The IMF has lowered its global growth forecast for 2022 and 2023 to 3.2% and 2.9%, respectively, a global slowdown may be imminent. The World Economic Forum's Chief Economists Outlook for September 2022 surveyed economic leaders from around the world to collect insights on the global economic situation. The outlook is worth worrying, with 73% of respondents believing that a global recession is either likely or extremely likely!
A Global Slowdown Ahead
A global economic slowdown is avoidable, only if China emerges from its prolonged lockdown and central banks continue to intervene wisely, inflationary pressures may be alleviated, and the effects of recession may be minimized. At the end of the day, it is a supply-side shock.
The outlook, however, varies by region. The Chief Economists Outlook survey found that 9 out of 10 of respondents expect Europe's growth to be weak. A 67% of respondents expect China's growth to be weak or very weak. Sub-Saharan Africa and Latin America also, face a gloomy outlook, according to economists. A 60% of respondents believe the US could see moderate growth, while 71% and 77% are optimistic about MENA and South Asia's growth, respectively
With the exception of China and MENA, respondents expect elevated rates of inflation across the world for the remainder of 2022. This will have a major impact on the growth outlook, with 93% of respondents in the US and Europe expecting inflation to remain high.
The US Recession, recent History and Forecasts
A US recession is effectively certain in the next 12 months in new Bloomberg Economics model projections. The model is more certain of a recession than other forecasts. A separate Bloomberg survey of 42 economists predicts the probability of a recession over the next 12 months now stands at 60%, up from 50% a month earlier. The Bloomberg Economics model uses 13 macroeconomic and financial indicators to predict the chance of a downturn at horizons of one month to two years.
These forecasts come on the back of the aggressive tightening measures taken by the US Federal Reserve since March 2022, in an effort to absorb inflation running at its highest levels in more than 40 years. Markets have reacted strongly, with stocks sloping down and Treasury yields surging.
Despite the US administration is clearly underrating the crisis, President Joe Biden told CNN earlier last month that a “slight recession” is possible, though he does not anticipate it. Transportation Secretary Pete Buttigieg told ABC News that a recession is “possible but not inevitable.”
Rating Agencies do not agree. Fitch slashed its US growth forecasts for this year and the next, because of one of the most aggressive inflation-fighting campaigns by the Fed in history. US GDP is now expected to grow by just 0.5% next year, down from 1.5% in the firm’s June forecast.
Fitch argued that the United States enters this difficult period from a relatively position of strength, in terms of consumer solvency and employment rates. That would be the main difference between this foreseen recession and the early 1990’s.
Fitch Ratings said, there is still the risk of a deeper recession than the one that began in 1990 (ended 1991), in part because US companies are carrying more debt relative to the size of the economy than 30 years ago. The report also cited the “highly uncertain” impact of the Fed’s efforts to shrink its $9 trillion balance sheet.
The unemployment rate spiked by 11.2 percentage points during the Covid recession and by 5.6 percentage points during the Great Recession 2007. Following the 1990-1991 recession, the rate increased only by 2.8 percentage points.
Inflation coupled with a Recession; a Possible Stagflation
In a New York Times poll published in September 2022, 44% of likely voters said economic concerns are the most important issue facing America, far higher than any other issue.
Inflation remains the biggest concern of the US economy. The high cost of living is eroding real wages and damaging consumer confidence. Persistent inflation has also caused the Federal Reserve to slam the brakes on the economy by dramatically raising interest rates.
The Impact of the US Recession on the MENA region
A US economic recession could not come at a worse time for emerging markets, particularly those in MENA region, where most are fighting chronic unemployment, especially among youth and women, slowing growth, and higher debt levels. Large natural gas and oil exporting countries in the Gulf Cooperation Council (GCC)—such as UAE, KSA, and Qatar are in a better position, given heightened energy prices. GCC countries shall face the US recession with more diversification in their investment portfolio away from upstream oil industry.
1. Impact on demand and debt:
The global demand destruction is a fact, as the post-pandemic surge in demand levels off, with consumers beginning to feel the squeeze from inflation and rising interest rates. This may put an impediment on global energy demand and tourism. Inflation also affects global emerging markets, causing a perfect storm for the arrival of tough economic times. Currency depreciation against the US dollar is increasing the cost of imports and repaying foreign currency debts for banks, companies, and governments, many of which scored significant debt during the pandemic.
2. Impact on capital flows and FDI:
As the pandemic-fueled liquidity begins to vanish and the reality of inflation and higher interest rates sets in, many economies will face considerable challenges. MENA countries are struggling to attract global investors and increase Foreign Direct Investment (FDI). Yet, capital flows are reversing from emerging to developed markets—specifically in the United States, where interest rates are rising to levels not seen since 2018. Emerging markets experienced substantial capital outflows in 2018, as international investors minimized their exposure into emerging economies.
Attracting foreign investors into emerging market economies, to fill the domestic savings gap, has always been difficult. Nevertheless, thanks to the extended period of near-zero interest rates (cheap capital era in the US and Europe), emerging markets were blessed with investors eager for higher returns. The plentiful supply of money coupled with historically low yields in rich countries led investors to explore higher yields in riskier markets across various assets, including public equities, public debt, private equity, and venture capital. The lower cost of capital allowed investors to finance opportunities that otherwise would have been unfeasible.
Geopolitical risk, inflation, and US interest rates are all rising. In addition, two crucial macroeconomic trends will impact the future capital flows to emerging markets. First, globalization policies that have focused overwhelmingly on cost efficiency and rationalization will now focus on resiliency and values-based investments. Second, Environmental, Social, and Governance (ESG) issues are gaining more attention with countries and companies putting them on the agenda. As a result of the confluence of these complex issues on top of challenging macro-economic concerns, investor appetite for emerging market assets is weakening. It will become more discerning in the coming years.
How MENA Countries can improve Resilience
Fiscal policy can help shield economies against global shocks, but many low-income countries are already low on fiscal ammunition to support struggling consumers.
Rising debts burdens and the slowing down demand, may force many countries to compete on the scarce global capital flows. According to Amjad Ahmed, the chairman of empowerME at the Atlantic Council, MENA countries can better position themselves amongst others competing for capital by:
1. Attracting and empowering policymakers to make dynamic and bold decisions that complex changes in the global economy require. Deepening the bench of talented policymakers should be another priority.
2. Driving policies supportive of private sector development and investment. Reducing government-owned enterprises and providing ample space for private companies to grow and prosper on an even playing field is critical to building a dynamic economy.
3. Continuing to support the promising entrepreneurial ecosystem. Entrepreneurial economies are consistently more resilient and lead to better outcomes over the long term.
4. Enhancing regional and international economic integration through bilateral and multilateral agreements with more robust economies. Proactive engagement with multilateral financial institutions will also increase financial stability and resilience.
5. Standardizing policies according to global norms for greater regional and international integration.
6. Increasing transparency and reducing uncertainty around laws and regulations. Investors and companies need more clarity on the game’s rules.
Several MENA countries continue to take bold steps to improve their global competitiveness. The UAE ranked first in the Arab world and 25th globally in the Global Competitiveness Report 2019 (issued by the World Economic Forum). One such example is the privatization programs of government-owned enterprises in UAE, Egypt, and KSA to increase liquidity in local capital markets, improve transparency, and expand private sector participation. Those countries that maintain their momentum will be clear winners in the coming years. History is rich with evidence that economic challenges are followed by periods of historic gains.
