Next global recession may be just two years away—and India should be worried
- The slump in the global economy is likely to follow the ongoing spiral in world trade.
- The global trade conflict will hurt emerging countries including India
- Global trade conflicts, rising interest rates, and volatile commodity markets will likely worsen
It’s been nearly 10 years after the last global financial crisis that plunged the world into an economic recession. And the next one may be just two years away, predicts IHS Markit in a report published by the World Economic Forum (WEF).
The slump in the global economy is likely to follow the ongoing spiral in world trade.
“One major risk in the coming year is the sharp drop-off in world trade growth, which fell from over 5% at the beginning of 2018 to nearly zero at the end. With anticipated escalation in trade conflicts, a contraction in world trade could drag down the global economy even more,” the report said.
Additionally, US President Donald Trump’s trade war with China has already dented the global economy and is likely to cause more damage.
Last week, the World Bank cut its estimate for global economic growth in 2019 to 2.9% from 3% in 2018. "Downside risks have become more acute and include the possibility of disorderly financial market movements and an escalation of trade disputes," the report said.
The problems could be aggravated by “the combined effects of rising interest rates and surging equity and commodity market volatility mean that financial conditions worldwide are tightening,” according to the report.
All three threats – global trade conflicts, rising interest rates, and volatile commodity markets —are likely to worsen this year. The chickens of the protectionist rhetoric – from US to Britain to China—may, in fact, come to roost only in 2020.
“IHS Markit believes that the risks of damage from policy mistakes will rise in 2020 and beyond, as growth slows further,” the WEF report said.
Bad news for India
The global trade conflict will hurt emerging countries the most as they depend a lot on exports for economic growth. The growth in emerging economies like Brazil, India, and Russia is expected to slow down to 4.6% in 2019.
India will be one of the economies that will suffer from rising protectionism as well as rising interest rates in developed countries. The country’s exports have been ailing for a few years now and there seems to be no light at the end of a tunnel.
This will has severe implications for India’s fragile economy vulnerable to global shocks in the form of crude oil prices, the dollar exchange rate, and the foreign portfolio investors.
India imports nearly 80% of all the crude oil it needs, and it means the import bill is uncomfortably high. The economy needs strong growth in exports to have adequate dollars to pay for the imports.
This also means that India is extremely sensitive to sharp rise or fall in dollar exchange rate. And that is where the rise in US interest rates will hurt the South Asian economy.
Rising interest rates in US increase the value of dollar, as well as lead to outflow of foreign money from Indian stocks and other financial assets, leading to a vicious cycle that will weaken the rupee further.
The result will be a rise in the cost of imports and the Indian consumer will have to pay more for the same goods and services that he or she availed before.
In an increasingly shaky world, India will need a strong cache of reserves and a firm domestic economy that can support the local economy if and when the world enters the next recession.
The country’s foreign exchange reserves jumped by $2.68 billion -- one of the largest increases in recent months—to touch $396.084 billion in the week ended January 4. The value of the gold reserves increased by $465.5 million to $21.689 billion in the reporting week, according to latest RBI data.
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