Context

• There have recently been growing concerns about the global economy slipping into recession. These concerns were primarily triggered by the contraction of the US economy, observed in the first half of 2022. Negative growth in two consecutive quarters is commonly but not officially used as an indication of recession.

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Background: Status of the US economy

• First and second quarter of 2022: As reported by the Bureau of Economic Analysis (BEA), the US real Gross Domestic Product (GDP adjusted for inflation) decreased at an annual rate of 1.6 per cent and 0.6 per cent in the first and second quarters of 2022, respectively.
• Third quarter: In the third quarter, however, the US economy grew by 3.2 per cent, signalling a significant recovery.
• Fourth quarter: The latest BEA advance estimates show that the US real GDP increased at an annual rate of 2.9 per cent in the fourth quarter.
• Expansion of US economy a positive sign: Despite the slight decrease from the third quarter, the continued expansion of the US economy at the end of 2022 marks a positive sign, soothing concerns about a recession in 2023.

Economic recovery of the US economy

• Positive growth in fourth quarter: The positive growth in the fourth quarter can primarily be attributed to consumer spending, which increased by an annualised rate of 2.1 per cent, and private inventory investment that showed an upturn in 2022. Although a significant decline from the 5.9 per cent increase in 2021, the difference accounts for the enthused post-Covid economic recovery in 2021.
• The US labour market continues to remain robust: The unemployment rate was recorded at a low of 3.5 per cent in December 2022, matching the pre-pandemic levels. Also, the total non-farm payroll employment increased by 2,23,000 in December, exceeding the Dow Jones estimate of 2,00,000.
• Inflation has eased: While the labour market remains tight, US inflation has eased in the last few months. Consumer prices fell 0.1 per cent in December the largest month-over-month decrease since April 2020, due to reductions in motor vehicle and gasoline prices.
• Layoffs not yet translated into rise in jobless claims: Although not a perfect association, the decline in jobless claims in January shows that the mass layoffs in recent weeks, particularly in the tech sector, have not yet translated into a rise in claims, suggesting the possibility of finding new jobs.
• The reopening of China’s borders can have positive implications for the global economy: As China resumes its economic activities to pre-Covid levels by boosting growth, domestic consumption is expected to increase significantly. With the ease of trans-border movement and eventual increase in exports of consumer and industrial goods, global trade is expected to strengthen as well.

What is Recession?

• A recession is a significant decline in economic activity that lasts for months or even years.
• Experts declare a recession when a nation’s economy experiences negative GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
• Recessions are considered an unavoidable part of the business cycle or the regular cadence of expansion and contraction that occurs in a nation’s economy.

Possibility of a global recession

• Elevated inflation continues to be a cause for global concern: Despite the fall in consumer prices, the headline CPI for the US showed an annual increase of 6.5 per cent in December 2022. In spite of the slow-paced increase in headline CPI, persistent elevation in core inflation excluding food and energy continues to be a major issue across economies.
• Interest Rate Hikes on the Horizon: Consequently, the central banks are expected to continue with interest rate hikes in the coming months. On an annualised level, the CPI inflation in Australia also jumped to 7.8 per cent in the 2022 fourth quarter, increasing the likelihood of respective interest rate hikes as well.
• China’s Impact on Commodity Prices: Moreover, an increase in China’s demand for goods post-reopening could drive up commodity prices, thereby creating an inflationary impact. For instance, China’s increased demand for natural gas would mean more competition with the European market, leading to higher commodity prices that can put further inflationary pressures on Europeans already dealing with high energy bills.
• Higher borrowing costs: Rising interest rates would incur even higher borrowing costs that could dampen consumer spending. While sectors sensitive to high borrowing costs such as housing and construction have slowed down significantly.

Conclusion

• Among the positive signs are the continued expansion of the US economy and the reopening of China’s borders. Rising inflation remains a cause for global concern. However, prevalence of mixed signals suggests that the onset and depth of a global recession in 2023 are not certain.

Mains question

Q. Highlight the current situation of global economies. Discuss if there’s a global recession in 2023?

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