Current Global Economic Contraction – a PlanMatrix Strategic Comment

It’s critical to examine events in the current global space, socially and economically, and how these will affect economic events.

A scrape of a range of opinions returns the following index of current affairs events that could potentially and meaningfully threaten the global economy:

TABLE 1: Issues Threatening the Global Economy

•           prolonged fall in major stock markets destabilizes global economy

•           pressure on continued feasibility of Top 50 banks

•           rising food prices, food insecurity, and resultant social unrest

•           debt distress in emerging markets and developing economies

•           supply chain disruptions – shortage of shipping containers

•           underperforming or pressurized major currencies

•           raw material and input shortages

•           labour markets remain overly tight – causing inflation to remain stubbornly high

•           COVID variants

•           disorderly climate transition

•           barriers to migration – refugee pressure

•           digital dependencies and cyber vulnerabilities

•           higher energy prices

•           Nord Stream 2 gas pipeline – sudden stop of European gas flows

•           relations between Russia and the US and European allies – Ukraine war and economic sanctions against Russia

•           spike in global oil prices & supply – US-Iran

•           intensifying rivalry – Saudi Arabia and Iran

•           slowdown in China – crackdown on tech titans and heavily-indebted real estate giants

•           US-China relations tense over Taiwan

•           the Korean peninsula – tensions act as bellwether for major global powers’ relationships

•           global trade slumps as US steps up protectionist policies

•           United States and Euro area experience near-zero growth next year – negative knock-on effects for rest of the world

•           inflation in the Eurozone and the United States to multiyear highs

•           trade war breaks out between the US and the European Union

•           security and bedding down of fresh British leadership

•           multiple countries withdraw from the Eurozone

•           geopolitical fragmentation impedes global trade and cooperation

The world may soon be teetering on the edge of a global recession, only two years after the last one.

A recession is caused by a chain of events in economies, such as disruptions to the supply chain, a financial crisis, or a world event.  It is characterized by significant decline in activity spread across economies, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. It can also be triggered after an inflationary period. When inflation increases, the probability of a recession does as well, leading to layoffs, fewer jobs, and higher interest rates.

The global economy is approaching a recession as economists polled by Reuters once again cut growth forecasts for key economies while central banks keep raising interest rates to bring down persistently-high inflation.

Michael Every, global strategist at Rabobank, says ‘“risk of a global recession’ is what everyone’s talking about and has become mainstream in forecasts. I think that’s pretty much a no-brainer when you look at the trend in all the key economies.”

One bright spot is that most major economies already in a recession or heading into one are starting with relatively low unemployment compared with previous downturns. Indeed, the latest poll expects the smallest gap between growth rates and joblessness in at least four decades.

The four stages of the Business Cycle, expansion, peak, contraction, and trough, together, describe the various states of the economy as it expands and contracts over time. Each of them is characterized by its own set of economic circumstances and scenarios.

The Contraction phase is defined as a period of continuous and sustained economic decline. A stronger version of this phase is known as a recession. Typically, at least two consecutive quarters of negative GDP growth is what economists consider to define a recession. During a contraction or recession, businesses are typically contracting their operations and shedding jobs, leading to decreased consumer spending and an overall decrease in economic activity. The contraction phase is typically marked by rising unemployment rates, falling wages, and weakening economic indicators.

In the most extreme scenarios, a recession can become a depression, which is a prolonged period of economic decline that can last for years or even decades. Daniel Liberto for, comments as follows: “a depression…leads to a decline in real gross domestic product (GDP) of at least 10% in a given year…and tends to be accompanied by high unemployment and low inflation.

Economist Nouriel Roubini – Dr. Doom – observes that “by the end of 2021, global debt, both public and private, exceeded 350 percent of the planet’s gross domestic product. We owe 3,5 times more than the revenue we realize.”

As if explicit debts were not enough to worry about, implicit debts are even more alarming. Even the richest societies are not rich enough to deliver on all the promises made to the swelling ranks of pensioners. The Organisation for Economic Co-operation and Development has estimated that unfunded or underfunded government pension liabilities in the top 20 economies amount to a staggering $78tn. “Implicit debt is a major time bomb and a severe megathreat.” Roubini then makes mention of “‘stagflation’ — the painful combination of stagnant growth and rising prices”.

Statistica Aaron O Neill – Oct 20 – 2022

Christine Romans, CNN Business: “As consumers face these challenges head on, household finances today are in much better shape than they were at the start of the financial crisis in 2008-2009. The job market is still robust, with unemployment at a half-century low.” Mark Hamrick, senior economic analyst for says “What do recessions and inflation have in common? They part people from the ability to buy the things they want and need. And in this case, the inflation issue has really affected more people than a larger number of unemployed would in that situation.” Victoria Cavaliere, writing for Bloomberg, states ”Economic output rebounded following two quarterly contractions, in part because of resilient consumers and business. Inflation remains stubbornly high, but unemployment is at historic lows.”

Globally major banks and fiscal authorities have classified the current global inflationary state as “persistent “rather than “transitory”.

The four takeaways from this are (1) low consumer debt, probably arising out of the pandemic pressure to tighten exposure, (2) a consequent response to shop for goods and services, the housing market having tanked and major assets, for the moment, out of reach, (3) low employment rates, relatively speaking, (4) a concerted attempt to by central banks to reign in high inflation, and (5) economic threats to a growing elderly demographic, increased longevity and social isolation are perhaps the most significant.

While the corporate and financial sectors are under severe pressure to maintain acceptable levels of revenue and trade, the current recession will, most likely, be rescued by a robust personal consumer base.