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For global economy, recession fears will not be going away soon

Major economies see welcome dips on inflation, but that may not be enough



It is a delicate balance being played out between rate hikes and trying to get inflation back under some control. Amidst this, recession remains a distinct possibility.
Image Credit: Shutterstock

New data show a significant decline in inflation rates across major economies, with that in the US at 5 per cent in March from 6 a month earlier. In Germany, the drop was from 8.7 per cent to 7.4 per cent.

Other countries experienced fluctuations to various degrees on their inflation, which would have consequences on their economic conditions, especially on monetary policies and the possibility of limiting the continuous rise in interest rates, which has had an impact on growth.

Bloomberg reports the potential for recession remains high in developed economies, with the UK’s chances at 75 per cent and 65 per cent for the US. Asian heavyweights such as China have a much lower probability to head into recession, at 12.5 per cent, and India at zero per cent. The GCC’s chances are not expected to exceed 5 per cent.

These findings raise important questions about prospects for the global economy, particularly given the strong correlation between inflation, interest rates, and recession. To gain a clearer understanding of future prospects, it’s important to consider some facts.

Rate hikes for longer

While it’s true inflation in developed countries have decreased significantly, this decline has been mainly driven by lower oil and gas prices. This rubbed off on inflation levels due to the decline in the prices of fuel and gas. However, prices for other commodities have remained high or only decreased by small percentages.

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As oil prices continue to rise periodically due to the OPEC+’s insistence on selling at fair prices, the factors that led to a reduction in inflation rates are not guaranteed. Thus, rates may experience some upcoming fluctuations. The US Federal Reserve has responded by stating that it will continue to raise interest rates, albeit at a slower pace. The European Central Bank is also expected to raise rates three times in the coming period.

This helps explain the data that suggests a high probability of recession, despite the possibility that the Fed may stop increasing interest rates by the end of this year if the decline in inflation continues, and more so if oil falls below $70. While this possibility is not yet indicated, such a drop cannot be completely excluded as it is related to any dip in oil demand next summer due to a recession.

Another OPEC+ cut?

In such a scenario, the OPEC+ countries may take decisions to reduce production further to defend their interests, which could limit the pace of achieving the target of bringing inflation down to 2 per cent in developed nations. The global economy may experience fluctuations and also see continued tensions between oil and gas exporting countries and consuming countries.

These tensions reflect the ongoing realities in the competition building up in the global economy and the accompanying changes, which are expected to weaken the positions of traditional economic powerhouses and lead to new economic poles that sway the balance of in international relations.

While traditional powers may resist attempts to destabilize their positions, some of these powers are starting to recognize the need to align power-centers on the global stage in step with the new reality. As global economic realignments take shape, it is evident that some emerging powers, such as the GCC and India, will gain in significance alongside others striving to establish themselves in the shifting landscape. This will become more apparent in the near-term.

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Mohammed Al Asoomi
The writer is a specialist in energy and Gulf economic affairs.
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