Recession: US recession set to impact India, may lead to growth slowdown in medium-term

Analysts say the impending slowdown in the United States will hamper India’s growth path in the medium term.

Research firm Nomura said in a note on Thursday that according to the Nomura India Normalization Index (NINI), the Indian economy is now speeding back to above-normal levels, led by broad improvements in consumption, investment, manufacturing and the external sector.

The services sector lagged about 4 percentage points below its pre-Covid level in March 2022, but is now moving almost 40 percentage points above that level. This rebound is expected to support the growth trajectory of the Indian economy in the near term.

However, in the medium term, with a “prolonged mild recession” in the US as the company has forecast, the Indian economy is likely to see a slowdown in growth. There are already growth challenges, with India being the only Asian country with inflation furthest above target.

“Our US economic team recently lowered its base case scenario for the US economy to a mild recession beginning in the fourth quarter of 2022, due to tighter financial conditions, negative consumer sentiment shock, worsening energy and food supply disruptions and weaker global growth prospects.” said in a note.

The US makes up about 18% of India’s goods export market and over 60% of India’s IT-ITeS exports. In addition, the general slowdown in global growth is also likely to weigh on India’s export and investment prospects.

“Combined with high levels of inflation undermining consumption growth and the growth sacrifice of tighter financial conditions, this suggests a broader growth slowdown for India in the medium term,” the report said.

Nomura expects India’s GDP growth to average 7.2% yoy in 2022 and moderate to 5.4% in 2023, with downside risks.

Soft landing in the US: impossible?

Be it the stock market, commodities or yields, they have all taken a beating in recent weeks amid mounting recession risks. Experts are divided on whether there is already a recession or whether it is heading for one.

In an effort to stem soaring inflation, central banks have implemented aggressive rate hikes, with the US Federal Reserve being no exception. This is likely to lead to an economic downturn.

Fed Chair Jerome Powell acknowledged the possibility of the same on Wednesday, telling Congressional lawmakers that the central bank is “strongly committed” to curbing inflation and can do so with its monetary policy tools.

“We’re not trying to provoke and don’t think we’re going to have to provoke a recession,” Powell said. “But we find it absolutely essential that we restore price stability, really in the interest of the labor market as anything else.”

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