Blog - Views on the Economy and the World

Views on the Economy and the World

A blog by Jeffrey Frankel

For more information on this publication: Belfer Communications Office
For Academic Citation:Views on the Economy and the World,” Views on the Economy and the World, https://www.belfercenter.org/publication/views-economy-and-world.

342 posts

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Economists spent most of 2022 convincing themselves that the global economy was about to fall into recession, if it wasn’t already in one.  With the year over, the global recession has now been postponed to 2023.

  1. Tour d’horizon

In the US, reports that a recession had begun in the first half of the year clearly were premature, especially given how tight the labor market was.  It still is. The chances of a downturn in the coming year are well below 100%, despite the confidence with which many say it is certain.  It is foolish to think we can predict a recession with certainty. But the chances are indeed far above the usual 15 %.  I would put the odds at perhaps 50-50 in 2023 and 75% at some point during the next two years.  The main reason is the rapid raising of interest rates by the Fed (and other central banks), of course, which in turn is attributable to high inflation.

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The most important task in confronting global climate change is the need to enforce serious quantitative limits on Greenhouse Gas emissions, such as the Nationally Defined Contributions which were originally negotiated in the 2015 Paris Agreement.  The 27th Conference of Parties to the UNFCCC,  which concluded in Sharm-el-Sheikh November 20, did not tackle this task.  Carbon border equalization measures, including tariffs against carbon-intensive imports from lax countries, might supply the teeth that have been missing from such agreements.  But they also risk advancing protectionism, which would ultimately slow the needed global energy transition.  Adjudicating the fairness of carbon tariffs would be a good job for a reinvigorated WTO.

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 Americans will go to the polls November 8.  It appears probable that they will give the Republican party majority control of the House of Representatives, and possibly the Senate as well.  The same for Secretaries of State and other statewide offices.  The consequences could be enormous. Especially worrying is the future of US electoral democracy, if the result is further distortions of voter eligibility rules, congressional redistricting, the electoral college, and other structural features.  How could such an outcome of the mid-term elections be explained, seeing as how the Republican party is now dominated by its extremist MAGA faction?

The dollar is sky-high.  Since May 2021, it has risen 19% against Europe’s euro, even reaching 1-to-1 parity in recent weeks. The dollar has appreciated 20% against Britain’s pound.  And it is up 28% against Japan’s yen, provoking the Bank of Japan to sell dollars on September 22, essentially the first foreign exchange intervention by a G-7 country since 2011 and the first in the direction of supporting a currency’s value against the dollar since the euro in 2000.

Project Syndicate asked, “Is a Global Recession Inevitable?”   Steven Roach says, “yes”;  Anne Krueger says, “Depends…Certainly not inevitable”; & Jim O’Neill says, “Quite possible.”

My answer to the question, Is a global recession inevitable:

No. A global recession is entirely “evitable.”

True, the odds of a downturn are high in Europe, hard-hit by the need to manage winter without Russian natural gas; China, where Covid shutdowns already turned growth negative last quarter; and Emerging Market and Developing Economies, many of which have debt troubles.

Among the most salient of economic developments in the last two years have been big movements in the prices of oil, minerals, and agricultural commodities.  It was hard to miss the big rise in commodity prices.  The Brent oil price increased from a low $20 a barrel in April 2020, during the first Covid-19 wave, to a peak of $122, in March 2022, after Russia invaded Ukraine.  But it was not just oil. The price of copper doubled over this period.  Wheat more than doubled. And so on. Global indices of commodity prices almost tripled from April 2020 to March 2022.

On July 28, the US Bureau of Economic Analysis will release its advance estimate of economic growth, as measured by GDP, in the just-completed second quarter of the year.  The announcement is attracting more than the usual eager anticipation.  The reason is that many observers predict that the Q2 GDP number will be negative and that this will officially confirm widespread beliefs that the economy went into recession in the first half of 2022, figuring that growth in national output is already determined to have been negative in the 1st quarter of the year. After all, isn’t a recession defined as two consecutive quarters of negative growth?

Some new problems have afflicted the economy in the last year.  Two examples come from the US:  blockages in supply chain logistics and a critical shortage in infant milk formula. One problem applies to the EU even more than to the US: energy scarcity due to sanctions against Russian fossil fuel exports.  And one applies almost everywhere: inflation.

The US dollar is up 12% against the euro over the last year.  Having moved from 1.21 $/€ in May 2021 to 1.07 $/€ today, the exchange rate seems to be approaching one-to-one parity for the first time.  Europeans are not happy about it. If you think that prices for oil and other commodities are high now in terms of dollars, you should see what they look like in terms of euros.  Get ready for “reverse currency wars.”