Esperio: Will We See a Recession?
The analyst suggests that while a short-lived recession occurred in 2020, the likelihood of a global recession in 2023 seems low, although potential risks and external shocks could lead to a downturn in the coming years.
There have been many speculations about the recession over the last few years. Many people expected the recession to arrive in 2020-2021 amid a growing debt bubble that could worsen indebted economies like Spain and Italy. Eventually this did not happen as the COVID-19 pandemic hit the global economy. Although, many might think the pandemic has rescheduled the arrival of a recession, it is still somewhere just around the corner, or is it?
The definition of the recession has slightly changed overtime. Most of the people familiar with the matter think the recession could be officially declared when a country’s GDP has been contracting for two consecutive quarters. This easy to understand definition was introduced in 1974 by an economist and a U.S. Commissioner of Labour Statistics.
The modern definition of a recession is not quite as easy to understand. Officially, it is defined by the National Bureau of Economic Research as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” There are certain criteria surrounding the matter that should be met individually to a certain degree and could be offset by a strong reading of the other criteria. This sounds very complicated.
With all this said, when will there be a recession? The answer to this question could be short and very disappointing, or very promising on the other hand. We are already in a recession to some degree though it is not a recession in the classic sense. We are unlikely to see a global recession soon as we already had one in the first half of 2020.
Esperio analysts believe that modern recessions are very short-lived, and could be defined as such post factum or as happening after the event itself. The last recession was detected in 2020 and lasted for two months, from March through April 2020, after the economy gained traction following a sharp drop of business activity. Unlike the recession in 2007-208, economic fundamentals are much stronger for the most of the developed nations. This could be partially attributed to a changed regulation of the financial markets that are usually accused of instigating economic downturns, or to the ability of the regulator to cool overheated economies, or to a rising polycentric economic world that is supported primarily by the United States and the expanding Chinese economy. All these parts together shape the modern economic puzzle, where nobody is keen to welcome a recession anywhere in the world.
Even over the past three years, when this short-lived recession was detected back in 2020, there are numerous reasons that could prompt a start to a recession. We were faced with zombie companies that benefited from low borrowing rates but were dissolved after interest rates surged across the globe. There was a huge mortgage crisis in China which also affected neighboring nations like Vietnam, and a huge banking crisis, that was swiftly extinguished by the U.S. Federal Reserve (Fed) and U.S. Administration, hit the US economy and also leaked into European Credit Suisse and some U.S. regional banks.
We may witness other debt issues emerge in some European countries in the South, but all these issues are not seen to be enough to be responsible for the wide-scale crisis with long lasting economic contraction, high unemployment rates, or the reason for the significant deterioration of the real income. The latter could be attributed to persistent high inflation that is eating the value of money, but easing economic issues globally.
Monetary authorities may instinctively feel the power of inflation as they are used to counteracting any critical issue by adding more money into the economy, and then cooling it by withdrawing extra liquidity from the market. It may seem like a patient that looks like a healthy person, but is permanently in hospital.
One may argue that Germany is already in a recession as it’s GDP contracted for the last two consecutive quarters, in the fourth quarter of 2022 and in the first three month of 2023. However, even European economists predict that this contraction will be short-lived. Claus Vistesen, chief euro area economist at Pantheon Macroeconomics, believes that the economic recovery in Germany has already started to pick up “We think consumers’ spending is now rebounding as inflation eases,” Vistesen said in a note. “We doubt that GDP will continue to fall in coming quarters, but we see no strong recovery either,” German Chancellor, Olaf Scholz, also said with optimism, as he waved confidence over the audience when speaking about economic development and pointing to a lot of investment in Germany.
So, what could go wrong to cause a long-lasting recession to hit the world, firstly in the U.S. and China? The mater, of course, could originate inside major central banks that could stifle economic activity by higher for longer interest rates that will suppress investment activity. Their inability to act in an emergency to medicate the financial system when needed by providing extra liquidity could also be a catalyst. Some external shocks, like the pandemic, that resulted in intentional closures of economies and disrupted supply chains for a long time could be prompted by chaotic borrowings of developed economies that could jeopardize the global financial market.
The latter is the most possible scenario, but so far it is under the control of the central bankers and supranational institutions, like the European commission, in the form of multinational trade agreements. These are very fragile structures, but they are now supported by the rising economic power of China that could reach the United States in terms of consumption.
So, the answer to the question of whether there will be a recession in 2023 is likely no. Could there be one in 2024 or in the coming years? The answer is yes, but it would be rather a short-lived story if patients or developed economies regularly take their liquidity pills.
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