ARE WE HEADED FOR A GLOBAL RECESSION IN 2022?

 

An unmistakably audible sigh of relief was heaved across the world last week when, for the first time since the beginning of the Russia-Ukrainian conflict, global oil prices fell back below $100 amid ceasefire talks between Russia and Ukraine.

This comes after a month of heightened anxiety over the rising oil prices driven by the Russia-Ukrainian conflict which saw per barrel oil prices surge close to record levels of about $146 per barrel set in 2008, propelled majorly by concerns over supply disruption and the impact of economic sanctions by the West on pugilistic Russia.

Already, morbid fear was starting to grip the world amid speculation that the US and British bans on Russian oil imports- and pressure on Europe to follow suit were likely to prompt a supply shock equivalent to the 1979 oil crisis, which led to a severe global recession. To really understand this, we have to put the 1979 oil crisis into context.

In January of 1978, Iranian youth, students and recent immigrants took to the streets to protest against what they considered “slanderous remarks” made against Sheikh Khomeini on a Tehran newspaper. Shah Mohammed Reza Pahlavi retaliated by ordering government forces to descend on the protestors leading to the death of dozens, maybe hundreds of protestors. These deaths catalyzed a cycle of violence over the following months with each death prompting further protests.

In efforts to curb the escalating anarchy, the regime moved to impose martial law on September 8 of that year which led to trigger happy troops opening fire against protestors in the streets of Tehran killing hundreds of them. This was followed by a strike by government workers, and the epitome of it all came on October 31 when oil workers downed their tools bringing the Iranian oil industry to a grinding halt. 

The strike led Iranian oil output to plummet by 4.8 million barrels per day (about 7 percent of world production at the time) by January 1979. While the supply in disruption led to an upward surge in global oil prices, it also prompted an almost palpable fear of other disruptions leading to panic buying among crude oil buyers and induced across the board speculative hoarding. Per barrel oil prices shot up from $13 in mid-1979 to $34 in mid-1980 while oil sold for as much as $50 on the spot market. The rise in oil prices led to a jump in inflation levels in the Western economies and ultimately a recession dubbed the “global recession of 1982” by the World Bank.

A hike in oil prices means that consumers will have to contend with higher costs of living leaving them with lesser disposable incomes, thereby forcing them to lower their expenditure levels causing a dip in aggregate demand. This leads to a form of inflation referred to as cost-push inflation where prices of goods are high despite a dip in consumer demand.

Cost-push inflation in turn puts pressure on Central Banks to adjust interest rates upwards. Higher interest rates drive up the costs of borrowing therefore discouraging investment on credit. Moreover, an increase in interest rates also drives up the cost of mortgage repayments further reducing spending by consumers. As a result of the early 1980’s inflation, UK interest rates jumped to 17% setting the stage for a recession.

            Is the world headed for a global recession in 2022?

The ongoing crises is bound to drive up inflation in two ways: firstly, if the oil prices resume the upward trend they were on, they are certain to drive up inflation levels; secondly, a surge in the prices of basic commodities such as wheat, aluminum and corn is to be expected as a result of supply shocks.

On the brighter side however, according to the Washington Post, several economists have posited that continued growth in the United States, China and India accounting for close to half of the world’s output – should be enough for the global economy to avoid an ‘outright recession’.

It is starkly apparent now, that for as long as the Russian-Ukrainian continues, the global economy will remain on tenterhooks