Today's Edition
By: Mouza Hasan Almarzooqi*
The world appeared on the verge of an economic recession when global financial markets turned red, with key stock indices around the world plummeting, particularly in Japan, where the index fell to its lowest level since 1987. This downturn was accompanied by declines in global currencies, cryptocurrencies, and oil prices.
On August 5, 2024, fears of a recession in the United States dominated the scene, especially as the jobs report showed that the US unemployment rate rose to 4.3% in July, the highest since October 2021. Consequently, bond yields fell significantly, and investors worldwide rushed to abandon risky assets in favour of gold as a safe haven. However, the US jobs report was not the only factor contributing to this situation; the Bank of Japan also increased its interest rate to around 25 basis points, while there is currently a bet on lowering interest rates globally to save economic growth.
The monetary tightening policy after years of negative interest rates, along with escalating conflicts worldwide-particularly in the Middle East between Iran and Israel, with the ongoing war in Gaza and the continuing war in Ukraine since February 2022-has increased uncertainty. The war in Ukraine, in particular, has affected global trade and supply chains, leading to contractions in European and Asian economies, rising inflation rates, and disruptions in global energy and food markets. With the risk of escalating geopolitical tensions in Gaza and Ukraine, this will raise shipping costs, increase sharp price changes in the oil market, and consequently limit global economic growth, negatively impacting businesses worldwide and deterring investors from taking risks, potentially leading to a recession in major economies.
As the world faces changes in government leadership due to elections in no less than 64 countries in 2024, the slow recovery of the Chinese economy, and the ongoing crisis in the real estate sector in the world’s second-largest economy, all of this affects trade and investment policies, economic activity, and increases uncertainty.
Despite the shocks of recent years, the global economy managed to overcome them in 2023, with global stock markets achieving strong gains supported by the anticipated shift in central banks’ monetary policies and the rapid slowdown of inflation. However, many factors have changed; climate-related disasters have increased, demand for metals associated with the energy transition has risen, and there are no signs of easing geopolitical tensions. Therefore, it is expected that global economic growth will slow in 2024 due to the continued rise in interest rates, increased energy prices, and a slowdown in the two largest economies in the world, the United States and China.
Interest rate movements remain a concern as inflation rises again in the United States, the effects of monetary tightening that has already taken place over the past year and a half are felt, and the debt burden escalates. Advanced economies continue to rely on deficit financing, with commercial real estate values around the world witnessing a significant decline after the COVID-19 pandemic and high interest rates.
The global markets have experienced a violent simultaneous sell-off, resulting in sharp losses amounting to trillions of dollars across all sectors, most notably technology stocks. This signals that the global economy’s ability to withstand economic and financial pressures amid the current crisis is in doubt. There is concern that any signs of fragility in major economies could lead to new fluctuations. While markets are expecting interest rate cuts in the upcoming US Federal Reserve meetings, fears of a recession are real. The world has gone through a series of severe shocks, nearly one after another, since the COVID-19 pandemic. The high demand for goods and services during the pandemic led to a sharp rise in prices. Although raising interest rates has helped reduce inflation, the continuation of this policy for an extended period, along with a decrease in overall demand, is pushing the economy towards a recession. Therefore, central banks will try to take more flexible measures to address the decline in demand, stimulate local economies around the world, and manage the escalating debt burden to avoid a global recession and its impacts on societies.
*The writer is a Researcher/ Head of Economic Studies Section at TRENDS Research & Advisory
