If there was one word that caught everyone’s attention in 2022, it was “inflation”. Inflation was a major concern for people around the globe and will remain so in 2023 as well. The cost of daily consumer goods and services is rising everywhere. These exorbitant rates are making life difficult for a lot of people who are struggling to buy groceries, pay their bills, and fill up their tanks at fuel stations.
Several countries have tried to counter this situation by repeatedly hiking their interest rates. On 7th December 2022, the Reserve Bank of India increased the Repo Rate (the rate at which the RBI lends funds to banks) by 35 basis points to 6.25%, marking their 5th hike in just 8 months!
The greatest risk to all this is the possibility of a global recession. When thinking of recession, the first thing that comes to everybody’s mind is the 2008 global economic crisis. But before moving on to the past, let's talk about what exactly a recession is.
A global recession is a period when countries around the world are affected by an economic decline. It is characterised by a decline in the Gross Domestic Product (GDP), increased unemployment, a decrease in consumer confidence as well as a decline in trade and industrial production.
It can be simply understood by taking a look at the graph of a country’s change in GDP. Two consecutive quarters of negative growth indicates that a country is in recession. In today’s globalised economy, recession in one country spells trouble for another and moreover, puts the economy of the whole world in danger due to the domino effect.
The 2008 crisis started with the housing industry in the United States of America. The industry was filled with bankers giving mortgages to people for their houses, but they got a little too greedy and started giving mortgages even to the people who couldn’t afford to repay the money. The mortgages bundled up in packages were sold to banks and then the inevitable happened, people stopped paying the interest and the banks fell. The banks were ultimately bailed out by their government, but the crisis started to spread. European banks had bought a lot of bad mortgages from the U.S., which led to their collapse and they also had to rely on their government for help.
But this time around, the reason for the recession is a little different. Money is no longer an issue because the world is not short of cash but of pretty much everything else. When the COVID-19 pandemic struck, the fragility of supply chains became apparent. Factories all around the world halted production, sending the global economy into a free fall. Now that the pandemic has receded, the demand for goods and services has increased faster than the supply. Businesses around the globe have struggled to hire workers, and food and energy prices are on the rise.
Europe is hit hard by soaring energy prices. In this cold weather, people can’t even turn on the heater as they cannot afford the energy bill that comes with it. China is in even worse shape because, in addition to the energy prices, they have a collapsing property sector and a surge in COVID-19 cases. Due to Xi Jinping’s “Zero Covid Policy”, entire cities are on lockdown, thus affecting the supply chain all over the world.
All of this leads to a major concern regarding a global recession in the coming years. Russia’s invasion of Ukraine also played a big part because countries are sending support to Ukraine and cutting business ties with Russia, straining their budget.
Meanwhile, some countries are bucking this trend, like Indonesia. Investors are avoiding China and the most obvious alternatives are its neighbours- Indonesia, India, etc. These countries are the future hubs for factories of all the big MNCs. The government of Indonesia is giving subsidies and setting its own prices for gas called administrative prices.
In conclusion, with negative GDP growth all over the world, predictions of a global recession are hardly a far cry. But with timely preparation and correct measures by all the countries, it can be avoided.