Business Magazine

Is a Recession Coming?

Posted on the 14 July 2022 by Sgyounginvestment

Just as we thought all is well after COVID and economies around the world start to recover, we are hearing the word recession now. Is this really happening just as we went thorough 2 years of COVID where recession just happened?

Recession just happened during COVID where jobs were lost which led to unemployment going up. Singapore's GDP growth rate became negative in the period of March to June 2020. We would remember that many people lost their jobs, salaries were cut and it was a painful period. Fast forward 2 years later, we are seeing another phenomenon. Inflation went up a lot due to supply chain shocks caused by the Russian Ukraine war. In fact, US inflation rose to 9.1% in June 2022 which is the highest increase in 40 years since the 1980s.

Inflation is a tricky situation to deal with. With prices increasing, wages need to keep up if not in the long run, the people in the country will suffer with real wage growth stagnating. Real wage growth is the increase in wages minus inflation growth. If the increase in wages is 3% and inflation is also 3%, then real wage growth is 0%. In essence, our wage did not go up at all considering inflation is the same increase. This is true because if our wages don't keep up with inflation, we will feel the impact of the rising cost of living and will be unhappy.

As workers expect higher wage growth, companies will feel the cost pressure as they also increase the salary of their workers to keep up with market competition. You can see that in Singapore, the public service is leading by example by adjusting salaries to keep up with inflation. Private companies will also start to adjust their salaries so that they can attract and retain talents. As companies face the cost pressure of workers salaries increase, they will adjust the price of their goods and this in turn will affect consumers in the form of higher prices of goods we buy or consume. Coupled with increased prices all over the world due to the Ukraine war etc, we have a situation of huge inflation growth we see now and may even go higher in the next couple of months.

Now, governments all over the world know this is not sustainable so they will come in and use their monetary policy tools to stabilise the situation. Most countries have an interest rate policy where they increase interest rates to combat high inflation. By increasing interest rates, it becomes harder for individuals and companies to borrow and thus reduce consumption and demand as a whole. This slows down growth and if not done properly, will trigger a recession event where companies start to retrench staff. We have seen this happening in many prominent companies such as Shopee, Tesla and even Google is slowing hiring. Many tech companies such as Shopee rely on investors funds and debt to fund their operations as they are primarily loss making and in expansion mode. With interest rates so high, it doesn't make sense to borrow so much now and thus they are slowing down their operations and keeping cost low.

We might see a recession coming and jobs might be loss again. If interest rates keep rising and shows no sign of slowing down, we might be hit even harder as borrowers default on their loans if they are unable to pay the higher amount of installment due to higher interest rates. Good news is for the general public who do not have too much loans, we should see prices coming down thereafter. Let's see how the situation evolves as we live in unprecedented times now.

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