Global recession-and Pakistan | By Farrukh Saleem


Global recession-and Pakistan

The United States of America, the largest economy in the world, has gone into a recession (a recession is defined as negative growth for two consecutive quarters).

The largest economy in the world will lead the rest of the world into a recession. The United Kingdom, the fifth largest economy in the world, has also gone into a recession.

The Eurozone-Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland, Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia and Lithuania-is following America’s lead into a recession.

Japan, Canada and South Korea are also heading into a recession. Lo and behold, China is slowing down but still growing.

For the developed world two things have happened at the same time: stimulus-induced demand and pandemic-related supply chain disruptions.

The developed world is going through two phenomena at the same time: pandemic-induced supply chain disruptions and an overheated economy.

Interest rates, as a consequence, are up around the world and stock markets are down. Energy prices are up around the world and consumers are pulling back on spending.

In 2021, the global economy grew by 5.7 percent but this year it is expected to slow down to under 3 percent.

Yes, high rates of interest are going to further choke global growth. Global recession means four things: lower capital investments, higher unemployment, lower entrepreneurial activities and lower incomes.

Global recession also means a lower demand for energy including the international price of oil.

Global recessions and Asia’s textile industries are tied up. To be sure, Pakistan’s exports-especially our textile exports-are also tied up to global recessions.

From a historical perspective, global textile demand goes down during a global recession-and as a consequence have a negative impact on Pakistan’s textile industry.

For Pakistan a global recession means both bad news and good news. For Pakistan, a global recession means seven things: lower exports, lower capital investments, slower economic growth, unused industrial capacity, higher unemployment, lower incomes and increased poverty.

For Pakistan, a global recession also brings some good news: a lower price of oil resulting in a lower trade deficit and a lower current account deficit.

The State Bank of Pakistan (SBP), along with central banks around the world, is raising the rate of interest-essentially to fight inflation.

The SBP, in its fight against inflation, risks slowing down the economy too fast.Will the SBP succeed in putting off the fire of inflation by jacking up the rate of interest?

Only time will tell. If the SBP raises the rate of interest too fast the SBP risks a ‘hard landing’ for Pakistan’s economy.

Right now, the biggest challenge for the SBP is to engineer a ‘soft landing’ for Pakistan’s economy, bringing down the rate of inflation and then stimulating a recovery.

Global recessions come and go. When global recessions end unused capacity comes back online and recovery begins.

The billion dollar question is as to how long would the current global recession drag on for. Right now, the biggest challenge for central banks around the world is to engineer a ‘soft landing’ and to cut short the length of the recession.

Will the central banks of the developed world be able to avoid a ‘hard landing’? Only time will tell.


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