Global recession risk 'rising sharply' due to combination of shocks, IIF says

The risk of a global recession is “rising sharply” amid a combination of “shocks”, including the impact of the Russia-Ukraine conflict on the eurozone, Covid-19 pandemic-related uncertainty in China and the sharp tightening in US financial conditions, the Institute of International Finance has said in a report.

The IIF, which warned of the looming possibility of a global recession six weeks ago, said its initial forecast was focused on the eurozone, where the Ukraine war was dragging down growth, and on China, where Covid-19 lockdowns were causing growth to flatline in the second quarter of the year.

“The combination of these two things was already enough to put our global growth forecast for 2022 near zero, adjusting for sizeable statistical carry-over from last year,” IIF said in the report.

“Since we made this forecast, however, it has been US data that has surprised to the downside the most. This is driven by the sharp tightening in US financial conditions, with mortgage rates seeing their biggest rise — in real terms — in over 15 years. The rapid slowdown in the US pushes our global growth forecast from near zero into outright contraction,” it said.

The global economy is projected to grow 2.3 percent in 2022, compared to an earlier 4.6 percent estimate, the IIF, which is based in Washington, said in a May 26 report. It also cut its growth forecast for the eurozone this year to 1 percent from an earlier 3 percent estimate, saying it was a “recession call”.

Fears of a recession have been steadily increasing amid rising inflationary pressures, steep interest rate increases by central banks and the Ukraine war.

In April, the International Monetary Fund lowered its growth forecast for the global economy this year to 3.6 per cent due to Russia's war in Ukraine and rising inflation stoked by soaring commodities prices.

“With forward-looking measures of consumer confidence tumbling [in the US] as housing enters deep recession, driven by the sharpest rise in real mortgage rates since at least 2010 … this deterioration in US data tips our global growth forecast — which was flat adjusted for statistical carry-over — into outright contraction for this year,” the IIF said.

European data, especially from Germany, also look bleak, with consumer confidence in the country “languishing at levels below the 2020 Covid shock, which is remarkably bad”, the report said.

Meanwhile, the situation in China remains uncertain in relation to the spread of the Omicron variant and any ensuing lockdowns. “However, one thing is increasingly clear … unlike the first Covid wave in the first quarter of 2020, weakness in Chinese data looks set to be more drawn out, whether in manufacturing or in services. Whatever happens, China is unlikely to be a source of stimulus as global recession risk builds,” IIF said.

While an early end to the war in Ukraine could provide an upside to the outlook as it would boost global sentiment and cause commodity prices to fall, “this seems unlikely”, the report said. “Similarly, it seems unlikely that the Covid-19 pandemic will abate. Instead, it seems likely that there will be more mutations and waves of infections, requiring additional shutdowns. In short, things look bleak for the global outlook,” it added.