From the Editor-in-Chief
India may have entered ‘Quasi-Recession’ as GDP growth declines
With growth dipping for two consecutive quarters, India is effectively in a quasirecession, an economist said India’s longest growth slump since 2012 is heightening concern that it may be tough for policy makers to reverse the slowdown. “Growth has now slipped below the long term trend of 6.6% for two consecutive quarters, which implies that India is effectively in a quasi-recession,” Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai, said in a report published Tuesday. Early indicators suggest “growth remains elusive,” she added.
While the standard macroeconomic definition of a recession is two consecutive quarters of shrinking GDP, a significant decline in economic activity spread across months is another often-used description. In India, which offers only year-on-year calculations of output, automobile sales have plunged the most in two decades and the chairman of Hindustan
Unilever Ltd. warned that the consumer goods his company makes are “recession-resistant, but not recession-proof.”
Official data on Friday showed that gross domestic product in Asia’s No. 3 economy grew 5% in April
June from a year earlier, below the weakest estimate of 39 economists polled by Bloomberg and the slowest pace in six years. The five straight quarters of slowing growth mark the longest slump since 2012. A Bloomberg gauge of high-frequency indicators suggests that economic activity continued to weaken in July, with investment and consumption both falling.
Economists at Nirmal Bang expect GDP growth to bottom out in the quarter ending September but believe that “a counter-cyclical government pending boost is required.”
Is another global recession round the corner?
The probability seems high, especially if there is no quick end to the trade and tech war between the US and China Economists are reasonably good at analysing past economic events. At the same time, they are said to have a pretty bad record when it comes to forecasting. With this caveat in mind, what is the current thinking on the question: Is another global recession (the last was the Great Recession of 2007-09) likely in the near future? Statistically, the probability of another global recession happening soon is increasing, especially if the current economic expansion continues. Already, the expansion in both the USand the EU has lasted longer than the average historical cycles. So, analysts are looking for reasons behind this apparent lengthening of the business cycle.
Some are saying that in the past most
of the business cycles were ‘inventory cycles’, meaning that economic expansion eventually led to a build-up of excess inventories which, in turn, meant less production in order for inventories to return to normal levels. Thus recession inevitably followed expansion after a lag. But, in recent years, because of ‘just-in-time’ inventory control and other methods of quicker response to changes in demand (due to revolution in production and control of supply chain), the length of the typical inventory cycle is expanding. Low interest rates The monetary policy pursued by the major central banks is also being held partially responsible. Overly loose monetary policy with policy interest rate hovering in the 0.5-1 per cent range, and in some cases even being negative, has been pursued for too long.
This process has been helped by the fact that despite unemployment reaching historically low numbers, the growth of wages and prices has remained below the target rates of central banks. Hence, the reversal of the interest rate cycle is taking much longer.
China, the second most important economy in the world, at the first sign of a slowdown in growth has turned to the time tested fiscal stimulus, of massive infrastructure spending even if it means exacerbating the already alarming public debt. Also, Chinese savings and resources are being used abroad as part of the country’s Belt and Road Initiative. Among other things, this is pushing up demand for Chinese made machinery and metals. Another structural change is the declining share of manufacturing and a corresponding rise in the share of services in most economies. So, even when manufacturing activity has suffered due to factors like trade war, spending on R&D and advertising has helped stabilise the economies. Similarly, a fall in oil prices forced shale oil companies to reduce extraction but the ongoing research on alternative energies kept up the total spending by the energy sector. Politically, faced with a trade-off, growth with moderate inflation is being preferred over recession and unemployment. Thanks to Keynesian economics, economists and policymakers have broadly mastered the art of preventing a recession from sliding into fullblown depression. Rising debt with fiscal stimulus shifts the burden of extra taxes to service debt on future generations. Here, again, a distinction should be made between domestic debt and foreign debt.
Servicing of domestic debt involves transfer from domestic taxpayers to domestic bondholders and is likened to a transfer of money from one pocket to another. By contrast, a foreign debt has to be serviced by transferring ownership of a part of GDP to foreigners, which cuts into the standard of living of domestic residents. As it involves payment in foreign exchange, it is further subject to risks arising out of Fluctuations in the exchange rate.
The US, even when it Finances its does so usually in dollars and, therefore, escapes the exchange rate risk. China’s debt is predominantly domestic and is financed by stateowned banks, which, therefore, cancels out for the consolidated public sector. Hence, both the US and China are less deterred by their mounting debt problem and can afford debtFInanced spending to a larger extent than many other countries. However, the ongoing trade and technology war between the two nations, by disrupting global supply chains, is creating huge uncertainties for business in many countries. This is, currently, the single biggest factor which has the potential to start a global slowdown and, if not reversed, may snowball into a global recession.