Global recession looms as cost of living crisis crushes post-Covid rebound

A global recession is looming as rising interest rates and the cost of living crisis eat away at the remaining strength of the post-Covid rebound, economists have warned.

Britain’s economy is suffering its biggest slump in more than two and a half years amid an “increasingly severe” downturn in manufacturing and people having less money to spend on services, leading economists to warn the nation is at risk of recession.

Dwindling demand led to the services sector shrinking in August, as it contracted for the first time since January, according to S&P Global’s purchasing managers’ index (PMI), an influential survey of businesses.

James Smith, an economist at ING, said: “The economy does appear to be turning from a state of very modest growth to stagnation and perhaps even modest recession.”

At the same time the eurozone economy is in even worse shape, according to the survey, while top economists warned the US also faces recession.

Combined with China’s slowdown it means there is a growing risk of a global recession, as the recovery from Covid has petered out.

The eurozone is also facing a deeper crunch as the PMI points to the currency area’s worst private sector performance since 2020, led by Germany.

Rory Fennessy at Oxford Economics said the dire numbers will force the European Central Bank to stop raising interest rates for fear of recession.

“With the eurozone composite PMI now in contractionary territory for three consecutive months, and emerging signs that the slowdown is becoming broader, there is an increasing risk that the eurozone could slip into a contraction in the third quarter,” he said.

Economists at Citi said the US has to face a downturn to get prices back under control: “Getting inflation back to 2pc will require a recession and higher unemployment. That is a clear lesson we glean from past episodes of high inflation.”

Freya Beamish, chief economist at TS Lombard, said a global recession is now on the cards.

“We expect a global recession. Hopes of recovery in China are misplaced and the European data are grim. These two blocks interplay heavily so the bulk of Eurasia is going to be in recession,” she said, adding that the US is likely to fall into recession next year as interest rate rises overcome the resilience of the American consumer.

Investment bank Nomura predicts recessions in the US and Japan, and warns that the UK and eurozone are looking increasingly shaky too.

“It could be that we are staring down the barrel of a global downturn. It may be that has been generated by the pace and size of the rate hikes we have seen,” said economist Goerge Buckley.

“It may be that the world economy has spent the last 30 years gearing itself up to ever-lower interest rates, all to be undermined in a very very short space of time by substantially higher interest rates.”

Ben Gutteridge at Invesco said the risk will grow the longer interest rates stay high.

“Despite the impressive ‘consumer-led’ resilience, the world’s major economies continue to grapple with ever higher interest rates; with this challenge set to become greater still as expiring loans are refinanced at higher, more punishing levels,” he said.

“On this basis the prospect of a global recession remains a risk as we look ahead to 2024, though our core view [is] that any such recession would likely be shallow.”

Nathan Thooft at Manulife Asset Management said a global recession is now “very likely”.

“It takes a while for higher interest rates to really start to kick in. That delay typically is in the neighbourhood of a year to 18 months,” he said.

“We’re getting toward the end of that period where you’ll start to see it quite a bit more and in my opinion, we will see a recession.”