The word “recession” doesn't sound very appealing. Most of us would rather avoid talking about finances and the economy, because we don't feel very confident about our ability to predict the future. We'd rather look at the positive side of things and focus on what we can control. Unfortunately, the world isn't that simple, as we all know too well. There are a number of economic factors that could lead to a recession in the near future. Here are just a few of them.
Rising food and energy costs
It's no secret that food and energy costs are skyrocketing. Especially since the beginning of this year, food prices are rising and have even surpassed previous record highs. This is due in part to the fact that the world's largest producer of almonds, the United States, has historically been affected by a growing number of food price hikes, as well as global warming, which is threatening the agriculture industry. The oil price is also a key indicator of where the market is heading. While there's no clear indication that we're about to enter a recession, there's no doubt that high food and energy costs are going to have a significant impact on consumer spending.
Higher interest rates
It's been a rough year for stocks and a lot of market participants are still feeling the effects of the pandemic. This has resulted in a number of market crashes and a number of global financial bodies, like the International Monetary Fund (IMF), warning that a recession is imminent. Higher interest rates are one of the main contributing factors to a growing number of people living in poverty. According to the World Bank, there are nearly a billion people around the world who still suffer from extreme financial hardship. These people are particularly vulnerable to higher interest rates, because the cost of money is already extremely high for them. So, even a small increase in the rate of interest can be catastrophic. This is why the IMF has recommended that countries, like India, with high rates of inflation and interest, implement fiscal and monetary policies to address the situation. However, some experts dispute this and argue that a rate increase wouldn't necessarily lead to a recession. They say that there are other, more fundamental reasons why a recession is looming.
Oil market overheating
Increasing oil prices are another potential indicator that a recession is coming. After falling for most of this year, oil prices have recently started rising again, propelled by both the demand and supply sides, of the oil market. The global economy is heavily dependent on oil, which is why a lot of people believe that higher oil prices are a leading indicator of a coming recession. Since most countries are still using more oil than they're producing, this also means that there's still too much oil in the world and not enough places to consume it. Some experts predict that oil prices could even reach $150 or more per barrel, which would make it one of the most expensive commodities in history. While prices have started to decline since then, they are still extremely high. This has led many to predict that we are still in a state of an oversupply of oil, which makes a recession inevitable.
Rising global temperatures
Global temperatures are on track to reach record highs in the coming years, as nations around the world continue to emit more greenhouse gases than ever before. This comes after a 3-year hiatus, in which there were no global temperature increases, due to the effect of the COVID-19 pandemic. Since the beginning of this year, temperatures are rising once again and are expected to hit yet another all-time high this year. This is particularly concerning, since the global economy is already highly dependent on consumer spending and a lot of industries, like retail and food services, are heavily reliant on warm temperatures to keep operating. The number of climate change refugees is also expected to hit a record high this year and some are already calling for an economic plan to address the growing number of people who are driven out of their homes as a result of the climate crisis. A combination of all these factors could spark a recession.
Increasing inequality
One of the main contributors to the growing number of people living in poverty is inequality. According to the World Bank, the global economy is currently experiencing its greatest inequality since the turn of the century, with the 1% wealthiest, accumulating more wealth than the other 99%. This has been attributed to both the current pandemic and the years of economic growth preceding it. Since the start of this year, a number of high-profile billionaires have seen their net worth plummet, due to plummeting stock market prices and the economic slowdown. If the trend continues, it will result in a greater number of people falling into poverty, especially, since the wealthiest individuals and companies will be able to recover first, before the rest of the economy. This could lead to a growing number of people displaced by the climate crisis, causing a political and economic instability, like that seen in the early stages of the COVID-19 pandemic. The growing inequality in turn, threatens the very fabric of society and could cause a political and economic backlash from the people, which the 1% won't easily recover from.
Trade wars
Trade wars are also one of the main reasons why so many people predict that we are about to enter a recession. The uncertainty surrounding the current economic climate, the potential for new conflicts to arise and increase trade tensions, all contribute to the growing sense of anxiety and foreboding among investors, corporations, and government leaders. Many business leaders, like the IMF's Christine Lagarde, have even called for a new, more ‘cooperative' economic order, in light of the current situation. While there's no clear indication that we're in the midst of a trade war, the risk of one, breaking out at any moment, is very real. It comes down to this: without stable economic growth, there's no basis for healthy trade and investment, which are indispensable to development and stability. This risk has led many, like the IMF, to advocate for a more cooperative economic order, in light of the COVID-19 pandemic. However, as the saying goes, hope for the best, but prepare for the worst.
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