The global economy is in an early phase of what could turn into a recession. The scale, duration and effects of a downturn will vary from country to country, depending on their economic integration with the rest of the world and the sophistication of their markets and investment efficiency. Nevertheless, it’s important to understand the mechanisms that make a global downturn more likely and what businesses can do about it.
During the COVID-19 pandemic, a growing number of companies have been hit by falling stock prices and a slowdown in sales. Some have been forced to lay off staff. Others are buried under mountains of debt, with banks and investors demanding repayment. This is not a new phenomenon; companies have always been subject to intense pressure when the going gets tough. But the scale and speed of the current downturn is unusually steep and widespread, with many companies in troubled waters.
One warning sign comes not from stock markets but from the price of copper, a key indicator of global demand. It’s dropped more than 15% since the Trump administration’s tariff announcement, which shows that the impact of trade tensions is reverberating globally.
Another warning sign is a metric with a long track record of predicting recessions, the inversion of the spread between short- and long-term interest rates. When this ratio rises, it has a high probability of being followed by a contraction in the global economy. However, the metric had a false alarm in 2022, and it’s still too soon to tell what the effect will be this time around.
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