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What this recession might solve

Lower inflation and greener energy infrastructure just might be the silver linings of this recession, as long as it is short-lived.

Among most experts, there is no question that the world is experiencing an economic downturn. For many years in America, a recession was defined as two consecutive quarters of GDP losses. Now, regulators have taken a more paternalistic approach by saying that a downturn is only a recession when they deem it a recession. But few are buying this revised approach: Q1 and Q2 of 2022 saw GDP losses; thus, the United States and many countries around the globe are experiencing a recession. The Federal Reserve has tightened monetary policy by raising interest rates by 2.25% since March, and the European Central Bank plans to continue raising interest rates across the bloc beyond its initial bump in July. China is still sticking to its increasingly hopeless Zero COVID strategy, and its shaky property market looks ready to knock some very large dominoes. And, with Russia’s invasion of Ukraine, the resulting sanctions, and Russia’s decision to turn off its natural gas pipelines leading to the EU, markets are shakier than they have been for a while.

Despite the doom and gloom, consumers are content with their personal finances. Consumer confidence is low due to heavy inflation – it is hard to trust in a stable economy when the price of staples keeps going up – but in general, people are pretty happy with the paychecks they are bringing home. Underwhelming GDP growth figures have not yet translated into underwhelming salaries, as labour markets in rich countries remain historically competitive. Households have also adjusted their spending from the early days of the pandemic. They are buying fewer air fryers and home workout equipment, and are instead spending much more money on leisure/travel to beat these heatwaves.

The bright side

Disregarding the question of whether we are in a global recession, and ignoring the severity of that recession, there are a few positive outcomes that will lead to long-term benefits for many countries. First, energy independence by way of renewable energy is now an absolute priority. European nations had already prioritised it – using Russian natural gas was meant to be a temporary measure during the bloc’s transition to greener energy – but now those plans have had to be sped up. The sooner the EU weans itself from fossil fuels, the sooner it can fully cut off ties with autocratic nations that it does not like doing business with. Many nations are also renewing their interest in nuclear power, including Japan, which experienced the Fukushima disaster in 2011. Simply put, there is no more complacency about energy supply, security, and independence.

The second unintended benefit of this recession is lower inflation. Recessions usually worsen when households and companies are forced to default, but since the Great Recession in 2008, both groups have far more cash in their bank accounts and are thus better equipped to handle downturns without defaults. These defaults tend to have domino effects, so the fewer tiles pushed over, the better off the economy will be. Moreover, due to monetary tightening, experts expect inflation to settle down, finally. Inflation levels are expected to fall to 3.8% in the next 12 months, a much more manageable level. If this downturn does happen, there will be great losses, but if the recession is short-lived, it should not leave too many scars.