It is always said that when America sneezes, the world catches a cold. Monday’s global market rout, which wiped out nearly Rs 15.34 lakh crore of investor wealth in India, has its origins in the United States. The trigger was the weaker-than-expected jobs report in the United States, which sparked recession fears in the world’s largest economy. The Japanese markets have seen the steepest fall since 1987, after a surprise hike in interest rates announced by the Bank of Japan.
Economists at Goldman Sachs Group Inc. put the probability of a US recession in the next year to 25 per cent, which is 10 percentage points more than their previous forecast of 15 per cent. Analysts at JPMorgan were even more bearish, assigning a 50 per cent probability to a US recession.
While some experts argue that the fundamentals of the US economy were stronger, the fact remains that the jobs have seen lower-than-expected growth. Whether it was caused by the stress in the US economy or new advancements in technology, it is bound to affect consumer demand in the United States, which continues to be the largest economy in the world and will have a ripple effect around the world.
A weaker US economy will have a twin impact on the Indian economy. The United States is the largest export destination for India, accounting for 18 per cent of its outbound trade. A weaker consumer demand in the United States will translate into softening exports from India. Similarly, if the US Federal Reserve slashes interest rates, it will exert pressure on all central banks, including that of India, to follow suit.
A weaker dollar will force other countries to recalibrate their currencies, which could lead to stoking supply-side imported inflation, throwing the world into an extended period of economic uncertainty.
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