Almost everyday well circulated newspapers around the world are reportedly pointing out that the US and most of the countries in the Eurozone are going to face economic recession in the coming quarters. Quite a number of agencies including the IMF and many economists are not very sure about the economic prosperity of these countries. Even China and many other prosperous economies of Asia may face slowdown. At the same time, there are some signs that may be considered favourable to maintain economic stability.
The US and European economies
First, it is reported that the US stocks have posted their worst first half in about 50 years. The stock market performance is the worst in Europe as well, since the last global financial crisis of 2007-08. But the worst may not be over for the US and Europe. This is because the investors have been worried about hiking interest rates by the central banks of their respective countries. Most of the central banks have been trying to control inflation in their respective countries by raising policy rates. Secondly, the rising energy and food prices in Europe and the US have been a major risk of inciting inflation. So, the US Federal Reserve may have to tighten money supply even at a time when the economy is struggling with several headwinds arising out of the Russia and Ukraine conflict and the Covid-19 pandemic which would further stoke inflation. In that situation, the economy may go into recession.
Some hopeful factors
Strong consumer spending is one of the biggest hopes of preventing economic recession. High consumer spending on both goods and services accounts for more than 50% of the total expenditure in most of the economies. After the Covid-19 pandemic, a considerable portion of the population have been going for a shopping spree in the US and many countries in Europe, according to reports. Therefore, that may help to prevent recession. But the poor and lower middle class are not spending more. A Goldman analysis reportedly said a few months ago that strong consumer spending remains a bright spot.
A huge forced savings has been another bright spot. A massive saving was accumulated by the households in the Eurozone - accumulated during the pandemic phase. According to an IMF estimate, total additional saving in the Eurozone reached about one trillion euro, that is, $1.3 trillion in that period. The same for the US was $ 2 trillion in the same period. This savings should be a favourable factor to stabilise the economies.
A resurgent service sector is another important factor. Christine Lagarde, President, European Central Bank reportedly pointed out in June, “Recovery is very much underway, driven by service sectors like tourism, travel, hospitality witnessing a strong rebound.”
Job markets remain strong. Lawrence Karz, Professor of Economics, Harvard University recently said (Economic Times 18th November) “Importantly, there was a large increase in inequality and education returns over the last 40 years. That has stopped now - for the first time in decades, we have seen inequality in the US not rising, except at the very top.” He also pointed out, “Low wage workers have in fact had the fastest wage growth recently. Unemployment is close to a 50 years low with job openings at a record high”. At the same time, Katz dis not forget to mention, “There is also a weaker labour market for the middle section....it is falling behind inflation now and this has significant political implication.” On announcements of lay-offs of some companies, Katz said, “In the economy as a whole lay-off rates are quite low but there are parts, particularly the tech sector, which is going through a strong re-evaluation.”
So, whether the US or the Eurozone would enter recession or not, no one can be sure of that. But India has already been affected by the fear of recession. The export sector has been the most prominent sector to judge this. The present export situation in India reveals that fear of recession in the EU and the US has impacted India. Export from India fell to 429.78 billion in October 2022 from 435.54 billion in the previous month of September. This is the lowest since February 2021, according to Data of Ministry of Commerce. A year earlier, the exports were 17% higher - at $35.73 billion.
What may happen in the days to come
Experts think that India will not enter economic recession but its growth will suffer in the present FY and the situation will slip further downward in 2023, according to Moody’s Analytics of recent APAC Outlook: A Coming Downshift. Moody analysis informs, “India is headed for slower growth next year more in line with its long-term potential.” It also said if high inflation persists, then the RBI would likely take its repo rate well above 6% - causing GDP to falter.
What India can do
It can take policy to enhance domestic demand by investing more in sectors like agricultural infrastructure including favourable support to micro and small industries. Expansion is needed to set up quality infrastructure in the rural areas to create ease of living. This may lower rural urban migration to an extent. Finally, there should be a policy to have a good health sector - both in urban and rural areas.