“There is going to be a recession next year,” Steven Blitz, managing director, global macro, chief US economist at TS Lombard, warned in his panel during the Global Macro Themes webinar in partnership with GlobalData.
The US economist said that while the market is resolute in believing that the current inflationary scenario is temporary, a recession will be a reality in the first quarter of 2023 for the US as well as for other countries globally.
“Inflation has shifted from goods and shipping – which poses a temporary challenge – to wages and services, which makes inflation harder to break,” Blitz said.
“The Federal Reserve is going a lot further than [it had anticipated] and the outcome will be messier in terms of trying to resolve the current labour supply/demand imbalance.
“Governments will do all they can to push up real growth through capital spending, while allowing the knock-on upside impact on inflation to carry through,” said Blitz. “If the cost of that is an inflation rate that goes up to 3% or 3.5%, in the US at least, [the government] will accept that.”
This, he added, will keep the Federal Reserve on its current course in terms of raising interest rates.
Another challenge to curbing a more permanent form of inflation, Blitz said, is the fact that wages are one of the main drivers behind it. “Rising wages need be cooled off; however, the labour market is currently going through a cyclical imbalance,” he added. “We have a smaller group of people coming on the labour market and a large group going out, and that pushes wages up.”
Who would suffer the most?
The UN Conference on Trade and Development (UNCTAD) recently published a report warning against the risks of excessive monetary tightening and an induced global recession. As previously reported, developing countries are the ones poised to suffer the most from it.
“This year’s interest rate hikes in the US are set to cut an estimated $360bn of future income for developing countries (excluding China) and signal even more trouble ahead,” the report warns.
“At a time of falling real wages, fiscal tightening, financial turbulence and insufficient multilateral support and coordination, excessive monetary tightening could usher in a period of stagnation and economic instability for many developing countries and some developed ones.”
UNCTAD expects the world economy to grow by 2.5% in 2022. However, prospects are worsening, with growth in 2023 expected to decelerate further to 2.2%, leaving real GDP still below its pre-pandemic trend by the end of next year and a cumulative shortfall of more than $17trn – close to 20% of the world’s income.
“The synchronised slowdown is hitting all regions but is ringing alarm bells for developing countries, where the average growth rate is projected to drop below 3%, a pace insufficient for sustainable development, further squeezing public and private finances and damaging employment prospects,” the report states.
“Middle-income countries in Latin America, as well as low-income countries in Africa, will register some of the sharpest slowdowns this year. The report notes that countries that were showing signs of debt distress before Covid are taking some of the biggest hits (Zambia, Suriname, Sri Lanka) with climate shocks further threatening economic stability (Pakistan).”
Net capital flows to developing countries have turned negative with the deterioration of financial conditions since the last quarter of 2021, the report says. “On net, developing countries are now financing developed ones,” it concluded.
Rising interest rates is only one of the tools at governments’ disposal to tackle increasing levels of inflation and avoid a recession. The course of action adopted by the Federal Reserve and other regulatory bodies might not only fail to avoid a domestic recession, but could end up worsening the already precarious positions of many developing countries.