The Coming Global Recession: Will Nepal Resist the Trend?

Published On: July 9, 2022 06:40 AM NPT By: Hari Prasad Shrestha

Nepal is also experiencing most signs of recession. Some economists say that a recession is almost sure to happen here, although we are not yet in a complete recession. The signs of an economic downturn are cropping up all over, in some sectors like fuel, food items, edible oils and other necessary commodities.

The general people are asking if a global recession is about to come. An apathetic stock market, soaring inflation, and rising interest rates have made the state of the global economy pessimistic.  

As a result of the Ukraine-Russia war, the prices of agricultural products, edible oil and fuel have increased in an unprecedented way and the supply system of these items has been globally distorted by high demands and low supplies.  

Clearly, a global recession is stepping up, and declining trends are visible in economic activity (GDP) and its components - consumption, investment, government spending, and net export activity. 

People are frustrated by the high prices. The inflation is eroding their life standard. The consumer price index jumped worldwide and in its highest level, especially in the US in 40 years, surging 8.6% for the past 12 months. And the central bank raised interest rates at an aggressive pace as it looks to slow down economic activity. 

Big companies in the US have already frozen new appointments. Share markets are in a downward trend - be it ordinary shares, crypto, mutual fund or others. 

According to some economists, the coming recession - as a result of the Ukraine war - is predictable and is called white swan; unpredictable recession is called by black swan. The COVID-19 pandemic was an example of white swan.  

As an example of black swan, the bankruptcy of Lehman Brothers of the US was a major cause of the 2008 recession; it offered excess loans in the market, and which did not return, and the bank failed to pay back money of its depositors.  

As per the reports of the central banks of India and the US, the current deteriorating economic situation could lead to some unprecedented worsening economic situation, and a black swan is likely to occur worldwide.  

Nepal is also experiencing most signs of recession. Some economists say that a recession is almost sure to happen here, although we are not yet in a complete recession. The signs of an economic downturn are cropping up all over, in some sectors like fuel, food items, edible oils and other necessary commodities. 

According to the Nepal Rastra Bank report based on seven months’ data ending mid-February 2021/ report of mid-April 2022 - inflation remained 5.97 percent on year-on-year basis, imports increased 42.8 percent and exports increased 88.3 percent, remittances decreased 4.9 percent in NPR terms and 5.8 percent in USD terms, balance of payments remained at a deficit of Rs 247.03 billion.  

These statistics of the economy are not encouraging. As we are dependent on the import of food items, fuel and other essential items and reserves of foreign currencies are in depleting trends.  And our other major economic trends are also prone to recession. Moreover, interest rates are on the rise, and the share market is experiencing downward trends. 

People’s income has not increased, and they have no choice but to adjust their spendings. Before the war and after the Covid-19 pandemic, the demand and supply of necessary items were in satisfactory position and the economy was functioning well. And now the economy is facing strong external shocks as well as instability due to internal policy failures. 

In economic terms, a recession is a significant economic downturn spread across the economy that lasts more than a few quarters. 

More specifically, recessions have a simple definition: when the gross domestic product (GDP) declines , when a recession starts by measuring a variety of indicators such as decline in real GDP, decline in real income, rise in unemployment, stagnation of industrial production and retail sales and decline in consumer spending. 

Moreover, a recession is a business cycle contraction when there is a downward trend in economic activity. It generally happens when there is a widespread decline in spending. This may be caused by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or large-scale evolution or natural disasters (e.g., a pandemic). 

A serious (GDP down by 10%) or lengthy (three or four years) recession is referred to as an economic depression, although some assert that their causes and cures can be different.   

It would be relevant to know, how long do recessions last? Because of the unpredictable nature of business cycles, it's difficult to measure how long a recession typically lasts. However, the average post-World War II recession lasted 11 months.  

The Great Recession (December 2007 to June 2009) in the US was the worst and deepest economic downturn, which lasted 18 months but had a profound impact on the decade to follow.  The Gulf War Recession (July 1990 to March 1991), which also lasted eight months, was incited by an oil price spike. 

Governments usually counter recessions by adopting expansionary macroeconomic policies, such as increasing money supply or increasing government spending and decreasing taxation. Besides, an increase in interest could decrease the supply of money in the market to control inflation. It’s a kind of measure to take money out of the people’s pockets. 

For the general public, during a recession, one must hold money and not spend on unnecessary things; it could be another measure to cope with a recession. Saving liquid money would be supportive in times of difficult economic situations. Some additional steps would be beneficial in such situation such as- eliminate your debt, calculate essential monthly expenses, build an emergency recession fund, start a side hustle or part-time job, live within your means, lower your expectations, start Investing in the stock market, educate yourself on finance and look to barter and alternative markets. 

If the situation during a recession becomes worse, people's agitation against the government would certainly increase due to their economic difficulties, as we have seen in the Sri Lanka economic crisis. 

Establishing import-substituting industries and increased production of agriculture products could be resilient to bear the shocks of recession. And fast replacing gas by electricity and better supplies of essential items compared to market demands could be some of the supportive measures during a recession. 

The end of recession can be assessed when inflation comes down to four percent, when considerable decrease is noticed in interest rates and a rise in the share market.  

The end of recession is measured from the peak of the latest non-recession growth period to the trough or very bottom of the decline, before an upswing. Technically, if the economy starts growing again, no matter how slowly, the economy has left the recession period.

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