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General Studies 3 >> Economy

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The US GDP fell 1.6% on an annualized basis in the first quarter of 2022 followed by a 0.9% fall in the second quarter.

RECESSION-two consecutive quarters of economic contraction or declining real GDP.


  • Rising rates typically signal danger in the financial system, apart from dampening consumption and demand.
  • There is also an oil price shock, and a possible downturn in Europe if Russia's natural gas supplies wind down, the economic crisis in China
  • Threat from the new strain of Coronavirus.

Economic contraction and unemployment typically move in tandem because they feed on each other, when there is a downturn, businesses lay off workers. As a result, people spend less money, which in turn, dampens demand and lowers profits for businesses. So they lay off more workers, which further dents demand, and this ends up becoming cyclical.


Economic output in the US is contracting in line with the Fed's rate tightening, but companies are still hiring in droves, especially in the pandemic-hit service sector remains unfilled.


There is a view that the strength of the labour market increases the headroom for the Fed’s rate tightening action.

The other view is that given the Fed’s target to “achieve maximum employment and inflation at the rate of 2% over the longer run, the central bank could be forced to go more aggressive in its monetary policy tightening path to tame inflation, leading to a hard landing.

The Fed tightening cycle has a long way to go with many more rate hikes due.


Fund manager Cathie Wood and her team Florida-based ARK Invest believe that the US has entered a recession and that there are signals – including household employment metrics – that the economy is very weak. If one looks at household employment, it has been flat to down for the last four months.

Walmart world’s largest retailer working on controlling to reduce inventory through sales and price rollbacks while Target another big retailer took a major sales hit.


Other indicators are looking up or staging a substantial recovery, quite out of sync with the Fed’s aggressive moves to slow the economy down.

American shares are on a sharp rebound .since the middle of June, the NASDAQ is up more than 20% from its low, officially entering a bull rally, while the S&P 500 is up by more than 15%.

Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley, noted in June that while the chances of a recession ticked higher by the Federal Reserve's latest hike and hawkish forward guidance, a recession today is likely to be shallower and less damaging to corporate earnings than recent downturns.

Before the pandemic-induced 2020 recession, other recessions have been credit –driven, including the financial crisis of 2007-08 and the dot-com bust of 2000-01


Impact on emerging markets-

  • When the Fed raises its policy rates, the differences between the interest rates of the two countries narrow, thus making countries such as India less attractive for the currency carry trade.
  • A high rate signal by the Fed would also mean a lower impetus to growth in the US, which could be negative news for global growth, especially when China is reeling under a real estate crisis.
  • Higher returns in the US debt markets could also trigger a churn in emerging market equities; there is also a potential impact on currency markets, stemming from outflows of funds.

According to Neelkanth Mishra, co-head of Asia Pacific strategy, India equity Strategist with Credit Suisse, and part-time member of the PM'S Economic Advisory Council, as economies have opened up, supply is responding but demand has gone up well in advance. That created inflation exacerbated by what is referred to as supply chain bullwhips.

Everyone is building an inventory. In the US in particular, this became bad because it didn’t have the manufacturing capacity to meet the additional demand, but it triggered that demand by handing over cash to people through a stimulus. The demand went over to China, Japan, India,  and Bangladesh and when the goods started hitting the US ports, they realized these didn’t have the capacity. This triggered a wage-price spiral in the US, which is the most dangerous form of inflation where people start demanding wage hikes and prices go up.


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