Global Recession 2024
The whole story begins in the month of February 2024 when
two major economies of the world- the UK and Japan fell into a “technical
recession” along with other countries like Finland, Ireland, and New Zealand.
The recession is not limited to only these countries rather 20 other major
economies are also on the brink of falling into a technical recession.
On the other hand, India’s gross domestic product (GDP) is
growing at an enormous rate of 8.4% in the 3rd quarter of 2023-2024. So,
in this section, we will be talking about whether the global recession is a reality or
just an illusion that is haunting the people.
Now, Japan and the UK are the 4th and the 6th
largest economies of the world. They are also part of the G7 nations which are
some of the wealthiest nations of the world and also part of G20 nations. So,
if these two economies fall into recession it is bound to have a drastic impact
on the global economy. To understand the concept clearly let us first get
familiar with a few terms that would be required for a better understanding.
Let's Warm Up by knowing the basics :
1. Recession : Recession could be defined as the falling/contraction of economic activity or GDP of a nation or whole world over
a long period of time. For instance, if the GDP of a nation continuously declines
for a stretch of several months, then it could lead to a recession. However,
there is no formal definition given for recession but the term “technical
recession” is well defined formally which we would be understanding further.
2. Technical Recession : A technical recession is a
situation when the GDP of a country continuously declines for 2 consecutive
quarters. Recession or technical recession may lead to an economic depression.
Now, the question would be about economic depression and what is it?
3.
Economic Depression : Economic depression is
defined as a recession for several years at a stretch due to multiple
recessions, higher unemployment, lower GDP, low consumer confidence in the economy,
etc. It can last for 10 or more years. To bring the concept of economic
depression into context you can take the perspective of “the great economic
depression” of 1930.
4. Gross Domestic Product (GDP) : Now in the above
discussion till now I have been again and again using a term, that is, GDP. Now
most of you would know about it but still, as a responsible blogger, it is
my duty to explain GDP.
So, GDP is defined as the total value of
all the goods and services being produced in the domestic territory of a country in
a financial year. Now what I really wanted to explain about GDP in the context of
global recession is the method of calculation of GDP. GDP is basically
calculated using the “expenditure method” and there are 4 components of the
expenditure method that should be understood (I will try to keep it simple)-
· Consumption Expenditure : It is the expenditure
done in the purchase of goods and services. For instance, buying clothes, mobile
phones, shoes, etc.
·
Investment : It is the money that the private sector
invests for the production of goods and services.
· Government expenditure : As the name suggests, it
is the money spent by the government to build infrastructure like roads,
buildings, highways, etc.
· Net Export : In simple empirical terms it can be
defined as total exports minus total imports of a country.
The above 4 components decide the course of GDP in a
national economy and if it is attributed that the GDP of a nation is going up
then it implies that these 4 components are performing well and similarly for
when the GDP is declining so any of these 4 components is not performing well.
Reason
for Technical Recession of Major Economies
Now having understood
the basic concept it is now time to understand the reasons for the recession of
major economies. Some of the major reasons are listed below-
1.
Protectionist wave and deglobalization situation
in the whole world- Now major nations in the world are adopting protectionist
tendencies that is they are confining their trade and commerce as well as
services to their territory and this is creating a deglobalization-like
situation. There are several contemporary developments that have led to such
tendencies like-
·
Trade wars·
High import tariffs/duties levied by the nations
on imports.
·
Restriction and sanctions on trade
· Major nations like US, China, Russia, and European
countries adopting protectionist tendencies.
2.
COVID-19 Pandemic : It is a well-known fact that
during COVID-19 there was a worldwide lockdown leading to a negative impact on
product and services supply chains along with job losses, and income loss of people
which led to a decrease in global demand. The recovery of the global economy from
the impact of COVID-19 has been difficult and is continuing even today.
3. Global Conflicts : The Russia-Ukraine war and the
Israel-Palestine/Hamas conflict have further led to the disruption of supply chains
causing oil price increases which has increased the import bill of nations. So, the
economy is not performing well. Understanding the reasons
for technical recession let us now try to look into the reasons for the dull
economic performance of UK and Japan one by one.
UK’s dull economic performance
Now, the decline in the economy of the UK
is not recent, it has been declining since the 2008 financial economy, and in
the 3rd quarter of the financial year (FY) 2023-2024 the economy of the UK
contracted by 0.3%. The contributing factors to the decline in the economy are
listed below-
1. Brexit : Because of Brexit when UK exited the European Union (EU), there was a reduction in the trade level of both UK and EU.
Due to the reduction in trade, UK’s economy has been substantially hit.
2.
High Energy Prices : This is a straightforward
series of steps that have led to high energy prices in UK. Due to the Russia-Ukraine war and the Israel-Palestine war, there has been a disruption in the supply
chain which led to reduced oil supply. Now the supply of oil increased
demand which led to higher oil prices due to which the energy prices in UK have
hit a record high. For instance, there has been a 54% increase in oil prices and
energy prices in UK in 2024.
3.
Moreover, there has been an increase in the
interest rates in the economy in UK due to which credit has become expensive so
people are not taking loans due to which investment is lower and consumption
expenditure also declines. So, UK is not performing well.
Furthermore, the exports for UK have been declining for many years due to which the trade balance (Import and export balance) has not been performing well.
Japan’s dull economic performance
It is known to many that Japan
has dropped down to 4th place in the list of world economies being
surpassed by Germany. Also, there has been a contraction of 0.4% in Japan’s
economy in 3rd quarter of 2023-2024 FY. The major factors
responsible for the decline of Japan’s economy are mentioned below-
1. Private Consumption Expenditure : The private
consumption expenditure of Japan declined by 0.2% along with a decline in private
investments which was by 0.1% due to which people were not getting high wages
which in turn depreciated the consumption expenditure meaning overall GDP will
face a downfall.
2.
Ageing and shrinking population : Japan’s average
population age has been increasing for the last many years and the population is
shrinking because of the high old age population compared to other nations which
has in turn decreased the workforce of Japan.
3.
Inflation : Inflation in Japan has been in a very
grave condition as it has hit a 4-decade high and due to the increase in inflation
the prices of goods and services are at a record 4-decade high because of which
there has been pressure on the economy of the country.
As explained above the major
economies, UK and Japan are seeing a downward trend in their economy. In this
hyper-globalized world, the financial and services sector exists virtually
without any borders. The economies of different nations are intertwined and due
to such financial connectivity, if there is a negative impact on any one major
economy it can drastically affect the economy of other nations. So, we can
conclude that technical recession in any one nation can have a butterfly
effect on the global economy which can deliver multi multi-layered impact on the global
economy.
Impact of Global Recession 2024
1. External Sector of the Countries- It is very
easy to understand that if major economies like the UK and Japan have recessionary
economies then it will obviously impact the economy of other countries. Let’s try
to understand the how aspect of this, let us say country ‘A’ is having a recession,
so, people of country ‘A’ would not have money to spend on goods and
services which implies that people won’t demand goods and services from other
countries as well which would lead to the contraction of global demand which as
a result would cause a reduction in export of other countries. Now, due to the reduction of exports, there can be a negative trend of a balance of trade
(export<import) which can decline the GDP of other countries which may or
may not be directly related to country ‘A’ facing recession. Similar is the
case of UK and Japan in relation to other countries.
2.
Remittances- As we all know; remittances refer
to the money that comes into any country from other countries and it forms a
major chink of the economy. To get a grip of this let us consider the case of
India. India received $125 billion in the form of remittances in 2023. Now, suppose people are living in a recessionary economy, then they would not be able to
send money back to their country in the form of remittances. Since remittances
form a major chunk of the economy, it would obviously negatively impact the economy.
3.
Flow of investments- It includes Foreign Direct
Investments (FDI), Foreign Institutional Investors (FII), and Foreign Portfolio
Investors (FPI). Again the concept or flow would be the same if some major
economies are contracting and people do not have money to invest for themselves
then how would they make investments into other countries. So, overall foreign
investment will decrease and eventually diminish which will negatively impact
the global economy.
4.
Job Market- Regarding jobs, it is needless to
mention that there will be a major job loss in the case of MNCs in our country, for
instance. Now, a substantial number of companies in India or, say, any
other country belong to major economies like UK, Japan, etc. Now, in case of
economic decline in UK or Japan these companies would obviously try to cut down
their costs and the prima facie way to do so is by laying off the employees which
would lead to substantial job losses along with a major impact on the stock market
and financial market as stock and financial market are very much dependent on
the economy of the country. Also, the financial sector of different countries
is interconnected so disruption in one could lead to a negative impact on others
too.
5.
Indian students studying abroad- It is a
well-known fact that many students to pursue higher studies go to countries
like USA, UK, Canada, New Zealand, Australia, etc. Now recession in such
countries may render the students jobless which would eventually hit our Indian
diaspora. So, we can reach to the inference
that if some major economies of the world are not performing well then that
could significantly impact the global economy. Some remedial measures can be
taken to eradicate this problem.
The Big Question: “Is 2024 a year of global recession?”
Currently, the world economy is
not in any recession, only a few major economies of the world like UK, Japan, etc. are
in a technical recession, but if the trend continues and proper precautionary
measures are not taken then it is highly possible that the world economy will
fall into recession and according to economists it could be worse than the 2008
global economic crises and on the lines of the great depression of 1930.
To eradicate this crisis major
institutions like WTO, World Bank, IMF, and major national economies should
formulate their fiscal and monetary policy in such a way that they complement
each other to prevent any major global economic crisis in the present or in the future.
This is it for now, keep the discussion ON, and let's hope we don't get to see the World falling into Recession.
