Economy
Mint Primer: The chances of a US recession and its impact on India
Summary
- Some economists argue that not all indicators point to a recession. Previous recessions were preceded by certain symptoms which are not visible now, such as corporate margin erosions.
Stock markets and some economists fear the US economy, weighed down by high interest rates, is heading into a recession. Not all agree as some indicators suggest otherwise. Mint digs deeper to make sense of the noise and fears around the world’s largest economy.
Who says the US is looking at a recession?
A cooling job market and the Sahm Rule, which predicts the beginning of a recession based on the unemployment rate, have sparked the fear of an economic decline in the US. In July, unemployment in the US rose faster than expected to 4.3%, compared with 4.1% in June. This triggered the Sahm rule which stipulates that the US is in recession if the three-month average of the unemployment rate is 0.5% higher than the lowest three-month average over the previous 12 months. An inverted yield curve, where short-term bond yields are higher than long term, also fuelled the fear.
Also read: Why inflation fell without a recession
Why is the job market softening?
In June 2022, inflation in the US touched 9.1% - the highest level in four decades. To tackle this record surge in prices, the US Federal Reserve began hiking interest rates. Between 2021 and 2023, rates were increased 11 times, taking the benchmark rate to 5.25%-5.5% levels – a 23-year high. While the higher interest rates eased inflation, which has since fallen to 2.9% in July, it has also cooled the job market (as business and consumer spending decline). Demand for labour fell and the unemployment rate rose, triggering the Sahm Rule. Many blame the Fed for keeping interest rates high for too long.
Other than jobs, how is the US economy doing?
It’s doing quite well actually, growing at an annualized rate of 3% as of the second quarter of 2024. In 2023, it grew by 2.5%. The Fed has already indicated that it is against further tightening of the job market and will begin cutting interest rates soon, possibly from September. Markets are already factoring in a 50 to 100 basis point reduction.
Is the fear of recession overstated then?
Some economists argue that not all indicators point to a recession. Previous recessions were preceded by certain symptoms which are not visible now, such as corporate margin erosions. Corporate profits have continued to grow. There are also no signs of slackening in economic activity. Credit card spending remains strong, and the wider credit market is devoid of any stress. With the Fed signalling rate cuts, they say the US economy has managed a soft landing which means inflation has been tamed without triggering a recession.
Also read: Turning Three Recessions Into a Policy Win
How does recession in the US impact India?
It will depend on the extent of the downturn. Recession fears have caused the stock markets in the US to tank. It fell again on Tuesday, by 2.1%. India’s stock market, on the other hand, remains a star performer on the back of a strong economy. Earlier this week, the World Bank raised India’s FY25 GDP forecast from to 7% from 6.6%. This will increase investment flows into India. However, a severe and sustained recession will hurt India’s exports, which could impact India’s economic growth going forward.
