Global recession risk: why should we worry?

A global economic recession appears increasingly on the cards, according to some of the world’s most influential economic institutions.

There is no consensus yet on whether the New Zealand economy might also be dragged into recession, but commentary from some of the country’s leading economists has taken an ugly turn.

Why now?

The big three drivers behind the recession fears are the war in Ukraine and the related energy crisis in Europe, aggressive hikes in interest rates to combat inflation around the world – but most influentially by the United States Federal Reserve and European Central Bank – along with declining growth in China.

But ANZ chief economist Sharon Zollner says fears have definitely been on the rise this week, and have been crystallised by the recent sharp rise in the US dollar and events in the UK.

The economic outlook appears particularly bleak in the UK, where financial markets balked at a ‘‘miniBudget’’ released under new Prime Minister Liz Truss that includes £45 billion (NZ$86b) in tax cuts and an extra £70b in government borrowing to help people offset soaring power bills. This has threatened to trigger a financial crisis as bond yields rise and the pound sinks.

The response to the UK tax cuts is a reminder that fiscal policies have limits and governments can’t just do whatever they want without consequences, Zollner says.

Meanwhile, the rise in the US dollar has put central banks elsewhere in the world in a difficult position, she says.

‘‘Countries are going to have a nasty choice of raising their rates to sort of keep up with the US Federal Reserve, or watch their exchange rates fall through the floor and inflation rise very rapidly.’’

What people are saying overseas

The managing director of the Swissbased World Economic Forum, Saadia Zahidi, says dark clouds detected in May seem to be turning into ‘‘a full-blown economic storm’’.

A survey of senior economists it released on Wednesday found that most believed a global recession next year was either very or somewhat likely.

World Trade Organisation director-general Ngozi OkonjoIweala said the organisation was in the middle of revising its forecasts, but all the indicators were pointing to ‘‘downside numbers’’.

In July, the IMF revised down its global growth projects to 3.2% in 2022 and 2.9% next year, but there may be room for a further downgrade when it reviews its numbers next month.

Credit ratings agency S&P said on Thursday that the performance of the global economy over the next few quarters was ‘‘increasingly a one-way bet’’.

‘‘This may be the most anticipated economic slowdown on record,’’ its chief economist Paul Gruenwald said.

‘‘The question is how low growth will go, and for how long it will stay down.’’

And locally?

BNZ said the global economy was still expected to grow 2.6% this year and 1.9% next year, but that those forecasts were still falling.

People were underestimating the likelihood of a global recession, research head Stephen Toplis warned on Tuesday.

‘‘The rapidity of rate increases globally, coupled with the disastrous consequences of Europe/UK’s energy crisis, means things could well and truly turn to custard.’’

Infometrics also dialled up the rhetoric this week, with principal economist Brad Olsen saying he had been struck by the number of people he met who were ‘‘really, really’’ concerned.

What to watch for

Some of the signs the situation is likely to deteriorate may be more obvious than others. Any escalation of the war in Ukraine would fall into the former category.

Zollner says further falls in global sharemarkets and rapid rises in interest rates are also things to watch for. In terms of ‘‘real economic data’’, the early bird signs of an impending recession can include the data from monthly surveys of manufacturing activity, and then movements in the US junk bond market, which can shed light on what will happen to the availability of credit.