by Kari Grenade, PhD Regional Economist and Macroeconomic Advisor
In broad terms, a recession is an acute contraction in economic activity that is widespread and prolonged.
Two consecutive quarters of decline in Gross Domestic Product or GDP is a technical definition that economists commonly use. Once a country’s total economic output or its GDP declines for 2 quarters in a row, economists refer to that country as being in a recession (technically), but there are caveats to this technical definition of a recession, which I explain later in this article. A recession manifests itself in several ways including, reductions in employment, industrial production, wholesale and retail sales, personal and corporate incomes, government revenue, and economic output.
A global recession is defined as a synchronised and sustained period of economic decline in multiple countries worldwide as economic shocks in one country or region spill over to other countries and regions. The economic contraction has to be broad-based, that is, affecting several economic sectors within and across countries, lasting for a while, certainly more than one quarter for the contraction to qualify as a global recession.
In recent weeks there have been heightened discussions and concerns among economists and analysts about the possibility of a global recession in the later part of 2022 and into 2023. Indeed, the global economic prospects have weakened considerably, occasioned mainly by an acute slowdown in the 3 largest economies in the world – USA, China and the Euro Area; rising interest rates in the USA and other countries (such as England, Canada, Australia and India); and the war between Russia and Ukraine and its adverse spillover effects.
In the USA, GDP declined by 1.6% in the first quarter of 2022 and by 0.9% in the second quarter, based on statistics of the National Bureau of Economic Research (NBER). Moreover, several key economic indicators, though relatively strong, are flashing warning signs; for example, the unemployment rate, though low, rose to 3.7% in August 2022, up from 3.5% in the previous month. Similarly, the increase in consumer spending on groceries decelerated to 5.7% in August (year-on-year), compared to growth of 10.7% in the previous month.
In China, GDP fell by 2.6% in the second quarter of this year (quarter-on quarter) following growth of 1.4% in the first quarter, according to reports of the Organisation for Economic Cooperation and Development (OECD). In the Euro Area (the third largest economy globally) the combined economy of the 19-member grouping grew by a mere 0.8% in the second quarter of 2022 (quarter-on-quarter), a marked slowdown from the 4.1% from a year earlier as reported by the European Union’s Statistics Office (Eurostats).
On rising interest rates, the higher they go, the more expensive it becomes for companies to borrow money for expansion and innovation and for individuals to access credit. Consumers’ disposable incomes also fall as their debt servicing obligations increase. Moreover, rising interest rates also tend to reduce construction activity, both residential and non-residential, which ultimately weigh on economic growth. After all, that is precisely the intent of central banks, to raise rates to quash inflation by slowing economic activity, without causing too much economic fallout.
There are mixed views as to whether or not a global economic recession is looming.
Some economists and analysts have contended that the series of synchronised rate hikes in recent months have tilted the global economy towards a recession. Some analysts opined that a global recession is inevitable and it is not going to be short and shallow, but severe, starting in the fourth quarter of 2022 and lasting well into 2023, depending on the severity and duration of supply shocks. Some express the view that they do not expect the recession (if it happens) to be as wrenching as previous ones such as the 2007-08 Great Financial Crisis in part because private-sector balance sheets in the USA in particular, are in relatively good shape.
Others argue that notwithstanding the two consecutive quarters of GDP contractions in the USA, its labour market is relatively robust with 528,000 and 315,000 jobs added in July and August respectively, despite the economic challenges. Additionally, they point out that consumer confidence and spending in the USA are up with the Consumer Confidence Index rising to 108.0 in September up from 103.6 in August. Furthermore, they cite the fact that the unemployment rate is low and wage growth is strong. Those positive indicators, they argue, do not suggest that a recession is imminent in the USA. However, they do acknowledge that the economy is indeed slowing down and they also rightly admit that the unemployment rate can lag behind a contraction in GDP and though nominal wage growth is strong, real wages are not when adjusted for inflation.
As an economist who follows international macroeconomic developments on a daily basis, it is clear to me that the risks of a global economic recession are indeed rising. For sure, storm clouds are hanging over the global economy that are thickening in some parts of the world. A broad-based global economic weakening seems likely. However, a global recession can be avoided if a contraction in the world largest economy (the USA) is smaller than in previous recessions. Furthermore, the global economy can dodge a recession if global supply-side challenges are speedily addressed, if China jettisons its prolonged lockdown policy, and if leading central banks skillfully manage the balance between reducing inflation and safeguarding economic growth.
However, if a global recession does occur, it could be short-lived and its impact cushioned. Indeed, there is time to adequately brace for impact. Caribbean policymakers in particular should monitor global developments daily (or certainly be briefed daily), have adequate budget contingencies, prioritise counter-cyclical spending, develop credible medium-term fiscal and economic plans, promote and support local production, update their citizens regularly, and continue to lobby the international community to speedily address pressing trade and economic challenges.
Grenada exports rum which is supported by small sugar plantations. Molasses is imported to make Grenada’s rum. At the same time sugar is imported.
Decades ago, it was justified to import sugar because it was cheaper to do so rather than produce.
The funny thinh over the years there has been no study to show if the importation sugar is really cheaper. Instead, it was just accepted. Today, the cost of sugar has increased and no OECS Government is in a position to anything about it, other than throw millions of dollars in subsidy towards it.
The very same millions which could have been used in sugar production.
The island of Dominica has lots of lands…they could have being a partnership where Grenada, SVG, St. Lucia, and Antigua could have invested in viable sugar production in Dominica which could insure supply and standard cost throughout the region. Instead, each island spend millions importing sugar.
I really don’t understand, why the leaders go to CARICOM meetings which has no meaningful outcome.
CARICOM meets should not be about mere ideas but it should be annual report on actual industries invested in….everyone says nice things then return their respective islands only to do the same thing the following year….what waste of tax dollars.
Look at LIAT…total disaster which highlights the decay in regional cooperation. Every man is for himself.
There is a lot of Macro and Micro economics at play.
No island in the region should subsidized North American and European Airlines. This extortion should stop.
The food import bill is killing the region.
Textile industry is something of the past. There is little to no investment in this industry.
Everyone relies on India and China for cheap labor. Import, import and more importation. Get more loans from IMF just afford more importation.
Look at the cost of local fish. The Region have abundance of healthy food, yet it’s a luxury to most. $10 per pound of fish…outrageous.
There is so much talk about farming and very little done. IMO, the only reason why farming is not at capacity as should be is because of the rural land ownership.
The folks who are agents and dealers of imported food does not own the lands to grow the food.
Why invest in farming when they are self made millionaires of importing food.
Remember, these are the same folks who influenced Government policies.
It will take strong will of the government to invest in full scale food production. Grenada needs full scale food production not only to offset importation but make healthy food accessible to its residents.
Healthy and healthy life styles create less burden on Healthcare.
I spent days looking for imported fruit juice that stated 100% on the box. However, Local passion fruit, Gospo, and lime mix did job. That mix was delicious. You should try it.
The importation of the artificial flavored drinks should be reduced, if not banned.
Hate to say, regurgitating the obvious is not rocket science. What I want to see from the local economist are micro and macro policies that Grenada can adopt.
What is point of drawing conclusions from what are generally reported about the U.S and other major global economies.
So what are exact policies Grenada should adopt? What industries should Grenada invest in?
As an example, are there any industries that can be developed within the OECS that can improve the balance of trade.
Will Grenada ever have a surplus to create a slush fund which be used for rainy days?
It’s so sad to see that the policy makers in just getting around to legalize and create a herbal / Marijuana industry.
While local governments continued to condemn and ostracized the Rasfarians, the rest of world embraced and moved on….Now region which has everything going for it will merely followers instead of leaders….
Frankly it’s a meaningless construct on its own , something to bamboozle those who have no real understanding of the situation so frankly your posting is irrelevant.