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Serious recession threat for U.S.

New York-based Economic Cycle Research Institute (ECRI) tracks some 20 large economies contributing about 80% of the world GDP and provides critical information about upturns and downturns of economic cycles to money managers, corporate bodies and policy makers.

It follows the economies like the US, Canada, Brazil, the UK, Germany, France, Japan, China and India. Set up by the legendary Geoffrey H Moore , whom the Wall Street Journal had dubbed 'the father of leading indicators', ECRI has earned a reputation for itself by predicting recession successfully in 2008.

Its co-founder and chief research officer Anirvan Banerji tells ET that this time too, some of the leading economies may slip into recession as industrial growth slowed quite dramatically across the spectrum. Excerpts:

With a weaker-than-expected data showing that US economic growth is indeed slowing, do you think the US is heading towards yet another recession?

In any market economy, we see growth rate cycles... periods of acceleration and deceleration. And if you have decelerating growth in the US, historically you would find that about half the time the economy slipped into recession. This time too, there is a serious recession threat for the US. At this point, it is not there yet but the danger is real. Whether the slowdown turns into a recession is something which will be determined over the next few months by the actions taken by the policy makers. It's not yet a lost cause.

US has unemployment over 9%, budget deficits in the trillion-dollar range. So, to start a recession with these kind of numbers is dangerous. If it happens, all of those proposals and projections of US budgetary support will become meaningless and that will be very scary.

What is your take on the European economy?

European countries are slowing down too. Germany has faced it in the April-June quarter. France has in fact seen a slight contraction in the second quarter of the year. So, Germany and France, which were the engines of growth in the Europe, faced dramatic deceleration in growth. The situation in really bad in the southern European countries like Spain as they face serious recession threat.

India's GDP for the April-June quarter grew at 7.7%, lower than last year's 8.6%. Do you think, the recent policy interventions to tame inflation will slow growth further in the long run?

India's growth has already slowed and the last 50 basis point rate hike will slide it further. The impact of the last policy decision will not be felt immediately, it will be seen next year. If you do not have tools to know where inflation is going in the next few months, you are always reacting too late and by doing so, you are reinforcing the bull wave cycle.

This is not a critique of RBI per se. This is a critique of central bankers all around the world. All major central banks, be it the Reserve Bank of India, the Reserve Bank of Australia or the Federal Reserves, these guys don't have good forward looking indicators. They don't know how to do it, because the economics profession has abandoned the study of leading economic indicators a couple of generations back. So, they are always behind the curve and when you are constantly behind the curve, you will automatically foster more volatile economic growth and inflation.

As in the case in India, inflation has peaked and will start coming down soon. But the RBI is still worried about price rise because it doesn't have good leading indicators. So, the GDP growth will slow down.

How far the global downturn will impact the Indian economy? Will the country be able to isolate itself from the decelerating growth in the US like in 2008?

Unlike China, India was not the world's factory and it still isn't. So, even if the US slips into recession, India will have some limited impact. India is still not a part of the manufacturing exporters' space. Even if an US recession makes an impact on India's export-oriented manufacturing activities to some extent, that will be limited too as it does not contribute much to the country's GDP. It may have an impact on the software exporters, but this may force them to evade the blow by cutting cost and this may actually augur well for the sector in the long run.

So, a global recession may not necessarily be a disaster for India. Indian economy is largely self contained, much more than China, Brazil or Russia. So, India is not susceptible to turns of global economic cycles.

But the local stock markets reacted sharply to the global business scenario...

Where the downturn will hurt India is the stock markets. It is already hurting. When the West sees any turmoil, you will see international investors pulling back their allocation from risky assets from developing countries including India. And that's why the Sensex goes down every time the global turmoil happens. But one should not over-emphasise this. The stock market is not even a good indicator for the Indian economy. Policy makers should not react to the gyrations of Sensex. It's not relevant.

What could be the impact of the recent global economic trends on Asia?

When trend growth remains low, any slowdown becomes dangerous. Take the case of China and Japan, for instance. China witnessed a 10% trend GDP growth since 1988-89. When one sees such robust growth consistently, it's highly unlikely that growth falls below zero, even if there is one or two cyclical downturns. So, China has not had witnessed any recession in last 20 years. Now look at Japan: in the last 20 years, their trend growth rate hovered around 1%. It's very easy for an economy to slip into a negative growth terrain when the trend growth remains low. No wonder, Japan has seen five recessions in 20 years.

What's significant is, after the recession in 2008, the trend rate for economic expansion remained low over the past two years for most of the economies. And therefore, the chance of a recession is very prominent as industrial output slowed significantly across the spectrum.

When do you expect the economic growth to rebound and stabilise?

The slowdown pressure will definitely remain till December across the spectrum. There can only be a rebound early next year but that will largely depend on the policy decisions the large economies take in the next few weeks.

The problem is this slowdown is happening within couple of years of huge recession and the world has not recovered fully from the 2008 crisis.