Many believe, as the World Bank has indicated, that since central banks around the world are raising interest rates to combat rising inflation, the entire world may be heading for a global recession. 2022 was a problematic year, but fortunately, the global economy continues to perform quite well – for example, job growth is strong. Despite the fact that inflation is at an all-time high and interest rates are at an all-time high, consumer and business spending remains stable.

Nonetheless, problems are growing, and business revenues are declining. For many banks and businesses, savings have been seriously depleted in 2022. Recession might be a result of this shift. The interest rate hikes that were supposed to slow inflation are also likely to limit growth for many businesses.

Prices continue to rise, and companies are taking advantage of inflation to increase their profit margins. This, in turn, is causing declines in the stock market. Is a recession coming in 2022? No, but it's not out of the question that we're facing a recession in 2023. While the economy is relatively stable for now, another major issue, like a pandemic or war in Europe, could trigger a major crisis.

What is a recession?

A country is in economic recession when its real gross domestic product (GDP) falls for two consecutive quarters (six months). But what then exactly is real GDP? GDP is a measure of the value of all goods and services produced in a country, usually during a single year. It can be calculated based on totaling the amount of all goods sold domestically or exported minus the amount of goods imported from other countries.

Real GDP simply means that the value of GDP has been adjusted for any changes in nominal prices. If a country produces $1 billion in goods and services, and the next year produced $1.1 billion, but prices rose by 10%, that means real GDP hasn't changed at all.

Each country has its own way of measuring GDP and determining whether it is in a recession—although some, such as Russia, may frequently understate or overstate their data indicators. If the world's aggregate GDP falls, it will mean a global recession. 2022 wasn’t the first year the economic indicators slumped, but it might get worse in the next few months.

A recession is associated with rising unemployment and the bankruptcy of many companies. It is easy for a country to enter a recession, but difficult to get out of it, as many companies and taxpayers fall into a poverty trap.

There were many changes in 2022 – recession, though is usually associated with stock market declines, such as the Great Crash of the 1930s. People who rely on savings—from retirees to landlords—are particularly hard hit. Crime is also on the rise, partly because people are more likely to turn to drugs.

To restart the economy during a recession, governments should spend more on unemployment, health care and social projects—like President Roosevelt's New Deal. Of course, this comes at a cost to taxpayers and can make the national debt rise.

global recession - a woman calculates her financial results

The impending storm

According to the World Bank, the post-recession slowdown in the global economy was the worst since the 1970s, and consumer confidence has already dropped more than before previous global recessions. 2022 made the global growth slow down sharply and is expected to slow further as more countries enter recession. This could harm developing countries in particular, since they have fewer capabilities to boost their production.

Are we in a recession? 2022 made some economic factors slump, but we can still slow them down. Global interest rate hikes and other austerity policy actions are likely to continue next year. However, according to experts, they may not be enough to bring inflation back to levels seen before the COVID-19 pandemic, especially in the face of a global fuel crisis related to Russia's invasion of Ukraine.

If supply issues and labor market pressures persist, global core inflation could reach 5% in 2023—more than doubling the pandemic's impact. These projections exclude energy prices, which could fluctuate dramatically due to sanctions against Putin's regime in Russia as well as the climate catastrophe.

According to World Bank economists, if central banks want to reduce inflation, they may need to raise interest rates by another two percentile points on top of the two percentile point increase seen in 2021. However, an increase of this magnitude, combined with financial market stress, would stifle global GDP growth. This could lead to a much worse crisis than the one that occurred a dozen years ago.

Instead of cutting consumption, production, and productivity should be increased to avoid another turn of austerity policies—but this is not that simple during a global energy crisis. This year, central banks around the world raised interest rates at the same time, which has not happened in the last 50 years.

Such actions, however, may not be sufficient to return global inflation to pre-pandemic levels; coordinated action by governments is required.

Opportunities squandered

According to prominent economists, including the president of the World Bank, he has stated that previous methods of combating recession have not worked well enough. To reduce inflation, many governments have called for tighter monetary and fiscal policies. But it may be too late; tightening these policies at the same time is likely to worsen the situation and contribute to the global slowdown.

These efforts tend to be dependent on government assistance, not for large corporations, but for small businesses and individual consumers. This is the pyramid's base, the foundation of any country's economy. Anyone can try to fight inflation and save money, as seen in our guide.

Consumer spending was high at the start of 2022, but the savings that enabled this were also shrinking. Spending in 2023 will most likely increase by only 1%. Furthermore, inflation is accelerating, consuming citizens' savings. It is likely that all types of subsidies and assistance provided during the pandemic period have already been spent and returned to the economy. This also implies that the majority of money in the United States—but not only—is spent rather than saved. Perhaps another stimulus is needed—austerity does not seem to be the answer.

global recession - the chart and the world in the background

How to curb inflation and recession

Central banks should continue to try to control inflation, which can be done without starting a global recession. However, many policymakers will have to work together to make this happen, giving clear policy decisions. In developed economies, central banks should think about how the effects of monetary tightening can spread to other countries.

Many governments in developed countries will most likely implement austerity policies in order to increase the purchasing power of money. However, this may limit economic growth. Social projects could be a solution, but they are clearly a taxpayers’ expense. Less developed countries should strengthen their financial reserves and economic foundation.

Policymakers should also develop credible medium-term economic plans and assist vulnerable households in various ways. Other economic policymakers will need to contribute to the fight against inflation, particularly by taking decisive steps to increase global supply of goods.

Increasing employment and reducing labor market restrictions can help, since many people are likely to seek additional work on their own. Labor-market policies should also make it easier for people to find new jobs—or provide free education in a new field. You, too, can try making money on the side.

Global recession—2022 conclusions

Increased demand and production can help to make more goods available globally. Global cooperation can go a long way toward ensuring that everyone has enough food and energy. When it comes to energy resources, policymakers should accelerate the transition to low-carbon energy sources and reduce energy consumption—a shift away from Russian raw materials could benefit both China and developing Europe.

This is related to the expansion of global trade networks. Global supply bottlenecks must be eliminated. We can only hope that no further disaster, such as Brexit or a ship stuck in a canal, will obstruct the flow of goods. Many countries are increasing their self-sufficiency in order to reduce delivery times.

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