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Recession risk rises as WoodMac lowers its global economic forecasts

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(Kitco News) - Recession fears continue to grow as economists lower their global growth forecasts due to rising inflation and geopolitical uncertainty caused by Russia's invasion of Ukraine.

Tuesday, research and consultancy group Wood Mackenzie said it was lowering its 2022 global growth forecast to 2.5%. Next year the economists see the global economy expanding by only 0.7%, as the world feels the long-term impact of Russia's war with Ukraine.

Although commodity prices have soared higher in the first quarter of 2022, WoodMac said that lower economic growth does not bode well for future gains. Peter Martin, research director at the firm, noted that rising commodity prices had pushed inflation prices higher, forcing central banks worldwide to tighten their monetary policies, pushing the threat of a recession even closer.

The research firm noted that sharp rises in energy and food prices hurt industry demand and erode consumer purchasing power. At the same time, global business confidence deteriorates and investment contracts.

"Energy and commodity prices could fall as the global economic downturn takes hold and the E.U. and U.S. recessions bottom out after four to six quarters when consumption hits its nadir. The lag in reaching the bottom of the economic cycle sees the global economy take a bigger hit, relative to the base case, in 2023 compared to 2022," Martin said in the report.

Gold price has peaked for the year -

The outlook comes as the U.S. Consumer Price Index showed annual inflation rising 8.5% in March, pushing slightly above economist expectations.

Although broad commodities prices could suffer in a recession, many commodity analysts have noted that gold could do well in an environment of high inflation and low economic growth. Gold prices are trading near a four-week high following the latest inflation data. June gold futures last traded at $1,976.20 an ounce, up 1.44% on the day.

WoodMac sees sharp declines for both Russia and Ukraine as the invasion could last longer than expected. Martin noted that these two countries account for less than 2% of total global GDP. However, he added that the war will have a much larger impact on international trade. Although Martin said he doesn't see the end of globalization, he does a realignment in regional trade.

"If the Covid-19 pandemic highlighted a need to shorten supply chains, the war in Ukraine underscores the importance to have reliable trading partners. These forces could lead to a lasting realignment of global trade. The global economy becomes more regionalised — shorter supply chains with 'reliable' partners," Martin said. "In the short term, regionalisation could reduce efficiency, increase transaction costs and prolong higher inflation. It could also weigh on productivity growth over the longer term. If so, our downside scenario would see the global economy suffer a sustained loss of output."  

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