Almost out of the Covid 19 crisis, it seemed that things looked bright in the beginning of the year as restrictions on travel started to lift. So exactly what happened that led to the question “Are we headed for a recession?”. In the following paragraphs you will be able to check the top reasons why the global economy may be going south.
The number one concern for investors and households. After a long period of low inflation, the reopening of the economy and the attractive central bank policies with low interest rates and quantitative easing (or as most people call it “printing money”) led to too high demand for goods. This was combined with supply chains which still weren’t fully recovered, and we saw an increase in consumer prices.
Russia and Ukraine
Whether you call it a war or a military operation, what is happening between Russia and Ukraine led to a further increase in energy and grain product prices. This further increased the inflation pressures for the major economies. Unless a peaceful resolution is found soon, it is likely that we may see further increases in energy and grain prices because of the degrading relationship between Russia and the West.
Central Bank policies
And here comes the problem for all of us – the only way Central Banks can deal with inflation which is out of control is to raise interest rates and stop printing money. The higher borrowing costs will lead to problems for businesses and consumers that are financing their activities with loans. The higher deposit yields in banks may mean that investors are incentivized to keep their money in the bank rather than invest it in businesses. And this means that we may see a drop in economic activity across the board which can lead to a recession. In other words, in order to fight the inflation, central banks have to cool down the economy.
Is there a way to avoid a recession?
A sudden fall in prices may get us out of the current position. Maybe an end to the Russia – Ukraine conflict or some other event can help out Central Banks in their current fight with inflation.
Other than this the only other way to get out of the situation is raising interest rates and economic slowdown.
What can I do?
Such situations can sometimes open opportunities for investors as all asset classes may potentially become cheaper in a recession. Stocks may drop up to 50% from their highs. It’s similar for properties, crypto etc. Bitcoin now is down more than 60% from all-time highs. If you want to invest in stocks and cryptocurrencies but don’t have a broker, there are solutions which can help you filter and find the best ones. So, it’s not all doom and gloom if you are smart with your borrowing, savings and investments. But one thing is for sure – the following months are going to be eventful in financial markets and tough for the global economy and the consumer.