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ASSIGNMENT ON

:

RECESSION, CAUSES AND ITS IMPACT

BY:SUSHMA PGDM-IB ROLL NO: 45

What causes it? An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. recession is defined as "a significant decline in economic activity spread across the economy. Recession (or contraction) is a natural result of the economic cycle and will adjust for changes in consumer spending and consumption or increasing and decreasing prices of goods and labor. employment.Recession According to the National Bureau of Economic Research (NBER). the GDP begins to . Moreover. They also budget more. and start saving more money than they did. lasting more than a few months. The agency that is officially in charge of declaring a recession in the United States is known as the National Bureau of Economic Research. industrial production and wholesale-retail sales". people tend to cut out things like leisure spending. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. normally visible in real gross domestic product (GDP). spend less on things they usually indulge in. real income. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. or NBER A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. As people and businesses start finding ways to cut costs and derail unneeded expenditures. A recession is also preceded by several quarters of slowing down. In an environment where inflation is prevalent.

The Indian stock markets also crashed due to a slowdown in the US economy. Internal factors Stock markets & recession The economy and the stock market are closely related.decline. the Dow Jones Industrial Average went down by 22. are Treasury bonds that carry a nominal interest rate. a recession is yet to be declared by the Bureau of Economic Analysis. It is these combined factors that manage to drive the economy into a state of recession. the Sensex was down 45 per cent. because consumers are not spending like they were. Between January 2001 and December 2002. However. In the US. . but investors are a worried lot. while the Sensex fell by 14. stock prices are now at a low ebb in India with little cheer coming to investors.7 per cent. unemployment rates will rise because companies start laying off workers to cut more costs. The major difference is that the interest rate payments and underlying principal are automatically increased to account for inflation. TIPS. Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment. The markets bounced back after the US Fed cut interest rates.6 per cent. similar to other Treasury securities. The stock markets reflect the buoyancy of the economy. as measured by the consumer price index. TIPS and commodities. The Sensex crashed by nearly 13 per cent in just two trading sessions in January. In contrast. the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. or Treasury Inflation Protected Securities. If the fall from the record highs reached is taken. to be specific. Then.

investors continue to flock toward assets with intrinsic value or increasing global demand -. The realty sector boomed but could not sustain the momentum for long. coupled with rising oil prices at $100 a barrel. This. Since March 30.TIPS have soared in the last 12 months because of increasing speculation of inflation and the decline of the dollar. . Major banks have landed in trouble after people could not pay back loans and this overall affects consumers and thus consumption. The decline in home prices is causing a broader set of problems than what was witnessed during the technology bubble. as economic forecasts have been revised downward. 2007. Foreclosures spread like wildfire putting the US economy on shaky ground. As a result. is basically a housingled (read sub-prime crisis) slowdown. Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. the Lehman Brothers US TIPS index is up 14. an unmanaged index composed of future contracts on 19 commodities.18 percent in the first quarter. the Dow Jones AIG Commodities Index. was up 12. agricultural products. and it collapsed under the gargantuan weight of crippling loan defaults. etc.23 percent during the last 12 months. Some experts view that this crisis has the potential to be far deeper than the collapse of the dotcom boom at the start of the decade. The same index was up 5.08 percent). All these factors cause the slowdown. Similarly.commodities such as gold.41 percent in the first quarter and increased 17. silver. oil and gas. building products.the crisis has its effects on the stock market and causes heavy volatility and affecting the investor. The housing market soared on the back of easy availability of loans.54 percent (S&P 500 over the same period is down 5. Current crisis in the US Prima-facie the current crisis in the U.S.

the Iraq war has cost the US 50-60 times more than the Bush administration predicted and was a central cause of the subprime banking crisis threatening the world economy. the US Commerce Department confirmed that the US economy grew by 0. Impact of US recession on India . he said. and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history. That led to a housing bubble and a consumption boom. According to the former World Bank vice-president said the war had.000. cost the US something like $US3trillion ($3.000 recently to a seasonally adjusted 373.6pc in the last three months of 2007.The indications of slowdown were there during the start of 2008.3 trillion) compared with the $US50-$US60-billion predicted in 2003. showing a weakening labour market. "The regulators were looking the other way and money was being lent to anybody this side of a life-support system. Infact.Fresh economic data also revealed that the number of jobless claims in the US rose by 19. so far." he said. It is estimated that as many as two million Americans could lose their homes as a result of the sub-prime crisis this year External Factors According to Nobel Prize-winning economist Joseph Stiglitz. The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.

The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. January 21 and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being vaporized. interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing. A recession could bring down by 22. while the Sensex fell by 14. the benchmark index (BSE) has gained 2. If the fall from the record highs reached is taken. The worries for exporters will grow as rupee strengthens further against the dollar. A weak dollar could bring more foreign money to Indian markets. On the other hand. Oil may get cheaper brining down inflation. The whole of Asia would be hit by a recession as it depends on the US economy. Indian companies with big tickets deals in the US would see their profit margins shrinking. Indian companies have major outsourcing deals from the US. fears of a US recession led to panic in the Indian stock market. and Kospi. Thus.A slowdown in the US economy is bad news for India. In contrast. India's exports to the US have also grown substantially over the years. the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. . almost in line with Hang-Seng. the Sensex was down 45 per cent.7 per cent.5%. But experts note that the long-term prospects for India are stable. Even so. Nikkei. the effect may not be as drastic as would have been the case in the 1980s.6 per cent.

Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States. 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. The manufacturing sector has to ramp up scale economies. In other words. the effects of this recession on India may be quite distinct from those of the past. apparel. Much has happened between then and now. If this is done. The last time the bubble burst (2001-2002). consumer electronics. If other funds follow suit. a cascading effect can be expected. thus lowering prices. if it wishes to offset the loss of revenue from a possible US recession. and seaports-and be ready for a rapid takeoff when normalcy is restored. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. 3. airports. and improve productivity and operational efficiency. In terms of specific sectors. while the Indian Index fell by 15%. The Indian economy has shown a robust and consistent growth trajectory and the projection for 2008 is 9%. the DJIA went down by 23%. If Fortune 500 companies slash their IT budgets.History might hold a clue here. A large portion of this is likely to flow into India and China. Indian firms could be adversely affected. Instead of looking at the scenario as a threat. India can emerge as a major player in the IT products category as well. 2. It has been suggested that CalPERS is likely to shift an additional US$24 billion to its international portfolio. the sector would do well to focus on product innovation (as opposed to merely providing services). the additional funds could be deployed to create infrastructure--roads. Along with the already significant dollar funds available. The demand for appliances. Here are some areas worth following: 1. and a host of products is huge .

What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill. At the micro-level. most of them from the Gulf countries. A recession in the United States may see the loss of some jobs in India. specific sectors could be affected. Given the availability of talented professionals. Exporters are pushing for government intervention and rate cuts.000 Indian workers. and with a distinct cost advantage. that has been absent until now. China. increasing liquidity in the economy. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates. and narrow the overall trade deficit. A strong domestic demand would also help in competing globally when the recession is over. The tourism sector could be affected. at the macro-level. Although unlikely.and can be exploited to advantage by adopting appropriate pricing strategies. 350 million people with purchasing power cannot be ignored. This is not a sales pitch for India. have probably returned to the country due to the global economic slowdown. The concept of Social Security. a prolonged recession might see the emergence of new regional groupings--India. but not by much. and Korea? 4. For US firms. 5. a recession in the US may bring down GDP growth. Nearly 50. this may be a good time to look at India as well. who have long looked at China as a better investment destination. In summary. may gain momentum. but only a gentle suggestion to US corporations. . 6. After all. and catalyzing domestic demand. India can be the destination of choice for health tourism. The Indian Rupee has appreciated in relation to the US dollar.000 to 150. Innovation now may prove to be the engine for growth when the next boom occurs. Now is the time to aggressively promote health tourism.

the Bush government has proposed a $150-billion bailout package in tax cuts.100. Now in an age of pink slips and mounting recession. control inflation and increase employment opportunities.1 trillion (Rs.000 crore) in association with the private sector in the Indian economy to stimulate internal demand to insulate it from the effects of global recession This is to increase productivity. from 1930 to 1939. In the current case. and high poverty. The government also hikes its spending to create more jobs and boost the manufacturing and services sectors and to prop up the economy. . The myth of IT and the glamour if private jobs are all history now.Jobs in recession The present job recession has also hit the aspiration level of the Indian youth. the Indian Youth is once again looking in public sectors for jobs. • • • Past recessions The US economy has suffered 10 recessions since the end of World War II. How to fight recession • Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. low prices of goods. The government also takes steps to help the private sector come out of the crisis. the government has decided to inject Rs. low profits. It was a decade of high unemployment. Government has encouraged foreign direct investment. The Great Depression in the United was an economic slowdown.

as did profits and employment. The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. The 2001 recession saw a 0.0 per cent in 1938. Unemployment jumped from 14. The economy also suffered after the 9/11 attacks. and logging. In the 1990-91 recession.The trade market was brought to a standstill.6 per cent affecting the lives of millions of Americans. monetary policies help India . the American economy unexpectedly fell.7 million. investors' wealth dwindled as technology stock prices crashed.5 per cent from its peak in the second quarter of 1990. In 2001. which consequently affected the world markets in the 1930s. In 1937. This was followed by Black Monday in October 1987. From March to November 2001. The dot-com burst hit the US economy and many developing countries as well. lasting through most of 1938. Production declined sharply. The US saw one of its biggest recessions in 2001. The early 1990s saw a collapse of junk bonds and a financial crisis. ending ten years of growth. when a stock market collapse saw the Dow Jones Industrial Average plunge by 22. the GDP fell 1. Fiscal. the longest expansion on record.6 per cent decline from the peak in the fourth quarter of 2000. employment dropped by almost 1.3 per cent in 1937 to 19. Industries that suffered the most included agriculture. mining.

balancing economic growth.it brings fear and uncertainty for an economy. with a pick-up likely due to new infrastructure development. the bottom of the global downturn is now in sight China.It has both positive and negative effects. Sherman Chan. the downward trend in the country's industrial output seemed to have ended. as reflected in the rapid increase in net capital inflows in the stock market during recent months. Some of the positive effects include taking the excesses out of the economy. Conclusion Recession is a natural phenomenon of an economic cycle. India and Indonesia & have dodged recession and maintained strong growth despite the global turmoil. a severe slowing in the economy. creating buying opportunities in different asset classes and creating changes in consumer attitudes The negative effects include rising unemployment. an economist. the creation of fear and the destruction of asset values .Fiscal and monetary policies have helped India to curb the recession and sustaining the economy.It has occurred many times throughout the history. Investor confidence in India had certainly improved. said in a note on the recovery of the Asia-Pacific region that amid increased sightings of green shoots.