By Rajesh Mehta and Tanya Nagpal
On August 2, the global stock markets saw an all-time low with Japan’s Nikkie plunging below its worst crash since the 1987 Black Monday. Dow Jones also fell by more than 600 points due to investors’ fear of economic slowdown. While these prior recessions resulted from stock market crashes and bank failures, the current economic downturn is a result of a medley of various geopolitical factors such as the continued consequences of the COVID-19 pandemic, supply chain disruptions, tensions between countries, as well as inflationary pressures. While the earlier periods of the 1930s and 2008, were widely accepted as recessionary, the current fiscal slowdown is historically unique in a way that it is only characterized by prolonged signs of a severe recession without any economy actually entering into one.
This recession is also shaped by a globalized economy, where shocks in one region can quickly impact others. The prevailing global economic crisis has indeed trickled down to India and caused the companies to cut costs on their payroll expenses. Even after the economy has recently recovered momentum, Jamie Dimon, the showrunner & CEO at J.P. Morgan Chase, recently released his statement indicating that the recent economic recovery does not indicate a positive outlook for the global fiscal scenario. In fact, JP Morgan has raised the recession odds for 2024 to 35% from 25%.
The supply chain for multiple commodities has been skewed for a long time due to the stress between Ukraine and Russia, the chances of a war in Iran, and trade tariff increases between China and the US leading to increasing recessionary probabilities. Supply chains have also been disrupted in 2024 due to global shipping companies increasing their prices for the third time in this fiscal year. Further, with 70% of the world going into an election in 2024, uncertainties faced by companies have skyrocketed to unprecedented highs, resulting in cautious hiring and quick measures to cut payroll costs. Just in July 2024, over 8,000 employees were laid off by different companies across the world including Unacademy in India. 2024 has seen major tech giants such as Tesla, Amazon, Google, and PayPal hand pink slip to their employees. In India, the practice of silent layoffs has been increasing rapidly, and many companies including Deloitte, TCS, Infosys, and Tech Mahindra have let people go in 2024.
Though India has only been moderately affected by these adverse economic indicators until now, past trends indicate that it is very likely that the Indian economy can be hit severely by the snowball effect due to its interdependence and co-existence with the world economy, at large. Sahm Rule says when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months, the US is in a recession. The triggering of the Sahm Rule in the US early last month is a key clue that India might be in recession soon. Some signs have already started to show up such as the GDP predicted to recover only marginally to 3% in 2024, after a decline of 2.8% in 2023 from 3.4% in 2022.
In the face of possible economic turmoil, it is only prudent for all the stakeholders such as the Central Bank, the government, and business houses, to adopt measures in advance to avoid potential adversities. The Federal Reserve is expected to reduce interest rates in the United States in its September Committee Meeting. Similarly, the Reserve Bank of India can take cues and prepare a plan of action to combat the expected recession. These lower rates from RBI, encourage commercial banks to lower their lending rates, which further makes it cheaper for the companies to borrow capital to pay their expenses instead of cutting costs by laying off their employees.
Some businesses also have the power to play recession to their advantage. When the government reduces rates during the recession to inject capital among the general public, big companies can leverage these rates to secure capital at a much lower rate. Big firms also accelerate automation or outsource operations to lower-cost regions during a recession to remain competitive and profitable when economic conditions are challenging. The benefits of this are 2 pronged – it helps them stay afloat in the period of crisis and it also creates employment for people in less developed regions.
Even though the onset of a recession cannot be accurately determined, the current sky-rocketing unemployment rate is an alarm for the country. At a time when nearly 40% of candidates from IIT, the best and brightest youth of the country, remain unemployed and IIM graduates are struggling for jobs, nothing makes more sense than taking immediate steps to prepare for a potentially upcoming recession.
Rajesh Mehta is a leading international consultant in the fields of Market Entry, Innovation, and Public Policy. Tanya Nagpal is an independent researcher.