Global Recession 2024

 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 3^rd 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 4^th and the 6^th 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 3^rd 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 4^th 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 3^rd 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.