A recession is a drastic downfall in the economy, indicated by a drop in the stock market, a steep fall in the housing market, and an increase in unemployment. An official recession is voiced when the GDP (Gross Domestic Product) i.e. the total value of goods and services in the U.S. is in declination for six months or more. Besides, an economic slowdown as such is followed by a decrease in corporate and business profits. A massive contraction in economic activities leads to an enormous disorder in the economy.
The petrifying factor of a recession is that the longer it lasts, the more power it gains from negatively impacting important aspects of an economy. It’s a chain of mishaps that catches everything it faces on its way. It begins with a decrease in GDP, followed by an attempt of businesses to survive by cutting back. This, in turn, leads to layoffs and an increase in unemployment. People who still have secured jobs worry about the worst outcome and start spending less. As an attempt to preserve the economy, governments incur debts. Besides, inflation occurs which refers to the increase in prices of daily necessities such as consumer goods, groceries, and gasoline.
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What is a Global Recession?
A global recession is defined as an extended period of recession around the world. According to the International Monetary Fund (IMF), certain factors help to pinpoint a global recession, a drop in GDP worldwide being the most prominent one. Additionally, the decline in other macroeconomic factors such as capital flows, trade, and unemployment around the world supports that theory. For a decline in the economy to be identified as a global recession, the macroeconomic indicators have to sink for a substantial period. The criterion that has been established by the IMF is considered to have significance based on the organization’s reputation around the world. Not only do they focus on the fall in GDP, but they also put weight on the collapse of other economic components such as employment rates and oil consumption.
Theoretically, adding the GDP figures of all the countries around the world should produce a global GDP. However, it becomes difficult to do so due to the extensive number of currencies used around the world. To calculate the global GDP, the IMF uses purchasing power parity (PPP) which simply refers to the ability of one unit of currency to purchase the total number of goods and services.
That being said, a global recession will not have the same effect on every country. To state a few, the impact on the manufacturing sector of a nation will depend on the trading relationship it has with the rest of the world, and the negative effect on the financial services industry will be determined by the investment efficiency of the country. An example to portray that would be of the German economy. Irrespective of what the world faces during a global recession, Germany would suffer significantly due to its trade relationship with the rest of the nations.
What Global Recession Looks Like in 2020
Multiple factors indicate that a global recession is underway in 2020. Firstly, the fiscal-stimulus policies that were determined by the US are causing inflation to surpass its target. In correspondence, the Federal Reserve will continue to increase the federal fund rate by up to 3.5% (from 2%) causing a rise in the short term and long term interest rates. To add to the inflationary pressures, there’s a rise in oil prices. Meanwhile, the US presidential administration’s differences with Mexico, China, Europe, and Canada will further lead to higher inflation and slower economic growth.
To make matters worse, the Coronavirus pandemic will take a huge toll on the global economy. As most parts of the world are still on the first wave of the virus, the threat to global deterioration keeps increasing. If any country begins to recover domestically, the external pressure from other countries’ economic downfall will prolong the recession for them. On the other hand, all the other major nations will slow down undoubtedly. To prevent a hard landing, China will slow down and control its overcapacity. Trade frictions with other countries will lead to slower growth in European economies. And the emerging markets are bound to decelerate as the US monetary conditions would tighten.
The Major Indications that a Global Recession is Approaching
Practically, a set of indicators cannot determine the extent to which nations will face economic downfall. However, certain indicators point towards the possibility of a global recession along with several micro-factors that keep appearing on the daily. That being said, there are specific signals that have been accelerating toward a definite global recession in 2020. The potential triggers are not identified overnight thereby, making it important to understand the roots of the economic catastrophe that the year 2020 will face globally.
Decelerating US Economic Growth
The US economic growth will decelerate based on several factors including slow growth of GDP, and an increase in the unemployment rate and inflation. Moreover, industrial production in the US has been negatively affected due to the increased import costs. Thanks to Trump’s tariff war with China. The US GDP growth will see a decline from 2.2% in 2019 to 2.0% in 2020. According to a recent forecast, it will further decrease to 1.9% and 1.8% in the years 2021 and 2022, respectively.
Also, structural unemployment will increase as people who have been out of jobs for a long time will not be able to obtain high-paying jobs anymore. The increase in the unemployment rate will stand at 3.5% in 2020, followed by an increase to 3.6% and 3.7% in the years 2021 and 2020, respectively. Moreover, inflation will strike to 2.0% in 2021 from 1.9% in 2020. The key factors stand as potential indicators for a global recession that will be tough to recover from.
The Upsurge in US-China Tariff War
Since the announcement of “America First” made by the US president, his sole focus has been on China. By blaming Beijing for offering goods at a lower price, he imposed import tariffs on a variety of Chinese goods and posed a threat that the same would be done on electronic devices such as laptops, mobile phones, and game consoles. This is by no means a one way battle since China has set tariffs on $185 billion worth of US goods as a response to the US pressing tariffs of a solid $550 billion on Chinese goods. The trade war between two major economies will just act as one of the catalysts for a global recession.
Debt Crisis in China
China’s debt has been piling up since 2005 and it keeps increasing as each year passes by. The country’s industrial growth stands at 4.8% that is the lowest it has been in 30 years. Besides, the banks are heavily weighed down by consumer loans that will never be repaid. Even if Beijing plans to restrain the economy to slow down, it will negatively impact European and global growth.
Recession in Germany
Recession in Germany is an ongoing phenomenon that is bound to get just worse over the next few years. In the last nine months, industrial production in Germany faced a downfall five times. Besides, according to researchers, GDP would decrease by 4.2% this year due to the current pandemic, along with the increasing unemployment. The virus will take a toll on the German economy with the sharpest decline of 9.8% which is twice as steep as the one during the global financial crisis the country had faced in 2009.
The Contraction in Iran, Argentina, South Africa, Venezuela, and Turkey
These countries have suffered a recession in recent years and will be subjected to an even stronger decline in the economy due to the global recession that is around the corner. A blockade by the US is encountered by Iran which prevents them from selling its oil or gaining easy access to financial markets. Argentina suffers from a huge amount of debts, while Venezuela is in the middle of a political crisis which poses a counter-effect on the world’s largest oil reserves that they own. Meanwhile, South Africa and Turkey seem to pose a greater threat to the global economy as they are more blended into international markets.
The coronavirus recession is an ongoing key indicator towards a global recession which began in February 2020 leading to a crash in the 2020 stock market. Along with being one of the worst health crises of all times, the coronavirus recession has impacted the global economy and will continue to do so exponentially. Stock markets in major cities such as New York, Frankfurt, Tokyo, and London have been facing turbulence. Countries are bound to be pushed into recession due to the lockdown and the uncertainty of it. For situations to be more full-blown, advanced industrialized countries such as Germany, Italy, and Japan were already experiencing an economic downfall due to various factors and were not prepared to face even an ounce of decline at least for the next few years. Furthermore, even though the US and China were attempting to maintain steady economic growth, the coronavirus recession took them by shock.
As the pandemic continues to create chaos in the majority of the world, it has disrupted both supply and demand even in the most advanced economies. The mandatory lockdown has put a halt on all economic activities leading to interference in interconnectivity, integration, and the fundamental concepts of the modern economy. When people’s livelihood is at a pause due to closed shops, restaurants, airlines, and businesses around the world you know for a fact that a global recession at the doorstep.
As the financial aspects of every country continue to deteriorate, markets have been experiencing volatility in paramount measures. What’s crucial is that the short-term lending markets need to continue functioning so that the real economy does not fully disrupt. To reduce the adverse effect to an extent, the US Federal Reserve reduced its interest rate almost to zero and promised to make it cheaper for banks around the world to borrow US dollars. This paints a picture of how worried central banks are regarding the financial disaster that would worsen the economic status.
To sum up on the adverse sources of the coronavirus recession, we must be aware of the fact that more than 20 million jobs were terminated in April 2020, along with 33 million layoffs since the pandemic began. The rise in the unemployment rate in response to the virus is significantly higher than it was during the Great Recession that took place in October 2009. Furthermore, $3 trillion has been authorized by Congress to be utilized as rescue spending in the last two months to soften the viral storm. Without a doubt, the stock market is facing one of the lowest periods with a loss of about 40%.
Although the control of the spread of the pandemic is the topmost priority, the global recession that it follows will take years to recover from because even when the world surpasses the pandemic, they won’t be able to go back to a functioning economy and striving through that is tougher than one’s imagination.
History of Economic Recessions in the US
The recession history in the US portrays that it is indeed a natural business cycle, with one term worse or better than the other. With the year 1797 when Robert Morris, the financier of the Revolutionary War suffered from enormous debt, began the list of the most noteworthy recessions in the United States. The next notable recession took place in 1873 when the largest US bank at the time, Jay Cooke & Company failed. Later in 1907, the Federal Reserve System was formed by Congress to support New York’s Knickerbocker Trust Co. which led to a drastic drop in the stock market.
The biggest economic crisis, known as the Great Depression lasted from 1929-38 that caused the unemployment rate to reach up to 25% in 1933. A few years later US faced another relatively short term (about 8 months) recession due to a significantly decreased demand on military weapons after World War II. In 1973, the extensive increase in oil prices by the Organization of Petroleum Exporting Countries (OPEC) instigated another recession that lasted about 16 months.
The year 2008 marked the worst financial crisis in the US after the Great Depression in 1929. The Great Recession lasted for two years from December 2007 to June 2009. A global bank credit crisis took place as a consequence of the subprime mortgage crisis according to which banks sold more mortgages than they should to support the mortgage-backed securities. By the fourth quarter in 2008, GDP had dropped to -8.4%, worse than the country had faced since the Great Depression.
How Will the Global Economy Collapse in 2020
According to the International Monetary Fund, the world is bound to face the worst economic failure in 2020 since the Great Depression. Unfortunately, most poverty-stricken countries will suffer the most with no preparation whatsoever. The coronavirus has quickly turned the year of opportunities into the biggest downturn in less than a few months. Before the outbreak of the pandemic, a forecast showed how 160 nations were in for an income growth which has turned to the possibility of 170 nations suffering from negative income growth. Low-income nations in Asia, Latin America, and Africa will receive the shorter end of the stick. Realistically, social distancing and strictly followed lockdown aren’t even options in poor countries where the majority of the population depends on daily wages.
Furthermore, due to the fear involved regarding investment in emerging markets a total of more than $100 billion cash flows have occurred from these nations in the first two months of 2020 alone. Besides, commodity prices have suffered a sharp fall due to which countries that highly depend on exporting commodities went on a downward spiral. What makes it a lot worse is that a pandemic like COVID-19 will most likely come in waves. However, if it fully subsides by the third quarter of the year, a fragmentary recovery is possible in 2021.
A global recession negatively impacts the majority of the nations around the globe, some on a larger scale than others based on the strength of the economy as well as how well-prepared they are before the debacle. Multiple factors help to determine the arrival of a global recession including changes in capital flows, unemployment rate, industrial production, oil consumption, trade, and more.
According to the IMF’s statement, the Global Recession could be the worst since the 1930’s when the Global Depression took place. Moreover, the Economic Intelligence Unit (EIU) believes that there’s a risk of a subsequent recession due to the debt crisis that governments all over the globe will face. Unquestionably, the recovery will not follow the pattern of how quick the global economic downfall is. It will be gradual and painstaking at the least.