Risks of recession grow in the world due to inflation, covid and the war in Ukraine

Economic growth projections for this year have been lowered as the world grapples with high inflation and uncertainty caused by the conflict between Russia and Ukraine.

According to a recent article in The Economist, rumors of a global recession are growing among economists due to a mixture of factors, among which the rapid increase in prices in the United States stands out, with the Federal Reserve willing to drastically tighten policy to combat inflation. While Europe suffers from an energy crisis that undermines the purchasing power of consumers. And the repeated outbreaks of the Omicron variant in China are added, which paralyze the country due to its strict zero covid policy.

The article says that US bond investors are betting the Fed, which is currently aggressive on its monetary policy, will have to cut interest rates again within two years as the US economy weakens. which given the history, a recession seems likely in the next two years in that country.

This same conclusion was reached by german bankwho assured in an analysis that the Fed’s battle against inflation will cause a recession in the US that would begin at the end of next year. It is the first bank to reflect this concern.

Deutsche Bank economists no longer believe the US central bank will achieve a soft landing.

“Clearly the United States has not been oblivious to the global phenomenon of the economic crisis, measures to control inflation such as raising interest rates to control supply and demand, will trigger a control of inflation but in turn the increase in the value of credits. The important thing will be to have a balance that allows household economies not to suffer but at the same time reactivates after the pandemic. In the end, the recession seems very probable, what is going to have to be managed is how serious it will be”, assured the oil analyst Roger Rincón.

Rincón does not rule out that these effects can be seen throughout the world. He says that “with this scenario it is very possible that many countries will enter a recession, some more marked than others, everything will depend on the measures of the governments. However, it may not be enough.”

To the risks of recession are added those of stagflation, the increase in prices together with a slowdown in the economy. The rating agency Fitch Ratings analyzed a possible stagflation scenario and predicted that, if it were to occur, it would reflect an increase in oil prices to US$150 per barrel in 2022 and US$130 in 2023, US inflation would rise to 10% and remain in high single digits for the rest of the year, European Union inflation would be 5% for 2022 and 2023, there would be more aggressive monetary tightening, and US and Eurozone growth it would fall to around zero in 2023, with unemployment rates rising by this one and two percentage points.

Although he clarified that global infrastructure ratings would not be greatly affected in a scenario of severe stagflation.

However, there are opinions against the possibility of a recession, at least in the United States. Recently, the International Monetary Fund’s new chief economist, Pierre-Olivier Gourinchas, said it is too early to talk about the risk of a US recession, where growth is likely to remain positive for the foreseeable future even if it slows.

“We are not facing a recessionary environment in the US, at least in the near future. What we see is similar to a slowdown in growth, but it remains solidly in positive territory,” Gourinchas said.

Likewise, the chief economist of Scotiabank Colpatria, Sergio Olarte, indicated that the world is experiencing a slowdown, rather than being at risk of a recession.

“Commodity prices are showing that there is still demand for them. When there is demand for energy, it is because there is production. We are expecting a slowdown in the world, rather than a recession,” said the Scotiabank economist.

Inflation, key point of the slowdown

As explained by Sergio Olarte, chief economist at Scotiabank Colpatria, among the elements that could generate a global recession, the real problem could be the high rate of inflation. “The rise in the interest rate while the disposable income of family agents begins to reach for fewer supplies can cause household consumption in the world to slow down sooner rather than later. That is the great threat facing the growth of the world economy”, assured Olarte.

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