The Great Financial Crisis of 2007–2008 and the dot-com collapse of 2000–2001 are two recent recessions that were credit-driven, in addition to the pandemic-caused recession of 2020. In both instances, excesses caused by debt accumulated in the housing and internet infrastructure, and it took the economy over ten years to absorb them.
On the other hand, today’s recession is most likely to be sparked by excess liquidity rather than debt. In this instance, extremely high levels of fiscal and monetary stimulus related to COVID pumped money into households and investment markets, causing inflation and fueling financial asset speculation.
For investors, the distinction matters. The damage to business profitability during recessions brought on by inflation has historically been less severe. For instance, S&P 500 earnings decreased by 14% and 15%, respectively, during the inflation-driven recessions of 1982–1983, when the Fed hiked its policy rate to 20%, and 1973–1974 when it reached 11% when compared to the Great Financial Crisis and the tech crash, profit losses of 57% and 32%, respectively, were seen.
Every recession is unique; therefore, it seems unlikely that 2022 will have one. In the past, a major decline in expenditure typically resulted in a recession or a prolonged period of sluggish economic activity with negative growth, as well as, of course, a sharp increase in the unemployment rate. If this ever happens, it would be different.
Indicators of a downturn in the economy, such as a decline in homebuilding activity and a two-quarter decline in GDP, are already present in the Consumer confidence has never been worse than it is now, post-pandemic. There have been 32 cycles of economic growth and contraction in the US since 1854, with an average of 17 months of contraction and 38 months of expansion.
The National Bureau of Economic Research has documented eight instances of negative economic growth lasting at least one fiscal quarter and four instances that qualify as recessions since 1980. (NBER). The first one, which took place between July 1981 and November 1982, lasted 15 months. The second, which took place between July 1990 and March 1991, lasted for 8 months. The following one, from March 2001 to November 2001, lasted for eight months as well, while the most recent one, from December 2007 to June 2009, lasted for 18 months.
NBER had predicted a two-month Covid-19 recession for February to April 2020 during the Covid pandemic, but it was viewed as a component of a global freeze experienced by almost all nations. However, the NBER stated in July 2022 that “there is no clear rule regarding what measurements provide information to the process or how they are weighted in our choices” after the GDP shrank for the second consecutive quarter.
According to a thorough new study by the World Bank, as central banks around the world simultaneously raise interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging markets and developing economies that would harm them permanently.
The analysis indicates that if supply disruptions and labor market pressures don’t abate, those interest rate hikes may leave the global core inflation rate (excluding energy) at around 5% in 2023, which would be nearly twice the five-year average before the pandemic.
The report’s model suggests that central banks may need to increase interest rates by an extra 2 percentage points to reduce global inflation at a pace that is consistent with their aims. If financial market stress were to accompany this, global GDP growth would fall to 0.5 percent in 2023—a per-capita decline of 0.4 percent that would technically qualify as a worldwide recession.
“The global economy is severely dropping, and it is expected to continue to decrease as more nations experience recessions.” David Malpass, president of the World Bank Group, expressed his grave fear that these trends would continue and have terrible long-term effects on people in emerging markets and developing countries. “Policymakers might change their focus from cutting consumption to growing output to achieve low inflation rates, currency stability, and quicker growth. To promote growth and the eradication of poverty, policies should work to increase the capital allocation, productivity, and investment.
The report emphasizes the highly complicated conditions that central banks are now battling inflation under. Several past global recession indicators are already sounding the alarm. Following a post-recession rebound, the world economy is currently experiencing its greatest decline since 1970. Compared to the period leading up to past global recessions, the loss in worldwide consumer confidence has already been far more severe.
The three largest economies in the world—the US, China, and the euro area—have all seen a significant slowdown. Given the situation, even a slight blow to the world economy over the ensuing year might send it into a recession.
The 2008 recession-era continued to be the worst of all of them, with all aspects of the country’s economic activity contracting, particularly the bust of the subprime mortgage, falling private consumption, and the onset of extremely high unemployment. The Bureau of Economic Analysis first recorded a loss of 63,000 jobs in February 2008, and then on October 1, it announced a further loss of 156,000 jobs in September.
The number of employment losses in November 2008 hit 533,000, the highest monthly loss in 34 years. The number of jobless people increased by 5.1 million by March 2009, the biggest yearly increase since the 1940s, after an estimated 2.6 million jobs were lost overall in 2008.
The US entered its worst period of recession, and the third quarter of 2008 had a GDP contraction of 0.5%, the worst decrease since 2001. This contraction was caused by a protracted financial crisis and excessive inflation in commodities including gasoline, food, and steel. Additionally, the third quarter of 2008 saw the worst reduction in non-durable goods consumption since 1950, falling 6.4%.
The 2008–2009 recession was later confirmed by the NBER to have ended in June 2009, making it the longest recession since World War II and serving as a benchmark for formal theoretical or empirical models that can successfully forecast the course of a recession.
Expert opinions on the 2022 recession vary.
Experts contend that the United States market is currently healthy with cash and increased job statistics, unlike any of the aforementioned characteristics that made the 2008 crisis worse. There is no sign of a spending crunch; instead, the Fed has announced increased interest rates.
The cycle of recession is characterized by declining economic output, rising unemployment, and decreased consumer spending, but in 2022, unemployment is still at a record low of 3.6% in June, the lowest level since February 2020. In contrast to the 2008 cash shortage, US businesses are now making substantial profits and amassing enormous cash reserves, with an average after-tax profit margin of almost 16%—already a double-digit. According to estimates, corporate cash reserves currently stand at a record $4 trillion.
The central banks typically lower interest rates and inject more money into the economy during recessions, but in 2022, the Fed has been aggressively hiking interest rates to fight inflation. The NBER’s business-cycle dating committee has previously disproved the idea that two consecutive quarters of GDP contraction constitute a recession and instead opted to focus on measures of consumption, employment, and industrial activity.
A significant decrease in economic activity that is widespread and lasts for more than a few months is what the NBER committee defines as a recession. The NBER likes to wait for more than one or two indicators to show weakness, for the decrease to be considerable, and for the decline to linger for longer than a few months before declaring a recession. Therefore, a recession, if there is one, will be different in 2022 unless the IT sector experiences a serious setback that has a ripple effect on other contributing factors.
Differences and Similarities between 2008 and Today
One of the Federal Reserve’s preferred instruments for affecting the economy is interest rates. Interest rates were high, hovering at a little over 5% when the housing market crashed in 2008, giving the Fed plenty of breathing room. Between September 2007 and April 2008, interest rates were reduced by 3% to revive the economy. Unfortunately, market conditions today are much less favorable. Interest rates were already at excruciatingly low levels when the economy began to deteriorate. The Fed must proceed in the other direction with painful rate rises rather than lowering rates to stimulate the economy.
The national debt, which is another crucial sign of how well-rounded an economy is, was also in much better shape in 2008. It was around $8 trillion just before the economic collapse, which at the time looked like an absurd number. But the government’s propensity for spending kept getting out of hand. The national debt has almost doubled during the last 14 years, reaching an astounding $30 trillion.
Perhaps the most important and reliable indicator of the health of the economy is inflation. Continuing the theme, relative to today’s inflation rate, it was rather healthy in 2008. It was a little above the Federal Reserve’s target annual inflation rate of 2%, at roughly 3.8%. In comparison, the current inflation rate of 8.5% doesn’t even fully represent the situation. When we factor in the expenses of electricity, housing, and food, we can see the true situation of inflation more clearly. These elements cause the inflation rate to increase to over 18%.
The way that governments and institutions responded to the 2008 financial crisis and the present economy is another significant distinction. There wasn’t a significant move toward gold and other precious metals when the housing bubble burst. Individual investors undoubtedly strengthened their holdings with more reliable assets, but this didn’t take place globally.
According to a poll, 66% of CEOs in India anticipate a recession in the next year.
According to a private poll, just 66% of CEOs in India predict a recession in the coming year, compared to 86% of CEOs worldwide. According to the KPMG 2022 India CEO Outlook, over 58% of Chief Executive Officers (CEOs) in India and across the world believe that the recession the global economy will experience over the next 12 months will be moderate and brief, with 55% of CEOs in India having preparations in place to deal with it.
CEOs worldwide and in India were polled for the KPMG 2022 CEO Outlook to get their perspectives on the business and economic landscapes over the next three years. Despite geopolitical and economic difficulties, CEO confidence in India and the global economy rose to 57% in August from 52% in February 2022.
While the long-term growth picture has yet to improve, 82% of CEOs in India are optimistic about the short-term durability of the global economy. According to the poll, CEOs in India perceive a drop in growth prospects for their organizations and their nation overall, but they appear robust enough to recover quickly.
According to the survey, CEOs in India appear to be less concerned than CEOs in other countries about the recession and its various potential effects on their companies. CEOs in India feel that the Covid-19 pandemic fatigue, economic factors, such as the risk of rising interest rates, inflation, and an impending recession, as well as reputational risk, are among the most pressing concerns moving forward.
Over the following three years, CEOs in India predict that geopolitical concerns will continue to influence strategy and supply chains. According to the survey, 75% of CEOs in India and 81% of CEOs worldwide have changed or plan to change their risk management practices to account for geopolitical risk, and 21% of CEOs in India and 20% of CEOs worldwide will take more steps to adapt to geopolitical issues to achieve their growth goals.
“The epidemic and the developments in Europe have demonstrated how interwoven our global community is.” The biggest risk, in my opinion, is related to geopolitics. “We must all create resilient and optimized supply chains,” “Tata Steel’s CEO and Managing Director, TV Narendran, stated.
The study concludes that central banks should continue their efforts to keep inflation under control since it is possible to do so without causing a worldwide recession. However, it will need coordinated action from a range of policymakers.
Clear communication of policy choices is required while central banks maintain their independence. This may serve to stabilize inflation expectations and lessen the amount of tightening required. Central banks in advanced economies should be aware of the consequences of monetary tightening on other countries. They should tighten macroprudential rules in emerging markets and developing countries and increase foreign currency reserves.
The removal of financial assistance measures must be calibrated carefully by fiscal authorities while maintaining conformity with monetary policy goals. It is anticipated that the percentage of nations tightening their fiscal policies in 2019 will increase to its highest level since the early 1990s. The impacts of monetary policy on growth can be amplified as a result. Additionally, decision-makers should implement dependable medium-term economic plans and offer disadvantaged households specific assistance.
To effectively combat inflation, more economic decision-makers will need to take substantial action to increase global supply. In reducing labor market restrictions, policies must work to lower pricing pressures and boost labor force participation. Policies affecting the labor market may help reallocate displaced workers. Expanding the supply of goods globally, the availability of food and energy may be increased significantly with global cooperation. Politicians should propose steps to cut energy usage and hasten the switch to low-carbon energy sources for commodities like energy.
To enhance international commerce networks, to ease supply constraints throughout the world, policymakers should work together. They ought to be in favor of a global economic system founded on norms, one that protects trade networks from further disruption caused by fragmentation and protectionism.
edited and proofread by nikita sharma