Is the US recession a possibility; and what it means to India?

17 Mar 2025 , 11:31 AM

A US RECESSION: IS IT JUST ANOTHER SCARE?

In the last few weeks, talks of US recession have become louder. It began with the Atlanta Fed GDP, which changed its forecast of projected Q2CY25 GDP from +2.4% to -2.8%. The recession concerns have a lot to do with Trump tariffs, which was already implemented for Canada, Mexico, and China. Tariffs will be expanded to the EU, India, and other nations in a phased manner, with reciprocal tariffs likely to hit most countries trading with the US.

The warning signals are already there in the stock markets with the diversified S&P 500 falling over 10% from the peaks and the tech-laden NASDAQ falling 14% from peak levels. Generally, the stock markets have been a fairly reliable barometer of the economy. The concerns are not without reason. Q4 GDP growth in 2024 was already sharply lower than Q4 of 2023. The story is likely to get worse in 2025; that is what markets expect.

WHAT HAS RAKED UP RECESSION FEARS IN THE US?

To be fair, the story has been doing the rounds since last 2 years, but has just got more legs after the series of policy shifts announced by Trump. Here is a quick dekko.

• Trump and Elon Musk have started with the view that the government machinery and bureaucracy is awfully bloated. It is estimated that the Trump government may lay-off more than 3,00,000 government employees to cut costs. Trump also plans to cut policy spending on housing and clean energy. Overall impact on GDP growth can be 10-15 bps.
• However, the bigger concern could be the tariffs, already imposed on Canada, Mexico, and China. Trump feels that the US is offering unfettered access to US markets, but its trading partner are not reciprocating. These tariffs could not only slow down world demand, but also make these products more expensive in the US, indirectly triggering inflation in the US. Brokerages estimate that the impact of these tariffs on growth could range between 40 to 60 basis points.
• The US undertook its first rate cut in September 2024. Economists felt that, just as Fed had waited too long to hike rates, it had also waited too long to cut rates. While the Fed cut rates by 100 bps between September and December 2024, it has been on hold since. The CME Fedwatch only expects 1-2 rate cut in 2025. That is likely to induce monetary tightness, something that can exacerbate recessionary conditions. Such tightness may continue as Trump Tariffs are likely to add about 50 bps to core inflation.
• However, the biggest concern is the US debt burden at $36 trillion and currently standing at 122% of GDP. By next year, it is estimated that the US will pay $1 Trillion annually, just as interest on debt; accounting for 20% of the US budget. Economists find that situation unsustainable and feel recession could be a highly likely outcome.

Let us turn to what the data tells about a possible US recession.

SEVERAL DATA POINTS HINT AT SLOWDOWN IN THE US

A recent report by SBI Research has hinted at several indicators that may support the contention of a slowdown in the US. Here are a few such indicators.

• The PMI (composite) indicator is generally a good high-frequency indicator of growth. That has shown a distinct slowdown in the US in February and March 2025. With higher costs, the business optimism has also tapered in the US. That is not great news.
• Over a longer time frame, the US economy has shown tiring of real GDP growth. The trend is consistently down in the last 25 years, even after considering the growth spurt provided by liquidity post the COVID crisis.
• Like the real GDP growth, even the export growth has been showing a consistent fall in the US. Economists expect that the recent tariffs may not boost exports (as Trump hopes), but instead may end up causing imported inflation.
• The bigger concern for the US is that the private consumption is consistently coming down and GDP growth is too dependent on government spending. Economists expect the impact of the post-COVID liquidity boost to soon fade out.
• According to Trump, the US businesses need to invest aggressively in the US. However, the local wages are so high that it would be almost impossible for the US businesses to invest locally and be viable. Growth will have to be exported.
• Finally, debt is a big issue for the US. Debt to GDP ratio went up from 55% in 2002 to 100% in 2014 and up to 122% in 2024. Whether the DOGE solves this problem, or worsens it, is something time will tell.

What could be the implications of a US slowdown for India?

INDIA WILL BE HIT BY A US SLOWDOWN

There is no rocket science. India is likely to be hit hard if there is a US recession, although such an impact may be temporary. However, the impact on the stock markets is likely to be quite sharp. While the stock markets are divorced from GDP calculations, stock market losses are likely to hit consumption patterns, especially among the higher income groups. On the positive side, the tariffs may open up opportunities for boosting metal exports to the US. However, the concern will be on the IT front, where the signals are of slowing tech spending. That could hit India quite hard!