The global economy appears to be heading towards a major step back by the end of 2022. According to the Peterson Institute for International Economics (PIIE), Russia’s invasion of Ukraine and COVID-19 shutdowns in China have elevated the risks for a global recession. These are in addition to other factors, such as high oil prices, steep inflation in the United States (US) and lower consumer spending in several major economies.

Economists surveyed by Bloomberg have also raised concerns about a recession. Economists typically define a recession as a period of economic decline during which there is a contraction in economic activity, generally identified by a decline in Gross Domestic Product (GDP) for two successive quarters.

The PIIE has projected that global growth will slow to 3.3% in both 2022 and 2023, compared to 5.8% in 2021. In the US, still the world’s biggest economy, growth is forecast to grow at 3% and 2% this year and next respectively.

Karen Dynan, PIIE Senior Fellow and former US Treasury Department Chief Economist, said that following a year of recovery from COVID-19 related weakness, almost all countries are seeing considerable slowing of economic growth. According to Bank of America, a ‘recession shock’ is coming.

In the US, a new government report released on Tuesday 12 April, 2022, showed consumer prices surged by 8.5% in March alone, the fastest pace since December 1981. Bank of America’s Chief Investment Strategist, Michael Hartnett warned that inflation is “out of control” and that “inflation causes recessions.”

US markets are also readying for the Federal Reserve (Fed) to rapidly raise interest rates to help to control prices. However, some economists fear that in doing this, the Fed may overcompensate, thereby sinking the economy in the process.

Recessions tend to generate a high amount of anxiety across the society – governments, the private sector, workers and consumers. People could lose their jobs, businesses may fold, consumers may cut back on spending and governments may see a drastic reduction in their fiscal space. A recession hardly spares anyone.

Recessions in major world economies, such as the US, China and the European Union ( EU) also have knock-on effects around the world and tend to drag other countries down, especially countries which are highly reliant on them for trade, investment and tourism. This is why inflationary pressures in the US, slowing growth in China and the war in Ukraine are so concerning because the consequences are global.

While no one wants a recession, all of society can learn important lessons when one occurs. Workers learn the value of saving, even small amounts, for rainy days. Businesses have to think differently about their competitive edge and governments must think about strategic policy responses to bring about short, medium and long term economic growth and development.

Since recessions affect all of society, an all of society approach is also required to engineer an adequate response. Workers need protection, businesses need to stay afloat and governments need to continue to function and provide public goods.

Governments and businesses in particular need to think about accelerating structural shifts in the economy to create a more sustainable and resilient future. For example, businesses have to think about diversifying their export markets, as well as product and service innovation.

Meanwhile, governments have to contemplate how they can create the most facilitating environment possible for both local and foreign firms to invest in and operate in their economies.

Particularly in the current environment of high energy and food prices, an anti-recession response, must out of necessity, focus on the development of greener economies and food production. Higher oil prices, if anything, should point all of society towards the need for investments in renewable and alternative sources of energy. Furthermore, food insecurity concerns should point the way towards investments and innovations in agriculture as well as industrial renewal.

Large and advanced economies have the luxury of spending their way out of an economic crisis through large investments in infrastructure, industrialisation and innovation. Small economies are much more restricted in what they can do. This reality strengthens the need for global finance and trade rules which are more responsive to the unique circumstances of small states.