Is the world headed for recession?

High inflation is leading central banks to raise interest rates, and China’s economy is slowing due to its Covid-19 lockdowns and restrictions



The logo of the World Economic Forum is seen on a window in front of Davos platz village, at the 51st annual meeting of the World Economic Forum (WEF) in Davos, Switzerland. — AP
The logo of the World Economic Forum is seen on a window in front of Davos platz village, at the 51st annual meeting of the World Economic Forum (WEF) in Davos, Switzerland. — AP
by

Issac John

Published: Wed 25 May 2022, 3:52 PM

Economists, central bankers and thought leaders gathered at the World Economic Forum meetings in Davos said they are increasingly fearful that the world may be headed for recession.

The backdrop for such grim eventuality is being set as the war rages on in Ukraine with no end in sight while supply chains remain choked with many of China’s factories still shuttered over Covid amid an escalating a global food crisis, they said. Markets are panicky, with technology stocks in particular distress, and inflation is running high across much of the developed world, they pointed out.

“We are not in a recession yet, but the signs are not good,” said David Rubenstein, co-founder and co-chairman of Carlyle. “The war is not likely to end tomorrow and it will be a precipitating factor.”

Gita Gopinath, first deputy managing director of the International Monetary Fund, told delegates on Wednesday that while the world continues to face headwinds with the war in Ukraine escalating. — Reuters
Gita Gopinath, first deputy managing director of the International Monetary Fund, told delegates on Wednesday that while the world continues to face headwinds with the war in Ukraine escalating. — Reuters

Gita Gopinath, first deputy managing director of the International Monetary Fund, told delegates on Wednesday that while the world continues to face headwinds with the war in Ukraine escalating, current growth forecasts offer a buffer against a potential global recession.

High inflation is leading central banks to raise interest rates, and China’s economy is slowing due to its Covid-19 lockdowns and restrictions, she said on the sidelines of the WEF.

“We have a confluence of shocks hitting the world, and we are still not out of the woods,” Gopinath said, pointing out that there are very divergent recoveries due to the pandemic, with emerging and developing economies lagging.

Among the major threats to economic growth, sanctions and counter sanctions, inflation, a tightening of interest rates by central banks and a slowdown in Chinese growth, Gopinath said.

“So all of these provide downside risks to our forecast,” Gopinath said, with reference to the IMF’s 2022 growth forecast issued last month of 3.6 per cent, a downgrade from a 4.4 per cent estimate in January.

“I would say at 3.6 per cent there is a buffer,” she said, conceding, however, that risks are uneven around the world.

“There are countries that are getting hit hard ... countries in Europe that are getting hit hard by the war, where we could see technical recessions,” she added.

Veteran philanthropist George Soros gave a chilling warning on Tuesday that Russia’s invasion of Ukraine threatens to be the “beginning of the third world war” that could spell the end of civilisation.

Soros warned that autocratic regimes were in the ascendant and the global economy was heading for a depression.

With the mood in Davos already downbeat due to the war, Soros ramped up the gloomy rhetoric to new heights. “The invasion may have been the beginning of the third world war and our civilisation may not survive it.

“The invasion of Ukraine didn’t come out of the blue. The world has been increasingly engaged in a struggle between two systems of governance that are diametrically opposed to each other: open society and closed society.”

International Monetary Fund (IMF) managing director Kristalina Georgieva takes part in the World Economic Forum (WEF) annual meeting in Davos. — AFP
International Monetary Fund (IMF) managing director Kristalina Georgieva takes part in the World Economic Forum (WEF) annual meeting in Davos. — AFP

The IMF Managing Director Kristalina Georgieva said she did not expect a global recession but hinted that there might be a further downward revision of growth forecasts.

“We have downgraded projections for growth for 143 countries, accounting for 86 per cent of GDP,” said François Villeroy de Galhau, governor of the Central Bank of France. “The horizon has darkened.” In addition to China’s Covid lockdowns, he cited the appreciation of the dollar and commodity price shocks in fuel resulting from the Russo-Ukrainian war.

But fuel isn’t the only commodity experiencing precipitous price increases – food may prove to be even more critical. “We can reduce the use of petrol,” he said, “but we have to eat every day.”

De Galhau added that with inflation running at 7.45 per cent in Europe and rising, “We will have to mobilize monetary policy. There is an increase in consensus about this. In the short run, our priority is fighting inflation.”

Jane Fraser, CEO of Citi, also emphasized the significance of food. While acknowledging some bright spots – including a Middle East that, she said, is stronger coming out of lockdown and exudes optimism – she warned: “Food is, I think, the big worry because that could be the wild card, when people are hungry around the world, and there’s going to be one-and-a-half-billion hungry people without the means or the access to food, particularly in Africa.”

— issacjohn@khaleejtimes.com


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