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Is a Recession Coming?: Lessons for the Common Man

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Deepa is a freelance researcher and journalist. She writes and makes documentaries and videos.

Is a Worse Recession Looming?

A recession means the economy slows down and there is less activity on that front for a period of more than a few months. Economists predict that this recession that we are on the verge of is going to be far worse than the 2009 recession because there is far little wriggle room to compensate for the impact. The Emerging Market and Developing Economies (EMDEs) will be faced with many challenges in that case.

Problems That will Make Emerging Markets and Developing Economies Vulnerable

  1. The countries have no more fiscal reforms left to make adjustments for a recession
  2. Growth is already sluggish and never picked up after the 2009 recession
  3. Improvements to fiscal management do not have much momentum, these days

The decade following the 2009 recession has seen only weak growth across the world. Low debt, deficits, inflation, and high foreign reserves were the factors that helped EMDEs effectively navigate the last recession. Last time, the EMDEs also got the benefits of the high-intensity policy stimulus implemented in developed countries. However, this time, the EMDEs are weak on all these four fronts as revealed in Sri Lanka and Pakistan.

The Covid 19 pandemic, the never-ending lockdowns in China, and the Ukraine war have slowed down the world economy further. Global growth is anticipated to fall from 5.7% in 2021 to 2.9% in 2022 and will stay at that level as long as the war in Ukraine continues, according to World Bank.

Stagflation is Coming

Stagflation is going to be a major threat to all economies.

The supply disruptions are what trigger inflation.

The Ukraine war caused oil prices to spike.

When energy price is high, production becomes costlier and real incomes fall.

This causes inflation.

To balance this out, the fiscal management will be adjusted so that interest rates will get higher. Then, spending in the productive sector will dip and growth will be further weakened.

Unemployment will soar.

Russia and Ukraine were supplying 28% of global wheat exports before the war. Belarus and Russia together were supplying 40% of the global potash requirement. Both have been affected severely. A food crisis is looming large over our heads.

What Countries can Do

Countries need to spend carefully

They need to focus their spending on providing safety nets to the poorer segments

They need to spend on key sectors such as education and health.

There has to be equitable taxation which means more tax collection from high-income groups/companies.

The debt of the affected countries needs to be restructured which is possible if debtors and creditors work out viable solutions.

The governments will be compelled to stop giving subsidies and freebies.

At least 75 central banks across the globe have already raised interest rates. This is to curb demand and to let the supply side catch up. But if the interest rates stay high for too long that would cause growth to slow down and people to lose jobs.

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What Individuals Can Do

Experts are asking common people,

Not to invest in stock markets but in I bonds, money market funds, high-interest bank accounts, short-term Treasury securities, and comparatively stable corporate bonds.

Also, they ask us to invest long-term.

In the US, people have already started to cut down on meat purchases, vacationing, pet grooming, and also growing home gardens for vegetables.

Investing in renewable energy (solar panels, biogas) is another way to cut expenses

Experts advise starting an emergency fund and putting as much money as possible into it

Experts also recommend paying off as bills and debts as possible now

We should also rethink our financial situation to get into better planning and prioritising

Businesses are advised to,

Build better liquidity

Cut expenses that do not generate revenue

Keep a careful watch on monthly cash flows

Start resilience training

Keep a close watch on the changes in the industry

When War Impacts Worldwide Oil Supplies..

What Experts Say

A few economists say there is no need to worry and the economic slowdown will not aggravate into a proper recession. Fiona Cincotta, the senior financial markets analyst at City Index, London, says that the still vibrant job market in the US might help reduce the impact of recession in the US. In Europe, the recession seems to be more imminent than in the US. JPMorgan Chase CEO Jamie Dimon has said that the US is going to witness an “economic hurricane”. To be on the safe side, we need to cut down on expenses and be ready to brace for difficult times.

References

A Decade After the Global Recession Lessons and Challenges for Emerging and Developing Economies, 2021, World Bank Publications.

Stagflation Risk Rises Amid Sharp Slowdown in Growth, The World Bank, worldbank.org

Facing Crisis Upon Crisis: How the World Can Respond, Kristalina Georgieva, IMF Managing Director

Washington, DC, 2022.

Bear Markets and Recessions Happen More Often Than You Think, Jeff Sommer, nytimes.com

5 Strategies to Brace for a Recession, bestmoneymoves.com

14 Pro Strategies To Brace Your Business For Economic Downturns, 2020, Expert Panel: Forbes Finance Council, Forbes.com

Bracing for Recession, Fiona Cincotta, What Goes Up Podcast, Bloomberg.com

Jamie Dimon says ‘brace yourself’ for an economic hurricane caused by the Fed and Ukraine war, Hugh Son, 2022, cnbc.com

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2022 Deepa

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