief economist and managing director, told reporters.

He added that India was never fully integrated into the global economy and so is relatively independent of global markets.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 20 Oct 2022, 11:23 AM IST