Recession 2008-09 By Rahul In

PRESENTATION

MADE BY : RAHUL BURAGOHAIN (006) MBA 1ST SEMESTER NIEC

Before, understanding “Recession”, we need to understand the market economy;

A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A] TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2] Declining Market Economy

A1] Growing Market Economy

Starting Point = Willingness to buy

A2] Declining Market Economy

tarting Point = Unwillingness to buy

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

oducer wants his demand always to be high nsumer wants his buying cost always to be low

Actually, Demand is the price at whic consumer is ready to buy and producer is ready to sell;

Producer Price Consumer Price

Usually, we think; Demand = Quantity But, here Demand = Price; This is because, Price decides the Quantity of Sales; Competitive Price = More Demand; In competitive Price = Less Demand

C] What is Recession?

Recession is the economy shrinking for two consecutive quarters (=6 months) with a decrease in the GDP (=Gross Domestic Product)

GDP = Value of all the reported goods and services produced by the people operating in the country GDP = MONEY VALUE OF {C + I + G + (X – M)}

Consumables, I = Gross Investments, G = Government Spendin X = Exports, M = Imports

C] What is Recession? GDP is a good indicator of economy; Other indicators could be; -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc.. If GDP is growing, then market is growing due to increased demand;

C] What is Recession? GDP is a good indicator of economy; Other indicators could be; -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc.. If GDP is growing, then market is growing due to increased demand; Note: If the recession continues for next quarter, (>6 months) then we go through “DEPRESSION” Economy;

C] What is Recession? There is a joke that economists quote to explain the Difference between “Recession & Depression” RECESSION = WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRESSION = WHEN YOU LOSE YOUR JOB

D] What is a Business Cycle?

What goes up; Has to come down;

Growing economy has to come down if the production rate of goods & services was more than the actual consumption;

E] Why Recession happens?

E1] OVER PRODUCTION

E2] LOW CONFIDENCE LEVEL

E] Why Recession happens?

E1] OVER PRODUCTION PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS COMPANIES PRODUCED MORE

A situation in which the supply exceeds the nation’s ability to consume what has been produced; Supply > Demand

E] Why Recession happens? E2] LOW CONFIDENCE LEVEL

E2.1] Word of mouth E2.2] Assignable Cause

E2.1] Word of mouth

Confidence Level Consumers are fearing that they may lose their jobs; So, they have less Millions of confidence to spend money and buy sumers and ducers after they goods; This will result in reduction in demand in the market; Consumers r many job cuts, mand coming down,start saving money instead of spending money; This is a downward spiral in mpanies’ bankruptcy, the economy;

E] Why Recession happens? E2.1] Word of mouth

E2] LOW CONFIDENCE LEVEL

E2.2] Assignable Cause

E2.1] Word of mouth

Confidence Level Millions of sumers and ducers after they r many job cuts, mand coming down, mpanies’ bankruptcy,

Consumers are fearing Producers do not that stockthey may lose their materials, jobs; So, they less theyhave reduce confidence to spend money gets and buy their productions, into goods; This result in reduction thewill cost reduction in demandactivities, in the market; Consumers worried about start saving insteadetc… of spendin themoney profitability, money; This is a downward spiral in the economy;

E] Why Recession happens? E2.2] Assignable Cause

d Incidences Happening;

ample: September 11 Terrorist Attack in US; International Airport block in Thailand; Mumbai Attacked in India; etc… Series of such incidences leading into a kind of War

ase see next slides, for details on business impact;

Terrorists’ Attack on 11th September in US Created fear in people People cancelled their travel plans Resulted in low occupancy rates Airlines & Hotel Industries badly hit Airline & Hotel Industries offered discounts, gift coupons, to attract people But, still, no improvement in occupancy rate Airline & Hotel Industries started “Cost Reduction” activities

CONTINUED IN NEXT SLIDE

Terrorists’ Attack on 11th September in US Airline & Hotel Industries started “Cost Reduction” activities

i] Reduce No. of flights

In flight meals reduced

ii] Lay off people

iii] Salary reduction to “Not laid off people”

Low or No income to They became careful due spend and buy goods to the fear of loss of job

Meals supplying company Demand for other goods Started saving money got the hit come down instead of spending Catering company now, lays off people

Demand for other goods come down

o, you can see how the hit on Airline and Hotel

dustries can affect the end;

“Un-related” industries

ne industry can hit many other industries when the onfidence level of millions of consumers & producers astically comes down;

F] How to know recession? Indicators to say a nation is in recession;

- People buying less stuff - Decrease in factory production - Growing unemployment - Slump in personal income - An unhealthy stock market

They define recession as : “significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.

What Causes Recession ?

An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. 

 A recession normally takes place when consumers loose confidence in the growth of the economy and spend less.  This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.  Investors spend less as they fear stocks values will fall and thus stock

World Economy

The Global Economy

The world economy grew 5.2% in 2007 Powered by growth in China (11%), India (9%) and Russia (8%). The BRIC countries had been posting 7%-10% grow rates for years. Property and stock market booms. Investment was bringing economic development. Developing and less developed economies depend on the developed countries for their economic wellbeing.

What a difference a year makes?? The global economy has been hit by a rapid one-two punch that set the stage for stagflation to make a comeback. It started with the sub-prime crisis in the US.

U.S.A – Consumption based

Economy. 2/3rd economic activity i.e. GDP – comes from consumers. Credit - free flowing for U.S consumers

for years the prices of homes in the U.S. kept rising.

Result Overconsumptio n/ Extravagant spending by the consumer Thus

For years prices of homes in US

Felt a need to Preserve capital. Therefore

Started tightening credit , Started restricting lending to the U.S consumer and businesses. Since then

Loans became difficult to come by banks, Bank cut Credit card limits.

U.S. consumer significantly reduce spending.

Reduced spending meant - reduced activity for

most businesses and consumers. businesses started to layoff workers (firing people as there was no work).

Because of layoff Unemployment started to rise which resulted in further reduction in spending by consumer.

ng oil prices at $100 a ba

market crashed

All this slowed down the growth

of economy. GDP growth rate fell to 2%

 All this put together has

driven the U.S. economy in recession.

 In

Feb, 63,000 jobs were lost.

In Sept, 159,000 jobs were lost, the

5 yr U.S record.

Another bank failure occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual

The year 2008 as of September 17 has seen 81

public corporations file for bankruptcy in the United States.

Lehman Brothers being the largest bankruptcy in

U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals.

The year also saw the ninth biggest bankruptcy

with the failure of Indy Mac Bank.

Other Famous who got bankrupt were, fannies

mae & Freddie Mac, aig, bearstearns etc.

G] How to come out of recession?

unhealthy for any nation to be in Recession; Government will take certain countermeasures iminate or reduce the Effect of recession for turnaro Important Point: Today, it is a market Economy

Producers;

Consumers;

Can produce and sell at their prices

Can decide to buy or not;

th Producers and Consumers are free to act; Not a forced act

G] How to come out of recession?

, Government does not have direct control on Producers mers’ behavior; But, they can influence millions of Producer mers with Government’s policies;

Government has 2 plans Fiscal Policies (By Govt.)

Government influences the economy by changing how it (Government) spends and collects money

Monetary Policies (By RBI)

RBI manipulates the available supply of money in the country

G] How to come out of recession?

Government influences the economy by changin Fiscal how it (Government) spends and collects money Policies 1] Tax cuts for businesses or for individuals

More money available for spending

2] More Spending by Govt. to create jobs

Individuals get salary and spend money

3] Automatic fiscal policy; Unemployment Insurance

Some income to unemployed people to spend

Demand picks up; Market can recover;

G] How to come out of recession?

Government manipulates the available supply Monetary Policiesof money in the country More money 1] Reduce reserve available for bank ratio to give loans What is Reserve Ratio? Each bank has to keep a high % of their assets in RBI (Reserve Bank of India). These assets do not earn any interest to banks. This money kept in RBI is called “Reserves”; RBI sets certain ratio of this reserves and it is called “Reserve Ratio”

Demand picks up; Market can recover;

G] How to come out of recession?

Government manipulates the available supply Monetary Policiesof money in the country More money 1] Reduce reserve available for bank ratio to give loans 2] Lower the interest rates

Individuals take more loan

Demand picks up; Market can recover;

G] How to come out of recession?

Government manipulates the available supply Monetary Policiesof money in the country More money 1] Reduce reserve available for bank ratio to give loans 2] Lower the interest rates

Individuals take more loan

3] Use its own reserved money to buy Govt. bonds

It becomes an income to Govt. to inject money into the market

Demand picks up; Market can recover;

I] WOW!!!!!!!!

RBI’s Power or Government’s Power is double-edged sword; Sometimes, their policies to recover from recession can be counter-productive and it may further worsen the situation; If we advise our people to save money, then, the multiplication effect is that the demand will not pickup and recession will continue; Very peculiar!!!!! But, am not misguiding you; Just think from a macro level, if everybody in the country stops spending, what will happen?

Nation’s recession is controlled by the actions of everybody living in that country;

Currently, Most of the developing Slow Down Economies like China, Stage; Not yet India; in Recession

Most of the developed Economies like US, Japan, Germany, etc

Currently, in Recession

GDP Growth Rate Down; But, Still expected to be Around 6% in India

GDP Growth Rate Negative;

HOPING THIS TIME RECESSION VANISHES SOON SO THAT INDIA GETS BACK TO ITS STRONGER GDP GROWTH RATE OF 8% TO 10% (THOUGH THE EXPERSTS SAY IT WILL LAST TILL Q3 OF 2009)