Author : Ritu Mandal
“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.”
~ Bo Bennet
The current state of the global economy is fraught with difficulties, prompting many analysts to wonder if a recession is imminent. The ongoing COVID-19 epidemic severely disrupted international trade and business and is one of the key elements causing this uncertainty. Additionally, there are worries about rising interest rates and inflation which might further stifle economic growth.
You have probably heard the term inflation many times. Newspapers, television news, and politicians all highlight it. It is the acronym most commonly used in economics. But what is inflation exactly, and why is it so significant?
A crucial indicator of an economy’s health is inflation, which measures how quickly prices for goods and services are generally rising. When inflation is low, the economy is often steady and expanding at a healthy rate. Inflation can be a symptom of an overheating economy and a potential recession, though, when it is high.
In several nations worldwide, inflation is currently at an all-time high. Growing interest rates can further hinder economic growth because they directly result from rising inflation. When interest rates are high, borrowing money costs more for consumers and businesses, and this can result in less spending and investment. A consequent decrease in economic growth may result from this.
Imagine a town where everyone shops at the same market for everything they need, from food to clothing. In response to its worry for the village’s economy, the government intervenes one day and reduces interest rates so that people may access credit and the economy can grow. Villagers are now shopping in their market and buying many more items out of their price range. They can, without a doubt, now that they have all of this extra cash. Because everyone has extra money today and spends far more than they did, stores need more things. To keep up with the rising demands, the prices of goods and services rise, which is what inflation is.
A recession is when the economy declines, often indicated by a fall in the GDP for two or more consecutive quarters. Its defining characteristics are high unemployment, decreased consumer spending and investment, and reduced output and commerce. Dropping stock prices and increasing government spending to boost the economy are common indicators of a recession.
The GDP (gross domestic product) keeps declining year after year. It is the outcome of countless individuals making several small decisions about how to spend their money. This decision’s tremendous chain reaction impacts every person who engages in the economy.
Decisions taken by the banking sector plays an important role in a recession. Let us have a look on how the banks play a role.
The Role of Banks:
The puppet master of the economy and the bank of all banks for most nations is the Central Bank. They play a crucial role in the economy and can significantly impact recessions.
But actually, it’s creepy how the Central bank operates like a puppet master, using us as puppets. They manipulate the economy to influence how we spend our money, affecting how much firms raise or lower their pricing.
Banks may tighten their lending criteria during a recession, making it harder for people and businesses to obtain credit. This may slow down economic growth and lengthen the recession. Additionally, banks may only be able to lend as much money if they have financial difficulties, limiting economic growth.
However, during a recession, central banks like the Federal Reserve can act to expand the money supply and reduce interest rates to encourage borrowing and spending, which can assist in jolting the economy into action and accelerate recovery.
The war between Russia and Ukraine resulted in a subsequent increase in inflation, which harmed the British people the hardest. Since COVID-19, the UK has experienced rising costs, followed by trade obstacles brought on by Russia’s invasion of Ukraine. Energy prices have increased, and supplies have decreased since the West put sanctions on Russian gas.
Over the previous few months, the US dollar has been rising. It is currently at its most vital point in two decades, and analysts predict it will continue to strengthen over the next few days. The value of many other currencies has decreased due to the rise of the importance of the US dollar. As a result, importing necessities like food and fuel becomes more expensive for these countries.
The current state of the global economy is undoubtedly cause for alarm, but it is vital to remember that the situation is complicated and continuously changing. While some analysts contend that a recession is imminent, others argue that when consumers start to resume their pre-pandemic activities, the economy will rebound in the coming months.
Ultimately, it’s challenging to say with certainty whether or not the world is on the verge of a recession. Even if there are legitimate causes for concern, it’s wise to note that the economy is a dynamic, complicated system continuously evolving. As a result, it’s critical to keep up with the most recent economic events and be ready for various potential outcomes.
ACM GITAM Visakhapatnam
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