What is a recession?

Fears of a coming recession erupting in the US economy have fuelled bullish investors worldwide to hold on to their reins and safe equities. The gut feeling now is that the shadow of the Great Depression of the 1930s and the Japanese recession are haunting the economic policies once again. Within US, citizens are scanning information to stay calm even if the recession affects them financially. Elsewhere in the world, bourses are experiencing the ripple effect as major trading markets are on the run. Recession is defined as a slump in economy of the country for a minimum two quarters of the year. If this has been happening for two or more years, the country has been hit by a recession. The writing was on the wall for long, but the economic slide was being ignored. The recession will take time to sink in for the new generations have not experienced the Great Depression when jobs were lost and older generation was sadly remembering ‘How Green Was My Valley’. Economists can talk about the great depression as it was recorded in history. As history repeats itself, will the new generation be more careful? No one was aware of the coming recession that would affect rest of the world. Financial institutions are besieged with worried investors. Consultants are trying to clam down companies who have great risks at the stock exchanges. Panic buttons have been pressed and there are efforts to stop recession in its tracks. Forecasts are still showing that more losses will be felt in the coming weeks. In a country, which lives and thrives on credit bills and mortgage loans for just about everything, there is cause to get worried. Defaults will hit the consumers and companies equally. The stock exchanges have always been indicative of the recession. The individual investors are still safe. But will the professionals be able to have recession proof stocks? Will some companies remain unaffected by the Dow Jones industrial slide? Americans already started to feel the heat when jobs were being outsourced to cheaper countries. The US economy is hurtling towards a recession. It has not yet turned into a depression. But the signs are looming large. Every business is slowing down. Expatriates are leaving for native countries. In 2007, many businesses felt the heat and closed shop. Is a 2008 recession, imminent that could change equations once again? The dark forces of attrition, retentions are spreading tentacles to US companies worldwide Definition of recession

Recession is not to be confused with depression. Recession means a slow down or slump or temporary collapse of a business activity. In its early stage it can be controlled in a methodical manner. Experience helps to avert total collapse. Unchecked, it leads to severe depression. Depression is a dead end. It is time to close shop completely. It is a total state of irrevocable economic failure. When a country is doing well all round its Gross Domestic Product (GDP) is on the rise. Overall economy is bullish; it is not only the stock exchanges that tell riches to rags stories but even small businesses. It all adds to the national exchequer. An economist is likely to give a detailed, comprehensive definition of recession. But for the layman who has been affected knows it only one way-when he loses his job and has no money to pay his credit and loans. Recession is when the consumer faces foreclosure and the banker comes knocking for his pound (or dollar) of flesh. Many companies and whole countries go bankrupt for want of liquid funds and cash flow for even daily requirements. If you look at it from the point of view of a businessman, recession is a transitory phase. The Business Cycle Dating Committee of the National Bureau of Economic Research has another definition. It profiles the businesses that have peaked with their activity in one season and it falls naturally in the next season. It regains its original position with new products or sales and continues to expand. This revival makes the recession a mild phase that large companies tolerate. As the fiscal position rises, there is no reason to

worry. Recession can last up to a year. When it happens year after year then it is serious. Are we facing a recession or not? Yes, for the simple reason that not only our neighbors but our friends are unemployed. There is less of business talk and more billing worries. Transitory recessions are good for the economy, as it tends to stabilize the prices. It allows run away bullish companies to slow down and take stock. There is a saying, ‘when it’s tough the tough get going’. The weaker companies will not survive the brief recession also. Stronger companies will pull through its resources. So when is it time to worry? When you are facing a foreclosure, when the chips are down and out and creditors file cases for recovery. Firms face closures when they go through recession and are not able to recover from losses. If, at this time, they are not able to sustain their prices and stocks then there is more trouble. Even when the recession period gets over, they will not be able to do well. If a business survives a recession period they should be able to survive a depression. But how many recession proof businesses are there? Who will eventually survive the recession? 1. Those that have been able to save their funds. 2. Those who have not invested in fly-by-night companies. 3. Those who remain clam till the storm passes. 4. Those that take stock immediately and decide to reinvest in a recession proof business.

Effects of Recession Even the strongest feel the cracks in the face of an earthquake. The cracks are visible even during a brief recession. When the markets are disrupted the effect shows. Unemployment is the greatest dread of any man. How will he feed his family now? Expatriates are being shown the doors. America which has been home to many people is now turning them out. Branches of American companies abroad are shutting shop. When there are cuts in the weekly budgets, priorities changes, when job seekers are dumped there is a big change in lifestyle. When there are recessions the female employees feel the winds of change first as they are more vulnerable. They know they will be laid off the jobs. It is difficult to believe, but it is true. Women who work as receptionists, doing odd jobs in the office, public relations and communications are picked out when downsizing is done. Recessions have the tendency to touch sore spots of business. Those which are no longer viable are shut off. For instance publications that are now low on subscription, advertising and sales get the first cut. Most companies spend large sums on advertising in print and electronic media. The PR companies have to work on tighter budgets with maximum mileage. Chances are that different agencies that were used for different products are now merged. A single agency is given the job to do. Staff in the office faces retention as now the work load is divided between only the most necessary employees. The ones left can also forget about the raise in salaries and also work hard. As USA faces a visible recession in current times, it is evident that economists are in overdrive to review the fiscal statistics and give expert opinions. The stock markets have already created a panic situation in the country. The biggest lenders are now facing a cash crunch and for the first time they are also admitting it. Most of the credit has gone into housing, car, security and insurance schemes. Americans who have invested in such schemes have only their stocks to offer as collaterals and now are facing the brunt with embarrassing foreclosures. Does this recessive situation warrant a soul search amongst the other nations who are depending and banking their economies on Uncle Sam’s federal reserves? The answer is yes. There has been no sustainable development in major sectors like housing, medical, small scale business. The US economy has reached its peak and is slowly going downhill. Jobs are being outsourced to other countries while Americans are themselves jobless. As Asian countries

are getting more employment, even expatriates are returning home. India and China are major outsourcing backyards for the US. Cheap goods manufactured in China, Thailand and other poor countries have hitherto relied on the dollar power for sustenance. As the value of the dollar falls, the American dream is going bust for many. Whether it is the shoe maker or the food chain or cola giants or even real estate developers, the earning potential has been cut. US recession 2008 and can it affect India Indo-US bilateral trade has been upbeat, except for the nuclear deal that is facing a stormy period. According to the Indian Finance Minister, USA will not go through the impending recession. Even if it does, it is not likely to impact India. Having said that, in the last week of January 2008, the actually story seems to be different. But trade and commerce, is affected. Investors are aggrieved at the trading activity coming to a grinding halt frequently in the last three months. Indian exports to the US are less than earlier and dependence is less as it is also exporting to rich European nations, China and Japan. Asian markets have also felt the slump when Dow Jones hit the low notes. How much can India withstand the impact? In the first place, is the 2008 recession coming at all? If the rest of the world recession impacts other nations, how can India remain insulated? The crisis of US recession is looming on its policies in the Middle East and home turf. There is no immediate concern for Indians. The jobs are not being threatened as yet. BPOs are still working 24 X 7 and jobs are being generated in other sectors. Real estate has more or less stabilised in many cities and small towns. Infrastructure activity has not slowed down either. The software professionals are returning home and Indian students prefer to study in Australia, New Zealand and Britain. Since US is one of the major super powers, a recession–mild or deeper will have eventual global consequences? USA may cut their capital investments into the country if they have to control recession at their end. The year 2008 has not started on a good note for the US economy. Till the stocks don’t climb upwards chances are that investors will loose more money. Despite world recession and India’s optimistic outlook, the results will not show at least in the next two years. Is a recession coming to Indian shores? Highly unlikely. The rupee may have appreciated against the shrinking dollar. But Indians are enjoying the new found material wealth and flaunting it. The reigns have to be tighter at the US end till the economy becomes buoyant. India can get affected by the BPO units becoming less aggressive. The American food chains that have opened up will be impacted. There could be down sizing on staff and advertising. The equity market will see a slide in a few months, if things go out of control. Consultants across the world are hoping that they will be able to keep their clients upbeat in the face of recession. The prolonged recession is likely to result in further weakening of the dollar. According to the World Bank officials, the credit crunch will reflect on decline in business development, unemployment, weaker consumer outlays and longer period of depressed consumer prices. In India strong technological advancement have engineered a buoyant growth rate. There is still time for the storm to come to India. Impact of a Possible US Recession in India Though no one likes or wants a recession, almost everyone appears (looking at WEF, Davos) reconciled to one in the United States. Meanwhile, politicians continue to downplay any fears of global repercussions, citing decoupling of the United States and other economies as a buffering factor. But what is the reality for countries like India? It would be naïve to imagine that a recession in the United States would have no impact on India. The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. Thus, the effect may not be as drastic as would have been the case in the 1980s.

Even so, fears of a US recession led to panic in the Indian stock market. January 21 and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with Hang-Seng, Nikkei, and Kospi. History might hold a clue here. The last time the bubble burst (2001-2002), the DJIA went down by 23%, while the Indian Index fell by 15%. Much has happened between then and now. The Indian economy has shown a robust and consistent growth trajectory and the projection for 2008 is 9%. Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States. In other words, the effects of this recession on India may be quite distinct from those of the past. Here are some areas worth following: 1. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. It has been suggested that CalPERS is likely to shift an additional US$24 billion to its international portfolio. A large portion of this is likely to flow into India and China. If other funds follow suit, a cascading effect can be expected. Along with the already significant dollar funds available, the additional funds could be deployed to create infrastructure--roads, airports, and seaports--and be ready for a rapid takeoff when normalcy is restored. 2. In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as opposed to merely providing services). If this is done, India can emerge as a major player in the IT products category as well. 3. The manufacturing sector has to ramp up scale economies, and improve productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see the emergence of new regional groupings--India, China, and Korea? 4. The tourism sector could be affected. Now is the time to aggressively promote health tourism. Given the availability of talented professionals, and with a distinct cost advantage, India can be the destination of choice for health tourism. 5. A recession in the United States may see the loss of some jobs in India. The concept of Social Security, that has been absent until now, may gain momentum. 6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing for government intervention and rate cuts. What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill, and narrow the overall trade deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would also help in competing globally when the recession is over. In summary, at the macro-level, a recession in the US may bring down GDP growth, but not by much. At the micro-level, specific sectors could be affected. Innovation now may prove to be the engine for growth when the next boom occurs.

For US firms, who have long looked at China as a better investment destination, this may be a good time to look at India as well. After all, 350 million people with purchasing power cannot be ignored. This is not a sales pitch for India, but only a gentle suggestion to US corporations.

Toronto, ON, Canada, — The United States is heading toward recession. This is no longer conjecture -- the threat is real. This was indirectly acknowledged by the White House on Jan.18 with the unveiling of an economic aid package that practically confirmed everyone's worst fears. The signs have been apparent since last June or July. The stock market has been moving sideways rather than up. There were signals that the economy, which had been hopping from one record to another for the last six years, needed a breather. Then the sub-prime loan crisis began to unfold. Banks and financial institutions began to take losses, followed by other related companies. Later the housing market began to collapse, induced by the sub-prime loan crisis. When this was followed by less-than-spectacular Christmas retail sales, the "R"' word began to be uttered. The recession will not be officially confirmed for awhile, and rapid interest rate cuts announced on Jan. 22 may reduce its impact. A near agreement between Congress and the White House on an additional aid package as unveiled on Jan. 24 may further reduce the impact of the upcoming slowdown -- yet a general slowdown is inevitable. Half a trillion dollars spent on the Iraq war, $200 billion in losses in the sub-prime loan crisis, and a huge trade deficit with China are structural factors that cannot be helped by any aid package. Global stock markets suffered catastrophic losses on Jan. 21. Japan's stock market dropped 6 percent, India's 8 percent, Canada's 4.5 percent and European markets fell from 4 to 6 percent. The U.S. market, closed for a holiday, was spared catastrophic losses. Luckily for U.S. markets, the Federal Reserve stepped in on the morning of Jan. 22 and cut interest rates by 75 basis points, which had the desired effect. It curbed investors' rush to sell, and a day later profiteers stepped in to buy stocks cheap, which helped reduce losses. India suffered miserably on Jan. 21, as well as a few days prior to that day of infamy. Institutional investors from abroad, who had driven the Indian stock market sky high, pulled back. As in the United States, the investors were back the next day, helping the stock market recover some of its losses. The Chinese are not immune to the worldwide financial crisis, although they are less exposed to institutional investors. Their worst nightmare may be yet to come. With reduced merchandize exports, factories will be idle. Layoffs may follow and social unrest begin -- not good for the upcoming Olympics in Beijing. When the United States goes through a slowdown, Canada is next, followed by Europe and the rest of the world. The impact of a U.S. slowdown will be: a) A fall in commodity prices; oil for example would be out of reach at US$100 a barrel; b) Layoffs and the closure of factories will send the unemployment rate soaring, with the side effect of high benefits payments; c) With less money to spend, consumers will leave their wallets and credit cards at home, reducing retail sales. Sales of housing, cars and other big-ticket items will undergo a dramatic drop; d) Stock markets in upcoming months will perform miserably. The value of people's assets and other holdings will contract. They will be less likely to indulge in cruises or holidays or other extravagances; e) With less money all around, there will be less for the United States to spend on war on terror in Iraq and Afghanistan. It is possible that the United States may prematurely wind up and leave the war halfway; f) There may be a complete re-look at the North American Free Trade Agreement, which has moved jobs to Mexico and Canada; g) Unequal China trade, which has been a sore point for quite some time, may come under the scanner. The dollar-yuan currency relationship may be revised or, in the worst-case scenario, a few countervailing

duties may be applied. In other words, a long-avoided protectionism may creep into the U.S. political thought process. Apart from whatever happens in the United States, India and China will be at the receiving end of a few unpleasant jolts. China's ever-increasing exports to the United States may find an uneven reception. India may suffer the consequences of the withdrawal of investments from the stock market. In China itself the booming real estate cum infrastructure reconstruction may cease. Cities in China are on a spending binge to boast of new infrastructure, which they finance by borrowing from the banks without adequate checks and balances. When all hell breaks loose, banks will either go insolvent or foreign reserves stashed in the United States -- now US$1.3 trillion -- will have to be transferred to keep them afloat. That is one reason China has been keeping its foreign reserves close to its chest. This will cool off the overheated Chinese economy by a few percentage points. Domestic consumption may be increased to offset the decline in exports. China may also begin investing in U.S. companies with financial troubles, like their US$5 billion investment in Morgan Stanley. A much greater U.S. buying binge by China is unlikely, however. There are domestic consequences to worry about, and cash stashed away as reserves may be urgently needed at home. The impact on India will be indirect. Globalization, in which India is a small fry, will impact it less. It is the institutional investors who will place India on the slippery slopes. In seven days including Jan. 21, the Indian stock market lost 8 percent of its value. This translates to about US$400 billion of investors' paper money wiped out, or about two years of steady gains made by the little guys in the market. The U.S. recession will thus lower expectations in India but will not have consequences as severe as in China. An already unhappy textile export sector may find it difficult to achieve its 2008 export target. Alternatively, a boom in the information technology and business processing outsourcing sector will continue. U.S. companies looking for cheaper alternatives may outsource additional work. One salient feature of India's spectacular economic performance in the last six years is that it is driven by domestic consumption. Not being dependent upon the United States makes the impact of the U.S. recession a bit more manageable. This is completely opposite for China, where exports drive the economy and domestic life may be ruined if orders dry up. India will have to worry about rapid interest rate cuts by the U.S. Federal Reserve Board. That would widen the gap between Indian and U.S. commercial interest rates, resulting in a capital outflow from U.S. to India where interest rates are still high. The arrival of excessive cash in India would not be welcome today. India would not know what to do with a huge inflow, and would have to cut its interest rates appropriately. Combine this with a weakening dollar and it would erode any export advantage. Hence additional rapid interest rate cuts by the Fed would require an appropriate response from India. In the end the world may emerge out of this U.S. slowdown much more sober. The United States will develop a bit of a protectionist attitude. China's free reign of cheap exports may be a thing of the past. Domestic demand will keep India's growth high, though a drop by a few percentage points for miscellaneous reasons is not unexpected. India's stock market will receive a sobering lesson on overemphasizing foreign investors. Foreign investors will remain, but in a much more controlled manner

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