Experts Fear Global Economy Might Relapse Into New Recession

Rabat – While raising central bank interest rates is the textbook solution to rising inflation, governments might be facing a tough decision to make, as bringing down inflation might slow down economic activities and result in a second global recession.

Converging reports point to high vulnerability in the global economy as major stock indexes have been trading in the red for the past four days, reflecting an overall trend of market decline.

Recession fears

Fears of a looming recession are mounting on both sides, among investors as well as international market observers. In a report published on Thursday, the World Bank warns that the world “may be edging towards a global recession” in 2023.

While the World Bank warns of a potential recession, the threat is already materializing for investors, as some are closing offices and freezing hiring, among other early damage control measures.

On Thursday, American logistics conglomerate FedEx (FDX) announced it is pulling its full-year guidance, a document informing investors of its prospective earnings. The company cited macroeconomic weakness.

As FDX’s share value dropped by 20%, FDX CEO Raj Subramaniam said he expects the economy to enter a new recession, prompting his company to enact a number of measures to scale back on expenses. These measures include closing 90 offices and five corporate locations, freezing hiring, and reducing flights, among other measures.

Investor Panic

Far from being an isolated incident, the news triggered a wave of panic among traders, as the prevailing sentiment is that FDX’s case is the first of many to come.

Rising interest rates translate into a constrained flow of investments as loans become more expensive for investors. This commonly leads to higher unemployment rates and slower economic growth.

However, rising interest rates are largely viewed as the only viable option to wind down inflation, putting central banks in a tough position to choose between inflation of the threat of a recession.

“The Federal Reserve – – the US central bank– – might have a hard choice to make,” Chief Investment Strategist at iCapital Anastasia Amoroso said.

“Before they were saying, we’re going to try to have a soft landing and bring down inflation. Now they may have to make a choice. It’s either a soft landing or bringing down inflation. In other words, they may have to engineer more of a crackdown on economic growth to bring down inflation.”

The end of the free money era

For over a decade now, central banks in North America, Europe, and Asia have stepped in to inject massive amounts of liquidity into the global economy in addition to buying private market assets, to rally the economy and avert the threat of a 1930s-grade recession.

Known as Quantitative Easy (QE), the policy meant that central banks poured money into the economy in the form of interest-free loans, creating a state of an artificial economic boom, as opposed to organic market growth.

As part of the QE policy, central banks issued free loans to other banks by lowering interest rates as close to zero as possible, making it now virtually impossible for central banks to bring down interest rates.

Today, as the world economy grapples with the prospects of another global recession, central banks are forced to turn to Quantitative Tightening, which would automatically translate into an end of the artificial post-2008 economic boom.