The whispers (or rather noise) of an imminent recession in US have been around for a year now. And if we were to believe in all that is there on social media, then 2023-24 is the year when US will see a recession. Mild or not, I have no idea. I am no economist. But the risk of recession has no doubt escalated given the recent US bank failures, Fed hiking rates and tightening credit, and financial instability across many developed nations.
Indians are obviously a worried lot.
The possibility of a recession in the US leading to job losses in IT and US-linked sectors, a major correction in global and Indian stock markets, are just few of the things that are being discussed among those at risk.
To be honest, a global recession, if there is one, will definitely not leave India unscathed. While the country’s fundamentals continue to remain strong and fairly stable, it would be foolish to believe that there will be no impact here at all. But I feel that the Indian economy is well-positioned to cushion itself from the impact of a US recession in the short term. And Indian economy is highly resilient and in fact in much better position compared to many other large countries globally, in terms of its economic future.
So while a recession in the US is bound to impact the Indian economy to some degree, I don’t expect India to go through a recession. A slowdown may be possible but recession is extremely low probability outcome. And even if there is a setback of slowdown here, the country is expected to comeback much stronger as has always happened in the past recessions.
(Reminder – I am no economist and these are just my ramblings.)
Talking of past, the current slowdown/recession is being blamed on US Fed. And if you look at historical data, this is not rare. There have been many Fed-induced recessions earlier. And whenever that happens, India experienced 1.5-2.5% slower growth. As this TOI article (link) points out – Recessions caused by the Federal Reserve is not uncommon. However, the good news is that these recessions that are caused by Fed’s tightening of rates are usually shallow and short lived, lasting a few quarters only and with average GDP declines of less than 1%.
Image source – Link
Remember the adage – ‘When America sneezes, the world catches cold’? That is still true, to an extent. Hence a recession in the US economy will impact global and Indian stock markets.
As per the latest IMF World Economic Outlook Update (link), The growth in India is set to decline from 6.8 percent in 2022 to 6.1 percent in 2023 before picking up to 6.8 percent in 2024, with resilient domestic demand despite external headwinds. Compare this with other countries in image below and you will know that you are lucky to be in India right now.
What can you do?
In an interestingly titled article How to Survive a Recession and Thrive Afterward? (link) in Harvard Business Review (HBR), the author talks about corporates and how they do and should deal with recession. I know we are talking about individuals and personal finance. But stay with me. The author of the article says – The difference maker was preparation. Among the companies that stagnated in the aftermath of the Great Recession, few made contingency plans or thought through alternative scenarios. When the downturn hit, they switched to survival mode, making deep cuts and reacting defensively. Many of the companies that merely limp through a recession are slower to recover and never really catch up.
So just like the corporations, even you need to look at how prepared you are. If you feel your job, industry is vulnerable, then you need to prepare accordingly and hope for the best. Don’t just pray (that nothing happens) and do nothing. It is time to act and prepare.
Recessions can create wide and long-standing gaps in the financial life of people who are prepared and those who aren’t.
So your main focus, if you think you are at risk, should be to be part of the ‘prepared’ side of the population.
If you feel your job is a bit vulnerable or you see people around you being laid off or finding it tough, then here is what you should do:
- Relook at your expenses. Not all your expenses are mandatory and some are obviously unnecessary. It is time to rationalize and cut the flab. Try asking yourself how to reduce your monthly expenses and you will see some patterns emerging.
- Next, if you still don’t have an emergency fund, then that’s a red flag. Emergency funds can help you take care of expenses in case your regular income stops for any reason. Ideally, you should have an emergency fund that covers expenses for at least 6 months at all times. And the money that you saved up by cutting few expenses on previous step, can also be used to prop up the savings for emergency fund. And if you are employed in a sector in which you may find it tougher to get another job, then having a larger emergency fund is advised.
- If you have a credit card and some outstanding on it (remember that credit card interest rates are close 40% per year) or a personal loan, try to use your unutilized funds (but not from emergency fund) to clear them off as soon as you can. Prioritize paying off these high interest debts/loans and do not take up any new loans or make unnecessary expenditures.
- If you are worried that you may lose your income due to the slowdown, then it would be smart to hold off on any financial decisions that would lock you into hefty EMI payments for several years, like a car loan or even a new home loan.
- If the above points are taken care off, then you can look to benefit from a slowdown. Yes, you read it right. If economy is not doing well, then stock markets may also be down. Market may not crash sharply but it may not do too well and you may get some good opportunities once in a while to invest at lower prices. If you are in a kind of financially stable position, then you can use surplus money to invest as and when such opportunities arise. It is what we call as Buying the Dip. For long-term investors, a market downturn is about taking advantage of low prices and this is why many such investors love bear markets. But remember that this point is only for those who have fairly reliable jobs and have already taken care of previous points. Never try to use your emergency fund savings to invest in markets.
- Apart from finances, try to become indispensable or as close to indispensable as possible in your job/profession. That way, you can reduce the threat of a recession/slowdown on your life. Easier said than done, but that’s the truth. You may never become a recession-proof employee but at least, you can try to become the last person to be fired if it comes to that. Isnt it?
It doesn’t rain every day. But if it rains and you are unprepared (say you don’t have an umbrella), then your day will be tough. So, it’s always a smart idea to be prepared for the rainy day aka possibility of recession if it comes to that. But each recession will be different from the previous one. And generally, a sell off (gradual or sharp) in markets happens much in advance of a recession or slowdown.
All said and done, a slowdown cannot be averted if the world is going that route. But we are lucky to be in India, which has a comparatively solid economy and projected to grow at the fastest rate among the major world economies.
A slowdown or recession is always followed by a recovery in the economy and sharp rebound in the stock market. And that is what should be remembered at all times, in particularly on not-so-good days, rather than trying to forecast macros (like me doing it in the article you are reading).
As this article in the New York Times (link) states, it is better to be optimistic in the long run as – Fundamentally, maintaining a bullish view assumes that history will be a useful guide, that the markets will recover and that their long-term trajectory will be upward. It assumes that pain now will lead to better prospects down the road.