The world has been through uncertainty for over the past two years now. A pandemic which has crippled world economies and led to the devastation of millions of lives seems to be waning as several restrictions have now been lifted. The return to normality has been hindered by the invasion of Ukraine by Russia. The supply chain disruptions caused by these chaotic events have led to worrying levels of inflation, following an economic downturn.
The inflation levels registered are considered to be volatile and unsustainable, with rising commodity, food and utility prices, making it difficult for lower income families to keep up. In such a high inflation situation, central banks may impose interest rate increases to slow down the spikes in costs, which could then lead to a recession.
A recession can be defined as a significant decline in economic activity that can take months or years. The symptoms of a recession include increased levels of unemployment, lower sales volumes and contained incomes for a period of time. It is important to mention that recessions are natural phenomena in economic cycles. As part of a quantifiable definition, two quarters of economic decline are classified as a recession.
A recession can be caused by different factors. One of which can be a sudden economic shock. One recent example is the COVID-19 pandemic which shocked global economies and led to increases in unemployment and a general economic downturn. Another driver of a recession is debt at excessive levels. When people’s incomes are hit and they have high levels of debt that they cannot pay, bankruptcy can follow. Defaults on a massive scale can bring an economy to its knees.
Asset bubbles are also dangerous and can lead to a recession. This is when investors make decisions driven by emotion, inflating the value of assets exuberantly. When bubbles blow, panic ensues to sell these assets, spurring forth a recession.
Another major risk is that of inflation, a phenomenon that we are facing now. Although it is expected and ideal when it takes place in a steady and sustainable manner, excessive price increases can spell financial disaster. With the current invasion continuing to disrupt supply chains globally, there is no indication of when this inflation will end and where it shall lead to.
A number of financial institutions and economists are predicting a recession in the coming months. What is your take on this? Let us know your thoughts in the comments section below.