Opinion
R-word revival: A global recession is only a tail risk right now
Summary
- For the moment, fears of a recession are greatly exaggerated. The global economy—America’s and India’s included—is likely to see a dip in growth, not a contraction. Yet, uncertainty rules high and we must track every risk.
Suddenly, the R-word has staged a comeback. As US President Donald Trump’s on-again-off-again tariff war holds the world in thrall, some economists (admittedly, a minority so far) worry that the world’s largest economy could be headed for a recession. This is a possibility that, ironically, even Trump has refused to rule out, opting instead to say the US must be prepared for a period of pain as part of a “transition."
This admission is puzzling, since there is little that leaders, especially in democracies, abhor more than presiding over a recession. The prospect, however remote, opens up a host of questions. Apart, of course, from the tricky question of how and when one should call a recession.
Also Read: ‘Worst recession of my lifetime’: Jim Rogers issues stark warning on US economy
Economists may be famously divided on a host of issues, but the one issue they all agree upon is that it is notoriously hard to predict. Recall Nobel laureate Paul Samuelson’s famous quip, “The stock market has predicted nine of the past five recessions." According to the US-based National Bureau of Economic Research, the most common criterion is two consecutive quarters of economic contraction.
The problem is that since GDP numbers come after a lag, and are often revised, data can confirm a six-month output drop only after the fact. All of which makes the job of policymakers incredibly difficult. Monetary policy, in particular, is not only broad-brush, it acts after a lag of three-to-four quarters.
Also Read: Watch out! The US Fed seems to be driving blindfolded
To be sure, despite fears of tough times ahead, the US economy is nowhere near such a deep slump. On the contrary, fresh data shows that while it has lost some pace, it’s still in fairly good shape. The think-tank Conference Board expects US GDP growth to hover around 2% in 2025, compared to 2.3% during the fourth quarter of 2024, before Trump took office. Although US unemployment ticked up to 4.1% in February 2025 from 4% in January, it remains low by historical standards. Employers reportedly added 151,000 jobs last month, so hiring has clearly been on. Retail sales also rose.
True, the US Fed’s chief Jerome Powell warned after the central bank’s last rate-call meeting that growth seems to be slowing even as inflation shows signs of a pick-up. But that’s stagflation, at worst, a far cry from recession.
Also Read: US economy: Is stagflation making a comeback amid Trump turbulence?
Yet, the air is turgid with tariff uncertainty. And what happens in the US does not stay in the US. Despite globalization getting roiled by Trump, the US economy’s dominance puts other economies at risk of spillover effects. America’s Great Recession of 2008-09, for example, spelt bad news for everyone. That followed a long phase of easy money, asset inflation and exotic new financial devices that hid a risk build-up. While monetary-policy easing after the covid crisis may have inflated asset prices again, few suspect it has exposed the financial sector to instability this time.
So the good news is that as of now, fears of a US recession, like Mark Twain said about reports of his death, are ‘greatly exaggerated.’ However, should Trump’s tariffs prove more than a tool to gain sway over other countries and they kick in with enough force to have a harsh impact, world trade would get crimped and both US and global growth will slow. Whether we suffer a temporary dip or deep slump will depend on a variety of unknowns.
Let’s hope that Trump won’t shrug off the US economy’s fate and no nasty surprises lurk in its financial sector. Right now, a recession is only a distant threat, but one we must keep track of.
