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Just a Flesh Wound

Economists are predicting that by 2024, many of the world’s major economies will enter a recession. Overall, we are used to seeing recessions about once every decade. That’s why many experts were predicting a recession in the late 2010s, roughly ten years after the Great Recession changed the world as we know it. What nobody expected was the pandemic, which stopped the world economy in its tracks after the first lockdowns took effect. Thus, 2020 and 2021 saw economic regression, so by normal macroeconomic logic, we should not be facing another recession until the late 2020s. But as experts point out, there are quite a few reasons why the recession business cycle has sped up dramatically.

The Causes

The expert predictions are based on solid numbers. Surging food and petrol prices throughout the world are eating into consumer spending. In April, consumer prices were 8.3% higher than one year ago. Food and energy prices aside, annual inflation is still 6.2%. Moreover, supply-chain problems have been greatly exacerbated by the war in Ukraine. And despite all reason, Beijing seems to be fiercely adhering to its zero-COVID policy, meaning supply chains will not be stable anytime soon. The more unstable supply chains grow, the more expensive things become.

From a labour market standpoint, there is such thing as too much of a good thing. Employees are enjoying the fact that they have so many opportunities – it is definitely a job-hunter’s market. But when there are two job openings for every unemployed worker, companies are forced to pay higher wages. Goldman Sachs is reporting that wage growth is at an all-time high of 5.5%. This means that to keep up with increasing expenditures on employee salaries, companies will have to raise prices across the board. This means that consumers will have to spend more, thus adding fuel to the existing, raging inflation fire. The only silver lining about the current level of inflation is that it has only lasted for about a year; previous battles with high inflation in major economies were often waged over the course of many years, like in the 1980s, when inflation lasted for over six and a half years.

Silver Linings, Black Knights

The good news about the impending recession is that it is likely to be a relatively light one. During the Great Recession, the financial system nearly collapsed, and in 2020 entire industries and sectors ground to a screeching halt. Those two recessions had the sharpest GDP declines since WWII. The upcoming recession may be, in the words of the black knight from Monty Python and the Holy Grail, “just a flesh wound”, but the trouble is that a mild recession among major economies will expose the weaknesses of other economies. Because of the war in Ukraine, countries in the Middle East and Asia are facing severe food shortages and sky-high fuel prices. The EU is dealing with energy shocks as it cuts itself off from Russian oil and gas. And around the world, household incomes are declining, despite increased wages in G7 economies. Even though the world economy may not be as devastated by the upcoming recession, this impending injury will hurt.