Recession Overview 11

What is Recession ?

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

Growing Market Economy

STAGES OF MARKET ECONOMY

Declining Market Economy

Growing Market Economy

R eces s ion Contraction phase of business cycle

What WhatisisRecession? Recession

?

 A Recession is a contraction phase of the business cycle.

 National Bureau of Economic Research (NBER) has defined 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 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

What is Recession? There is a joke that economists quote to explain the Difference between “Recession & Depression”

RE CESSI ON = WHEN YOUR NEIGHBOR LOSES HIS JOB

DE PRESS ION = WHEN YOU LOSE YOUR JOB

Why Recession happens ?

Declining Market Economy

E] Why Recession happens?

E1] OVER PRODUCTION

E2] LOW CONFIDENCE LEVEL

Why Recession happens ?

E1] OVER PRODUCTION 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

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;

Why Recession happens ? Word of mouth

LOW CONFIDENCE LEVEL

Assignable Cause

Bad Incidences Happening Consumer

Producer

T-Shirt Quote (Word of Mouth)

Assignable Cause

Bad Incidences Happening;

Example: 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

Please see next slides, for details on business impac

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;

How to come out of recession? It is unhealthy for any nation to be in Recession; So, Government will take certain countermeasures to eliminate or reduce the Effect of recession for turnaround; Important Point: Today, it is a market Economy

Producers; Can produce and sell at their prices

Consumers; Can decide to buy or not;

Both Producers and Consumers are free to act; Not a forced action

How to come out of recession? Hence, Government does not have direct control on Producers’ & the Consumers’ behavior; But, they can influence millions of Producers & Consumers with Government’s policies;

Government has 2 plans Fiscal Policies (By Govt.)

Monetary Policies (By RBI)

How to come out of recession? Fiscal Policies

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

1] Tax cuts for businesses or for individuals

More money available for spending

2] More Spending

Individuals get salary and spend money

by Govt. to create jobs

3] Automatic fiscal policy; Unemployment Insurance

Unemployed people gets income from government for their daily needs

Demand picks up; Market can recover;

How to come out of recession? Monetary Policies

Government manipulates the available supply of money in the country

1] Reduce reserve ratio

More money available for bank 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;

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;

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

WOW !!!!!!!!!!!!!!!!!!!!!!! Most of the developing Economies like China, India;

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

Currently, Slow Down Stage; Not yet in Recession

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

Currently, in Recession

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)

Venkatesh.Zanwar