According to the United States-based National Bureau of Economic Research (NBER), a recession occurs when real GDP, unemployment rate, income, industrial production, and wholesale-retail sales fall significantly within a few months (Arteta et al., 2019, para.7). recession occurs when there is a continuous increase in the prices of commodities with little economic growth. Since the Great Depression, the financial crisis of 200/2008 that led to the Great Recession caused havoc in most financial markets globally (Recession in 2023? That depends on where you are in the world, 2023, para. 6). The new forecasts from the International Monetary Fund (IMF) reduced global growth expectations by 0.2 percentage points, while the Eurozone’s prognosis was drastically reduced to 0.6% from 1.1% (Facing crisis upon crisis: How the world can respond, 2022, para. 4). The IMF predicted a slowing from six percent in 2021 to 3.3% in 2022 and 2.7 percent in 2023 (Bove, 2023, para. 6). Apart from the global economic downturn and the peak of the COVID-19 epidemic, this is the lowest growth profile since 2001. Policymakers are grappling with tough decisions due to the global economy’s persistent low growth and inflation. While China is facing a shift, India and Bangladesh are expected to reap benefits. The Middle East and South Asia are regarded as thriving regions, and this year saw global central banks coordinate unprecedentedly to raise interest rates, a trend that’s predicted to continue well into the next year. By 2023, investors anticipate that global monetary-policy rates will have increased by over 2% points from their 2021 average (A Global Recession on Our Way, 2022, para. 3). A quarter of participants in a recent survey expressed concerns about the possibility of a global recession. The latest poll numbers indicate that this percentage has doubled since September. Fascinatingly, experts are more hopeful about economic growth in these regions than in Europe and the United States. The World Bank predicts a decline in GDP growth to 1.7% in 2023, which is projected to be the worst year since the recessions in 2009 and 2020 (World Economic Outlook, April 2023: A rocky recovery, 2023, para.9). The paper will delve into the causes of inflation in major world economies, as well as detail the potential solutions. The leading causes of inflation include the asset bubble burst, sudden supply shock, and technological development and demand shocks.
Asset Bubble Burst
A significant factor in major global economies’ recession is the asset bubble’s bursting. The devastating consequences of an asset bubble’s collapse are felt throughout economies as diverse assets lose value. As asset values plummet, personal and corporate disposable income decreases. This could lead to central banks implementing interest rate reductions and other quantitative easing measures to revitalize the economy. Inflationary pressures may result from these measures, in turn. For instance, in the U.S., The Nasdaq Composite Index dropped by nearly 78% between 2000 and 2002, when the Dot-Com Bubble burst (Arteta et al., 2019, para.7). Consumer expenditure and personal wealth both fell as a result of this downturn. The Federal Reserve Board of Governors of the United States reacted by cutting interest rates dramatically, from 6.5 percent in the year 2000 to 1 percent in the year 2003 (World Economic Outlook, April 2023: A rocky recovery, 2023, para.8). CPI inflation increased from 3.5% in 2002 to 1.8% in 2004 as a result of the ensuing loose monetary policy (Facing crisis upon crisis: How the world can respond, 2022, para. 8). In the wake of the property bubble burst, asset prices tanked, and consumer spending suffered a corresponding decline across many European nations. The ECB implemented measures to boost growth in response to the economic slump. Eurozone inflation accelerated from 1.7 percent in 2010 to 3 percent in 2011 (Arteta et al., 2019, para.8). Without efficient mitigation strategies, the asset bubble burst can negatively impact the economies.
Sudden Supply Shocks
Recession can be caused by supply shocks based on their magnitude and duration. Reduced output and higher prices are common responses when an incident disturbs an economy’s productive capacity, rendering a pivotal ingredient to production either scarce or relatively costly (Arteta et al., 2019, para.4). Reduced production and employment with higher inflation are classic features of recessions triggered by supply shocks. Due to the rise in prices, a supply shock can decrease aggregate demand, which compounds the economic slump. While each link in the supply chain has the potential to cause a disruption, shocks to inputs of the manufacturing process that are fundamental to output throughout the economy are particularly likely to trigger a recession. For instance, oil shocks are a typical reason for supply-related recessions since oil products are essential to manufacturing practically all U.S. exports and imports. Two oil price shocks occurred in the 1970s. The first happened in 1973–1974 when the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo on the USA for many months (Bove, 2023, para 8). Oil prices virtually quadrupled due to the blockade, and U.S. oil imports were drastically reduced.8 After the Iranian Revolution cut oil output worldwide, the United States felt the effects in 1978 and 1979. Several major supply shocks have hit the American economy in recent years. The necessity for social distance slowed trade considerably, causing problems in supply chains and leading to idle productive resources, which contributed to the COVID-19 slump. Significant supply-chain interruptions in numerous commodity markets occurred in 2022 due to the Russian invasion of Ukraine (Bove, 2023, para. 10). Therefore, sudden supply shocks can lead to significant recession.
Technological Advancement
Extensive technological development, such as using Artificial Intelligence in production through automation, can lead to unemployment and recession. While automation improves productivity, it also has the potential to reduce employment opportunities, keep wages low, and widen economic gaps (Raziev, 2022, para.5). The consequences of sophisticated robots and AI-driven automation in production are evident in the labor market. As a result, many workers have been laid off and relocated, potentially damaging consumer spending and the economy as a whole. Despite its role in fueling globalization, supply chains may also experience disruptions from technological progress. The effects of technical failures or international tensions might be magnified by relying too much on intricate global supply networks. The stopping of production and economic contractions occurred due to the COVID-19 pandemic, which revealed weaknesses in global supply lines. By 2025, 85 million jobs across 15 sectors and 26 economies will be affected by automation and the new division of labour between people and robots (Mchugh & Bonnell, 2023, para. 10). As workplaces become more automated and digitalized, demand falls for positions like data entry, administrative and accounting assistance. Eighty-plus percent of company CEOs are speeding up their plans to digitize processes and introduce new technology. Fifty percent of businesses anticipate speeding up the automation of at least some jobs (Raziev, 2022, para. 3). Compared to recent years; employment loss has increased while job creation has slowed. Some 42% of organizations say they aim to downsize staff owing to technological advancements. In comparison, 41% say they will increase their utilization of contractors for task-specific work, and 34% say they will increase their current staff size (Mchugh & Bonnell, 2023, para. 7).
Employers in Europe and North America will distribute tasks evenly between humans and technology by 2025 (World Economic Outlook, April 2023: A rocky recovery, 2023, para.6). The need for jobs that use human abilities will increase. The machines’ primary emphasis will be information, administrative work, data processing, and other mundane manual duties in the white and blue-collar sectors.
Demand Shocks
An occurrence or combination of events that cause consumers and companies to reduce spending is known as a demand shock. In contrast to supply shocks, which often lead to price rises, recessions caused by demand shocks typically lead to flat prices or even falls in the general price level (Mchugh & Bonnell, 2023, para. 7). When the economy is expanding, things are looking up. Wages and discretionary spending go up, unemployment drops, and people work fewer hours. Contractionary fiscal policy, such as cuts in government transfers or spending increases in taxes, can be implemented by policymakers during times of good or increasing economic circumstances. The economy benefits from such a policy when implemented at the right moment, and it prevents the economy from overheating. 4% less real GDP and 9% less nominal GDP may be expected from a pure negative overall demand shock (Mchugh & Bonnell, 2023, para. 7).
Due to the negative impacts of the recession on the economy, economies can utilize various mitigation strategies to become stable.
Clear and transparent communication of policy choices by central banks is essential to maintaining their autonomy. Inflation expectations can have stabilized, requiring a less stringent monetary policy. Monetary tightening in industrialized economies may have unintended consequences in other countries. They should bolster macroprudential laws and increase foreign currency reserves in developing countries and emerging markets.
It will be crucial for fiscal authorities to remove fiscal assistance measures with precision and in a manner that is consistent with monetary-policy goals. Next year could see the most significant percentage of nations tightening fiscal policy since the early 1990s (Meehan, 2022, para. 4). This has the potential to magnify the growth-promoting benefits of monetary policy. Governments should also give targeted aid to low-income families and implement realistic medium-term budgetary plans.
Conclusion
The paper focused on conducting an in-depth analysis of the causes of recession in major world economies and various mitigation strategies. When the asset bubble bursts, the value of assets such as stocks and real estate also drops, which leads cutting of interest rates and hence leads to a Recession. Sudden supply shocks can disturb an economy’s productive capacity, rendering a pivotal ingredient to production either scarce or relatively costly, resulting in recession. Other causes of the recession include technological advancements and demand shocks. Global economies can come up with economic policies to mitigate the recession. Also, these economic policies should be effectively communicated across all the stakeholders for efficient implementation.
References
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