International research firm sees 98% chance of a looming global recession

There is now a 98% chance of a global recession, according to Ned Davis Research data released late on Monday, a day when stock markets around the world (including in India) plunged over the same fears, and many currencies (including the rupee) dipped.

There is now a 98% chance of a global recession, according to Ned Davis Research data released late on Monday, a day when stock markets around the world (including in India) plunged over the same fears, and many currencies (including the rupee) dipped. With central banks around the world likely to keep increasing rates , at least in the short term, to combat inflation – the Reserve Bank of India’s Monetary Policy Committee meets later this week, and consensus estimates point to a 0.5 percentage point (560 basis point) increase – those fears are real.

HT Image

Most institutional and private forecasters believe that the forthcoming winter will usher in a long economic winter of slow growth if not outright contraction. The Organisation for Economic Cooperation and Development (OECD), for example, released its Interim Economic Outlook Report on September 26. OECD expects global GDP to grow at just 2.2% in 2023, 60 basis points – one basis point is one hundredth of a percentage point – lower than what it projected in June. The situation is much worse for advanced economies. Euro area is expected to grow at 0.3% (June forecast 2%) and the US is expected to grow at 0.5% (June forecast 1.2%). How will this affect the prospects of the Indian economy?

To be sure, OECD has retained India’s growth estimate for 2022-23 at 6.9%, and S&P at 7.3%. Still, India is unlikely to escape unscathed from the global slowdown.

While data on the real economy comes with a lag, capital and foreign exchange markets are already showing signs of weakness. India’s benchmark stock market index, the BSE S&P has lost 3% of its value in last seven trading sessions and the rupee has lost 2% of its value against the US dollar in the same period. It remains to be seen whether the Monetary Policy Committee of RBI makes a downward revision to its 7.2% growth forecast for 2022-23 for the Indian economy on September 30.

What should India’s response be?

Pranab Sen, India’s former chief statistician, believes that economic policy should guard against any kind of adventure until the global economy has settled. We will have to accept that there is going to be a deceleration in the growth rate of the economy as the export engine will slow because of the global slowdown and domestic demand, both from the consumption and investment side, is yet to gather momentum, Sen said. Given the fact that the fiscal deficit is already at a very high level, it can only be expected to come down, he added. When the global economy is in such turmoil, economic policy should focus on cutting the losses, he added. This includes allowing the rupee to depreciate even if it offsets the gains from cheaper commodity prices to some extent, Sen said.

Sen’s views were echoed by private-sector economists as well.

“RBI has already intervened aggressively to keep the INR from weakening. And indeed, while the USD has strengthened 18% since the start of the year, the INR has weakened only 9%. Some gradual depreciation could help nurture exports at a time global demand is weak,” Pranjul Bahandari and Aayushi Chaudhary at HSBC Research said in a research note dated September 26. “On the fiscal front, there is both good and bad news. The good news is that some positive changes have happened over the last few years. Central government capex has risen from 1.6% of GDP in FY19 to a budgeted 2.8% in FY22. On the other hand, fiscal deficit and debt are too high, and 50% of the net tax revenue is being deployed on debt servicing. There is urgent need for fiscal consolidation. But if fiscal consolidation happens on the back of capex cuts, it will be an unfortunate outcome for growth. Another way of thinking about it is that if the current capex budget is held on to, it will be difficult to lower the fiscal deficit below 5% of GDP. Fiscal consolidation beyond that should be led by higher revenues (disinvestment revenues and direct tax reforms). That will be the real challenge for the fiscal consolidation process,” they added.

Economic policy must be careful against moving to either extreme (supporting growth versus containing inflation) at the moment, Rahul Bajoria, chief economist at Barclays India told HT. What is important at the moment is that we recoup the policy space to bear with future economic shocks and this can only be done if a distinction is made between the real economy and the (equity and currency) markets, Bajoria added. There is no doubt that the global headwinds will have an adverse effect on business confidence in the Indian economy, but this will be compensated to some extent by the relief on the inflation front from moderation in global commodity prices, he added, while saying that the government already had some room to cut fuel prices.