After a pandemic and a war in Europe, people just want a little bit of peace. No wonder, then, that there’s an increasing preoccupation around one question: will there be a recession?
A question asked over and over in the last few months. After a major recession in 2008 and the Covid setback in 2020, people are tired of living under fear of losing their money and jobs. However there is a crucial variable that hangs in the balance: inflation.
Indeed, Central Banks like the American Fed and European ECB always stated that their first priority is to fight inflation. Fears of recession aside, they think that inflation is actually the biggest threat to the global economy.
Inflation reached its peak in 2022 following the Russian invasion of Ukraine. In the United States, though far away from the conflict, their peak consumer price increase reached 9.1% in June.
But the situation was far worse in Europe, the continent most directly influenced by the happenings in Ukraine. In the EU and Great Britain, inflation peaked at 11.1%.
However now consumer prices have slightly decreased, showing that inflation is steadily going away. In the US, it’s now at 6.45%, compared to the 8.5% in the EU.
These numbers, though promising, are sadly far from the ideal percentage of inflation both central banks look for. According to their estimates, a healthy economy sees its inflation growing only by 2% year-on-year.
So, will there be a recession or not?
An interconnected economy
In order to fight inflation, central banks have to slow down the economy. It’s a financial rule as simple as it is destructive, which could eventually bring the global economy into recession.
Until inflation reaches the desired level of 2%, central banks will keep slowing down the economy. To do so, they will increase interest rates, therefore decreasing the amount of currency in circulation. Without money, people cannot purchase goods or invest in services, therefore the economy will fall into a recession.
The good news is that, despite constant interest rate increases by central banks, the economy looks quite healthy. Unemployment in the US is at an all time low and 2022 GDP actually grew.
Unfortunately, however, there is also the possibility that only Europe will fall into a recession. Its inflation is much higher and therefore needs bigger cuts.
If Europe falls into a recession, the United States could follow suit given the typical interdependence of world economies. And if the United States falls, the rest of the world could as well.
Another wildcard is China. After abandoning the zero-Covid policy, which would have undeniably dragged them into recession, China reopened its economy to the world.
This might save the world from recession. After all, China is the world’s second biggest economy. Furthermore, the United States is generally a very sturdy nation (they are the world’s hegemon, after all), so they might resist a recession coming from Europe.
In short, a lot of variables stemming from just one factor: inflation. One thing is for certain: the faster inflation goes away, the sooner we will stop fearing a recession coming.
