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What is a recession?

In economics, a Recession refers to a considerable reduction in economic activity which lasts for a few months. Technically, a recession is declared when the economic activity shows a decline for two consecutive quarters indicated in terms of real GDP, real income, employment, industrial production, and wholesale-retail sales. According to the National Bureau of Economic Research (NBER), a Recession is when “A significant decline in economic activity spreads across the economy and can last from a few months to more than a year.” Recessions are generally caused by high-interest rates, lower consumer confidence, economic shocks such as war, an outbreak of disease, deflation, etc.

Can we predict a recession?

Yes, we can predict an impending recession by observing a few parameters. A careful look at the business cycle can help us prepare for the Recession. A few indicators of an impending recession are:

• Inverted yield curve

• Falling interest rates

• A decline in real GDP 

• Lower consumer spending

• Rising unemployment

• The decline in real income

• Diminishing industrial production.

What’s happening in the U.S.? And the dreaded Inverted Yield Curve?

According to American economists, the inverted yield curve is the most potent mathematical tool to predict a pending recession. It happens when short-term interest rates exceed long-term interest rates. It means that investors do not have confidence in the economy. The U.S. Treasury yield curve has shown inversion, and inflation (8.5%) is also considerably high. The U.S. might not see a recession of the 2008 kind, but a mild “garden-variety” type, where the economy “overheats” and inflation rises, is more likely.

How will it affect India?

According to Nomura, a ‘prolonged mild recession’ in the U.S. will lead to the economic downturn in India, which is nearing the pre-pandemic levels. The agency predicts the GDP will take a downturn from 7.2% in 2022 to 5.4% in 2023. The inflation expected by RBI is an optimistic 6.5% for FY23, but Nomura predicts a gloomy 7.5%. The rupee is fast declining against the Dollar, going from 74.25 in January to 78.93 in June. If this trend continues, RBI might increase India’s interest rates further. With the net outflow of 1.92 lakh crore in foreign investments in just five months of 2022, compared to 25,752 crore net positive investment for the entire year of 2021, the economy is already in a bind. With the increasing crude oil prices, the rupee will suffer even more.

The bottom line

In uncertain days like these, where conflicts between nation-states and contagious diseases are common, the economy will likely suffer. U.S. stepped up to the threat of the Russian invasion of Ukraine and put heavy economic sanctions to deter President Putin, and combining that with the COVID-19 pandemic, the economy of the world leader took a toll. Whatever affects the U.S. affects the whole world, especially emerging economies like India. So, as an average consumer, we shouldn’t panic about the Recession and be confident that the market will bounce back.