Recession has become a buzzword in international media these days. Many economists and industry experts are certain the world is headed toward a global recession. In fact, the International Monetary Fund (IMF) Managing Director, Kristalina Georgieva spelled it out clearly, “Faced with the darkening global outlook.... the risks of recession are rising.... prevent this period of heightened fragility from becoming a dangerous new normal.” These are words of caution, while putting forth a request to end the recessionary as soon as possible. IMF has also said that it is set to reduce the global growth forecast which was already at a dismal 2.9 percent, in its fourth downgrade revision. The post covid optimism has left plain sight, and a dark and gloomy future has taken its place.
What is recession?
Let us look at the technical definition first before we simplify it. Recession is a significant and widespread downturn of economic activity. A popular rule of thumb is that it is a consecutive quarter of decline in the gross domestic product (GDP). It manifests itself in the outward decline of economic output, consumer demand, and employment. In simple language, jobs will not be available, GDP will drop, either negative or just a downturn, drop in public spending, and businesses working on thin ice.
What is happening globally?
To put it simply, major economies globally are at risk of recession given the global situation. As per a UN report, this round of recession could be worse than the 2008 cycle. The primary reasons are something we are all well versed with. These include the pandemic-induced slowdown, and the soon after the war between Russia and Ukraine. A third and interesting aspect is climate change, rather than climate shocks.
Many economists and bank analysts are of the view that the USA should be ready to face a recession. In fact, the Dow Jones Sensex is sitting at the same rate it did two years ago, signalling economy is about to face the heat. In Europe, France and Germany had already shut their nuclear power plants, thinking they will import gas from Russia. 40 percent of gas consumption in Europe now comes from Russia, the latter of which now has leverage in arm-twisting the other countries to support them in the Russia-Ukraine war. Consequently, electricity prices have shot up from anywhere between 500 to 1000 percent. Germany has in fact accepted that the high inflation will lead to inflation in 2023.
China is a case study on its own. Its zero Covid policy has spelled doomsday for the economy, especially in cities focused on manufacturing. People are realising their over-dependence on China due to this, and are hence pulling away to other countries. This has led to an exodus of Chinese manufacturing. Companies are now looking at the ‘China plus one' policy of many companies. Additionally, owing to economic uncertainties, people have stopped paying their housing loans leading to a mortgage crisis. If you take a trip around China, you will find many under-construction houses. This leads to further slowdown. The banks there are in fact predicting a four percent slowdown, which is the slowest in one decade.
Will it impact India?
If we have to pick between yes and no, the answer is no, purely in terms of technical definition of recession. One of the reasons will be an increase in public spending during the festive season, negating one of the key aspects of recession. This will in turn give a boost to businesses and manufacturing. This is in sharp contrast to what is predicted to happen in USA, as has been predicted by Dr. Droom, one of the few experts who also predicted the 2008 recession. This has a cascading impact on business and livelihood, fuelling recession.
While there are indications that India will be safe, one should not draw conclusions so fast. For example, we are still a major energy importer. In fact, as per Japanese firm Nomura, India’s growth will slow down to 5.2 percent as against the expected 7 percent for FY 2024. This does not include 2023, which will see a steady pace of 7 percent. Given India’s goal to become a 5 trillion-dollar economy, this growth rate is far from enough. The Index of Industrial Production (IIP) is growing at 12.3 percent as against 20 percent before June 2022. While it is technically still not a recession, given that the growth rate is above zero, its impact can still be disastrous. This is despite the fact that India is set to become a global manufacturing hub, and the domestic economies are stronger than other economies. We also do not have massive external debt, a prudent monetary policy, a solid service sector, and a good social safety net. However, in reality, the world is interlinked, and domestic consumption and the job market are taking a hit.
Why should you care?
While some people see major economies slowing down globally as an opportunity for India, it is not really the case. Even if Indians do not face the direct impact of recession, there will be secondary shocks. For those working in large multinational corporations (MNC), Will you be able to save your job? Will you get your March increment? Will you get your annual bonus? For business owners, will they be able to pay their employees? Will you be able to pay your office rent? These all questions which are driven by recession directly or indirectly? Even when India was the fastest-growing economy, there were very few jobs in the market, leave alone at a time of recession. Even if India decouples from the Indian economy, there will be a profound impact. Additionally, retail inflation is at an all-time high of 7 percent, while the wholesale price index is at 14 percent, and is not looking to slow down. This will make a dent in the consumer’s pocket. In fact, the World Bank noted that Indians account for 80 percent of those who became poor due to Covid-19. The lack of investment in India due to the non-conducive global environment is one of the reasons behind this. It is time for the consumer and producers to heed the global market and be prepared to take a hit.