Is a New Global Recession the Price for Punishing Putin?

Hanging tough against Vladimir Putin was never going to be cost free. Energy prices are soaring, firms are pulling out of Russia and those that stay are at risk of nationalization. There’s concern about global food supplies. Recession chatter has started, even as the world economy is still mopping up from the last one. It would be foolish to discount a fresh slump — if it isn’t already upon us.

The “R-word” was deployed a couple of times Tuesday: International Monetary Fund Managing Director Kristalina Georgieva acknowledged risks are growing in a number of countries and Federal Reserve Bank of Dallas economists warned in a paper that the global economy likely won’t be able to avoid a slump, absent a resumption of Russian energy exports this year. Ultimately, that depends on how much pain the U.S. and its partners are prepared to endure to punish the Russian president for his invasion of Ukraine.

On the face of it, the world economy has some cushion before things get dire. The IMF projects an expansion this year of 4.4%, down from last year’s blockbuster 5.9%, but another universe from 2020’s pandemic-induced crater. A few important caveats: The lender’s definition of global recession is growth of 2.5% or lower — not an outright contraction — and the fund is almost certain to cut its forecasts next month. While arrival in recession territory is unlikely then, the direction of travel may point that way.

Dallas Fed economists Lutz Kilian and Michael Plante wrote that the prospective downturn could be more protracted than in 1991, the year that followed Iraq’s invasion of Kuwait. “If the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable,” they wrote. Three decades ago, Saudi Arabia was able to ease some dislocations in the market by ramping up production. The U.S. endured a relatively modest recession and was growing by the end of 1991, though the recovery didn’t become apparent quickly enough for then-President George Bush, who lost the 1992 election to Bill Clinton.

Bush later blamed Alan Greenspan, the Fed chair at the time, for keeping credit too tight. Might current chief Jerome Powell adjust his approach and take out a little insurance against a downturn? There is little sign of that in public remarks. If anything, the opposite. Speaking to the National Association for Business Economics, Powell sounded more aggressive than his relatively hawkish press conference last week after the Fed hiked its benchmark rate by a quarter point. He said Tuesday he’s prepared to consider half-point steps at the next few meetings of the Federal Open Market Committee to rein in inflation. “What would prevent us? Nothing: Executive summary,” Powell said, pushing an already hammered bond market lower.