There has been a consecutive decline in the Gross Domestic Product (GDP) of the US, in the last two quarters. In the first quarter of 2022, the GDP fell to 1.6 per cent, and further declined to 0.9 per cent in the second quarter. These two consecutive quarters of economic contraction or declining of real GDP are generally regarded as recession. Usually, every recession in the history of the US has been synonymous with unemployment, i.e., a slide in the GDP as well as a spike in unemployment. However, in this post-COVID era, this phenomenon has been completely reversed.
Inflation has taken the US by storm. Its annual inflation rate rose to 9.1 per cent in June 2022. It is the highest the US has witnessed since November 1981. The spike in the inflation is due to multiple reasons. For example, there has been an unprecedented rise in the energy prices due to the Russia-Ukraine conflict, the supply chain issues caused by the COVID-19 pandemic and hike in food prices, due to severe natural calamities, the economic crisis in China, and the threat of new strains of coronavirus, etc.
Paradoxical Recession
On the one hand, there has been an increase in the creation of jobs at the rate of nearly half a million a month in the US over the past six months, on the other, the US economy has been facing an unusual situation of experiencing a four-decade high inflation rate, while its unemployment rate is at five-decade low at around 3.5 per cent, which has been the lowest since 1970. According to US economists, this condition does not meet the formal definition of a recession. However, aggressive monetary tightening, that is presently happening in the US, would result in a recession sooner rather than later.
Action of the US Federal Reserve
In these circumstances, the US Federal Reserve is bound to tighten the interest rate. An increase in the interest rates points towards a forthcoming episode of systematic imbalances that would risk the financial system. Increasing interest rates would reduce the pattern of consumption and demand. However, it is yet to affect the labour market of the US as the Fed has decided to tighten the interest rate. The Fed targets to achieve maximum employment and inflation at the rate of two per cent over the long run. It has been predicted that more such hikes are impending in the future with the recession levels to stay at base levels.
Impact of the Recession
Due to recession, the growth is slowing and businesses are pulling back. The families are having a harder time in keeping up with the rapidly increasing prices. The income gains at minimum have been struggling to keep in pace with the inflation. As a result, there is curtailment of purchasing power of the people. Besides, this economic uncertainty might seep into the business world, leading to lay-off process. It lay-off happens, people would spend less money, and demand would dampen lowering profits for businesses, leading to more lay-offs. Retail giants of America have substantial unsold inventory, which indicates a diminishing consumption pattern. This vicious cycle of US-jobs recession would further shrink the US GDP, which would, in turn, affect the global economy.
Impact of the Interest Rate Hike by the Fed
Being the capitalist giant, the US makes up for about 30 per cent of the global GDP. Hence, if any changes occur in the US economy, it will not only affect the US but also the rest of the world. The hike in interest rates by the Federal Reserve could negatively impact emerging markets across the world. It would also narrow the gap between the interest rates of the two countries. A higher interest rate set by the US Federal Reserve indicates a weaker growth stimulus that could severely affect the global economy. Substantial returns for the US Bond markets could also negatively impact the securities market and dissuade foreign investors.
Way Forward
Despite the above trends, there could be a substantial recovery in the GDP of the US as the US stock markets have been witnessing an upward trend since mid-June 2022. Experts also opine that compressing the monetary policy by the Federal Reserve does not necessarily indicate a forthcoming recession. Earlier, recessions have happened due to economic shocks, except for the COVID-induced recession in 2020. Some experts believe that a recession could be avoided if inflation cools enough and the Fed slows interest rate increases which may take too much of a toll on hiring and spending.
Impact of US Recession on India
Since the beginning of 2022, India’s currency has been weakening fast due to the impact of seemingly imminent recession in the US. The predicted slowdown of the US economy would play a major role in the downfall of India’s GDP and could further contribute to the chronic job crisis.
The International Monetary Fund (IMF) has also downgraded the growth projections for the US, China, and India. This would lead to a downward revision to global growth during 2022–23. The IMF has knocked off 0.8 per cent of India’s GDP projections for FY 2022–23. The revision reflects mainly less favourable external conditions, and more rapid policy tightening for India.
Experts also say that the possible recession in the US would be mild and short-lived. Moreover, India’s domestic economic factors could save India from any major negative impact. Also, there could be some relief in crude oil prices.
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