By Albin Joseph

After a series of economic slowdowns, two of the world’s major economies, namely Japan and the United Kingdom, have plunged into recession recently. Japan has been displaced from its position as the third largest economy by Germany. The United Kingdom fell into recession at a critical juncture when the elections are just a few months away. This poses severe challenges to Prime Minister Rishi Sunak, whose primary commitment to the nation was to promote the overall economic growth of the kingdom.

A recession is defined as two consecutive contractions in the Gross Domestic Product (GDP) of a country. If there is a dip in GDP growth for a continuous six months, then it’s termed a Recession; Japan’s economy contracted by 0.4% and that of the UK by 0.3% in the last three months of 2023. There was a steady decline in the economies of these two nations throughout the course of 2023. From July to September 2023, Japan’s economy witnessed a de-growth of 3.3%, and the UK’s economy had a slump of 0.1%. Going by these numbers, it’s obvious that these two economies are under the grip of Recession.

The cost of living in the UK has risen considerably, major sectors like manufacturing and construction have not been performing well, and the British Pound has been on a weakening trend against the US Dollar during the past six months. During 2023, the UK’s economy grew by a meagre 0.1%, which is the weakest growth ever since the 2009 financial crisis. All eyes are set on the next UK budget that UK Finance Minister (Chancellor of the Exchequer) Jeremy Hunt is to present in a couple of weeks. The budget is expected to bring in concrete measures to curb inflation and propel overall economic growth.

Japan was relegated to fourth place in terms of GDP which totaled $4.2 trillion in 2023, whereas Germany assumed third place with its GDP estimated at $:4.5 trillion. A weaker Japanese yen is the major reason attributed to the slump in Japan’s economic growth. Moreover, there has been a slowdown in business, which leads to a lack of wage increments and layoffs. This lead to a fall in domestic demand, which made people curtail their expenses and hold on to their earnings.

A decline in population growth and an ageing population have affected the overall GDP, as well as the productivity of Japan. Traditionally, both Japanese and German economies were powered by small and medium-scale industries that were renowned for their high productivity. Of late, Japan’s productivity took a beating because of its shortage of qualitative labour, whereas Germany managed to keep its productivity intact by endorsing immigration, which led to overall population growth as well. By immigration, Germany’s population grew to 85 million in 2023. This not only made up for the low birthrate in Germany but also fueled the overall growth in GDP. Japan could overcome its labour shortage by endorsing immigration, but the country has its own reservations in the formulation of policies on this front.

Though this recession wouldn’t last long, it’s quite obvious that whenever major economies plunge into recession, it will have a ripple effect across the world, at least in the short run. The Euro zone has revised its growth forecast for 2024 from 1.2% to 0.8%, and it remains to be seen whether other countries will follow suit.

The author is a Member of Loka Kerala Sabha

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NEW DELHI: 

India’s wholesale-price base inflation (WPI) for the first time in almost three years turned negative in April, as overall prices eased. The WPI inflation fell -0.92 per cent in April, as compared to a rise of 1.34 per cent in March, the Ministry of Commerce & Industry stated in a release on Monday. The WPI inflation has fallen into negative for the first time since July 2020.

The food index climbed 0.17 per cent year-on-year (YoY), against 2.32 per cent in March, meanwhile, fuel and power index jumped 0.93 per cent from 8.96 per cent last month.

The country’s WPI inflation has been easing continuously for the last 11 months after it jumped to a 20-year high of 16.63 per cent in May last year.

The decline in the rate of inflation in April was primarily contributed by the fall in prices of basic metals, food products, mineral oils, textiles, non-food articles, chemical & chemical products, rubber & plastic products and paper & paper products, the Commerce Ministry said.

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“India’s rating reflects strengths from a robust growth outlook compared with peers and resilient external finances, which have supported India in navigating the large external shocks over the past year,” Fitch Ratings said.

However, these are offset by India’s weak public finances, illustrated by high deficits and debt relative to peers, as well as lagging structural indicators, including World Bank governance indicators and GDP per capita, it added.

The agency has kept India’s credit rating unchanged at ‘BBB-‘ — the lowest investment grade rating — since August 2006. Fitch Ratings forecast India to be one of the fastest-growing rated sovereigns globally at 6 per cent in the current fiscal year ending March 2024 supported by resilient investment prospects.

“Still, headwinds from elevated inflation, high interest rates and subdued global demand, along with fading pandemic-induced pent-up demand, will slow growth from our FY23 estimate of 7 per cent before rebounding to 6.7 per cent by FY25,” the global rating agency said.

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The mission of the Reserve Bank is to build confidence in the market and the economy in times of crisis. After a three-days long review meeting of the monetary policy the announcement by Governor of the Reserve Bank of India Shaktikant Das reflected the expectations of a central bank of a country.

The Reserve Bank of India has limitations on what can be done by the Central Bank of a developing country as it is impractical to print currency as some of the world’s major economies have done. Central banks in the US, Japan and Europe printed currency and marketed it during the post-COVID crisis. Such endeavour is not practical in a country like India.

The announcements made after the Monetary Policy Review meeting show that the Reserve Bank has done a lot in the current situation. Banks have not been put under much pressure but have taken balanced steps that can be adopted now. Shaktikant Das has said that the announcement to ensure liquidity will follow. This is a decision that will stimulate the economy and the market.

The Reserve Bank of India has decided to keep the repo rate and reverse repo rate unchanged. The current repo rate is four per cent. The repo rate was last reduced in May. It is not possible for the Reserve Bank to cut rates in the face of rising inflation. At present the inflation rate is 6.09 per cent. The Reserve Bank of India has adopted measures to control inflation between 2 per cent and 4 per cent. Therefore, it does not appear that the Reserve Bank will be prepared to cut rates further without reducing inflation.

Shaktikant Das said measures would be announced to increase liquidity, ease financial pressure and increase lending to the market. The announcement that medium and small micro enterprises will be given the opportunity to restructure their loans is an important one. The committee, headed by former ICICI Bank CEO K.V. Kamath, will recommend ways to restructure loans of companies. A special window will be opened for loan restructuring. This is a step towards sustainability for small and micro enterprises in crisis.

The earlier condition was that the gold loan should not exceed 75 per cent of the market value of the gold. The Reserve Bank has decided to increase this to 90 per cent. The aim of this decision is to help increase liquidity and credit to people faced with job losses and fall in income. This proposal will help in creating more funding through means such as gold loans, which are used by those who are facing job losses and income leakage. Since it is often impractical to sell gold at a high price, getting a loan of 90 per cent of the price of gold will allow households to use their gold for more financial transactions. The core of the Reserve Bank’s announcements today is to ultimately create more liquidity for companies and the general public, thereby reviving the market.

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Developing countries such as Venezuela are already in a state of stagnation due to lack of economic balancing. Venezuela’s economy has been hit hard by falling oil prices, which have forced the currency to depreciate. Venezuela has been going through a period of economic distress since 2016 due to high inflation and stagnant growth.

The potential for stagflation remains worldwide due to the impact that COVID-19 has had on the world economy. The situation in India is no different. The country’s Gross Domestic Production (GDP) is likely to move towards ‘negative growth’ in the current financial year. Various global agencies have predicted a recession of three to six per cent this year. In the 2020-21 fiscal, India will face a financial crisis, which IMF has projected at 4.5 per cent, Fitch at 5 per cent and Citigroup at 6 per cent.

Inflation is on the rise, along with a severe downturn in economic growth. Inflation has already reached 6 per cent. Inflation in June stood at 6.09 per cent. Normally, when economic growth slows down, inflation falls. This is because when growth stops, people spend less. At the same time, we are moving towards rising commodity prices despite declining consumption. This is due to the significant shortage of supply. Inflation in essential commodities, including food, has already been seen.

Supply was affected by low production due to COVID-19. The pandemic has adversely affected the global supply chain. Supply is also declining globally as the world moves towards a trade war with China, which was responsible for the global epidemic of COVID. Restrictions on the import of products from China due to the conflict on the Indian border have adversely affected the availability of cheaper products. Apart from import of products, India is dependent on China for most industries and production materials. Although some industries in India are trying to reduce their dependence on China in terms of production materials, it will take time to see the full effect. China has so far maintained its dominance in the global market by producing more than it needs and supplying cheaply. When China is banned for political and emotional reasons, we must pay the price.

When GDP falls by 6% and inflation rises by 6%, the gap between growth and inflation will be huge. People who are frustrated by the loss of jobs and the leakage of income caused by COVID-19 are also facing inflation. On the one hand, the income of the people is declining and on the other, the need to cut costs as much as possible due to inflation will have a major impact on the economy of our country based on consumption.

At such a juncture, the central government is increasing fuel prices exponentially, which is like pouring oil on fire. Rising fuel prices have led to a sharp rise in inflation. With the international price of crude oil is at $ 40 a barrel, the prices of petrol and diesel are ruling at the highest ever point. The price gap between diesel and petrol has narrowed sharply. The government is pursuing a policy of squeezing people through fuel taxes as other sources of revenue have depleted. The government would not have been able to exploit this product if it had included petrol and diesel in GST-exempt products. As fuel prices rise after the lockdown, the “contribution” from the government to the slowdown of the economy is complete. There does not appear to be any move on the part of the government to recover from the crisis. The warnings and advice of economists fall on the deaf ears of the government.

Another effect of stagflation is that actual savings rate is ‘negative’. SBI, currently the largest commercial bank in the country, offers a one-year fixed deposit rate of only 5.1 per cent. When this interest rate is slashed to 6.09 per cent inflation, the investor loses about one per cent. Investing is done to prevent the value of money from being eaten away by inflation. At the same time, when inflation reaches higher than interest rates, this purpose of investment is thwarted. One of the strange consequences of stagflation is that even when invested, the value of the money leaks out.

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