What International Banking Tells Us About the Possibility of a Recession

There’s a distinct possibility that many countries, if not the whole world, will enter a recession in 2023. How fast this recession might come, how long it will stay, and how bad it could be, all remain to be seen. One key indicator for future economic performance is the banking sector. What does the current state of international banking tell us about the potential of a recession in our near future?

What is a recession?

We all know that a recession is bad for the economy. But what exactly is a recession? It’s an economic contraction caused by a decline in activity. In the United States, the Business Cycle Dating Committee defines a recession as, “[A] significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.

Many different factors can cause a recession, and these factors often compound on one another. The stage has been set for a recession since the Covid-19 pandemic began in 2020. Governments gave money to individuals and businesses so they could support themselves during lockdown and isolation measures. Government banks also kept interest rates very low.

As a result, people bought a lot of stuff. This increased demand and drove up the price of commodities, meaning consumers’ dollars (or pounds, or euros, etc.) had less purchasing power. In February of this year, Russia’s invasion of Ukraine amped up the inflation process by unsettling global markets and prompting sanctions, restricting trade. Furthermore, droughts and floods that reduced crop output around the world and gas prices fluctuating, for both practical and political reasons, have also contributed to surging inflation.

Counter inflation measures

Central banks play a huge role in foreign trade and the global economy. One of the most reliable methods these banks use to counter inflation is to raise interest rates. This makes people less likely to take out loans and mortgages, and less likely to spend. This curbs inflation, but it also constricts the economy, and it can easily lead into recession. The central banks of Australia, Canada, the Eurozone, Argentina, Russia, Sweden, the US, the UK, Switzerland, South Korea, and Turkey are just some of the banks that have raised their interest rates since the beginning of September, 2022.

What it all means

The International Monetary Fund, or IMF, has told central banks such as those listed above to continue their fight against inflation. The IMF suggests this despite its own warning that a third of the global economy could be in recession next year. The IMF went as far as to say the “worst was yet to come”.

The IMF’s half-yearly world economic outlook, or WEO, estimated that global growth will slow from 6% in 2021 to 3.2% in 2022, and to 2.7% in 2023. This prediction for 2022 is 0.4 percentage points lower than the WEO the IMF published six months earlier, but unchanged from an updated forecast made in July.

The prediction for 2023 downgrades growth by 0.9 points from its April prediction and by 0.2 points since July. The forecast for 2023 is weaker for 143 countries — which represent 92% of global output — than it was six months ago.

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