Recession in Developed Economies: It's Impact on Indian Economy

The clouds of economic recession are spreading all over the world slowly, and recent UK and Japan economic slowdown is a great concern not only to developed economies, but also to fast growing developing economies like India. Writes Dr. Himachalam Dasaraju, former Professor of Commerce, Senior Fellow and former Professor Emeritus Commonwealth Visiting Fellow, United Kingdom and Sri Venkateswara University, Tirupati.

A common rule of thumb for recession is that any negative trend in GDP for two consecutive quarters is considered as recession. It is a widespread significant prolonged downturn in economic activity, which reflects on various aspects of economy across the world.

The global economy is passing through unpleasant economic situation due to prevailing tough economic conditions in 2023 and would be expected to remain uncertain throughout 2024. As per latest WEFs chief economists outlook, it is observed that the "global economy to weaken this year (2024). Seven in Ten expect the pace of geoeconomic fragmentation to accelerate in 2024". (World Economic Forum’s January 2024 Chief Economic Outlook). The IMF forecasts a "slight decline in global growth to 2.9 per cent in 2024, from 3 per cent in 2023, much of this growth is from emerging markets activity, while growth in developed economies remains tepid".

The prevailing wide inflationary trend across the world is fueling for recession and it impacts on labor markets and financial conditions in 2024. The chief economists expect the slip over in advanced countries to the extent of 77 per cent in labor market and 70 per cent in financial market conditions, whereas 56 per cent of the experts expect that the global economy is weaken next year.

69 per cent expect the pace of geo-economic fragmentation to accelerate this year. Over the next three years, the chief economists expect that the recent geopolitical developments significantly increase to 87 per cent volatility in the global economy, 86 per cent localisation of economic activity, 80 per cent stock market volatility, 80 per cent geo-economic blocks of economic activity, 57 per cent inequality and north-south divergence, 36 per cent ruptures in global supply chains and 13 per cent globalisation of economic activity (Source: Chief Economic Outlook, WEF January 2024).

The clouds of economic recession are spreading all over the world slowly, and recent UK and Japan economic slowdown is a great concern not only to developed economies, but also to fast growing developing economies like India.

Recession in Japan & UK

As per IMF Outlook, "global growth is estimated to decelerate from 3.5 per cent in 2022 to 3 per cent in 2023 and further to 2.9 per cent in 2024. The biggest economies in the world, the Japan and UK have reportedly fallen into recession recently. Today Japan is no longer a third largest economy in the world due to weak domestic consumption, pushing the country into recession and slipped into fourth place next to Germany. In Japan, the economy in terms of GDP was contracted by 0.4 per cent in October-December quarter of 2023, after 3.3 per cent slump in the previous quarter (July–September quarter). It is well below the market forecast.

The UK, the sixth largest economy has seen downfall, slipped into a technical recession in 2023. It is not good sign for the world at large. UK's GDP is contracted by 0.3 per cent during October–December, 2023, and 0.1 per cent in July to September, as per the data by the Country's Office for National Statistics (ONS).

The production, construction, and services sectors declined in its results in the last quarter of 2023. The UK grew at 0.1 per cent last year 2023, the weakest growth ever registered since the financial crisis of 2009, barring 2020 due to pandemic severity. It's a bad remark on the Prime Minister of UK, Rishi Sunak as he failed in keep up one of his electoral promises "Growing the Economy". The recession leads to less spending, less demand, layoff, job loss, cost of living crises etc. In UK, 3.9 per cent unemployment rate. In January 2024, the UK annual inflation rate is 4.0 per cent which was higher than in France 3.4 per cent, Germany 3.1 per cent. and the Eurozone average is 2.8 per cent. US was 2.5 per cent annual inflation in 2023. As per ONS data, February 2024, around 46 per cent of the people in Great Britain reported an increase in their cost of living.

It is observed that some of the European countries are also slowly dip into recession and its spreading widely across the world.

Indian Economic Scenario

India is outshining with strong growth potentials as on today. India, a largest democratic country in the world, shining brightly despite geopolitical conflicts, population issues, and economic impediments. India is a fastest growing economy in the world and India's economic growth projected by IMF is worth to note in this context. As per IMF, the economic growth in India was projected to remain strong at 6.5 per cent in both 2024 and 2025 years.

According to IMF, India's economy is set to overtake Japan, Germany and others in coming years. Japan's nominal GDP is about $4.19 trillion, and Germany's GDP was around $4.55 trillion by the end of 2023. India has rose to 5th largest economy with a GDP of $3.7 trillion despite many hardships from a stage of $1.9 GDP ten years ago with 10th position across the world. India will become $5.00 trillion economy in next three years and touch $7.0 trillion by 2030 as said by Finance Minister on 29th January 2024. The Ministry said that the government has set a goal of becoming a "Developed Country by 2047" with continued journey of fruitful reforms.

India’s GDP is on an average 741.93 USD billion from 1960, until 2020 reaching record high of 3416.65 USD billion in 2022, from 37.03 USD billion in 1960.

RBI Governor said at Davos 2024 that India's inflation moving at 4 per cent and this moderating rate of 4 per cent will continue next years. He said that global recession has not happened and is unlikely. He firmly said that recession won't happened because of resilient economic conditions of advanced and emerging economies. Further he said the GDP growth has revived in three successive years including this year. The GDP expected growth will be about 7 per cent in FY 2024-25 and India is a greater resilient when compared to other countries.

According to the latest growth projections of Organization for Economic Cooperation and Development (OECD), India's growth was 6.3 per cent in 2023, ahead of China (5.2 per cent) and Brazil (3.0 per cent) and India expects to grow at 6.1 per cent and China at 4.7 per cent in 2024. On the other hand the US, UK, Japan are likely to have nominal increase in growth rates next year. Indian economic performance was better in global perspective in 2023.

Goldman Sachs in its 'India 2024 outlook' said that repeated supply side shocks are likely to keep headline inflation at above 5.1 per cent in 2024. Goldman Sachs sees India GDP growth at 6.3 per cent in 2024.

Measures for Recovery

Moving out of recession needs a multifaceted approach encompassing fiscal stimulus, monetary policy accommodation, structural reforms, and international cooperation. For Japan, revitalising domestic consumption, harnessing technological innovation, and addressing demographic imbalances are important. In the UK, fostering a conducive business environment, bolstering trade ties with global partners, and investing in infrastructure and skills development hold the key to sustainable recovery and to ease living standards, job creation etc.

As per IMF Outlook, "global growth is estimated to decelerate from 3.5 per cent in 2022 to 3 per cent in 2023 and further to 2.9 per cent in 2024. The recessions experienced by Japan and the UK underscore the interconnectedness and interdependence of the global economy. As these nations chart their paths towards recovery, concerted efforts at the national and international levels are imperative.