Here's Why The Global Economy Is Entering A Downturn

Is the US Economy in a recession? Depends on whom you talk to. While there have been two-quarters of contraction in economic activity, the Biden Admin is loath to call it a recession, fearing it might hurt the Democrats in the looming Midterms in November. On the other hand, in a "surprise" of sorts, the Chinese finally admit that they are in bear territory, with the release of economic data pointing to a "severe" downturn. Moreover, even Europe admits that the 2Ps of the Pandemic and Putin have left them high and dry. So, here we are, with the global economy headed into a downturn that can be protracted and painful. Though the Indian Economy claims the tag of the "world's fastest-growing major economy", it faces significant headwinds, as I shall explain below.

Of course, despite all this "evidence" pointing to a recession, there is much skepticism about the global economy's direction. This is mainly because the global economy has become a "forecaster's nightmare", with conflicting economic data and, more importantly, the overall "mood" and the confidence from consumers and critical economists, who are routinely polled to gauge the various indices of economic activity. For instance, the jobs data from the US is bullish, yet, the Great Resignation continues to wreak havoc. Next, despite the fall in commodity prices and the lodestar for the American consumer, gas prices continue to fall, and still, inflation is stubbornly high. Amidst all this, Americans are upbeat about their consumption yet downbeat about the economy. No wonder The Atlantic Magazine calls this the "everything is weird" economy.

If this is the case with the US, Europe is faring no better. Putin has gotten them by their tails by "weaponizing" gas and grain. Moreover, he is threatening to unleash a "winter from hell", and it sure looks like he is "going for broke" by throttling the Germans and squeezing the rest of Europe by halting oil and gas shipments. Added to this is the less covered "strategic" Russian default and the overall setback to globalization, hurting the trade-dependent Europeans. Especially hit is Germany, which due to decades of dependence on the Russians, is now vulnerable to the latter's whims and fancies. If this was not dire enough, there is added: "turbulence" in Italy's looming debt crisis, which reminds "everyone and their dog" of the Eurozone debt crisis of 2012. Mark this as yet another reason why the prospects for the global economy are indeed stark.

Perhaps the biggest surprise is the Chinese slowdown, which is now threatening to spill beyond its borders. While the Evergrande default rankles, news from China indicates that the Chinese are in for a very "deep and destructive" period, which even Xi and his "immortal" ambitions cannot contain. Maybe this is why the draconian Zero Covid lockdowns and the crackdown on its citizenry, anyway subject to regulation, are now in full swing. If the Great Recession of 2008 had a distinct "Made in the USA" tag, this time around, the downturn would be more "distributed" as nearly all the major economies are in red. Indeed, this is a recession, and no matter the nomenclature, it remains a recession.

While we in India are thumping our chests, there are enough signs that "all is not well". For instance, the Indian Economy is caught in a "jobless growth" trap, not to mention a unique combination of a few sectors doing exceptionally well while the rest languish. This K-shaped growth and the stagflation that few would admit, yet, undeniable, is the paradox at the heart of the Indian Economy. Though investor beast has much to cheer about, the "real" India is in dire straits. Otherwise, why would we witness periodic social unrest over jobs, high prices, and the like? Moreover, the social crisis exacerbates the economic pain, a "vicious" loop feeding off each other. Of course, the Davos crowd would be loathed to admit this, but there are enough signs that our "twin deficit" problem can lead us down the external forex crisis, much like in 1991 and recently seen in Srilanka.

Last, in the midst of all this, the overall mood has "darkened", which even the global elite admits to and which is a clear barometer that the global economy suffers from a "crisis of confidence". Battered by the Pandemic and bruised by Putin and the 3rd P, populism rearing its head again, we are entering the "unknown" where the "Age of the Unexpected" reigns supreme. No wonder there is no consensus on what to call this period in history, and despite the names, a recession remains a recession, no matter how you categorize it. I only hope there is no "crisis by Christmas" scenario, which can ruin the New Year parties and remind us that 2022 was no better than 2021 or the gloomy 2020.