Omilola Oshikoya: Recession and Other Global Financial Crisis of 2023 (1)
At the beginning of 2023, many financial institutions such as The World Bank released statements and reports about an imminent recession this year. What does this mean for an average individual? How can you recession-proof your money and showcase wealth-creation opportunities even in a global recession? Let’s focus on the opportunities in a global economic crisis in order to prosper in spite of it.
What is a global recession?
Let’s start by looking at what Gross Domestic Product (GDP) is. GDP is the total value of the goods and services produced in a country at a given period. If you want to determine the financial health of a person, check their cash flow, net worth and other metrics. If you want to check the economic health of a country, check its GDP. It is akin to checking your health status with a doctor and having your blood pressure, pulse, oxygen levels and others checked as well.
If the country’s GDP is high, then the economy of the country is good but if it is low, then the economy is poor. The goal is for the GDP to keep increasing or growing. To determine how fast a country is growing, you would check the GDP growth rate which is the percentage increase in the country’s GDP from quarter to quarter. If the growth rate declines in two consecutive quarters, then you are in a recession. It becomes a global recession when the annual global GDP declines.
In simple terms, a recession is a period of temporary economic decline during which the trade and industrial activities of a country are reduced.
Over the last 50 years, the global economy has experienced five global recessions. It was experienced in 1975, 1982, 1991, 2009, and most recently in 2020 which was caused by the global pandemic. I remember the 2009 global financial crisis vividly. I had just moved companies and the company I left sacked almost everyone. They never recovered.
Why is a recession imminent in 2023?
There are different causes of recessions. Nigeria faced a recession in 2016 because of a decline in oil revenues. The 2009 global financial crisis was caused by the US housing market bubble. However, the major cause of the coming predicted global recession is because of another economic term known as inflation.
Inflation is when there is an increase in the price of goods and services in an economy. Due to global issues like the war in Ukraine/Russia and some countries still battling with the aftermath of the pandemic, food and energy prices were most affected with the highest increases. Looking at the Russia/Ukraine war, for example, products like wheat and gas are supplied and exported from those regions but the war has affected the supplies. Therefore, demand became more than supply which would result in an increase in price because sellers would increase prices when there’s higher demand than supply. Let us use the current case in Nigeria as another example. The amount of new naira notes in supply is less than the demand and so people like POS owners are exploiting people’s desperation by charging ridiculously high charges.
To curb inflation, governments globally increase interest rates to reduce demand so it becomes closer to the supply which should reduce the price of goods and services. If fewer people are buying a particular item, sellers would reduce the price.
How does an increase in interest rate affect demand?
Higher interest rate affects two people: business and bank owners and general consumers.
Typically, banks and businesses borrow money to fund their expenses. By increasing the interest rates, the government makes it more expensive for banks, as well as businesses, to borrow money to fund their expenses or activities because they would have to pay a higher interest rate in return for the funds borrowed.
For consumers, especially in developed economies like the United States of America and the United Kingdom, a higher interest rate means items typically purchased on credit, such as homes, cars, and furniture will be more expensive. Furthermore, the rates charged on credit cards will be higher so people ultimately stop shopping.
When businesses and consumers reduce their borrowing and investing, they spend less. This would eventually bring demand back down to a level parring with supply.
Essentially, an increase in interest rates reduces the level of demand and this, therefore, reduces prices. This sounds like a great plan or idea, right? However, there are consequences, one of which is a recession.
In the long run, in response to consumers buying fewer goods and services, businesses may reduce their production of goods and services. For example, there is a bakery around the corner from my house that used to produce bread till 8.30 pm. But it suddenly changed and by, say 4 pm, they would have sold out because they are reducing the quantity of bread they are producing. And when companies reduce production, they cut back on the cost of production and labour. This will reduce inflation but would affect economic growth and increase the unemployment rate and poverty rate.
In simpler terms, when governments increase interest rates, it reduces demand for goods and services, which could result in companies hiring less or laying off their workers and potentially lead to a recession down the line.
The tech industry grew during the lockdown of the pandemic because everyone went digital. So, they expanded and went on a hiring spree and made a lot of investments. However, the inflation in many countries affected people’s purchasing power and as a result, people stopped subscriptions and stopped buying many of their products and services after the lockdown. Hence, they decided to cut back on costs by imbibing hiring freezes and laying off staff. In the first four weeks of 2023, over 55,000 people were laid off.
The World Bank Predictions
The World Bank is predicting that global growth is expected to reduce sharply to 1.7 per cent in 2023. This is the third weakest pace of growth in nearly thirty years. The other two are the global recessions caused by the pandemic and the global financial crisis. They are predicting that the most affected would be emerging markets and developing economies like African countries and small tourist countries like Seychelles, Mauritius and others.
I predict that we are most likely going into something similar to depression globally. As mentioned, a recession is when global growth declines in two consecutive quarters but depression is much worse. It is when there is an economic downturn for several years. Depression creeps in on people when their ends are difficult to meet. I believe the world has entered into a seven-year cycle of economic challenges.
But there is good news. Curious to know what it is? Watch out for my next article.
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