Is a Recession Coming in 2022?

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For months, financial experts have been warning us to prepare for a recession.

While we still can’t say for sure, signs are flaring up that Europe and the U.S. might be headed for a recessionary period.

We have already talked about the existing risks of a recession in one of our previous SPOTLIGHTs. But quite a lot of things have happened since then.

With the events of the last few months (you know, record inflation, war, energy crisis, slowing growth, market collapse, etc.) we thought it was time for a little update.

So, let’s see if those recent events are putting us on the path to recession.

Are there any major signs of a possible recession today?

The short answer to this question would be, yes, and quite a few.

Here are the main ones:

  • Red-hot inflation: If inflation remains high and salaries don't rise to match it (which is the case now), eventually inflation itself could lead to a recession.

Just to remind you, inflation in the U.S. has just hit 9.1%, reaching a new 40-year high. In the Eurozone, the annual inflation rate reached 8.6% in June, exceeding the 8.1% mark from May.

And, as you can see from the chart, inflation has been rising in other countries too.

  • Interest rate hikes by central banks: many analysts say faster and bigger rate hikes could raise the odds of a recession. Rising rates will make it more expensive to borrow money and therefore tend to reduce the amount of money circulating in the economy. In other words: rate hikes tend to slow growth and, in some cases, create recessions.

And right now, the Fed is on an aggressive path to halt a 40-year-high inflation. It has already hiked interest rates a few times this year and is bound to do it once again soon.

The ECB, too, plans to increase rates later in July and probably again in September.

  • The war in Ukraine: Russia’s war in Ukraine continues, heightening the risk of a food crisis in countries that depend on wheat exports from these two countries.
  • Russia’s gas squeeze: In addition to all this, Russia has temporarily shut down the Nord Stream gas pipeline, thus reducing Europe’s gas supplies. Now many officials are worried about a full gas shut-off from Moscow that could seriously harm Europe’s economy with winter slowly approaching.

As you can see, the outlook for the world economy is, to put it lightly, very hazy.

But could that potentially lead to a recession? Here’s what analysts are saying.

Natural gas disruptions could trigger a recession in Europe

Further disruption in the natural gas supply to Europe could send many economies into recession, the head of the International Monetary Fund, Kristalina Georgieva warned.

She wrote in an IMF blog post that Russia’s war in Ukraine had significantly worsened the economic growth outlook and that the IMF was prepared to lower its forecast for 2022 and 2023.

“The outlook remains extremely uncertain. Think of how further disruption in the natural gas supply to Europe could plunge many economies into recession and trigger a global energy crisis. This is just one of the factors that could worsen an already difficult situation.”

And it seems that, out of all EU countries, Germany is facing the biggest risk of recession.

“It seems reasonable to assume that Russia will continue to look for ways to disrupt economic activity in Europe in retaliation for Western sanctions and financial and military support for Ukraine… the impact on industrial output and economic uncertainty will almost certainly push the German economy into recession in the second half of 2022,” the economists said.

The graph below shows exactly this:

As you can see, before the conflict in Ukraine, there was a 20% chance that both Germany and the Eurozone would experience a recession. Today, Germany has a 55% probability of a recession, compared to 43% in the Euro area.

Former IMF chief economist: There’s a high risk of re-running the 1980s

According to former IMF chief economist Maurice Obstfeld, there is a real risk that central banks will push rates too high while trying to fight inflation.

“You’ve got a real cocktail of global monetary contraction that could go a bit too far because each central bank is looking only at its own domestic situation and not thinking about the global effects,” he warned.

In other words, along with many economists, Obstfeld fears that central banks run the risk of hastening the path of the world economy into a deep recession by not coordinating their rate hikes.

“We saw something like that in the early 1980s when the Fed was fighting inflation hard … We got a very deep global recession which spilled over to emerging markets in the form of the debt crisis of the 1980s and I think there is a risk of something similar now.”