A Global Recession May Be in the Cards — Let’s Understand Why

Court Ash-Dale, Investigative Journalist

November 6, 2022

The world is barreling toward another global recession. Economists anticipate the storm to come within the next twelve months, with far-reaching effects. If the 2008 Financial Crisis sets any precedent, this will be no picnic. 

Gregor Smith, an Economics Professor at Queens University, suggests three major causes of an impending global recession: the delay in interest rate raises, the energy crisis, and supply chain disruptions. 

The interconnectedness of the global economy causes seemingly insignificant events to have a ripple effect—as was made clear by the invasion of Ukraine. 

Until the world is in the thick of it, tracing a recession back to its source will remain a mystery.

A common cause of recessions is waiting too long to increase interest rates when faced with inflation. To recover from the COVID-19 pandemic, governments worldwide lowered federal interest rates.

When federal interest rates—the percentage markup on funds banks buy from the government—are low, banks are more inclined to pull more money out and loan it to businesses and individuals. As companies expand and increase their workforces, and more citizens take out cheaper loans, more customers can afford goods and services they usually couldn’t. 

When businesses raise prices to catch up with this newfound demand, it’s called inflation. When fewer people can afford goods and services, the economy slows down. That’s a recession.

The economic effects of the pandemic cannot be understated. Preliminary damage assessment estimates are in the ballpark of $6.5 trillion—nearly double the GDP of Germany. Almost every country drastically reduced interest rates to keep their economies up and running.

Luckily, the global economy soared like never before. 

Professor Smith and other economists are concerned the United States has been too reluctant to push the breaks on their flourishing recovery. The "kingpin" of global economics may have conjured a runaway train.

Interest rates and inflation typically have a synchronous relationship. When inflation gets too high, countries usually implement higher interest rates. According to Smith, increasing interest rates usually calms inflation within a year. 

The Federal Reserve locked interest rates at 0.25% from March 2020 to January of this year before incrementally raising rates to 3.25% as of last month. 

With interest rates requiring up to a year to make a noticeable impact on inflation, Smith calls this maneuver "too much, too late."

Economists agree a 2% annual inflation rate is healthy. Inflation in the United States has seen a four-fold increase in under two years; Americans can now afford 14% less than in 2021. 

Many economists believe the US Federal Reserve will aggressively hike up interest rates to crack down on growing unaffordability. Unable to thrive like it used to, the economy will stagnate and may slow into a recession—and likely bring the rest of the world with it.

“As residents are spending less, one of the things they spend less on is imports from other countries,” Smith explained. “So, exports from other countries in the world decline—for example, lumber from Canada—which transmits the recession to [other] countries.”

Startlingly high gas prices and headlines of Europeans panicking to heat their homes show the world is slipping into an energy crisis. The Russian invasion of Ukraine paved the way for a slew of Western economic sanctions against Russia, effectively pulling the plug on the world's leading natural gas supplier. 

With less than a third of our electricity being renewable, the world is creeping toward an energy crisis led by Europe. The situation looks bleak as the Global North closes in on a harsh winter. 

The West has so far avoided the full force of the oil shortage by shifting its dependence to other providers; the European Union isn't holding up nearly as well after losing its sole supplier.

Hit by a lack of energy supply, the European interest rates have surpassed those of the US—with each country seeing higher rates the closer their proximity to the Russian border. 

The IMF expects at least half of the EU to fall into a recession in the coming months. Since almost everything depends on oil and natural gas to some extent, swelling gas prices can infect nearly any price tag.

For a single bell pepper, oil drives the trucks that harvest them, powers the plants that disinfect and package them, fuels the vessel that ships it overseas, runs the delivery truck that delivers it to your supermarket, and powers the store that sells the pepper to you. Reluctant to pay the rising costs, businesses often push the financial burden on consumers. 

The war in Ukraine and the pandemic hangover have made shipping more expensive and complicated. 

The shift to online shopping during the pandemic led to a spike in outsourcing and an unprecedented load on global supply chains. The human cost became unbearable for the essential members of these links, bringing on a wave of labor strikes that continue to this day. 

The war forced popular transit routes between Asia and Europe to reroute around Ukrainian and Russian airspace, and rising fuel prices made sending goods around the globe more expensive.

Smith said a global recession would create sharp declines in commercial profits, flare unemployment, lower wages, widen income inequality, and cause corporate bankruptcies.

 "To insulate themselves from global inflation, some states are likely to introduce capital controls which limit one's imports and exports," Smith predicted. 

 When the alarm bells of an impending global recession rang in the late 1990s, Chile introduced capital controls to mitigate inflation. By the time the recession arrived in the early 2000s, their economy was already operating in a high-cost environment. 

 According to Smith, the recency of a pandemic makes it unlikely for countries to introduce capital controls – but not impossible.

 "The bludgeon of a global recession will not be felt universally," Smith said. 

 Economic crises always leave a deeper crater on the disadvantaged, for both states and individuals. Jobs in service industries are likely the safest, while those involving goods—mainly those reliant on global chains—may suffer.

 A recession could be a landmark of the early 21st century or stifled by increased interest rates. Opposing forces such as the looming energy crisis and rising shipping costs may make central banks' efforts negligible. Only time will tell. 

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