US Heading Towards A Recession? How Indian Market May be Impacted

The world's largest economy may soon enter a recession despite modest growth in the past few quarters with inflation showing clear signs of cooling and it will likely have a cascading impact on the Indian stock & bond market while the employment sector will possibly take most of the hit from the slowdown.

To make the matter worse, US is facing a debt ceiling crisis and the Government may face a shut down later this year after averting a partial shut down last week following the stopgap funding bill passed by the US Congress to hold the situation.

In an exclusive interview with NDTV, Neelkanth Mishra, chief economist, Axis Bank and part-time chairperson of the Unique Identification Authority of India, said the United States was expected to enter a recession this year and it was thought its GDP growth would fall, but that did not happen. By September-end, people thought that there would be a "soft landing" and there would not be a recession.

"Our analysis says however that, this year, their fiscal deficit has gone up by 4% of their GDP. They had targeted $1 trillion - their fiscal year ends on September 30 - and they ended up with a figure of $2 trillion. If the fiscal deficit is so high, there can't be a recession. The problem for them, however, is that if they don't keep increasing the fiscal deficit, they can't sustain the economy's growth," added Axis Bank's Mishra.

In the fiscal 2023 year that ended on Sept. 30, the US Government's year-to-date deficit totalled $1.524 trillion, a 61% jump over a $946 billion gap for the same period of fiscal 2022, according to Reuters.

"Uncertainty on the (US) economy remains high. Should the economy maintain its current momentum, the task of restoring inflation to target would become tougher and significant Fed tightening may become necessary, at the risk of a significant recession in late 2024," said Dave Sloan, senior economist at Continumm Economics.
While Inflation in the US has cooled off to around 3.7% from nearly 9% last year partially due to the Fed's 5.25 percentage points of interest-rate increases in the last 18 months, it is still about two-folds above the central bank's target of 2%.

The Fed is widely expected to hike one more time at its November meeting and then pause before cutting rates next year.

"November is a close call, but we retain our expectation for one last 25 bps hike. While the Fed will be happy with progress on disinflation, the strength in economic activity leaves the door open for inflation to re-accelerate, said Michael Gapen, chief US economist at Bank of America.

"Our base case is that it will not, but we think the Fed would prefer to err on the side of caution. The fact that the September dot plot is likely to reflect one more hike also lowers the bar, on the margin, for delivering that hike."

Expected Impact on Indian Market

While Indian market will not have a disastrous impact by a possible recession in the US, the market will face a road bump due to a fall in foreign inflows in the Indian financial sector.

"If the US sees a recession, (India's)Our IT services industry and our business services exports could be hit. Services exports make up 10% of India's exports. If they fall a lot, we could lose 1% of GDP growth," Axis Bank's Mishra told NDTV.

"Cost of capital would go up for the other economies. Good borrowers in India, like famed steel companies, would get dollar loans easily earlier. But such loans have not been available for the past 6-8 months. This would bring about a lot of volatility in financial markets like bond markets and equity markets," Mishra added.

While most economists feel that the fifth largest economy in the world will likely have an indirect impact on jobs and goods due to a US recession, marcoeconomic stability is what will help India get through most of the darker times.
"This year began with the anticipation that runaway inflation, aggressive policy rate hikes, and high commodity prices might topple a few major economies into recession in 2023," said Rumki Majumdar, economist at Deloitte India

India, meanwhile, enjoys a Goldilocks moment as it sees its economic activity gaining momentum amid continuing global uncertainties, added Majumdar.