Opinion: Opinion | Is The World Staring At A Big Stock Market Crash - And Recession? 5 Uneasy Signs

In his address to the United Nations General Assembly on Tuesday, Donald Trump painted a rosy picture of the US economy, including exaggerated claims about foreign investment, job creation, and his administration lifting Americans out of poverty. The US Federal Reserve, under its new Chairman, Kevin Warsh, is also not too worried about the economy's health, despite raising interest rates a week ago, the first such move in three years. But the picture of the world's largest economy is far from rosy, with some experts even predicting a stock market collapse and a recession engulfing the entire world. Trump has played a major role in creating that possible scenario, though other clouds on the horizon also warrant concern.

On Wednesday, the US bond market recorded its worst day since Trump's “Liberation Day” tariffs rattled markets in April 2025. The 30-year US Treasury yield topped 5.43%, putting it on track for its highest close since 2004. Benchmark 10-year yields also reached their highest level in 19 years that day. Yields rise when bond prices fall. The latest panic selling of US government bonds followed Iranian President Masoud Pezeshkian's warning at the UN that his country will never bend to US bullying, suggesting there is no end in sight to the Iran conflict. It also comes after American debt crossed the USD 40 trillion mark in August, and growing evidence that the recent strength in the US economy has largely stemmed from disproportionate AI investments, at the cost of other sectors. If you combine these developments with warnings about massive death and destruction from El Niño, we are looking at a looming severe global financial crisis.

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Another Recession?

Eighteen years ago this month, one of America's banking giants, Lehman Brothers, collapsed, plunging the global economy into a deep recession. The default followed a credit crisis triggered by the massive housing loans issued by Lehman and other US banks in previous years. US economist David Rosenberg, who predicted the 2007-2008 financial crisis, has warned that we are heading towards another recession. “Not once in the post-WWII era, outside of 2022 when the American consumer was swimming in a USD 2 trillion pool of fiscal stimulus checks, has the Fed managed to avert a recession when they tightened policy into an energy price shock,” Rosenberg wrote on X after the Federal Reserve raised interest rates.

Rosenberg is referring to the energy crisis caused by the US and Israel's war on Iran. One may argue that we should take his warning with a pinch of salt, as he has long been bearish on the American economy. But it is hard to ignore that crude oil shocks since the early 1970s have often preceded recessions. Higher oil prices reduce disposable income, leading to lower spending. They also push up inflation, forcing central banks to raise interest rates. Current US inflation at 3.4% is already well above the 2% target and 1% higher than the rate just before the war began. Wednesday's bond market sell-off was also driven by a comment from Fed governor Michael Barr that further interest rate hikes are likely to be needed to control inflation. That will hit consumer spending and deflate growth prospects.

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Crude oil prices are now over USD 100 per barrel, nearly USD 30 higher than before the war. Analysts say they could reach USD 140 per barrel if the conflict is not resolved, which doesn't seem likely anytime soon. Since the war, diesel prices in the US have risen from USD 4 a gallon to USD 6.52, an all-time high. Petrol prices have risen from USD 3 a gallon to nearly USD 4.50. Diesel fuels trains, farming, and commercial vehicles, so that's already hurting Americans. Several leading Republicans have called for a ban on diesel exports, and Trump appears to agree. But that would disrupt supply chains between the US and Latin America and push prices up.

The Oil Blockage

The blockade of the Strait of Hormuz, attacks by Iran-backed Houthis on the world's largest oil producer, Saudi Arabia, and the disruption of the Red Sea route have already affected global energy, fertilizer, and food supplies. The Saudi economy shrank by 4.8% in the second quarter compared with the previous year. The IMF estimates that Qatar, a leading exporter of liquefied natural gas, will see its economy contract by 8.6% this year. According to the International Energy Agency, oil stocks are falling, raising fears of further price hikes.

The war between Russia and Ukraine has also disrupted global energy and food supplies. Ukraine's attacks on Russia's refineries have forced Moscow to import petrol and diesel from India. Russia is the world's third-largest oil refiner, after China and the US. India is fourth. A global shortage of refining capacity means petrol prices at stations worldwide will remain high, even if crude oil prices stabilise. Moscow and Kyiv have also targeted each other's tankers and warehouses.

The economic implications of these wars extend beyond the countries involved. The Bloomberg Commodity Index has risen close to 40% this year, indicating that these conflicts have affected not only energy supplies but also industrial metals and grains. The wars have also hit the shipping industry hard, which is the backbone of global trade. Tanker hiring prices have hit new records. Last week, the price for a 40-foot tanker on the shipping route from China to the US East Coast reached USD 10,948, quadrupling since the start of the Iran war. Such prices are bound to hit global commodity prices.

Sovereign Debt

Perhaps a more serious threat to the global economy stems from the ever-increasing debt of major economies. The US reached a milestone in August when its national debt surpassed USD 40 trillion. It was the first time since the Second World War that the US government's debt exceeded the size of its economy (the US GDP is USD 31 trillion). The US debt-to-GDP ratio is 125.8%, according to the IMF. The speed at which the debt is rising has alarmed economists. It has doubled in the past nine years. The US pays USD 1.2 trillion each year in interest alone on the debt.

Other major economies also carry substantial sovereign debt, with Japan's debt-to-GDP ratio at 204%, China's at 106%, France's at 110%, and the UK's at 103.6%. India's 83% is not that high, but it's still concerning. However, America's staggeringly high debt affects not just the US but also the rest of the world because of its unique position. The US dollar has long been the world's primary reserve currency and is the most widely used for international trade. For the same reason, global demand for US Treasury bonds has traditionally been high. Yet nervous investors in the US and worldwide have been selling government bonds.

Last month, when it first hit 5%, the US government started a buyback programme. But it worked only for a day. Yields began rising within 24 hours, suggesting investors are not convinced of the economy's health. Bond sell-offs ripple through the economy, making loans and other credit more expensive. US mortgage (housing loan) rates have risen to 7% for the first time in a year. Prices of other goods and services have also increased. Ahead of the November midterm polls, 55% of voters have said Trump has hurt the economy, according to an NBC News poll. It also reported that his approval rating is now 41% - the lowest in his second term.

The Overstressed AI Bubble

Global capital expenditures on AI-related projects are expected to hit USD 1 trillion this year, including USD 581 billion in the US, according to Goldman Sachs. JP Morgan's figures are even higher, putting US investment at USD 800 billion. Despite this massive investment, AI contributed only 0.47% to America's GDP growth of 2.1% this year, according to JP Morgan. But 41 AI-related stocks now account for nearly half the S&P 500's market value. The S&P 500, which tracks the 500 biggest US companies, has risen 18% this year. The figures suggest that the rest of the US economy is not doing that well.

But the AI boom has fuelled an epic run for these companies' stocks, with investors hopping on the bandwagon in anticipation of robust future profits from companies leading the way in AI. However, financial analysts are worried. The CAPE ratio - or cyclically adjusted price-to-earnings ratio - has risen to its highest level since 2000, when the dotcom boom busted, indicating the US stock market is unusually highly valued relative to its profits. "There are plenty of signs that we are now in the late stages of a bubble in AI," John Higgins, chief economic adviser for financial markets at Capital Economics, said in a report earlier this month. If the AI boom busts like the dotcom bubble in 2000, it will be disastrous for many investors in the US and worldwide.

El Niño

Even if the AI boom survives, another serious danger looms for the global economy. A new report by the Climate Impact Lab at the University of Chicago warns that around 450,000 people worldwide could die by February 2027 due to weather chaos caused by El Niño. Africa will be hit hardest, but the report predicts 16,000 deaths in India. The World Meteorological Organisation, a UN agency, earlier warned that a very strong El Niño will persist through winter, bringing flooding, drought, and extreme heat. In India, this year's monsoon rains are already below average. The 1997 El Niño killed 23,000 people and caused USD 5.7 trillion in global income losses. This one is predicted to be even stronger and more damaging.

These developments pose a serious risk to the Indian economy. It has already suffered from Trump's tariffs and the energy crisis. The US president can further put pressure on India's economy by exercising his discretion to apply the new Russia oil sanctions bill. The latest global economic survey by the OECD, a research group of top industrialised countries, has even raised its growth forecast for India to 7.1% from 6.3%, as higher energy prices had a smaller-than-expected impact. But it also warned about dangers to the global economy from high oil prices, rising debt levels, El Niño, and rising bond yields. India must stay alert to these risks and act.

(Naresh Kaushik is a former editor at the BBC and Associated Press. He is based in London)