Is The World Economy Moving Towards Recession?

Global financial services group, Nomura is predicting a ‘procession of recessions’. It expects a number of major economies to enter a recession within the next 12 months as tightening monetary policy and surging commodity prices choke off global growth. The US, Euro-zone, UK, South Korea, Australia and Canada are all expected to witness economic contraction with different levels of severity and for varying time frames.

- Sudip Bandyopadhyay

The line-up of usual economic suspects behind these recessions includes rising interest rates, high inflation, negative consumer sentiment, etc. However, if we step back a little, we notice the root of all these symptoms leads back to one prominent protagonist-turned-antagonist - an extended period of easy money.

For over a decade, central banks in the US, Europe and even some parts of Asia, largely followed an easy money policy. It all began after the financial crisis of 2008, when the US Federal Reserve (the Fed) initiated a rapid surge in credit to bail out its struggling economy. Interest rates were low, making money cheap and more funds were made available too. As is typically the case, this trend was followed by the European Central Bank and Bank of Japan who were more cautious but effective with their own easy money policies.

What they were doing seemed to be working; with lower interest rates, businesses could borrow cheaper and expand faster and the global economy enjoyed a relatively uninterrupted phase of growth with manageable levels of unemployment. There were economic adversities that came and went, such as asset bubbles and overvaluation in equity markets. But nothing was as adverse as the impact of the spread of pandemic across the globe.

Governments and central banks responded promptly. They commenced fiscal stimulus and monetary easing to keep their economies afloat. These remedies were effective. The world seemed to recover tentatively after a year of experiencing its worst recession.