April 25, 2024
World Economy

A Global Recession Wave Is Building Steam

About the author: Desmond Lachman is a senior fellow at the American Enterprise Institute. He was previously a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

The world economy is in trouble. Not only are there clear indications of a substantial slowdown in a number of the world’s key economies, there are also growing signs that we could be on the cusp of a worldwide wave of commercial property loan defaults. Those defaults could put great strain on the global financial system and trigger a meaningful global economic recession.

The good news is that those developments should bring in their wake lower inflation in general, and lower international energy and food prices in particular. That should help both the Federal Reserve and the European Central Bank achieve their inflation targets, which should encourage those central banks to not delay the start of an interest rate cutting cycle that would provide much needed support to a weakening world economy and a challenged financial system.

A slew of negative economic data releases provides evidence for the global economy’s troubles. It now turns out that Germany, Europe’s main engine of economic growth, is already in recession. So too are Japan and the United Kingdom, the world’s fourth and sixth largest economies, respectively.

More troubling yet is the dismal economic data coming out of China, the world’s second-largest economy and until recently its main engine of economic growth. That data leaves little doubt that China’s outsized housing and credit market bubble has burst. Over the past year, housing prices have been falling and property developers have been defaulting on their debt mountain. At the same time, investor confidence has evaporated in response to the government’s poor handling of the Covid crisis, its heavy-handed clampdown of the tech sector, and its suppression of economic data and criticism. Underlining this loss of confidence, China has had the world’s worst performing major stock market over the past year.

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All of this suggests that China could be well on its way to a Japanese-style lost economic decade and to a prolonged period of price deflation. That could lead to a slowdown in world aggregate demand and a decline in international energy and food prices. It could also lead to China exporting deflation to the rest of the world through a weakening currency and through its efforts to deal with its domestic industrial overcapacity.

Compounding these problems, the world banking system is nursing large mark-to-market losses on its bond portfolio as a result of central banks’ interest-rate increases. Those circumstances raise the risk that the commercial property crisis could lead to a deflationary debt spiral that could push the world into recession.

Unfortunately, there are indications that we could be on the cusp of a wave of commercial property debt defaults both at home and abroad. In Covid’s aftermath, across the globe there has been a marked shift to working from home and to shopping online. That has led to soaring office vacancy rates and plunging commercial property prices in the U.S., Europe, and the U.K. It’s difficult to see how, over the next few years, property developers will be able to roll over the large amounts of loans that mature at considerably higher interest rates than those at which they were originally contracted.

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In 2008, the world paid a heavy economic price for the Fed’s tardiness in responding to the emerging subprime loan and housing market crisis with significant interest rate cuts. We have to hope that both the Fed and the ECB have learned the right lessons from that painful experience and that they start to cut interest rates soon to support the world financial system. If not, we should brace ourselves for another painful U.S. and world economic recession.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback toideas@barrons.com.

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