Impact of the recession: Vinod Nair deciphers the impact of the recession on the stock markets

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The U.S. economy contracted for the second consecutive quarter amid aggressive monetary policy tightening by the country’s central bank, which is working to bring down inflation, which has been high for decades. As the GDP figures became public, experts said the US was already in recession, while criticizing the central bank (Fed) for being in recession denial mode. So what is the recession?

Recession is defined as the period during which economic activities, i.e. demand and supply, collapse below the normal level of dynamism of the economy. Gross Domestic Product (GDP) is used as a key indicator to gauge the growth rate of an economy. Quarterly data on real GDP growth provide a good indication of economic conditions.

Although there is no universal consensus on the exact definition of a recession, economists and tax experts generally consider negative GDP growth for two consecutive quarters to be a statistic of a technical recession. Because it is possible that the GDP slows down due to various short-term factors without affecting the economy at large with a buoyant job market.

Many other major high-frequency (monthly) indicators such as the Purchasing Managers Index (PMI), Industrial Production Index (IPI), consumer sentiment, house prices, prices oil prices, bond yields, etc., are also used to predict the future trend of the economy. growth. This monthly data improves the throughput to forecast future economic activity, but with the notion of MoM volatility, as for an emerging country like India, but effective for a developed country like the United States.

Today, the world is worried about recession due to hyperinflation and geopolitical issues. Inflation is high due to supply constraints stipulated by Covid-19, war and easy money policy of 2020-22. It is estimated that prices will continue to rise due to economic imbalances. And the belated repair of monetary policy from an easy plan to a super hawkish plan leading to a very steep rise in interest rates. These two factors are expected to slow down the global economy and lead to a recession.

Technically, the United States, the largest economy, is already in recession. Q1CY22 QoQ real GDP growth declined -1.6%, followed by -0.9% in Q2. This should continue in Q3 with a consensus of -0.6% to -1%. A similar slowdown is seen in other key economies like China with -2.6% decline in Q2 and for the Euro region weak data is estimated in Q3 and Q4 due to out of control power prices. Many countries are under pressure like Sri Lanka, Russia, Ukraine, Canada, New Zealand, East Asia and Africa. Without a doubt, the economy is on a correction. The IMF has consistently downgraded the outlook for the global economy in 2022. In the latest update, it said the scenario was “gloomy and more uncertain”, cutting GDP forecasts to 3.2% and 2.9 % for 2022 and 2023, respectively, below the pre-covid average growth of 3.74% over the past decade.

Admittedly, the effect of the recession on the stock market is bearish. The market usually reacts before the actual fall in the economy. Quantitative and qualitative factors such as geopolitical issues, valuation level, bond yield range and spread (long-term yield minus short-term), market optimism and sentiment, inflation leading the trend of the market.

Over the past 2 months, global stock markets have rallied strongly, following the sharp drop in H1CY22. The sustainability of the recovery will depend on the ability to control inflation without affecting consumer sentiment. This is going to be a challenge as disposable income is being hit twice by rising inflation and rising interest rates. So far, this has had no impact on the labor market. For reference, although GDP growth in the United States is negative, the unemployment rate is exceptionally low at 3.5%, well below the historical average of 5.8%. The labor market added 530,000 jobs in July and, more encouragingly, consumer prices did not rise from the previous month. The market is holding on to the idea that inflation will fall quickly, as indicated by falling metal prices, not requiring big rate hikes in the future. Because this market may need some time to clear as valuations are back in the high range.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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