Ever since the fears of Covid-19 eased, inflation shot up - primarily due to the Russia-Ukraine war - and the US Fed started lifting rates, investors have been concerned that the world is staring at a looming recession.
Aggressive rate hikes have the potential to hit the economy at a time when the global economy was yet to recover fully from the Covid shock. The Ukraine war came as a rude shock to the world as it inflated crude oil and other commodity prices. The world suddenly started to experience the double whammy- soaring inflation and falling growth.
Gloomy global outlook
Top global financial firms and rating agencies have cut the global growth forecast due to these factors.
The International Monetary Fund (IMF), which in its April review downgraded the global growth outlook for 2022 to 3.6% from 4.4% before the war in Ukraine, will cut its global economic growth outlook “substantially” in its next update, reported Bloomberg.
The World Bank in its June report said, "Global growth may slow sharply from 5.7% in 2021 to 2.9% in 2022 as a result of deep recessions in Russia and Ukraine, adverse global spillovers from the war in Ukraine, the fading of pent-up demand, and the withdrawal of policy support amid high inflation."
World Bank added that despite the negative shock to global activity in 2022, there is essentially no rebound projected next year. Global growth is forecast to edge up only slightly, to a still-subdued 3% in 2023, as many headwinds—in particular, high commodity prices and continued monetary tightening—are expected to persist, the World Bank report said.
What's in store for India?
India cannot decouple completely from the global trend, say analysts. If the world is to witness a recession, there will be a spillover effect on India.
As earlier reported by Mint, Morgan Stanley now expects the country to grow at 7.2% in 2022-23 financial year (FY23), 40 basis points (bps) lower than their previous estimates. Nomura has also cut India's 2023 GDP growth forecast to 4.7% from its earlier projection of 5.4% amid recession fears.
Nevertheless, analysts and economists expect India to remain among the top performing emerging markets this year owing to the bright outlook of the rural economy and amid a fall in crude oil and other commodity prices.
Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank is of the view that engineering a global economic slowdown through aggressive monetary tightening seems to be the only way out of emerging from the current inflationary spiral as supply capacity remains crunched.
"While over the next 12-18 months some major economies may witness recession and India cannot completely decouple, overall we expect growth nonetheless even if at a tepid pace. While exports and consumption may remain muted, we expect government spending and in part revival in private capex to help buffer the adverse shocks," said Bhardwaj.
Aditi Nayar, Chief Economist, ICRA said: "We estimate India's GDP growth in FY2023 at 7.2%, and do not see a recession emerging in India in the immediate term unless there is another debilitating wave of Covid-19 that triggers restrictive lockdowns."
"In our view, the demand for contact-intensive services is robust, bolstering India's expected GDP growth for the current year. Some households, especially those that derive income from the services sectors, are also likely to witness better income visibility in FY2023, supporting their consumption," said Nayar.
The Russia-Ukraine war has dealt a severe blow to energy and food supplies, pushing up prices. High commodity prices have a domino effect on India.
In the words of Dipti Deshpande, Principal Economist, CRISIL, as the terms of trade worsen with a rising import bill, imported inflation surges. At the same time, slowing global growth is expected to be a drag on India’s exports.
"Domestically, revival in private consumption, the largest demand-side driver, remains weak. Though investments have shown some pick-up, it will remain closely tied to consumption momentum. Our forecast for real GDP growth forecast for fiscal 2023 is at 7.3%, with downside risks. The only bright spots are broad-basing of growth resulting from the uptick in contact-intensive services and forecast of a normal and well-distributed monsoon," said Deshpande.
"The latest tax collection data is encouraging and points to continued economic recovery. While higher tax collections are partly a result of higher inflation leading to higher nominal growth, they also reflect the healthy momentum observed in the first quarter of the current fiscal," Deshpande added.
Play the domestic theme
Most analysts advise investors should focus on domestic themes as India remains the fastest growing economy.
"I guess with the US most likely to head into a recession and other developed economies not in the best of shape either, it will be better to look at sectors focused on the domestic story," said Rahul Shah, Co-Head of Research, Equitymaster.
Brokerage firm Emkay Global Financial Services in its report on July 18 said while the global growth outlook is weakening, India is resilient in relative terms, and is a major outlier.
"The second half of FY23 may reveal India’s ‘true’ growth trajectory, based on a slew of reforms in recent years, improving ease of doing business, thrust on domestic manufacturing, rising capacity utilization while marginal base-effect from Omicron should be a bonus," Emkay said.
The Reserve Bank of India (RBI) believes that the Indian economy remains resilient and is on course to become the fastest growing economy in the world.
"In a global landscape marred by fears of recession and war, the Indian economy shows resilience. The recent revival of the monsoon, the pick-up in manufacturing and services, stabilisation of inflation pressures and strong buffers in the form of adequate international reserves, sufficient foodgrain stocks and a well-capitalised financial system together brighten the outlook and strengthen the conditions for a sustainable high growth trajectory in the medium-term," RBI's monthly bulletin for July stated.
As reported by Mint, RBI believes the worst of the recent spike in inflation will be behind, provided the slow-down of global commodity prices seen in recent weeks persists coupled with the relaxation of supply chain constraints.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.
