2008 recession caller Jim Walker warns of US slowdown, sees India as big winner – Markets

Dr Jim Walker, the economist who warned about the 2008 financial crisis before it became mainstream, believes the US economy is now showing signs of another significant slowdown. In an exclusive conversation with ET Now, Walker said the US economy is being supported largely by the massive investment in artificial intelligence, while other parts of the investment cycle are already weakening.

Walker, Chief Economist at Althia Capital and now also a global economic adviser to Equirus, had in February predicted that the US would enter a recession within six months. While that timeline has not played out as expected, he believes the warning has not disappeared.

“The US economy is hanging on by its fingertips,” Walker said, arguing that the headline growth numbers do not tell the complete story.

Walker pointed to US second-quarter GDP growth of 2.1% year-on-year, but said the headline number masks weakness elsewhere in the economy.

According to him, much of the growth is coming from a sharp increase in capital expenditure linked to AI. If that investment is removed from the equation, the US investment cycle is already negative, he said.

Walker expects the US economy to slow significantly in the third and fourth quarters, particularly as AI-related spending eventually loses momentum.

He also questioned the economic returns from the huge investments being made in AI.

“There are no returns at all just now on the AI,” Walker said, arguing that the cash flow being generated by AI is still “minuscule” compared with the amount of capital being invested.

In the longer term, however, he expects AI to become ubiquitous as companies and countries increasingly develop their own systems.

“AI is going to be ubiquitous over the next few years. There will be no return at all on it. It will be as cheap as air,” he said.

Despite his concerns about the global economy, Walker remains strongly positive on India. He said India’s capital expenditure cycle, credit growth and relatively controlled inflation provide the country with the conditions needed for a strong bull market over the next five to 10 years.

“All of the conditions for India to have an absolutely fantastic bull market are there over the next 5 to 10 years in particular,” Walker said.

He added that his India positioning remains unchanged, although global geopolitical tensions and the war in Iran are creating short-term uncertainty.

Walker said India’s broad-based economic growth story remains intact and that easing business conditions could further improve the country’s growth trajectory and returns for equity investors.

He criticised the growing dependence of markets on signals from central banks and governments, saying investors have increasingly based their decisions on what policymakers might do rather than on developments in the real economy.

“The bond markets are telling us that that game is over,” he said, arguing that governments will eventually have to bring their fiscal positions under control.

That shift, according to Walker, could benefit emerging markets, which he believes have stronger debt and inflation positions than many developed economies.

“When that happens, emerging markets will come back into favor and I think India will be one of the top names,” he said.

Walker also continues to see the disconnect between US central bank rates and Treasury yields as a major warning sign.

He pointed to the US 10-year Treasury yield, which was around 4.6% during the interview, despite the Federal Reserve having cut its policy rate significantly from its first rate cut.

According to Walker, this divergence is highly unusual and “extremely concerning” for the US government and bond markets.

He believes the warning signals will eventually force investors to rethink how they view the global economy and markets.

Walker said China has surprised him by doing less than expected to stimulate domestic consumption and the services sector. While China’s exports continue to support economic growth, he noted that Beijing has actually tightened fiscal policy during the first half of the year.

At the same time, Walker believes the government’s approach suggests that Beijing is relatively comfortable with growth of around 4.5-5%.

“If they were really really worried about the domestic economy, they would be panicking,” he said.

For Walker, however, one of the biggest risks to the global economy remains geopolitical uncertainty. He said the situation around Iran and the Middle East remains unresolved, while the closure of the Strait of Hormuz to some extent continues to create risks for global energy supplies.

Strategic reserves held by countries including China, Japan, the US and parts of Southeast Asia have helped offset the decline in supplies from the region, he said.

But those reserves cannot continue to compensate for supply disruptions indefinitely.

“That can’t last forever,” Walker warned, adding that the global situation could become “a lot more tight” over the coming months.