Change is here, and more will come. The global economy continues to face steep challenges, shaped by the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.
In this episode of the Gensler Design Podcast, our Host David Calkins, Regional Managing Principal of Gensler APME sits with his guest, Rajeev De Mello, Chief Investment Officer at GAMA Asset Management as they discuss economic expectations for 2023 in the Asia Pacific and Middle East (APME) region.
Looking back, how did we get to where we are today, with a high cost-of-living and inflation pressures?
There was already a sense of slowdown in the economy at the end of the long expansion that began after the global financial crisis. The US Federal Reserve's decision to raise interest rates and the ongoing trade wars added to this negative backdrop, particularly for countries in Asia. However, these challenges were exacerbated by the COVID-19 pandemic and the resulting global sudden stop, which had a significant impact on exports and tourism in our region. Despite this, the recovery since then has been initially very strong, leading some central banks to take action by raising interest rates.
In many parts of the world, we are now seeing the effects of higher interest rates and a slowing economy. While it is still early, central banks have also increased their efforts to bring down default rates and recent data suggests that these efforts have been somewhat successful in reducing inflation, which is the goal of higher interest rates.
What is inflation and how it is linked to interest rates?
Inflation is generally caused by an increase in the supply of money or a decrease in the value of money. The Central Banks may have chosen to raise interest rates in order to reduce inflation. In the current environment, we have seen a decrease in demand due to the COVID-19 pandemic, leading to a decrease in prices. However, as economies have begun to open and people have been able to spend again, demand has increased, leading to an increase in prices. This is known as demand-pull inflation.
How does increasing interest rates lead to recession?
A recession is defined as a period of negative economic growth, where there is a decrease in growth or a contraction of the economy, rather than the usual increase in growth. This can be measured in terms of real growth, which takes into account the effects of inflation. Recessions are relatively rare and can be caused by a variety of factors, including a decrease in productivity and a decrease in consumer and business spending. The current economic situation is being referred to as an "engineering recession," which means that it is the result of a policy decision, such as the decision by central banks to raise interest rates in order to slow down the economy. The goal of these actions is not to cause a recession, but rather to bring inflation back to target levels, typically around 2%.
Would we see a full-blown recession in 2023?
It is possible that we may see a mild version of a recession, as some companies and households have substantial savings that they can draw upon to cushion the impact. However, central banks, such as the US Federal Reserve, are determined to fight inflation, as expectations of high inflation can lead to wage and price increases. By signaling that inflation is returning to target levels around 2%, central banks can help to build confidence among households and businesses. This is important because the markets are forward-looking, and the cost of financing for companies has already reflected expectations of future interest rate increases. In our region, there are also other factors that may contribute to economic challenges going forward.
Listen to the full conversation on the Gensler Design Podcast. Thanks for tuning in!