Western Investors Set to Return to India, EMEs as Expert Predicts 'Multiple Recessions' in US, EU

People in the US and Europe are facing the highest inflation rate in decades, prompting the Federal Reserve and other central banks to tighten interest rates despite the threat of compromising GDP growth. Brokerage house Nomura sees the US and Eurozone economies contracting by one percent in 2023.

India and emerging market economies (EMEs) will gain “substantially,” reckoned experts, as Japan-based Nomura Holdings predicts “multiple recessions” for the world’s major economies over the next 12 months.

Nomura Holdings on Monday noted that the US, Eurozone, the UK, Japan, South Korea, Australia, and Canada will fall into recession amid tightening government policies and rising living costs.

“A recession in developed countries can result in heightened interest of Foreign Portfolio Investors towards emerging markets, including India, which is the fastest-growing major economy in the world”, Pranav Haldea, managing director of Prime Database, told Sputnik.

Haldea blames the US Fed rate hike aimed at controlling the rising living costs for the current capital outflow from emerging markets, saying interest rates in the US have a huge bearing on FPI flows.

Foreign investors dumped Indian shares worth $6.4 billion in June — the highest net outflow in over two years. Foreign investors withdrew $27.9 billion from Indian equities in the first six months of 2022.

“Once the current rate hike cycle shows signs of abating, FPIs shall again look at emerging markets with renewed interest”, Haldea reckoned.

Economists observe Fed missteps such as the delayed response to inflation, which the latter labeled “transitory” until March this year, hamper economic activity in the US. The US recorded 8.6 percent inflation in May, the highest in four decades.

Massive inflationary pressure is also hindering growth in European economies such as Germany, Spain, and France, which registered 7.6, 10, and 5.2 percent price rises in May, respectively. Inflation in the UK is running at 9.1 percent.

Economists warn of spreading high inflation beyond commodities to services items, rentals, and wages.

Nomura analysts Rob Subbaraman and Toh Si Ying wrote in a research note that there are increasing signs that the world economy is entering a “synchronized growth slowdown, meaning countries can no longer rely on a rebound in exports for growth”.

Professor Manoj Pant, a prominent economist and vice chancellor at the Indian Institute of Foreign Trade, said that emerging markets would also be affected by a decline in trade; still, some factors may lessen the impact.

“The factors which are operating in our favor are that the bulk of the buying consumers are located in India, and the current geopolitical situation means a lot of countries are looking at India not as a complete replacement, but as a possible third area apart from China and Vietnam”, Pant told Sputnik.

Nomura forecasts a prolonged recession in the United States and a much deeper slump in Europe if Russia entirely cuts off gas to the region.

Despite the global headwinds, the Indian economy is predicted to grow at 7.2 percent in the current fiscal, much higher than any other major global economy.

Experts advise Indian policymakers to capitalize on the structural changes that began in 2016-17 onwards but that were interrupted by the COVID-19 pandemic.

“The world is moving much more towards services than manufacturing. China’s boom was based on manufacturing, the services boom will have to be in India. So the question is how well we are able to take account of that. So depending on us, we can actually gain substantially, if we are ready”, Pant added.

However, Pant labeled the new forecast as a continuation of the 2019 recessions, as there has been no boom registered anywhere in the world since then.

China infuses immense hopes to all the developing economies, as economists bet on demand from the world's second-largest economy to mitigate negative impacts, even though they face slowing export demand from the US and Europe.