Recession on horizon again for many economies

Recession is on the horizon again for many economies as the global economy is under pressure from geopolitical uncertainty and inflation.

Market volatility and investor concerns can result in tighter global financial conditions, while depreciating currencies and rising borrowing costs expose vulnerabilities and increase the risk of contagion.

Against this concerning background, KPMG forecasts gross domestic product (GDP) global growth of 1.9% in 2023, down from 2.7% in 2022 for the second half of the year as the world grapples with a multitude of economic and political challenges.

Weaker growth could see inflation moderate to 4.7% in 2023 after averaging 7.6% in 2022.

The KPMG Global Economic Outlook H2 2022 warns that an acceleration in inflation puts pressure on household finances and business margins, while leading central banks tighten monetary policy aggressively. Recession is once again on the horizon for many economies.

Increasing costs are taking their toll on consumers and the cost-of-living crisis puts a significant dent in households’ purchasing power. As a result, consumer confidence took a big knock across most economies and spending is following suit, causing overall economic growth to weaken.

“The need for fiscal support is likely to stoke more inflation in the medium term, placing fiscal policy actions at odds with the aims of central banks in meeting their mandates. Our latest forecast suggests that tightening monetary policy will moderate inflation, but inflationary pressures are likely to linger for longer, Yael Selfin, chief economist at KPMG in the UK, says.

He says a very aggressive cycle of monetary tightening across the world could impose high costs for the global economy as it emerges from another synchronised shock, but other policy tools and further reforms to open up supply could be deployed to ease the burden on central banks.

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Energy uncertainty due to war in Ukraine

Selfin says although inflationary pressures were already present as economies reopened after the pandemic shutdown, Russia’s invasion of Ukraine added extra strain. With a range of commodities, the region exports exported by the region seeing their price rise significantly although some prices have moderated somewhat and supplies have adjusted, while demand is easing as the economy slows.

“Energy prices have been at the centre of the inflationary surge, although oil prices moderated recently, which contributed to a minor ease in annual inflation figures in many countries.

“Nevertheless, the price of gas across many regions remains heavily impacted by the war, with the rush to secure shipments of liquefied natural gas (LNG) for winter causing not just European, but also Asian gas prices to spike recently.”

It is still uncertain whether sufficient gas supply will be available over the winter months and this could be a significant blow to the short-term outlook of some European economies which rely more on Russian supply.

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Supply chain and labour market issues could fuel recession

The combination of supply chain bottlenecks, generous government spending, tight labour markets and a commodity shock triggered by the Ukraine war caused inflation to shoot well above central banks’ targets in many developed economies, Selfin says.

KPMG expects inflation to moderate significantly from the middle of next year, as the energy shock is no longer reflected in the year-on-year inflation calculation but warns that the world could be entering an environment that is structurally more inflationary, as production costs, from materials to energy and labour, remain high.

“As they face inflation well above target, an immediate concern for most central banks is that inflation expectations stay high, while their credibility in fighting inflation is lost. That is why central banks are likely to be more hawkish in their response to what could be a relatively short-lived burst in inflation, with markets pencilling in aggressive rate rises over the coming months.”

Should inflationary pressures become embedded, interest rates may stay at higher levels than the past decade even after the current spike in inflation subsides. Selfin says this would represent a significant shift in monetary policy in a relatively short space of time.

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Uneven recovery from Covid could contribute to recession

While there was cautious optimism of an international post-pandemic bounce with the easing of Covid restrictions across the majority of the world, KPMG’s analysis reveals that economic recovery was uneven and relatively short-lived before new challenges, including supply-chain issues and subsequently the war in Ukraine, began.

There is also concern that a potential spike in cases during the Northern Hemisphere’s winter months could see a return to some restrictions, causing more disruptions to production and economic output, particularly in China with its zero-Covid policy. Because of the recession, Selfin says a spike in cases could also see a tighter labour market and increased pressure on health services, as well as an additional burden on public finances.

“It is hard to downplay the scale of the geopolitical and economic uncertainty facing every one of us, from individual households to governments and business leaders. We entered the year with a degree of cautious optimism as Covid restrictions were gradually eased. But, what followed was a series of challenges that have tested the resilience of even the most robust, sustainable companies,” Regina Mayor, global head of clients and markets at KPMG, says.

While some countries, regions and territories achieved a strong post-pandemic rebound, for others chronic political and economic challenges dampened hopes of regaining lost ground, she says.