Recession, Stagflation Possibilities Are 50/50 at Best

Much of the recent media cycle has been dedicated to speculation regarding the potential for an economic recession, not just in the U.S. but across the world. But how likely is it at this point that a recession will actually occur?

That question is difficult to answer with certainty, but most economists at this point put the likelihood at 50-50, at best. For example, according to the recent global economic forecast from the World Bank, the recession will be hard to avoid “for many countries.” The forecast shows that global growth, which was at 5.7% in 2021, slowed to 2.9% this year, largely due to the lingering effects of the COVID-19 pandemic.

Beyond 2022, the World Bank also walked back its previous prediction of slow but steady growth for the next few years. This, the Bank cites, is due to the unforeseen risk that is the war in Ukraine, which has caused rapidly rising gas prices and large-scale economic instability in the energy sector — especially in European countries such as Germany, which has recently announced the re-opening of previously closed coal plants. “Just over two years after COVID-19 caused the deepest global recession since World War II, the world economy is again in danger,” said World Bank president David Malpass.

Even more concerning than the potential recession, however, is the possibility of what is known as stagflation: an economic phenomenon that occurs when inflation and high process combine with large-scale economic slowdown. Such a market state is largely associated with the 1970s, and unfortunately many of the economic signs of that timeframe align with what is being seen today.

“The interest rate increases that were required to control inflation at the end of the 1970s were so steep that they touched off a global recession, along with a string of debt crises in developing economies, ushering in a ‘lost decade’ in some of them,” said Malprass. Given that the Federal Reserve has repeatedly emphasized its commitment to increasing interest rates to counter the rising inflation, such an outcome must not be ruled out. Manufacturers must remain vigilant.