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They haven’t given the day a moniker yet. Friday saw every major global index—barring three—flashing red. Stocks, commodities and bond yields slid into negative territory. Thanks to fears of a demand de-growth and despite worries of a wider war in West Asia, Brent and WTI crude edged closer to year-to-date lows. Gold, the safe haven for anxious money, dipped and Bitcoin slid nearly 10 percent from Monday’s high of $70,000.
It would seem there is a new consensus around the Chaucerian expression “all good things must come to an end”. The slide in sentiments set off by the fall in the US markets on Thursday worsened and went global on Friday as the Nikkei 225 crashed over 2,000 points, apparently the worst fall since the Black Monday of 1987. Other Asian indices followed—the KOSPI, Shanghai and Shenzhen included. So did the FTSE and European indices. In the US, the VIX or the fear gauge touched 29 before settling at 23.3. The Magnificent 7 tech stocks lost nearly $300 billion as investors shifted from ‘tell me your AI strategy’ to ‘show me the earnings’ on calls. Tech totem NASDAQ landed in correction territory and investor wealth of $2.9 trillion was wiped out.
In India, the Nifty 50 tap-danced to the tune of the global piper. Sure, India has been among the better performing markets, thanks to the robust flow of domestic savings. That said, there are limits to the popular thesis of inoculation from viral global cues. FII holdings are valued at Rs 17.5 lakh crore. Capital tends to seek safe havens and the flight to safety will influence stocks and investment flows. To paraphrase Alan Greenspan, anything can be a proximate cause for correction. But there are clear limits to the thesis of inoculation from global cues due to the cushion offered by domestic flows.
A confluence of known unknowns is stoking fears of a recession. The textbook defines recession as two quarters of negative growth. Tracing its progression is complicated. The glacial arrival of gloom is eloquently illustrated in a conversation between two characters in Earnest Hemingway’s The Sun Also Rises. “How did you go bankrupt?” Bill asked. "Two ways," Mike said "Gradually, and then suddenly.” The exchange succinctly defines the evolution of recession.
The US is the epicentre of fears. On the face of it, the US GDP grew 2.8 percent in the April-June period. Indeed, on Wednesday the US Federal Reserve Chair Jerome Powell asserted “economic activity continued to expand at a solid pace”. Powell stated that a September rate cut was possible but not a given, and added, “We will be data-dependent but not data-point-dependent.” The smart semantics scarcely helped. Conversations among CXOs, economists and analysts migrated from a soft landing to a recession.
The consensus of fear is not entirely misplaced. New data revealed unemployment in the US had touched 4.3 percent and triggered the Sahm rule. The rule divined by economist Claudia Sahm essentially states that acceleration in unemployment—of 0.5 percent or more, using a three-month moving average relative to the previous low—signals the start of a recession. Context matters. For some, the stock sell-off is an August holiday phenomenon. It is also argued that higher unemployment is due to an expansion of the workforce. It is also true, credit card data shows, there is distress in the two-speed economy—and that there are cost limits to intervention as the US government adds a trillion dollars in deficit every 100 days. There will be splitting of hairs on the defining data, but the fears are for real.
Hard landing or not, what happens in the US does not stay in the US. Effectively, the global economic cycle yo-yos between QE and QT (quantitative easing of money and quantitative tightening). There is no dearth of studies illustrating the effect of a downturn in the US on the global economy. A 2010 study by IMF on the impact of the global financial crisis on emerging markets observed that EMs with strong external linkages experienced sharper falls in output.
How does it all matter to India? The US is the world’s largest economy. The impact of the global financial crisis on India—on GDP, currency, exports and credit—are all well chronicled by former RBI Governor D Subbarao. The US is among the top three destinations for exports and the largest source of remittances. Trade and investment flows will be affected in an increasingly protectionist world.
India faces the spectre of what the World Bank terms as the middle-income trap and a slide in global growth worsens the circumstance. Charting an all-weather glide path of growth rests on domestic action. Whether the US enters a recession or not, there is no disputing the need for structural reforms in India—in agriculture, which employs 45 percent of the workforce and yields a sixth of national income, and in the factors of productivity—to enable more jobs and higher incomes.
The good news is that India in 2024 is better off than in 2009. Its banks are healthier and foreign exchange reserves are higher at $667 billion. It is the fastest growing large economy and has a presence in the emerging geopolitics. India’s rise is dependent on consistent situational awareness and policy response. The global crisis could well be an opportunity.
Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
(shankkar.aiyar@gmail.com)