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What Economic Slowdown and Recession actually mean?
The economic machinery, like many others, is akin to a cycle. Once there is some disturbance, it goes a full circle. While an economic slowdown means less than expected growth, drop in the GDP refers to a state of recession. Slowdown is considered to be short term phenomenon while recession may take long to recover. During the state of recession, there is slow or no growth in the economy i.e. there is low demand for products and services which means lower business revenue (even bankruptcy for some) which in turn means lower production, less or no investment and increased unemployment. This also leads to lower tax collections leaving less money with the governments to spend on public welfare. In short everyone is in a distress. The world saw the last major recession in 2009 during the financial crisis triggered in the US.
So why is there so much gloom around?
In the economic corridors around the world, the buzzword these days is as to when the economic slowdown, or as many people call it as recession, will finally hit the shores. While no one is pretty sure of the date, almost everybody believes it will. The two events- Covid pandemic and the Ukraine War are creating the ripples no one likes but still can’t avoid.
What happens in a slowdown and why it seems to be around the corner. The whole world finds comfort in one currency-the US dollar and as we have recently seen the US dollar has been the strongest in the last two decades. This is so as like all other countries the central bank, or the US Fed is trying to control inflation by rising interest rates (which is a typical monetary policy intervention) making the US market attractive. This is leading to skewed demand for the dollar leading to a fall in the value of all major global currencies and hence turmoil in international trade.
Also, many developing countries having to pay foreign debt in US dollars are closer to default with weak currency and falling investment. Like the US, other countries are also raising interest rates to curb their domestic inflation, making it difficult for businesses to get affordable credit and hence halting investments.
All this brings the growth trajectory down and leads to a weak business sentiment. During the covid pandemic, major economies announced huge fiscal packages (India mostly refrained from this) which have now led to weak government. With the global economy increasingly under integration, the Russia-Ukraine war has impacted energy prices and supply badly which is another downside to the entire situation. While there is no certainty about recession being a confirmed reality it’s like expecting rain during meteorological forecast of over 90 percent.
Will Indian Economy be affected? Indian economy is also likely to be impacted by the global phenomenon specifically its IT sector whose fortunes hinge upon European and US markets. The silver lining is that Indian economy has a strong domestic base and we all can pray that it remains as resilient as it was in escaping majorly unhurt in 2009. However, the capital markets will be on tenterhooks at least for major part of the next year.
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