World Economy Headed for Recession, Inflation Fight Not Over Yet: Research

Traders work on the floor at the New York Stock Exchange in New York City, on July 1, 2022. Seth Wenig/AP Photo

The global economy is headed toward a recession as it tries to deal with the pressures of inflation, according to the Centre for Economics and Business Research (CEBR), which foresees China overtaking the United States economically by 2036.

“It’s likely that the world economy will face recession next year as a result of the rises in interest rates in response to higher inflation,” Kay Daniel Neufeld, director and head of Forecasting at CEBR, said to Bloomberg. According to the World Economic League Table 2023, a CEBR report (pdf) published this month, the global economy experienced an inflationary shock in 2022 of a magnitude unseen since the beginning of the 1970s.

“The question for the year ahead is how painful measures to rein in inflation will be for the world economy and if any potential economic contractions can be kept short and shallow or whether a more prolonged reduction in demand will be required to get price growth back to more comfortable levels,” the report stated.

The central banks of Europe, United States, and England have reiterated that the battle against inflation “is not won yet” and that interest rates need to rise further next year.

The fact that core inflation rates are several times above the targets set by the central banks is a confirmation that inflationary pressures “have indeed become more entrenched.” This could lead to inflation expectations getting “unanchored.”

“We expect 2023 to be a challenging year for markets and downside risks are prevalent in the housing market, where higher borrowing costs are compounded by falling real incomes and an anticipated uptick in unemployment over the year,” the report said.

United States, China

With regard to the United States, the report points out that the Federal Reserve has attempted to engineer a “soft landing” for the economy this year. However, inflation has remained high while annual growth is expected to be modest.

In terms of the outlook for 2023, the CEBR expects housing investment and private consumption to start wavering. The Inflation Reduction Act (IRA) of 2022 is expected to influence America’s economic outlook for “years to come.”

In the decades ahead, the U.S. share of global GDP is projected to gradually decline, with China overtaking America by 2036. However, the report proposes one situation that might block China from overtaking the United States: if Beijing invades Taiwan.

This could trigger the United States to impose severe economic sanctions on China as it has done against Russia in the aftermath of Moscow’s invasion of Ukraine.

The consequences of economic warfare between China and the West will be “several times more severe” than what has happened following the Russian attack on Ukraine.

“There would almost certainly be quite a sharp world recession and a resurgence of inflation,” the report said. “But the damage to China would be many times greater, and this could well torpedo any attempt to lead the world economy.”

Recession

In an interview with MSNBC, former National Economic Council director Larry Summers said that the Fed will have to “suffer through a recession” if it wants to bring down inflation.

Summers does not believe that the potential recession will be mild. However, he expects that the recession will not be anything like what happened after COVID-19 or following the financial crisis of 2008–09.

In a recent interview with PBS, economist Mohamed El-Erian criticized people who are dismissing the potential recession as likely mild.

“Those who are saying it will be short and shallow with confidence are falling into the same trap as they did with transitory inflation, trying to make bad news good news,” he said.

“So, I tell you we’re going into a recession. They say, ‘Oh, don’t worry, it’s short and shallow.’ We don’t know. And we’ve got to be very careful. But the major issue now is to avoid going into a recession.”