How severe will the expected world recession be? The answer depends on whether you’re talking to an optimist or a pessimist.
Optimists say the chances of recession are high, but it will probably be mild and pass with a relatively small impact compared to that of the 2008/2009 economic crash. Pessimists say the impact will be severe, and markets will take a long time to recover. The commonality is that a recession is likely to occur.
The Dolphin Bay Brief continues to cover the topic because we believe that it’s far wiser to build a company with a looming recession in mind, than to ignore the risk. Our view has not changed over the years.
In our previous newsletter and story, how to brace for a world recession, we interviewed Dawie Roodt, chief economist at the Efficient Group, who took a buoyant approach, pointing out that, brutal as recessions are for millions of people, they often improve economies in the long term as they get rid of “dead wood” − unproductive companies − releasing the capital for reinvestment elsewhere in the economy.
Dawie told us there was no certainty of a world recession in the near future. This contrasts with indications from other quarters: Bloomberg forecasts a 38% chance of the occurrence in the next year and a 100% chance of it in the next two years. Dolphin Bay decided to interview another expert, Nedbank Senior Economist Isaac Matshekgo, to be sure we’re viewing the topic from multiple angles.
The global economy could improve faster than expected, as central banks have liquidity to inject into their economies once more, said Nedbank’s Isaac Matshekgo.
The responses of Isaac, too, were tinged with optimism. A world recession is likely over the next year, he said: the Eurozone is probably already in recession, Chinese growth will be weak and while the United States’ GDP contracted in the first two quarters of 2022, the firm labour market suggests a mild recession is under way there.
His comments came as CPI figures for the United States were released, showing that inflation is under better control, which could prompt the Federal Reserve to lower interest rate hikes in order to cool the economy.
Isaac said that the global environment could improve faster than expected, and he would not predict a 100% chance of a contraction in world economic output in the coming years.
Asked whether the recession could turn into a depression, he said that central banks had mitigation mechanisms: should economic activity decrease substantially, they would halt and even lower interest rate hikes, helping to contain the pace of a global downturn. This was possible because global liquidity remains high, as central banks have started reducing the ample capital they injected into their economies after Covid-19 struck and, prior to this, in response to the 2008 global crisis.
“A critical risk emanates from the probability of the Russia-Ukraine war intensifying and Russia completely cutting off gas supplies to Europe,” Isaac said. “However, we believe the likelihood of this scenario to be moderate. Therefore, we expect the world economy will likely fall into stagnation (low growth and high inflation) for some time, instead of a deep and protracted recession.
“The general trend has been for people to become more, rather than less wealthy – and I believe this trend is still intact” – Dawie Roodt
“Central banks are pushing to contain inflation and ensure it does not persist for an extended period.”
Developing countries would be particularly hit, in a recession, by softer global demand and lower commodity prices, which are now higher than in previous years, he observed. Global institutions such as the International Monetary Fund and the World Bank would have to step in to bail out these countries.
While unable to give business advice for weathering a recession, Isaac commented that to survive high levels of loadshedding and the rising cost of business operations, Dolphin Bay’s previous recommendations were sensible. Our suggestions have included keeping a strong hold on your company’s finances and avoiding debt; setting sustainable prices; conducting stress tests and planning for possible investments when opportunities arise.
Dawie added that individuals should “have a plan, have a budget, keep your job, be prepared for unforeseen circumstances and don’t demand excessive wage increases.”
He said that contrary to some analyses – and despite the increasing poverty he had witnessed over the past two years – the global trend has been for families to become more wealthy, rather than less wealthy, over recent decades. “People are richer, live in more luxury, send their kids to better and longer education, buy bigger cars and so on. But also, values have changed, and women are also working now, allowing families to spend more on everything.
“I believe the underlying trend of things getting better is still intact.”
Companies in industries such as food production and health services will be relatively shielded from a recession, as demand for their goods is inelastic, Isaac said.
Bertus commented that The Dolphin Bay Brief writes stories on the economy to describe events likely to unfold in the future, “while also giving a broader perspective than might be found in some other media. Bringing hope is important to us.
“It’s exciting that Isaac’s commentary is not much different from that of Dawie Roodt,” he said. “The markets are driven not entirely by events, but also by psychology. We need to be wise to the bad things that can happen but keep a healthy level of optimism, and we can be encouraged by the optimism of the economists we interview.
“If we have hope, then all things are possible.”
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