Just as the global economy is bouncing back from the COVID-19 pandemic, a growing list of risks is clouding the economic outlook – although most economists still believe a recession this year is relatively unlikely. The war in Ukraine, Russia sanctions, China’s “zero COVID” policies, spiking inflation, and interest hikes by the United States (US) Federal Reserve (Fed) are all set to crimp growth in 2022, reports The Asean Post.
Global Recession
“Recessions are incredibly hard to predict, and even good forecasters, e.g., the Fed, only know we’re experiencing a recession once we’re in one, not in advance,” Tara Sinclair, an economics professor at the George Washington University in Washington, DC, said.
“In general policy makers underweight recessions in their forecasts and focus on predicting the economy in normal times.” In the US, the Fed faces the delicate task of cooling inflation, which is at a four-decade high, without raising rates so sharply that it brings on a recession.
Historically, the central bank has struggled to pull off such “soft landings” – most economists argue it has only done so once, in 1994, when then-chair Alan Greenspan oversaw a doubling of the benchmark rate without killing economic growth.
A downturn in the world’s largest economy, which recorded its fastest expansion in decades last year, would reverberate globally, threatening to send growth into reverse barely two years after the world economy shrank 4.3 percent due to the pandemic.
In an op-ed last month, Bill Dudley, the former president of the Federal Reserve Bank of New York, warned that a recession was now “virtually inevitable” as the Fed had waited too long to tighten policy.
US Fed Chair Jerome Powell, who is expected to oversee at least six more rate increases this year after a quarter percentage point hike last month, has insisted the central bank can “more likely than not” achieve a soft landing. Another warning sign in recent weeks has been an inverting of the curve plotting yields on short and long-term US Treasury bonds – an indication that investors are becoming pessimistic about the economy’s near-term prospects.
An inverted yield curve, which occurs when investors turn away from stocks towards less risky bonds, has preceded all eight US recessions since 1955, although the time frames between an inversion and a downturn have varied between months and years.
Real risk
