Three significant developments were reported in the last couple of days, all three relating to the economy are intrinsically linked and have long-lasting impacts globally. Japanese economy contracted for two consecutive quarters ending 2023 and reported recession. The embattled United Kingdom has also officially shifted into a recession-hit zone after the last two quarters of 2023. This has had an immediate impact. Japan moved to fourth position in the global economic sweepstakes while Germany moved up the rankings to third place.
All these were prominently reported in the last two days thereby leading to questions on the Indian economy’s future as we head for another Lok Sabha election in the next two months.
Firstly, the United Kingdom moved from stagnation to recession after economic contraction of 0.1 per cent (July-September 2023) and 0.3 per cent (October-December 2023). Loss of appetite for goods and services leading to negative consumer sentiment and political slugfest between Tories and Labour ahead of this year’s elections contributed to the recession that the Bank of England and analysts prefer to term as ‘technical’. Prime Minister Rishi Sunak however is gung-ho about the prospects going forward.
Secondly, the curious case of Japan needs significant explanation. An ageing population, negative growth in its numbers for the nth year, and scarcity of workers impacting output to Yen’s valuation vis-à-vis the US greenback have been identified as major factors. Japan’s economy shrank by 3.3 per cent (July-September 2023) and 0.4 per cent in October-December 2023. Yen depreciation has impacted valuations across the spectrum. During the last one year or more, the Yen has reported a depreciation of 20 per cent against major currencies while its 30 per cent against the US dollar.
On October 20, 2022, the Yen slipped to its worst levels at 150 as against the US dollar. In the last one week, it has been hovering around 104.7-105 against the US dollar. Yen depreciation vis-à-vis the US dollar is significant given that Japan imports from the United States both food and energy products.
Thirdly, Germany moving in as the third biggest economy at $4.55 trillion as against $4.19 trillion of Japan is significant for more than one reason. While Yen’s continued depreciation played a big part in Japan’s GDP, Germany’s performance on the economic front has been modest while dealing with its labour issues, human resources shortages and euro valuations.
The German economy contracted by 0.3 per cent in 2023 while analysts expect a modest positive growth of 0.3 per cent in 2024 followed by 1.2 per cent in 2025. Trade-driven recovery may be expected in Germany. But fingers are crossed, given the demand slump internationally and production woes in Germany.
There’s a fourth factor that’s discussed intermittently and rather in subdued voices. The United States, the largest economy, seems to have avoided recession in 2023 with a soft landing and there’s a likelihood of slipping into contraction mode this year. Some do suggest that the US economy was already on the decline owing to high inflation and retail prices though officially there’s no word on it as of now.
The fifth big factor is China which has gone through a lot in the last several months. Chinese economy, the second largest globally, may expand by 4.6 per cent in 2024 and 4 per cent in 2025. Where does it leave the dragon economy in the Year of Dragon that foresees everything good? Protracted Covid-related restrictions have subdued the Chinese economy under President Xi Jinping though officially the economy expanded 5.6 per cent in 2023. International Monetary Fund does not believe these figures and it has its own data points that estimate a much lower expansion.
In this backdrop, what happens in India will be more than interesting to watch for both Indians and the global populace looking for a straw of support in their struggle to counter the global downturn on the economic front.
With El Nino receding and the monsoon forecast being very positive, India will continue to be the ‘brightest star’ with 6.5-7 per cent growth. Apart from being the fastest-growing economy, India-induced expansion is bound to keep the tide on the positive side globally.
However, global headwinds cannot be wished away. Russia-Ukraine War is not coming to an end anytime now while the second bloody conflict between Hamas and Israel gets only worse. Shipping lines on international waters, especially in the Red Sea, are impacted, and thereby safe movement of vessels has been constricted.
Also, the Reserve Bank of India (RBI) has established its own track record, working independently of the Federal Reserve and European Central Bank on monetary policy issues. Continued strong domestic consumption, expansion in goods & services output coupled with healthy capital inflows – both domestic and foreign – will only keep the Indian economic wheel on an even keel.
In this backdrop, stable and strong political dispensation lends strength to argue that overtaking both Japan and Germany to become the third-largest economy globally by 2027 or a wee bit earlier is credible.
Prime Minister Narendra Modi has promised within and outside Parliament that Bharat will be the third largest economy in his third term with over $5 trillion valuation. Strong fundamentals and resilient economic order coupled with a reformer in Prime Minister Modi would help hasten the process. If a global upturn happens in the next few years as estimated by some economists, then India’s place under the sun is assured sooner than later.
The author is Director & Chief Executive with New Delhi-based non-partisan think-tank, Centre for Integrated and Holistic Studies. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect News18’s views.
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