Global economy needs coordinated action to mitigate risks

global economy facing recession
The global economy is facing multiple challenges and uncertainties, from the impact of rising interest rates to the struggles of key sectors and the persistence of inflation.

In a world riddled with economic uncertainties and challenges, it is important to take stock of the situation and chart a path forward. The recent reports from the Financial Stability Board and several global business surveys point towards a tumultuous economic landscape that demands policymakers’ attention. Klaas Knot, the chair of the Basel-based Financial Stability Board, has sounded the alarm bells. He cautions that the global economic recovery is losing momentum and the rise in interest rates across major economies is beginning to take its toll. This sentiment is echoed by many, and it is clear that the world is facing further challenges and shocks in the months ahead.

One key area of concern highlighted by Knot is the real estate sector. The vulnerability of this sector to rate rises cannot be overstated. As interest rates climb, borrowers on fixed-rate loans may find themselves struggling to keep up with higher payments. This situation requires close monitoring and risk management by financial providers in the real estate sector. Knot’s call for the full and consistent implementation of global bank capital rules agreed upon by regulators in 2017 is crucial. These rules are set to come into force by 2023 and will play a pivotal role in fortifying the financial system against potential stresses.

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Global economy slows down

Knot underscores the need for tighter regulation of non-bank financial institutions. These entities, ranging from private credit to hedge funds and insurers, have gained prominence in recent years. Implementing reforms to address risks in these markets is deemed critical.

Further evidence of economic challenges emerges from global business surveys. The euro zone, for instance, faces a gloomier outlook than initially perceived. The services sector, a critical component of any economy, has contracted, suggesting the possibility of recession. Germany and France, the biggest economies of the euro zone, have seen their services sectors contract. Britain, despite being outside the European Union, is also experiencing a sharp business slowdown. These trends are concerning and could have far-reaching implications.

Real GDP growth: Annual percentage change

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Asia, often seen as a driver of global economic growth, is not immune to the challenges. China, the world’s second-largest economy, is grappling with weak demand, with its services activity expanding at its slowest pace in eight months. India’s growth has lost some momentum, indicating that the global slowdown is not confined to specific regions. Japan stands out as an outlier, with its service sector activity expanding at a brisk pace. This is fuelled by robust consumer spending as inbound tourism makes a comeback.

Bain & Co’s analysis reinforce the prevailing uncertainty in the global economy. The possibility of a recession in the US and eurozone has been a topic of discussion for nearly a year. Inflation, once soaring, remains a concern, with rates showing resilience in the face of central bank rate hikes.

In Europe, structural challenges, from demographics to energy, and geopolitical tensions, notably the ongoing conflict in Ukraine, continue to pose significant headwinds. Economic growth rates are sluggish, and inflation is slow to come down.

Central banks in the US, UK, and the eurozone are grappling with the task of taming inflation. Higher interest rates are impacting the economy, but the path forward remains uncertain. This uncertainty, coupled with geopolitical risks, keeps the global economy on edge.

The global economy is at a crossroads, facing multiple challenges and uncertainties. From the impact of rising interest rates to the struggles of key economic sectors and the persistence of inflation, policymakers and businesses must navigate treacherous waters.

In this environment, it is vital to heed the warnings of institutions like the Financial Stability Board and to remain vigilant in monitoring economic indicators. Furthermore, concerted efforts are needed to implement and strengthen regulatory frameworks, both for traditional banks and non-bank financial institutions.

The global community must work together to find solutions to the economic challenges we face. Only through coordinated efforts can we hope to mitigate the risks and uncertainties that threaten the stability of the world economy. The road ahead may be fraught with difficulties, but with prudent measures and collaboration, we can navigate this challenging terrain.

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Anil Nair is Founder and Editor, Policy Circle.