Here are 7 signals that suggest that the world may be sitting on the precipice of a mega financial crisis:

1. The global debt-to-GDP ratio is at an all-time high.

In 2022, the global debt-to-GDP ratio was 256%, according to the World Bank. This means that for every $1 of output produced by the global economy, there is $2.56 of debt outstanding. This is the highest level of debt ever recorded, and it is a significant increase from the pre-financial crisis level of 220%.

2. Interest rates are rising.

In an effort to combat inflation, central banks around the world are raising interest rates. The US Federal Reserve has raised interest rates by 75 basis points since March 2022, and may raise rates several more times this year. Rising interest rates make it more expensive for businesses and consumers to borrow money, which can kill economic growth.

3. Inflation is rising.

Inflation is at a 40-year high in the United States, and it is rising in other parts of the world as well. The causes of inflation are complex, but they include supply chain disruptions, the war in Ukraine, and rising energy prices. Rising inflation can erode the purchasing power of consumers and businesses, which can lead to a recession.

4. The housing market is overvalued.

The housing market in many parts of the world is overvalued. In the United States, for example, the median home price is now 4.5 times the median household income. This is the highest level of home price appreciation relative to income since the 2007 financial crisis. An overvalued housing market is a risk factor for a financial crisis, as it can lead to a sharp decline in home prices.

5. The stock market is overvalued.

The stock market is also overvalued in many parts of the world. The S&P 500 index is currently trading at a price-to-earnings ratio of 21. This is above the long-term average of 15. An overvalued stock market is a risk factor for a financial crisis, as it can lead to a sharp decline in stock prices.

6. There is a growing risk of a sovereign debt crisis.

A number of countries are facing rising debt levels and a decline in economic growth. This is a risk factor for a sovereign debt crisis, which is when a government is unable to repay its debt. A sovereign debt crisis can lead to a financial crisis, as it can disrupt the global financial system.

7. The global economy is slowing down. 

The International Monetary Fund (IMF) has downgraded its forecast for global growth in 2023 to 3.6%, down from 4.4% in 2022. This is the slowest pace of global growth since the start of the pandemic.

Are we prepared for this?

The world is not prepared for a financial crisis. The global financial system is more fragile than it was before the 2007 financial crisis. Even in the US, multiple banks have failed and more could be on the verge of collapse in the coming months, exacerbating the situation. There are also fewer tools available to policymakers to manage a financial crisis because we exhausted them all during the pandemic.

Now, is this bad news for India? Let’s see.

First, the downsides:

• Reduced exports: A slowdown in global demand would hurt Indian exports, which account for about 20% of GDP. This can also hurt our balance of payment situation, except we are sitting on a large pile of foreign exchange, as govt took this very seriously after seeing the crisis faced by Sri Lanka, Pakistan and currently Bangladesh.
• Decline in foreign investment: A financial crisis could lead to a decline in foreign investment in India. Startups are already finding it hard to raise capital. FII investment has slowed down and in fact a lot of FII investment has been leaving India. PE & VC fundraise will be very slow. Forget all those unicorn valuations for unprofitable startups.

Finally, the advantages:

• Reduced inflation – commodity prices and energy prices will cool off – which will give a huge boost to our economy and reduce inflation further
• Rational stock market prices and reduced foreign speculation – Indians can now invest in Indian stocks at a more rational prices as the stock market has remained cool despite posting strong results
• Increase in services export and outsourcing as more western businesses try to cut costs by offshoring jobs – this will counter losses due to slowing goods export to a great extent. India remains a service export giant and will only grow faster during a global financial crisis.
• We will also attract global investment from places like ME, Russia and Japan as we remain the only large economy in the world that would continue strong growth, acting as a beacon for patient, long-term FDI.

How are you preparing yourself for a global financial crisis?

Indian IT sector and Software Developers

The tech industry, particularly in the US, has witnessed a significant number of layoffs. More than 187,000 tech workers have been laid off since January 2023, as per Layoffs.fyi. High-profile companies such as Meta, Twitter, Netflix, and Coinbase are among those that have announced layoffs recently.

Various factors contribute to these layoffs, including the rising cost of living, making it difficult for tech companies to afford their workforce, and a slowdown in the global economy, leading to a decreased demand for tech products and services. These layoffs are resulting in job losses, salary cuts, and a decline in investment in new technologies, making it challenging for tech companies to attract and retain top talent.

Given these developments, what can we expect for the Indian IT sector and software engineers?

1. Change in Project Nature and Outsourcing Model: Although most IT projects suitable for offshoring are probably already being outsourced to India, a financial crisis might further encourage companies to hire developers directly and remotely to cut costs. After all, remote developers can be significantly cheaper than hiring developers in the US. 
2. Job Losses and Salary Cuts: The IT sector may see a slowdown in hiring, job losses, and salary cuts as the global economic slowdown affects demand. Indian software engineers could face heightened competition from recently laid-off workers abroad, who might also be looking for remote work opportunities.
3. Emergence of Entrepreneurship: In light of widespread layoffs and the challenge of finding new jobs with comparable high pay, many engineers are exploring entrepreneurship. Despite the financial crisis, this could potentially lead to a surge in tech startups and innovation.
4. Remote Work: The financial crisis could further cement the trend of remote working. Software engineers may need to adapt to long-term remote working conditions, providing their services directly to overseas companies.
5. Competitiveness of Indian IT Companies: Despite the crisis, Indian IT companies’ competitive position, known for low costs and high-quality work, might help them secure new business. In any case, investment in new projects around AI, cybersecurity, and edge computing continue to grow. 

How do we expect the legal sector in India to be impacted?

1. FDI transactions and International Business Law: Despite the decreased M&A activity and reduced IPOs due to the uncertain global economic outlook, India’s continued growth and low inflation may keep international business and investment relatively stable. Volume of work for lawyers involved in international business is expected to be maintained. There has been a marked decrease in PE & VC investments due to expectations of a recession, but this is also leading to fundamentally strong companies to struggle without funding, leading to lower valuations and exits. This is likely to lead to growing M&A transactions as many large companies are sitting on humongous cash piles globally.
2. Bankruptcy and Insolvency Law: The anticipated bankruptcy of many startups and trouble for debt-heavy companies could increase the need for legal services in bankruptcy and insolvency. Lawyers with expertise in this field could see an uptick in work, helping to navigate the complex insolvency proceedings and restructuring plans.
3. Capital Market and Investment Law: With IPOs expected to decrease, lawyers working in capital markets might see a decline in business. However, the steady domestic investment in the stock market could offset some of this decline. They may also be called upon to advise on regulatory compliance and risk management in a potentially more volatile market environment.
4. Domestic Business Law: As India continues to grow and inflation remains low, enabling the government to maintain low interest rates, this could stimulate domestic business activity. This might lead to an increased demand for legal services in various sectors of the economy, providing a buffer for law firms against the global downturn.
5. Startup Legal Services: While there might be a significant challenge for startups due to the reduced PE & VC investments and potential bankruptcies, lawyers serving the startup ecosystem might find their services are in demand. There has been no slow down in new startups registering, especially with many top engineers and business operators laid off, many more professionals are taking the entrepreneurial plunge. This is keeping lawyers drafting contracts, doing compliances and helping entrepreneurs navigate the legalese quite busy.

What can you do at present to maximise your career outcome, and take advantage of this recession to move your career forward rather than slow down along with the economy?

• Diversify your income stream. If jobs at Google, Amazon or Meta are not secure enough and if they can lay off tens of thousands of people, you can understand how secure your job is.
• Probably it is a great idea to do some freelance work on the side, develop products or just explore if you could become a tech cofounder by teaming up with other non-tech experienced operators who have the credibility and skills. 
• This is definitely a great time to learn new skills and differentiate yourself. Remember, the bottom 10-30% people are affected by recessions, depending on the severity. The top 10% actually grow no matter what the business environment is. What skills can you learn that will catapult you in the top 10% of your industry?
• If you enjoyed a very high salary and compensation during the previous few years, you might find yourself struggling to land such well paid jobs at this time in case of a lay off. It may be a good time to finally take that entrepreneurial plunge you always wanted to take. Or, you can consult with multiple companies to increase your income.
• This is a great time to invest in building a great personal brand. Figure out how to give a TED talk finally. Share your life and career stories on social media. Make time to give talks at good colleges. Engage with local startup accelerators and see if you can help out some budding startups in early stage. Network and find the mentors who can help to unlock more of your potential. It takes just 6 months to build a personal brand that can do incredible things for your career! When you are very busy with work and climbing the career ladder, you do not get time to do these activities that can establish you as an authority in your niche, but this is the breather you always wanted. This is the time to rise to the occasion and change orbit!

Who is ready to do this?

What should we watch out for?

• the severity of the crisis
• government policies and stimulus

In the worst case scenario, we can expect a 2 year long period of economic turbulence, followed by the Fed printing dollars liberally and reducing the interest rates again, which will help in going back to the boom cycle of the economy worldwide. In the optimistic scenario, there will be no global financial crisis, but a mild recession and recovery will be seen by the beginning of 2024.

What is your prediction? Let us know in the comments.