Analysing And Understanding The Current Geo-Political Situation


Recession, sources, and implications

The National Bureau of Economic Research defines recession as “a significant decline in economic activity spread across the economy, lasting more than a few months”. With no official definition available, we can refer to recession as a period of significantly slower economic activities lasting for over a span of time.

It is difficult to predict recessions beforehand, as there could be several causes behind it. However, to understand sources, there are a slew of reasons; such as one linked with a sharp change in input pricing used in producing goods and services.

The next big reason for triggering a recession could be the contractionary fiscal and monetary policy employed to curb inflation, while another reason could be the credit boom or a fall in external demand.

Most organisations suffer during a recession, primarily because of the falling demand and revenue leading to an uncertain future.

The major cost of an economic recession is the vicious cycle of economic slump. As businesses seek to cut costs, unemployment rates tend to rise, leading to a reduction in the consumption rates causing inflation rates to go down. Lower prices further reduce corporate profits triggering more job cuts. With a falling government revenue, recession becomes a leading cause of Budget deficit and debts.

Are we heading for recession?

As per the IMF baseline forecast, the world is going to see a sharp fall in the real GDP growth from 6.1 per cent to 3.6 per cent, reflecting an impending growth in the world’s three largest economies – the United States, China, and the Eurozone.

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Higher than expected inflation, the US and the major European countries are triggering tightened global financial conditions. Amid the Covid-19 outbreak and lockdowns, China’s slowdown has been worse than anticipated following a further negative spillover from the war in Ukraine.

Still reeling under the pandemic and Russia’s invasion in Ukraine, the world is going to witness dismal and uncertain growth.

Despite the slowing activity, global inflation has been revised, partly due to the rising food and energy prices.

Global inflation this year is anticipated to reach 7.4 per cent from 4.7 per cent last year, showing the impact of cost pressures from disrupted supply chains and tight labour markets.

Amidst stalling growth of the world’s three largest economies, India is standing tall with a high GDP growth rate and strong foreign reserves (Forex).

A recent survey by Bloomberg has claimed that despite the rupee breaching the 80 per dollar mark against the US dollar, India’s chances of slipping into a recession are very low. Although the IMF has lowered India’s GDP prediction from the current fiscal to 8.2 per cent from 8.9 per cent, the country will still remain one of the fastest-growing economies in the world.

Reserve Bank of India Governor Shaktikanta Das on Friday, while announcing MPC outcome, said India’s GDP growth forecast retained at 7.2 per cent. Despite the economy still grappling with inflation, India’s real GDP growth projection for FY22-23 is retained at 7.2 per cent, with Q1- 16.2 per cent, Q2-  6.2 per cent, Q3 -4.1 per cent,  and Q4- 4 per cent with risks broadly balanced.

Way forward

Given the conducive recessionary circumstances, one can foresee the slow economic growth the world is heading towards.

The IMF has already given its numbers, predicting global inflation and real GDP growth. Inflation at current levels represents a clear risk for current and future macroeconomic stability. Now, central banks play a leading role in defining the country’s policies and priorities. Despite India’s chance of getting affected by the recession is marginal, the government and the Reserve Bank need to be highly vigilant towards the global disruptions.

Mehak Jain, Financial Planning & Analysis, ABP Network
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