The approaching global recession

It is the question that haunts practically all the forecasts regarding what will happen in 2023. Petr Coy, the economic columnist for The New York Times, quotes the veteran economist Arturo Estrella, from the Federal Reserve in New York, who affirms that an almost unequivocal sign of a coming recession is that the yield on US treasury bonds is higher for those issued with a term of three months, with respect to the yield of those of 10 years. This has been happening since October, so, according to his model, the possibility of a recession can be predicted with 95%.

The causes are obvious and are not going away anytime soon. Russia’s invasion of the Ukraine was the cause of the biggest global commodity crisis since the 1970s. But the event also generated an energy crisis, due to the logistical problems of the war and the sanctions that were imposed. Energy prices increased, but they also forced an acceleration of investments in clean energy in the United States and Europe. This will have clear environmental benefits in the medium term, but higher costs in the short term. All of this has generated global inflation that has reached double digits and a dangerous cocktail with recessive effects throughout the world, but mainly in Europe.

The factors for forecasting the 2023 recession are strengthened when China enters the equation. The economic engine of the world is paying for the mistakes of the zero covid policies, plus its crisis in the real estate sector and a new, more centralizing and less assertive leadership. What happens next year in the economy will depend on global tensions, those in Russia, but also those in China, the speed of the energy transition and the prices of crude oil and gas, as well as the central bank policy.

Mohamed El-Erian, the famous analyst of the financial markets, has pointed out that considerations based on rate increases are not enough, since we are not only facing a new recession, but also a change in the fundamentals of the economy. Unlike other crises, the problem now is not insufficient demand, but supply, and the problem is that this is going to continue for a while.

The labor market is changing because a part of the qualified workers did not return to their jobs after the covid crisis, or did not return under the same conditions, and because it is increasingly difficult to match the demand with the labor supply. By the way, one of the actions that Mohamed proposes to offer the market better human capital is to offer options for child care, since the talent of many women is wasted due to the lack of them. It is also required to train and retrain personnel in technological areas, where the demand for labor is present. All of this represents costs and restrictions on the supply in the short term.

Added to the above is the decision of the companies to reduce their dependence on China, this has to do with reasons of national security, but also to generate resilience, since they do not want to depend on factors such as those faced with the decision to the authorities of that country to practically shut down economic activity due to the pandemic.

The nature of globalization is changing, says El-Erian. The adjustments derived from the problems with the value chains broken by the pandemic have already occurred, but those related to nearshoring and friendshoring are barely occurring, which will generate higher costs and production delays. The energy transition itself, necessary due to climate change, but accelerated by Russian warmongering, is also inflationary, it implies operating with higher costs and new processes in the short term. All this implies that in reality the inflationary process will not be transitory.

In fact, in his opinion, that was the problem, since first the Federal Reserve considered the possible inflationary issue as temporary and therefore did not act, then when the growth in prices was already evident, it did not do so either, and then it had to react with such a force that it will inevitably cause an imminent recession. Things are not looking good for 2023, inflation will not subside easily and the recession will hit. It will not be such a prosperous new year, due to the outlook that is looming.

Twitter: @vidallerenas