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BUSINESS & ECONOMY

The Upcoming Recession and its Ramifications on World Economies

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By Rahul Ajnoti

The recent decision of the new head of Twitter, Elon Musk, to sack approximately 50 percent of the workforce is only indicative of the recession that is glooming over the world. The story of Twitter is just one example among many visible ones. Almost all the major firms around the globe have or are planning to lay off employees, including Microsoft, Meta, Tencent, Xiaomi, Unacademy, etc.

According to a comprehensive study titled ‘Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes’ by the World Bank, all the nation-states are tilting towards a cascade of economic crises in global financial markets and emerging economies, leading to long-term damages. The report blames central banks around the globe for raising interest rates to tackle inflation caused due to the Coronavirus pandemic and Russia’s aggression on Ukraine in the European arena. The report states that even raising the interest rates to an unprecedented high not seen over the past five decades will be insufficient to pull global inflation down to the pre-pandemic levels. It further instils the need to focus on supply disruptions and subside labour-market pressures. The President of the World Bank Group, David Malpass urged policymakers to focus on boosting production instead of cutting consumption and make policies that generate auxiliary investments, improving productivity and capital allocation, which are crucial for growth.

Economics 101: Recession

Amidst the pandemic, many states released relief and stimulus packages that heavily leaned on measures to expand liquidity, such as loosening lending restrictions or reducing repo rates (the rate at which commercial banks borrow money from the central bank) as well as reverse repo rates (the rate at which commercial banks lend money to the central bank). China was the first state to act upon these stimulus measures to counteract the disruptions caused by the covid, followed by Japan, the EU, Germany, India and so on. Though the measures helped economies absorb the pandemic’s impact, one major drawback was increased demand due to induced money flow in the market, leading to inflation.

Inflation, defined as the rate of increase in prices of general goods and commodities in a given period of time, can be caused by multiple factors. A shortfall in aggregate supply, one of the most common factors, can lead to excessive demand pressures in the market. To curb inflation, central banks often tweak or change the fiscal and monetary policies of the nation. Increasing the interest rates is one such measure, as it tightens the economy’s banking system and thus contracts the flow of money, reducing already high demands. However, suppose only the rates are increased without substantial reforms in line with resetting the supply chains, increasing production and overall growth to meet the demand; in that case, a country may move towards a recessionary period. Therefore, alongside rising rates, a nation must diversify its suppliers, invest in technology (without increasing the debt burden), and focus on self-reliance while sustaining employment.

The International Monetary Fund (IMF) defines recession practically as the fall in a country’s Gross Domestic Product (GDP), i.e. a decline in the value of all the produced goods and services in a country for two consecutive quarters. Simply, a recession is a period of massive economic slowdown. Pointing at a specific moment when a recession occurs is almost impossible and futile. However, a few indicators, like the downfall of GDP and public spending, increased unemployment, and a decline in sales and a country’s output, generally point towards an upcoming recession. To sum up, there are various ways for a recession to start, from sudden shocks to the economy and excessive debt to uncontrolled inflation (or deflation) and non-performing asset bubbles.

The Stumbling Economies

According to IMF Managing Director Kristalina Georgieva, “First, Covid, then Russia’s invasion of Ukraine and climate disasters on all continents have inflicted immeasurable harm on people’s lives.” One-third of the world economies, including the United States, Europe and China, are expected to contract in the subsequent quarters.

For US economists and forecasters, the recession is no longer about ‘if’ but ‘when’. The decision of the Fed (US Central Bank) to increase rates to cool inflation without inducing higher unemployment and an economic downturn has only shrunk the possibility of a ‘soft landing,’ which occurs when the tightened monetary policies of the Fed reduce inflation without causing a recession. Nouriel Roubini, one of the few economists who rightly predicted the financial crisis of 2008, also claims a prolonged and inevitable recession in 2022 that will last till 2023. Economists expect a growth rate of 0.4 percent in the fourth quarter of 2023 as opposed to the fourth quarter of the previous year, and in 2024, they expect the economy to grow at 1.8 percent. The rate of unemployment is expected to rise to 3.7 percent in December this year and to 4.3 percent in June 2023, compared to 3.5 percent in September.

Like the US, Europe was also under the impression that the economic situation would improve without a recession. Assumptions of subsiding or transitory inflation due to solid businesses, enough public savings and adequate fiscal adjustments turned out wrong for the European economies. The Euro area (5.1 percent), and the UK (6.8 percent), are among the countries with the most expected output loss. Europe has mainly been affected by the Russian war on Ukraine and the resulting oil and gas disruptions leading to an ‘Energy War’ against the former. Similarly, China doesn’t lie far from them, with an expected output loss of 5.7 percent in 2023. Zero Covid Policy, coupled with the mortgage crisis and exodus in the manufacturing sector, has led to the economic slowdown of the Asian giant.

Impact on the Indian Economy

India reported a growth of 13.5 percent in the April to June quarter and became the world’s fifth-biggest economy, taking the spot of Great Britain. However, this growth results from the nation’s shutdown amid Delta-driven covid lockdowns during previous quarters and not because of the significant improvements in the economic activities. India needs to focus on skill-based human development projects to unleash its economic potential and effectively utilise its demographic dividend. However, India is not immune to the global slowdown. It is expected to face an output loss of 7.8 percent in 2023.

Indian CEOs are also expecting a decline in the growth of companies, but the economy is expected to bounce back in the short term, according to KPMG 2022 report. Moreover, 86 percent of CEOs in India expect an impact of up to 10 percent on earnings in the next 12 months. Reducing profit margins, boosting productivity, diversifying supply chains, and implementing a hiring freeze (worst case, layoff policies) are a few steps firms can take to weather such challenges.

India, thus, needs to tap the potential of start-ups and small enterprises, as opposed to just established firms, by expanding and enhancing the private sector’s access to capital investments and curbing environment-related risks. Reforms in dispute resolution mechanisms are also long overdue, evident through the Ease of Doing Business report, where India ranked 63rd out of 190 countries worldwide. India needs to prove its worth by showing investors that not only can their money achieve decent returns, but it is safe in Indian soil as well.

The stand on India’s future remains split. The global rating agency S&P claims that India will not face the true and horrifying brunt of the global recession thanks to its decoupled economy with huge domestic demand, healthy balance sheets and enough foreign exchange reserves. On the contrary, according to the Japanese brokerage firm- Nomura, policymakers are misplaced in their optimism about India’s growth trajectory. Its economists assert India’s estimated growth at 7 percent in FY23, which is at par with the RBI’s revised forecasts, but it also predicts a sharp decline to 5.2 percent in FY24. This estimated growth doesn’t align with India’s commitment to becoming a 5 Trillion USD economy.

Way Forward

UNCLAD’s Trade and Development Report 2022 projects global economic growth will plunge down to 2.5 percent in 2022, followed by a drop to 2.2 percent in 2023, costing the world a loss of more than 17 trillion USD in productivity. It further warns that the developing nations will be most vulnerable to the slowdown resulting in a cascade of health, debt and climate crises. Regarding the proportion of revenue to public debt, Somalia, Sri Lanka, Angola, Gabon, and Laos are the worst-hit countries, evident through the excessive inflation these states face.

Similarly, Indian fuel and food commodities prices have increased, but India’s sturdy performance when other countries are struggling can be attributed to its efficient policies. India does not have a perpetual external debt burden to hamper its growth. In addition, the government has focussed on developing the industrial and service sector to promote jobs and increase savings, especially after the Pandemic, to revitalise the Indian economy. Domestically, the government has provided effective social safety nets to ensure healthy livelihood for the population.

Despite these factors, India must realize and accept the harsh reality of the upcoming turbulent times. India may have a decoupled economy, but the world is one interlinked system. Global slowdowns will lead to a recession in India as well, whose effects are becoming more and more visible with each passing day. Major tech firms in India like Wipro, Tech Mahindra and Infosys have revoked their offer letters to young freshers, while others have started laying off employees amidst the fear of global recession. Irrespective of whether India becomes the “fastest growing economy” in the end, even a modest growth rate of about 5 percent will push millions into poverty in a country like India. It’s only imperative to realise that a depreciating currency and elevated inflation will hit the poorest the hardest, and India must be prepared to deal with this challenge.

Courtesy: Modern Diplomacy


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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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BUSINESS & ECONOMY

10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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BUSINESS & ECONOMY

Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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