An economy wrecked by Covid, high inflation and fear of war. Is a new global recession approaching?

Since 2018, many economists and analysts have been regularly warning of a possible approaching global crisis, similar to the one in 2008 or even those of the 1960s and 1930s, which could last several years. The truth is that after 2008, once the mortgage and debt crisis had ended, the economy did very well. Apart from small dips, stock market figures only rose over the long term. But such a trend cannot last forever, and so the question of when the next big crisis would come naturally began to arise.

Chart of the S&P 500 index over the last 90 years

We define an economic recession as negative GDP growth over two consecutive quarters. In this article we look at a more serious and long-lasting global recession – a crisis (such as the one in the 1930s, for example).

A new crisis every year

Among the first news items to support theories of an approaching global crisis were the restrictions that the then newly elected US President Donald Trump began to push through. The trade war between the USA and China was really tense at the time, and the threat of a potential global crisis was justified. The tariffs introduced by the Trump administration did in the end cause the market to fall, but only in the short term.

In 2020, with the arrival of the Covid-19 pandemic, panic and fear spread around the whole world, and the markets were not spared either. A worldwide pandemic, falls on the stock markets, rising unemployment and fear of the future – a textbook example of the start of a long, multi-year global crisis. It did not come, however. Within a few months the stock market was back at its pre-pandemic values and continued to grow. The Fed (the US central bank) responded effectively and quickly at the time with a series of key measures, thereby saving many companies from collapse.

Today we once again find ourselves in an uncertain situation, as we did two years ago. A possible military conflict between Russia and Ukraine is one of the main factors that could cause a new global recession. Some experts compare the current situation to 1930, when the situation in the world was also unstable and a global conflict loomed, which in the end did come, in the form of the Second World War in 1939.

In addition to the negative news from Ukraine, the economic problems are compounded by the stance of the Fed, which has committed to gradually slowing its support for the US economy and, from March of this year, should also start raising interest rates, somewhere in the range of 0.25–0.5%. Making loans more expensive in this way will mean that ordinary people will not be able to spend as much, and this will also show in the sales of companies and businesses. The Fed is preparing these steps above all because of inflation, which in the USA is at its highest in 40 years (last December it reached 7%). This news has caused the current increased volatility on the stock markets, with daily swings reaching even tens of per cent.

Crisis in 2022?

We do not know whether the current mix of economic problems will be the one that finally causes the long-awaited global crisis. Perhaps the situation will calm down, the growth trend will continue this year as well, and the worldwide economic threat will once again be forgotten for a while. And perhaps not. The most important thing, however, is to be prepared for every possible scenario and to arrange not only your own affairs but also your finances accordingly.

And what is your view of the current economic situation? Share your opinion in the comments.