A deep downturn is unlikely, analysts say. But, if it does happen, another recession will be even more difficult to recover from.
Talk of an impending global recession is difficult to avoid these days, especially as central banks appear determined to tame runaway inflation in the face of weaker economic growth.
If a global recession does unfold, it will be the fourth in three decades, each of which rippled through South Africa’s economy. Another downturn will be no different — and may be even more difficult to recover from than the last, the pandemic-driven recession.
Economists and bankers have been in a tizzy about a looming recession since the United States Federal Reserve took a seemingly long-overdue crack at tempering inflation by hiking the interest rate earlier this year. Recession concerns were given even greater credence last week, when the Fed unexpectedly raised the rate by 75 basis points. The hike was the largest since 1994.
The US central bank, which once maintained that elevated prices would be a blip, has turned more hawkish towards inflation, which hit 8.6% in May, the highest reading since 1981.
But critics argue that the Fed’s more aggressive stance, which comes as economies are contending with major headwinds, is too late and now threatens to induce a recession by throwing even more cold water on consumer demand.
‘The current picture is plain to see’
One widely accepted definition of a recession is two or more consecutive quarters of negative growth. The US economy contracted by 1.5% in the first quarter of 2022, according to data released towards the end of May.
If the US goes into a prolonged recession, trade and financial market linkages with other major economies will be put in jeopardy, causing a spillover into the global economy.
In their latest economic projections, US policymakers revised the world superpower’s GDP growth down from 2.8% to 1.7% in 2022, as global supply constraints continue to bear down on demand. The unemployment rate is projected by all but one official to rise over the next two years.
Fed chair Jerome Powell said the US economy has been resilient over the past two and a half years but warned that “the current picture is plain to see: the labour market is extremely tight and inflation is much too high.” But he said the current hiking cycle is not expected to induce a recession.
Meanwhile, other advanced economies are feeling the heat as Russia’s war on Ukraine continues to exert pressure on global food and energy supplies.
The Bank of England raised its rate by 25 basis points, with three of its nine committee members preferring a bigger increase. The bank, which said it would “act forcefully” if necessary, now expects the UK economy to contract by 0.3% in the second quarter of 2022.
Germany’s central bank, the Deutsche Bundesbank, has also lowered its growth forecast, down from 4.2% to 1.9% in 2022.
Inflation in Germany hit 7.9% in May, the highest level since the first oil crisis in the winter of 1973. Data released this week showed that Germany’s producer price inflation, which measures the change in prices being absorbed by manufacturers, rose to an all-time record of 33.6%. Germany is particularly vulnerable to Moscow’s tempers because of its reliance on Russia-supplied natural gas for its electricity production.
But war-related supply disruptions are not alone in stirring recession fears. China’s zero-Covid policy means the second largest economy will probably remain prone to intermittent lockdowns, restricting travel and economic activity into 2023.
Recession-obsessed
Despite these headwinds, and a very vocal group of recession oracles, some are less convinced that a steep and prolonged downturn is on the horizon.
Martyn Davies, Deloitte managing director for emerging markets and Africa, said: “Commentators seemingly act in a sort of a groupthink fashion and markets tend to react accordingly. Everyone’s obsessed. Last month they were obsessed with Ukraine. The month before it was Covid. This month it is recession.
“I don’t know if we should all be carried away by this … I wouldn’t get overly stressed about a recession.”
In his recent analysis of US downturn fears, Daniel Bachman, who is in charge of US forecasting at Deloitte, noted that “a recession is more likely now than it appeared six months ago”.
He said a recession is expected to occur at the earliest in late 2022 or 2023 but added that a recession is less likely than some analysts would have one believe.
Bachman noted that, although recessions do occur when the Fed starts hiking interest rates, policy tightening does not typically trigger a downturn. He said recent recessions have not been associated directly with Fed tightening but with other shocks such as the bursting of the stock market bubble in 2001 and the financial crisis in 2008.
Davies said South Africa should be less concerned about the prospect of a global recession than with solving its internal economic dilemmas. “What keeps me awake at night? Is it a global recession or is it bad infrastructure? Is it the power supply, social instability, political risk — these are far more impactful on the daily lives of every single South African than a US recession.”
‘A weaker footing’
Sanisha Packirisamy, an economist at Momentum Investments, is also sceptical about the odds of a global recession.
There will be some fallout from what is happening in the US economy but, she said the Fed’s effort to “frontload” steep rates hikes now means the US economy will have to endure less tightening in the future.
The European Central Bank has also indicated its ambition to frontload hikes but it will coordinate this in a way that avoids the contagion seen during the 2010 eurozone crisis, Packirisamy said.
In the scenario that monetary policy tightening does trigger a global downturn, Packirisamy said, it may be more difficult to recover from than the Covid-19 recession.
When the pandemic-induced economic crisis hit, central banks were in a position to slash interest rates to encourage borrowing and investment. Fiscal authorities were also able to inject stimulus into their economies to boost growth.
A recession now would come at a time when many countries have not yet managed to restore government finances. Interest rates are also not yet at a level that would give central banks the latitude to cut them again.
“That’s what makes it very difficult to have these overlapping crises, because you haven’t had enough time for the fiscal and monetary authorities to get back to base. So they are operating off of a weaker footing.”
South Africa’s GDP has returned to its pre-pandemic levels and the country’s current account, buoyed by higher commodity prices, has remained in a surplus. But, Packirisamy pointed out, the country’s fiscal position is still weak and its debt is still high.
Moreover, South Africa’s sky-high unemployment has proven difficult to cut down and inequality has widened. “So from a socioeconomic perspective, we are on a weaker footing than during previous crises.”
Alexander Forbes chief economist Isaah Mhlanga agreed that, despite South Africa’s somewhat improved economic position, the country is “still not yet out of the woods”. This means policymakers need to ensure it has the tools, including a healthier public purse, to steel itself against the effects of a global slowdown — an endeavour that may prove difficult considering the country’s socio-economic crisis.
“They need to at least consider the potential risk that a recession will pose to the economy,” he said.
“In the event of a recession, they would have to have plans in place to respond to the slowdown in the economy, given that we already have a lot of pressure for more government spending on social social security.”
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