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Global Recession Is Now A Certainty

Global Recession Is Now A Certainty

It is good to note that analysts are now in the loop about the Ukraine war, that is it will not end so soon and that Russia is in for the long haul while a global recession is now more certain.

The Institute of Finance says Russia’s invasion of Ukraine caused us to delay publication by one month, given considerable uncertainty in the initial weeks over just how long the conflict would last.

That was true at the beginning of the war, on the onset of the Russian invasion that is, but a month into it, it was clear to us that this will be a long war.

Military analysts have also discussed the war, saying Russia is losing too many troops and equipment that are getting destroyed or captured. But all the while, they missed on important thing: That is Ukraine’s army was being overrun by the Russian army.

Failing to account for this in their early analysis made them believe in their initial assessment – economic or military – that Russia will be defeated.

Yet, Russia is fighting with monetary tools to bring down its currency in a bid to control rising inflation. The Americans and the Europeans thought the Russian currency will plunge to its lowest in history with their hasty and ill-planned economic and political sanctions.

It is the contrary that has happened. It is not the war in Ukraine that is heightening the risks of a global economic recession. It is the ill-thinking sanctions against Russia that is the main cause for the incoming recession, added with the major hiccups caused by the two-year hiatus in the global supply chain due to the COVID-19 lockdowns.

Global Growth Thwarted

Yesterday the IIF published its latest Capital Flows Report. Traditionally, publication coincides with the IMF World Economic Outlook, but Russia’s invasion of Ukraine caused us to delay publication by one month, given considerable uncertainty in the initial weeks over just how long the conflict would last.

“It is now becoming clear that fighting will be protracted, so that adverse fallout on growth across Europe will be severe, which is why we shifted to forecasting Euro zone recession over two months ago.

“The Omicron outbreak in China adds further headwinds to global growth, in addition to a sharp tightening in US financial conditions, with the sharp rise in mortgage rates already translating into weaker housing activity.

“The confluence of these shocks means that global growth – once we adjust for statistical carryover from the strong COVID recovery in 2021 – will be essentially zero this year, which makes for a more challenging environment for capital flows to EM. We have marked down our capital flows forecast as a result,” says the IIF.

New Forecasts

The IIF’s forecasts aggregate up to global average annual growth of 2.2 percent in 2022 (Exhibit 1). However, statistical carryover from 2021 is 2.3 percent, which means that global GDP is essentially flatlining this year, pulled down by the Euro zone and China.

Exhibit 1 also shows year-over-year growth in Q4 2022, which is only marginally above zero and underscores weak growth momentum globally.

High frequency data – unfortunately – continue to add to the case for global recession. This week’s flash manufacturing PMIs showed continued sharp falls in new export orders for Germany and the UK, while the US – which had looked strong in previous data – joined the weaker global picture (Exhibit 2).

Weak new export orders – especially from an export powerhouse like Germany – are a sign that global demand is weakening.

“Separately, we have been flagging rapid tightening in US financial conditions, with the real 30-year fixed rate mortgage rising to its highest level in well over a decade in recent weeks (Exhibit 3).

“This week’s much weaker-than-expected new home sales underscore just how drastic this tightening in financial conditions is and how much it will weigh on US activity.

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