Will global recession woes spoil India’s dream market run?

Several countries across the globe are depicting a gloomy picture of their economies. In recent months, developed economies like the UK and Japan slid into technical recession as both countries reported contractions in gross domestic product (GDP) for two consecutive quarters.

The British economy contracted by 0.3% in Q4 2023, following a 0.1% decline in Q3. Broad-based output decline in several key sectors like industrial production, retail trade and services impacted the UK economy. Meanwhile, Japan’s GDP shrank 0.1% in Q4 and 0.8% in Q3 2023.

Along with Japan and the UK, two other countries—Ireland and Finland—also reported GDP contraction for two consecutive quarters. However, the recession in the UK and Japan was in the spotlight due to their large size.

Countries that can face recession in Q1 2024

Besides these, several other countries like Germany, Thailand, Romania, Malaysia, Colombia could possibly slip into recession in the first quarter of 2024 as these countries reported GDP contraction for the first time in the December quarter. Germany, the biggest economy in the Eurozone contracted by 0.3% in the final quarter of 2023.

Being the largest European economy, a contraction in the German economy could impact the entire European region. Interestingly, the Eurozone economy stagnated in the December quarter. Furthermore, the German central bank has warned that the country’s economy is likely to shrink in the first quarter of 2024.

What’s in store for the Indian economy?

The Indian economy has shown resilience during these periods as global economies remain under pressure. But in the era of globalisation, no country is immune, and these external headwinds could adversely impact the Indian economy as well.

Impact on the Indian stock market

During the recession phase, the stock markets, in general, are volatile as share prices go through extreme swings amid changes in investor sentiments. Most investors tend to pull money from the market and park it in safe-haven assets like gold. For example, during the 2008 US recession, the NIFTY50 declined by over 51% in a single calendar year.

Impact on India’s exports

Countries facing recession tend to go through weak demand scenarios amid constrained consumer spending. This could indirectly impact India’s exports to these countries. More than 10% of India’s total trade comes from countries mentioned above. The UK and Germany are major trade partners, with a total export of $21.5 billion as of FY23. Moreover, India’s total exports are down 5.8% YoY between April and December 2023.

The recession impact is already being witnessed in India’s services sector. The Indian IT industry is facing sluggish growth and challenges in getting new deals as companies are cutting down on IT spending and saving on costs.

Conclusion

As global economies go through hard times, investors should closely monitor key economic data, especially from the US and China. Any significant economic downturn or recession fears can have an impact on Indian markets.

This article is written by senior equity analyst Sreenivas Ajankar. Views expressed are the author's own.