Sure signal of worldwide recession being months away, but is India prepared?

With pessimism deepening over global growth prospects, India can ignore these distress signals only at its peril.

Published: 20th August 2019 06:03 AM  |   Last Updated: 21st August 2019 09:57 AM   |  A+A-

Economy crisis

For representational purposes (Express Illustrations)

Express News Service

The global economic landscape is replete with slowdown signs, and it appears the recession beast may strike in the summer of 2020, or when summer turns to autumn.

The surest signal of its arrival surfaced in the second week of August, when the dreaded ‘inversion’, where short-term bond rates surpass long-term bond rates, attacked the US market - a phenomenon last seen in 2007, months before the 2008 recession.

Just as morning follows a rooster’s crow, inversions often precede recessions. All recessions in the US in the past 45 years saw yield curve inversions preceding them.

“The US 10-year vs two-year yield curve, a near-perfect predictor of recessions 6-24 months ahead, has inverted. We expect early easing action by the Fed to delay the onset of recession until the second half of 2020,” said Prasenjit Basu, Chief Economist, CrossAsean Research, who publishes on Smartkarma.

Bond traders are smelling blood as global growth rates are falling with intimidating speed. Crisis struck nations either due to economic or political policy blunders. But much of the trouble began when US President Donald Trump tightened norms of trade, particularly with China.

Part 1 of the series| Global meltdown: India needs to kickstart the growth engine

Bad news everywhere

In hindsight, Trump’s ‘trade wars are easy to win’, will be proved wrong, as US economy itself is growing at 2.1%, less than its historical average. China took the biggest hit, as its growth plunged to a 27-year low in June. Given the Brexit turmoil, the UK is feared to be in recession as we speak, while Japan and Singapore are fighting tough to ward off a recession.

Part 3 of the series | Even Rs 5 biscuit packs aren't selling: Inside India's worrying economic slowdown

The world’s fourth-largest economy, Germany, is seeing its GDP contract, Italy’s growth is in tatters amid a political crisis much like Asia’s financial hub Hong Kong, whose economy came to a standstill as the threat of Chinese military intervention looms large.

While South America’s Brazil and Mexico are weakening, Argentina’s stock market crashed 48% - the second largest single-day drop for any stock market in the world since 1950 - largely due to political setbacks.

“The bigger problem for Asia (and other trade-dependent global economies like Germany) is that China’s domestic demand is slumping despite China’s aggressive monetary stimulus (over the past 16 months) and recent fiscal stimulus,” Basu said, adding China’s slowing domestic demand is likely weakening the global economy.

This prompted investment bank, Morgan Stanley, to flash neon signs that if the US and China continue to raise tariff and non-tariff barriers over the next 4-6 months, global economic growth rate will fall to a 7-year-low of 2.8% and we could see a recession in 2020.


Stagnating global trade triggers a negative cycle, where businesses don’t spend, create fewer jobs, reduce wages, eventually leading to lower aggregate demand.

Sensing the sour market sentiment and to not upset the forthcoming Christmas sales, Trump deferred new tariffs on China imports to December.

Impact on India

For India, a global recession and the looming trade crisis leading to lower external demand, could weigh on our balance of payments, hamper foreign financial flows, and trigger exchange rate volatility.

“India’s exports, which shrank in recent times, can be expected to remain affected as trade barriers harden across the world and countries try and protect their domestic exports,” said Prof Biswajit Dhar of JNU.

Besides trade, oil imports, too, are flashing red. The US sanctions on Iran and Venezuela are actually benefiting the former, given that US oil exports to India rose three-fold between November 2018 and May 2019.

Until recently, Iran was India’s third-largest oil supplier and together with Venezuela, they accounted for 18% of our oil imports. Because of the sanctions on both, India had to look elsewhere.

Though Dharmendra Pradhan, petroleum and natural gas minister, in April sounded confident of a “robust plan for adequate supply”, recently, Harsh Vardhan Shringla, Indian Ambassador to the US, admitted the US sanctions were hurting the economy. “It has been a challenge to find alternative sources of oil at the same price and quality and it has affected the bottom line in India,” he was quoted recently.

According to estimates, a $1 increase in global oil prices increases trade deficit by $1.2 billion, depreciates the rupee by 1.4% against the dollar, and spikes retail prices by 30 bps (0.3%). Following production cuts by OPEC and non-OPEC countries, global oil prices rebounded from December lows of $57 per barrel to over $70 now. It means all three metrics - trade deficit, rupee and inflation - have blown up proportionately.

Iran-India relations are strategic because of Iran’s Chabahar port, which facilitates our trade connectivity with Afghanistan, Central Asia, Eurasia and Europe. That said, India needs to deal with US sanctions efficiently to protect its economic and strategic interests. It may consider measures like blocking statutes, which help countries mitigate the impact of sanctions, though they won’t make countries immune to sanctions altogether.

As if this isn’t enough, recently, the US-blacklisted Huawei, and threatened penal actions and sanctions on Indian businesses should they engage with it. China, too, warned India of consequences should it block the Chinese giant. Any prospect of cutting ties between India and Huawei could result in an eruption of cross-border tensions and escalate long-standing territorial disputes. India runs a trade deficit of $53 billion with China.

Meanwhile, Brexit and European slowdown can have repercussions for India’s external sector. There are consequential policy challenges for India, which enjoys strong trade and investment relations with the UK and the EU.

Britain is among the top trading partners for India, which runs a trade surplus and together with the EU, accounts for nearly 30% of IT exports, and is fast emerging as the next frontier for pharmaceuticals.

Never-before-seen double-barreled blitz

Never have we seen such a double-barreled blitz of economic and political crises gripping several countries confirming that the recessionary signs are, indeed, real and a present danger.

Given the unusual situation, it’s scary to imagine how the world would cope with it, considering our trillion-dollar debts. There’s little ammunition left to reduce rates as most central banks’ monetary policy are exhausted, forcing countries like Denmark to adopt negative interest rates for home loans, where banks pay borrowers in return!

Put it all together, the slow-down signs are extraordinary whichever way you slice it and what we need is Vasily Zaytsev’s sharpshooting skills to stop the enemy in his tracks.

Basket of woes brimming over

* Bond yields have turned negative in the highest-rated euro-area markets. Ten-year yields fell below 0.1% in both Spain and Portugal last week, compared with  8% and 18% seven years ago when the nations battled their worst debt crisis.

* Moody’s Investors’ Service has rated seven countries - Ukraine, Greece, Venezuela, Belize, Jamaica, Argentina, and Belarus - as having a significant amount of credit risk. These countries are fast approaching or have narrowly escaped bankruptcy.

* In Ukraine’s case, Moody’s says, creditors, can expect a 35-65% recovery rate on loans issued by the country. According to Moody’s, the likelihood of a distressed exchange, and hence a default on government debt taking place, is 100%.


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