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Image Credit: Reuters

Threat of another wave of global recession is looming barely a few months after world’s leading economies started limping back from the pandemic induced economic slowdown since the beginning of 2020.

With the world’s major economies across the EU, China and the US seen slowing, the fear of a global recession appears more real than ever.

While multilateral agencies such as the International Monetary Fund and the World Bank have been cautioning of a synchronised economic slowdown across world’s leading economies, the latest to join the ominous warning is the World Economic Forum. At the annual summit of the world’s financial elite in Davos, the central theme of discussions has been the flagging global growth and its impact on businesses.

A recession is seen inevitable in Europe as the impact of war in Ukraine bites many leading economies amid a looming energy crisis. In the US, it is the rapidly rising inflation and the Fed’s attempt to fight it using higher interest rates are almost certain to slow down consumption in the US and across the world, eventually leading to a decline in overall global demand.

Bottlenecks in global supply chains

In China, the latest COVID- related lockdowns could cause new bottlenecks in global supply chains. Faced with flagging export demand growth, China is already finding it hard to keep up with its 5.5 per cent GDP growth target.

While in the growth versus price stability trade-off, growth is clearly seen becoming a casualty in most leading economies, it is ironic that the same set of policies that were used to reflate economies a few month ago are being tightened to tame inflation, reversing growth.

From a long-term economic stability standpoint, monetary tightening in the US is justified, as inflation, which remains stubbornly at 40-year highs, has lifted prices 8.3 per cent in the past year and wiped out wage gains for almost all Americans.

By virtue of currencies’ peg to the dollar, GCC central banks track the monetary policy. Despite monetary squeeze this brings in terms of rising interest rates, growth in credit to the private sector is expected to remain robust given the high liquidity in the banking systems and robust government finances supported by high oil prices.