“Global activity and world trade firmed up at the turn of the year, with trade spurred by strong exports from Asia,” the IMF said. Image for representation.
| Photo Credit: AP

The International Monetary Fund (IMF) held global growth expectations for 2024 steady in a report on July 16 even as it cut forecasts for the United States and Japan, while warning of inflation risks and trade tensions ahead.

The IMF expects the world economy to grow 3.2% this year, unchanged from its April forecast, according to its World Economic Outlook update.

“Global activity and world trade firmed up at the turn of the year, with trade spurred by strong exports from Asia,” said the fund.

For 2025, it expects global growth of 3.3%.

But even as many countries saw better growth than anticipated early this year, the IMF flagged surprises in Japan and the United States.

The Washington-based lender also cautioned that risks to inflation have increased, with services prices holding up disinflation.

This increases the prospect of interest rates staying elevated for longer, “in the context of escalating trade tensions and increased policy uncertainty.”

Trade measures surged

“We see an explosion in the number of trade restrictive measures,” IMF chief economist Pierre-Olivier Gourinchas told a press briefing on July 16.

Over 3,000 such moves were implemented last year, up from an already-high level of 1,000 in 2019.

These take the form of export restrictions and industrial policies, leading to retaliation, he said.

“One concern we have is that going forward, this will weigh down on global activity,” he noted.

The IMF’s report warned that a resurgence of tariffs can trigger retaliation and a “costly race to the bottom.”

On whether risk assessments shifted after the attempted assassination of former U.S. president Donald Trump, the Republican Party’s nominee in November’s election, Mr. Gourinchas earlier told AFP the fund will consider its implications.

On July 16, he said 2024 is an election-heavy year, adding “there could be some increase in in trade measures” and distortions on industrial policy which could spill over to other countries.

EDITORIAL | Sobering assessment: On the IMF forecast, World Bank report

China concerns

While world growth appears stable, the IMF lowered projections for the United States and Japan.

U.S. growth in 2024 was downgraded to 2.6%, 0.1 percentage points below April’s forecast, due to a “slower-than-expected start to the year.”

Japan’s economy was seen expanding 0.2 percentage points less than expected, by 0.7% this year, mainly thanks to temporary supply disruptions and weak private investment in the first quarter.

The euro area meanwhile is showing signs of recovery with relatively strong services activity, Mr. Gourinchas said, although manufacturing shows weakness.

China and India are expected to power activity in Asia — with China’s 2024 forecast revised up to 5.0% on a private consumption rebound and strong exports.

But Mr. Gourinchas flagged risks to the world’s second biggest economy stemming from weak confidence and unresolved property sector problems.

Should domestic demand weaken, China would rely more on the external sector — a situation countries like the United States are pushing back against.

“An increase in the trade surplus might be small from (China’s) perspective. It could be big from the perspective of the rest of the world,” he said.

OPINION | The high cost of a global economic decoupling

Inflation risks

There also remain risks of sticky inflation amid renewed trade or geopolitical tensions, the IMF cautioned, even as it expects inflation to return to target by end-2025.

Wage growth, if accompanied by weak productivity, could make it tough for firms to ease price increases.

An escalation of trade tensions could also raise near-term inflation risks, by lifting costs of imported goods, IMF said.

Higher inflation could heighten the chances that interest rates stay elevated for longer, increasing financial risks.

The IMF called for careful monetary policy adjustments.

New Delhi:

A majority of the world’s leading economists believe the global economy will either strengthen or remain stable in 2024, according to the World Economic Forum (WEF). The latest edition of the Chief Economists Outlook presents a cautiously optimistic view of the global economy but also highlights significant geopolitical risks.

The report is based on policy development research and surveys with leading economists from both the public and private sectors. It aims to summarise the current economic environment and identify priorities for policymakers and business leaders. The latest survey was conducted in April 2024.

According to the report, over 80 per cent of chief economists surveyed expect the global economy to either strengthen or remain stable this year, a notable increase from the previous survey in January. This positive shift is attributed to advancements in technology, artificial intelligence, and the green energy transition.

However, 97 per cent of respondents foresee geopolitical tensions contributing to global economic volatility, and 83 per cent believe domestic political issues will also be a major source of instability in 2024, a year marked by significant global elections.

The survey indicates varying economic outlooks across different regions:

United States: Nearly all chief economists (97 per cent) predict moderate to strong growth, up significantly from 59 per cent in January.

Asia: Economies in South Asia and East Asia are expected to maintain at least moderate growth. In China, 75 per cent of respondents foresee moderate growth, with only 4 per cent anticipating strong growth.

Europe: The outlook remains pessimistic, with nearly 70 per cent of economists predicting weak growth for the remainder of the year.

Other regions: Moderate growth is generally expected, with some improvement noted since the last survey.

Geopolitical risks

According to the survey, 97 per cent of respondents anticipate that geopolitical tensions will contribute to global economic volatility in 2024. This concern is echoed by 83 per cent of economists who identify domestic political issues as another major source of instability, especially in a year marked by significant global elections.

Geopolitical risks are basically problems that come up because of how countries interact with each other. These problems can include things like wars between countries, arguments over land, trade disagreements, tense relationships between governments, and instability in politics. Geopolitical risks are significant because they can lead to economic disruptions, affect international trade and investment, and create uncertainty in financial markets.

Challenges for decision-makers

The report highlights the growing challenges businesses and policymakers face due to the complex relationship between political and economic issues.

According to 86 per cent of respondents, this interplay is becoming more difficult to manage. Important factors influencing business decisions include the overall health of the global economy, monetary policies, financial market conditions, labour market conditions and political factors.

Long-term prospects

Looking ahead, almost 70 per cent of chief economists are optimistic about achieving a return to 4 per cent global growth within the next five years, driven primarily by technological advancements and green initiatives in high-income countries. However, there is less consensus on the impact of these factors in low-income economies. Geopolitics, domestic politics, debt levels, climate change, and social polarisation are expected to be significant drags on growth.

Policy priorities

To promote growth, the report highlights the importance of innovation, infrastructure development, monetary policy, and education and skills. Low-income economies, in particular, could benefit from improvements in institutions, social services, and access to finance.

European Central Bank (ECB) headquarters in Frankfurt, Germany. File
| Photo Credit: Reuters

The euro has resisted falling to parity with the dollar for now, thanks to a rosier economic backdrop, to the relief of European Central Bank policymakers who could be struggling to detach themselves from the Federal Reserve’s monetary policy outlook.

Just a month ago, the euro’s fall to five-month lows prompted talk among analysts about a return to parity against the dollar as the fragility of the euro zone contrasted with a resilient U.S. economy that boosted the dollar and prompted investors to dial back Federal Reserve rate cut bets.

Lower euro area interest rates than those in the United States remain a headwind, but the euro seems on a stronger footing thanks in part to an improving macro backdrop.

Faster expansion

The most recent round of purchasing manager surveys, for example, showed business activity in the euro zone expanded at a faster clip than that in the United States in April for the first time in a year.

That has helped the euro recover roughly 1.7% from April’s lows to around $1.0708.

“We’re starting to see that divergence between economic performance close, offering some help to the euro,” said Fiona Cincotta, market strategist at City Index.

“That is also a cause for relief for the ECB and a reason for them to be more relaxed as well. It’s almost as if their ducks have lined up quite nicely so far.”

Citi’s economic surprise index for the euro zone has trended lower in recent weeks, but at 27, is comfortably in positive territory, as business activity and growth improve. In contrast, the U.S. index has fallen below zero for the first time since early 2023, as crucial data such as growth and employment have missed expectations.

Yuan weakness

On a trade-weighted basis, the euro is up 0.5% this year and not far from 2023’s record highs. A lot of this is down to weakness in the likes of the Chinese yuan and Japanese yen.

That offers a less negative picture on the euro than purely looking through the lens of the dollar in that it neutralises some imported inflation.

Gorilla in the room

Still, a sustained drop in the euro could boost import prices and rekindle inflation, thereby limiting the ECB’s scope to cut rates.

The euro has lost around 2.5% against the dollar this year and the ECB, which does not target an exchange rate, cannot easily ignore more weakness.

“To a certain extent, our data and decisions are naturally influenced by the Fed. We are not working in a vacuum. With the dollar, the Fed is, figuratively speaking, the gorilla in the room,” Austrian Central Bank Governor Robert Holzmann told Handelsblatt in an interview.

Geopolitical tensions

Other factors such as a spike in the oil price, or a deterioration in geopolitical tensions could undermine the euro area by again hurting the growth outlook and magnifying the inflationary effect of a weaker currency.

Right now, markets show traders believe the ECB will deliver three quarter-point cuts, bringing the benchmark rate to around 3.25% by year end. The Fed is expected to cut just twice, to a range of 4.75-5.25%, leaving the premium of U.S. rates over euro zone ones at 175 basis points.

Some analysts think three cuts from the ECB and no cuts from the Fed this year, bringing the gap to 213 bps, might tip the euro back to parity, which could sound alarm bells at the ECB if currency weakness threatens to fuel inflation. The euro last hit parity around August 2022, when the rate gap between the two central bank rates was 238 bps.

Pricing out Fed cuts

“If the market prices out Fed rate cuts for this year and pushes the cuts later into next year and the ECB pricing remains at the current levels, parity becomes a possibility and such a move would be enough to make the ECB delay its easing cycle,” said Athanasios Vamvakidis, global head of G10 forex research at BofA.

Neil Mehta, a portfolio manager at BlueBay Asset Management, said the currency market was where the divergence in interest rates would play out most clearly, with the dollar emerging as the likely winner, with parity for the euro, a possibility.

“It’s not the base case, but we certainly see the risks tilted in that direction. We think the first step is $1.05,” he said.

London:

UK Prime Minister Rishi Sunak on Monday cited India’s rise as an ‘economic superpower’ as he pledged to create a dynamic, innovative economy fuelled by technological progress.

Insisting that “more will change in the next five years than in the last 30”, Sunak, during his speech on security at the Policy Exchange think-tank, spoke on a “clear plan and bold ideas” to deliver a secure future for the Britons.

He also maintained that “new and fast-growing economic superpowers” like India, Indonesia, and Nigeria are significantly reshaping the global economy.

“We must be prepared strategically and economically, with robust plans and greater national resilience, to meet this time of instability with strength,” said the UK PM while elaborating on the current geopolitical situation.

The UK, which has had five Conservative Prime Ministers since 2010, is expected to go to the polls later this year.

Sunak was only spotlighting the resilience demonstrated by the Indian economy as it successfully mitigated the risks of global economic downturn over the recent years, including the Covid-19 aftermath.

“I see India as Asia’s Silicon Valley and the UK as Europe’s Silicon Valley, so there’s a lot we can work on together,” Jeremy Hunt, UK’s Chancellor of the Exchequer, had said following talks with Finance Minister Nirmala Sitharaman in Delhi last September.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)

London:

UK Prime Minister Rishi Sunak on Monday cited India’s rise as an ‘economic superpower’ as he pledged to create a dynamic, innovative economy fuelled by technological progress.

Insisting that “more will change in the next five years than in the last 30”, Sunak, during his speech on security at the Policy Exchange think-tank, spoke on a “clear plan and bold ideas” to deliver a secure future for the Britons.

He also maintained that “new and fast-growing economic superpowers” like India, Indonesia, and Nigeria are significantly reshaping the global economy.

“We must be prepared strategically and economically, with robust plans and greater national resilience, to meet this time of instability with strength,” said the UK PM while elaborating on the current geopolitical situation.

The UK, which has had five Conservative Prime Ministers since 2010, is expected to go to the polls later this year.

Sunak was only spotlighting the resilience demonstrated by the Indian economy as it successfully mitigated the risks of global economic downturn over the recent years, including the Covid-19 aftermath.

“I see India as Asia’s Silicon Valley and the UK as Europe’s Silicon Valley, so there’s a lot we can work on together,” Jeremy Hunt, UK’s Chancellor of the Exchequer, had said following talks with Finance Minister Nirmala Sitharaman in Delhi last September.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)

Russia’s state-owned reinsurer has given financial backing to three Russian insurance firms, allowing them to get Indian approval to provide marine insurance cover to tankers, two sources said, as Moscow seeks to facilitate trade with India amid Western sanctions.

A raft of sanctions by the U.S. and allies against Moscow over its Ukraine invasion, along with tighter scrutiny of Russian oil trade, has almost cut Russia off from the global network of service providers such as insurers and brokers.

Russian companies Sogaz Insurance, Alfastrakhovanie, and VSK Insurance, have joined Ingosstrakh as insurers approved by India for providing marine insurance cover, an order posted on Indian shipping regulator’s website showed.

India has approved the three new insurers after Russian National Reinsurance Company (RNRC) provided a financial guarantee, the two sources with direct knowledge of matter said.

This is the first time RNRC’s role in providing financial backing to the three Russian insurers to get accredited in India has been reported.

“With the backing of the Russian National Reinsurance Company, a wholly-owned entity of the Russian Government, these insurers boast robust financial support and stability,” one of the sources said.

Insurance is essential for maritime transport, particularly oil cargoes that require the highest safety standards due to the risk of spills.

Sogaz Insurance, Alfastrakhovanie and VSK Insurance representatives and an RNRC representative did not immediately respond to requests for comment.

RNRC, controlled by the Russian central bank, was sanctioned by the UK and European Union in 2023.

India’s Directorate General of Shipping did not respond to a Reuters email seeking comments.

“Ingosstrakh is not expanding its maritime insurance activities to India. Our relationship with India in the marine insurance industry has spanned over 57 years, dating back to 1967 when we opened our office in Mumbai,” an Ingosstrakh spokesperson said in an emailed statement.

The three Russian insurers, which specialise in protection and indemnity (P&I) insurance coverage, are not part of the Europe-based International Group, which is made up of twelve so-called P&I clubs.

The IG says it provides marine liability cover for approximately 90% of the world’s ocean-going shipping tonnage.

“A due procedure has been followed (by the Indian shipping regulator) for including these new entities in the list of non-IG companies that can provide insurance,” one of the two sources said.

Major Supplier

The Group of Seven (G7), the European Union and Australia have imposed a $60 per barrel price cap for Russian oil if Western services such as shipping and insurance are used.

The aim is to squeeze Russia’s oil revenues while keeping the supply to the market stable.

Russia has emerged as a major oil supplier to India, the world’s third biggest oil importer and consumer, as its oil is sold at a discount after Western nations halted purchases from Moscow.

The Indian government has said that the country abides by United Nations sanctions and does not follow those imposed by any other country.

A source from one of India’s refiners said banks are very strict in clearing payments for Russian oil to ensure that Russian crude is priced below the $60 per barrel cap.

The price cap mechanism bans Western companies from providing maritime services, including financing, insurance, and shipping for oil sold above the cap.

“Why would Russia like to forgo its revenue from insurance premiums and give it to the western insurers. It is not a small amount,” this source said.

“Even if Russia is legally allowed to use Western services they don’t want to use them,” he said.

“This also means they have to share details of their dealing with the (Western) service providers.”

Indian refiners buy Russian oil on delivered basis mostly from traders to avoid any liability arising due to sanctions before discharge of oil cargoes.

The accreditation of the three Russian entities is valid until Feb. 20 next year, but authorisation for Russia’s Ingosstrakh has been extended by five years to Feb. 20, 2029, an order posted on the website of India’s Directorate General of Shipping website showed.

The International Monetary Fund on January 30 edged its forecast for global economic growth higher, upgrading the outlook for both the United States and China — the world’s two largest economies — and citing faster-than-expected easing of inflation.

The IMF’s chief economist, Pierre-Olivier Gourinchas, said the global lender’s updated World Economic Outlook showed that a “soft landing” was in sight, but overall growth and global trade still remained lower than the historical average.

“The global economy continues to display remarkable resilience, with inflation declining steadily and growth holding up. The chance of a ‘soft landing’ has increased,” Mr. Gourinchas told reporters in Johannesburg, adding, “We are very far from a global recession scenario.”

But he cautioned that the base of expansion was slow and risks remained, including geopolitical tensions in the Middle East and attacks in the Red Sea that could disrupt commodity prices and supply chains.

Delays in announced fiscal consolidation in what Mr. Gourinchas called “the biggest global election year in history” could boost economic activity but might also spur inflation, he added.

The IMF said the improved outlook was supported by stronger private and public spending despite tight monetary conditions, as well as increased labour force participation, mended supply chains and cheaper energy and commodity prices.

The IMF forecast global growth of 3.1% in 2024, up two-tenths of a percentage point from its October forecast, and said it expected unchanged growth of 3.2% in 2025. The historical average for the 2000-2019 period was 3.8%.

Global trade was expected to expand by 3.3% in 2024 and 3.6% in 2025, well below the historical average of 4.9%, with gains weighed down by thousands of fresh trade restrictions.

The IMF stuck with its October forecast for headline inflation of 5.8% for 2024, but lowered the 2025 forecast to 4.4% from 4.6% in October. Excluding Argentina, which has seen inflation spike, global headline inflation would be lower, Mr. Gourinchas said.

Advanced economies should see average inflation of 2.6%, down four-tenths of a percentage point from the October forecast, with inflation set to reach central bank targets of 2% in 2025. By contrast, inflation would average 8.1% in emerging market and developing economies in 2024, before easing to 6% in 2025.

The IMF said average oil prices would drop 2.3% in 2024, versus the 0.7% decline it had predicted in October, and said prices were expected to drop 4.8% in 2025.

Red sea attacks

“Staying on the path to a soft landing will not be easy,” Mr. Gourinchas said, noting that new commodity price spikes from geopolitical shocks, including continued attacks on shipping in the Red Sea, could prolong tight monetary conditions.

Mr. Gourinchas told reporters the IMF was watching developments in the Middle East closely, but the broader economic impact appeared “relatively limited” as of now.

“It doesn’t seem to represent, as of now, a major source of potentially reigniting supply-side inflation,” he said.

The United States got one of the biggest upgrades in the January update of the IMF outlook, with its GDP now forecast to expand by 2.1% in 2024 versus the 1.5% forecast in October. Growth was expected to ease to 1.7% in 2025.

Mr. Gourinchas credited fiscal support and consumer spending for the upgrade, but said the IMF had warned Washington that some of its subsidies from domestic producers and other industrial policies could violate global trade rules.

The euro area got a downgrade, and was now expected to grow just 0.9% in 2024 and 1.7% in 2025, with the biggest European economy — Germany — expected to see minimal GDP growth of 0.5% in 2024 instead of the 0.9% forecast in October.

China’s GDP was expected to grow by 4.6% in 2024, an upward revision of four-tenths of a percentage point from October, and 4.1% in 2025. Mr. Gourinchas said the boost reflected significant fiscal support from the authorities, and a less-severe-than-expected slowdown stemming from the property sector.

The U.S. Federal Reserve, European Central Bank and Bank of England were expected to start lowering interest rates gradually in the second half of 2024, Mr. Gourinchas said, adding, “We are not quite there yet.”

The Bank of Japan was expected to maintain low interest rates, and that was “appropriate,” but the IMF had told it to be ready to raise rates if inflation spiked, he said.

Mr. Gourinchas added that markets had been “excessively optimistic” on the prospects for early interest rate cuts by major central banks, and a repricing could increase long-term interest rates and trigger more rapid fiscal consolidation that would weigh on growth prospects.

Emerging market and developing economies were expected to grow by 4.1% in 2024, with emerging and developing Europe getting an upgrade due to stronger-than-expected growth in Russia on the back of military spending for the war in Ukraine.

Russia’s GDP was expected to grow 2.6% in 2024, 1.5 percentage points more than expected in October, with growth seen easing to 1.1% in 2025. The IMF said there could be further revisions since the numbers were preliminary and there were questions about the extent of Russia’s fiscal stimulus.

Negative growth in Argentina depressed the forecast for the Latin America and Caribbean region, with growth seen dropping to 1.9% in 2024, four-tenths of a percentage point lower than in October. Growth should edge higher to 2.5% in 2025, the IMF said.

Mr. Gourinchas said the global outlook reflected more balanced upside and downside risks, with the risk of a wider conflict in the Middle East offset by the prospect that lower fuel prices could help inflation fall faster than expected.

“We see them as broadly balanced at this point,” he said, noting that a lot of the downside risks — especially with respect to disinflation — seen a year ago had not materialised.

High inflation will dog the world economy next year, with three-quarters of over 200 economists polled by Reuters saying the main risk is that it turns out higher than they forecast, suggesting interest rates will also remain higher for longer.

Several central banks are still expected to begin cutting interest rates by the middle of 2024, but a growing number of economists surveyed are adjusting their views, pushing the more likely date into the second half of next year.

This is a significant change from expectations at the start of this year. Then, some investment banks were predicting the U.S. Federal Reserve, which sets the tone for many others, would be cutting rates right around now.

Despite broad success in bringing inflation down from its highs – the easier bit – prices are still rising faster than most central banks would prefer and hitting their inflation targets is likely to be tough.

The latest Reuters poll of over 500 economists taken between Oct. 6 and Oct. 25 produced 2024 growth downgrades and inflation upgrades for a majority of the 48 economies around the world surveyed.

A 75% majority who answered a separate question, 171 of 228, said the risk to these broadly-upgraded inflation forecasts was skewed higher, with only 57 saying lower.

The results follow news on Thursday the U.S. economy unexpectedly grew nearly 5%, annualised, in the third quarter, underscoring how the strength of the world’s largest economy is setting it apart from most of its peers.

The survey results also follow a warning from European Central Bank President Christine Lagarde, who said after the ECB snapped a 10-meeting tightening streak that “even having a discussion on a cut is totally, totally premature”.

While many central banks, including the Fed and the ECB, have presented a “higher for longer” narrative on rates for the better part of this year, many economists and financial market traders have been reluctant to accept that view.

“I think all of us have to keep an open mind that maybe policy isn’t restrictive enough,” said Douglas Porter, chief economist at BMO.

“Our forecast is that the Fed has done enough and they don’t have to raise rates further, but I haven’t closed off the possibility we could be wrong and the Fed does ultimately have to do more.”

While most economists still say the Fed will cut by mid-year, the latest poll shows just 55% backing that scenario compared with over 70% last month.

The Reserve Bank of New Zealand, which often leads the interest rate cycle, was also forecast to wait until July-September 2024 before cutting.

The majority backing no cuts until the second half of 2024 has also grown stronger for the Reserve Bank of Australia, Bank Indonesia and the Reserve Bank of India.

Even the Bank of Japan, the outlier sticking to ultra-loose policy through this entire round of inflation, is now expected to abandon negative interest rates next year.

Crucially, most economists agree the first easing steps will not be the beginning of a rapid series of cuts.

Asked what would prompt the first cut by the central bank they cover, over a two-thirds majority, 149 of 219, said it would be simply to make real interest rates less restrictive as inflation falls.

The remaining 70 said the first move would mark a shift towards stimulating the economy, suggesting only a minority expect a hard enough hit to demand and inflation to warrant a monetary response.

Global economic growth was forecast to slow to 2.6% next year from an expected 2.9% this year.

“Central banks have had the highest rates in order to fight inflation … it’s certainly restraining activity, and it’s going to be a while before we get global growth above what has been its historical average,” said Nathan Sheets, global chief economist at Citi.

New Delhi:

The United States may see a deep recession soon, and such a scenario would impact not only India’s services sector, which is a key component of the country’s GDP, but also bring about a lot of volatility in the bond and equity markets, a top economist has said.

In an exclusive conversation with NDTV, Neelkanth Mishra, who is the Chief Economist for Axis Bank and the 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 the end of September, 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,” Mr Mishra said. 

“Even if they manage to keep the fiscal deficit flat next year, which is a problem in itself, the economy will go into a recession. Because of the fiscal deficit being so high, no one is wanting to buy US bonds. Rates are rising because of that, and this is going to lead to a contraction in demand across the world. So, the recession that will happen could be a very deep one,” he warned.

India Impact

Asked about how this could impact India, Mr Mishra said the effects could be felt through four pathways. Services growth, which is already slow, would get slower. 

“If the US sees a recession. 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,” he said.

The second pathway is the impact on goods exports. The economist said goods demand will fall. “It is already low in China, Europe and Japan and was above trend in the US. This could affect India’s goods exports,” he warned.

The bigger risk, he said, is dumping of products in India. Mr Mishra pointed out that If India remains the only country where demand is resilient, every manufacturer would like to sell here. This would adversely affect Indian manufacturers. 

The fourth problem is that a US recession would affect the yield on its government bond. 

“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,” he said. 

Preparing The Country

“Price of crude oil has already started falling in the past two-three days because people have started fearing a recession. If the US goes into a recession in May-June next year, oil prices will come down. On the other hand, if oil prices rise, it will have a negative impact on the Indian economy,” he added.

On the steps India can take to tackle all of this, Mr Mishra said the focus should be on macroeconomic stability, as opposed to risk-taking, to be able to deal with the waves of turbulence. “Macroeconomic stability gives you growth for a longer term,” he asserted.

State Vs Centre

Asked about Morgan Stanley’s report stating that if India gets a stable government after 2024, the stock market will rise by 10% and could fall by 20-60% if that does not happen, the economist said this is a very wrong way of thinking.

“The impact of the central government on the economy comes in the medium term. It can be seen in a big way, but in 3-5 years. State governments have a bigger role to play in the near-term economic momentum – whether investments are being done by foreign and private companies – and this will not change,” Mr Mishra said.

He pointed out that the fertility rate is falling in India and the net savings are increasing. 

“This is being seen in the increased investment in equity markets – 30-35 billion dollars are being invested each year. A change in government will not affect this. Housing construction is behind this current strength in India’s economy, and this will not change either. Nobody will stop building their house if the government changes. According to me, this kind of sensationalist forecast is totally wrong,” he said.

What The Middle Class Should Do

On whether he has any advice for the middle class, Mr Mishra said, “The next year or year-and-a-half will be very turbulent for the global economy. If we are lucky, that is. If not, it could extend to five years. I would advise precaution. Looking at the Indian economy in the next 5-7 years, I don’t see too much of a cause for worry. Its trajectory looks good for now.”