RECESSIONS ARE the result of reduction in the demand of

products in the global market. Recession can also be associated

with falling prices known as deflation due to lack of demand of
products. Again, it could be the result of inflation or a
combination of increasing prices and stagnant economic growth
in the west.

Recession in the West, specially the United States, is a very bad

news for our country. Our companies in India have most
outsourcing deals from the US. Even our exports to US have
increased over the years. Exports for January have declined by
22 per cent. There is a decline in the employment market due
to the recession in the West. There has been a significant drop
in the new hiring which is a cause of great concern for us. Some
companies have laid off their employees and there have been
cut in promotions, compensation and perks of the employees.
Companies in the private sector and government sector are
hesitant to take up new projects. And they are working on
existing projects only. Projections indicate that up to one crore
persons could lose their jobs in the correct fiscal ending March.
The one crore figure has been compiled by Federation of Indian
Export Organisations (FIEO), which says that it has carried out
an intensive survey. The textile, garment and handicraft
industry are worse effected. Together, they are going to lose
four million jobs by April 2009, according to the FIEO survey.
There has also been a decline in the tourist inflow lately. The
real estate has also a problem of tight liquidity situations,
where the developers are finding it hard to raise finances.

IT industries, financial sectors, real estate owners, car industry,

investment banking and other industries as well are confronting
heavy loss due to the fall down of global economy. Federation
of Indian chambers of Commerce and Industry (FICCI) found
that faced with the global recession, inventories industries like
garment, gems, textiles, chemicals and jewellery had cut
production by 10 per cent to 50 per cent.

How to tackle the global slump?

“Our economy is shrinking, unemployment rolls are growing,

businesses and families can’t get credit and small businesses
can’t secure the loans they need to create jobs and get their
products to market,” Obama said.

“With the stakes this high, we cannot afford to get trapped in

the same old partisan gridlock.

Introduction
In economics, a recession is a general slowdown in economic
activity in a country over a sustained period of time, or a
business cycle contraction. During recessions, many
macroeconomic indicators vary in a similar way. Production as
measured by Gross Domestic Product (GDP), employment,
investment spending, capacity utilization, household incomes
and business profits all fall during recessions.
Another rule of thumb to identify a recession is two successive
quarterly declines in GDP – Gross Domestic Product, a measure
of the nation's output. This two-quarter metric is now a
commonly held definition of a recession.
How to predict a recession?
Although there are no completely reliable predictors, the
following are regarded to be possible predictors. Normally a
significant stock market drop has often preceded the beginning
of a recession.
Inverted Yield Curve, the model developed by economist
Jonathan H. Wright, uses yields on 10-year and three-month
Treasury securities as well as the Fed's overnight funds rate.
The three-month change in the unemployment rate and initial
jobless claims.
How animal spirits destabilize economies?
Five aspects of these animal spirits affect the economy:
confidence and the feedback mechanisms that amplify
disturbances; the setting of wages and prices, which depend
largely on attitudes about fairness; the temptation toward
corrupt and antisocial behavior; the “money illusion,” or
confusion between the nominal and real level of prices (so that
people, for example, often miss the fact that conservative
investments may be risky in times of inflation); and the story of
each person’s life and the lives of others—stories that in the
aggregate, as a national or international story, play an
important economic role.
Stock market and recessions
Some recessions have been anticipated by stock market
declines. During an economic decline, high yield stocks such as
fast moving consumer goods, pharmaceuticals, and tobacco
tend to hold up better.
Why are financial prices so volatile?
No one has ever made rational sense of the wild gyrations in
financial prices—gyrations as old as financial markets
themselves.
When the stock market tanks, the authorities try to restore
public confidence by insisting that “the fundamentals of the
economy remain strong.” The authorities are right in the sense
that, almost always, it is the stock market that has changed;
the fundamentals haven’t. How do we know that they couldn’t
generate these changes? If prices reflect fundamentals, they do
so because those fundamentals are useful in forecasting future
stock payoffs. In theory, stock prices predict the discounted
value of future income streams: dividends or earnings. But
stock prices are much more variable than the discounted
streams of dividends or earnings they are supposed to predict.
Real estate market and recessions
The origin of the present global recession and resultant credit
crisis could easily be traced to the ‘sub-prime crises’. Fraud was
not only present, but, in most cases, could have been
identified with adequate underwriting, quality control and fraud
prevention tools prior to the loan funding.
The Federal Bureau of Investigation in the United States of
Americacorrectly identified the epidemic sub prime crisis could
have been averted had the administration acted with even
minimal competence.
The sub prime crises resulted in the down fall of the real estate
market in the United States. As per previous experiences, the
real estate market usually weakens before a recession. In this
instant too, it happened exactly the same.
Politics and recessions
Generally an administration gets credit or blame for the state of
economy during its time. It is generally assumed that
government activity has some influence over the presence or
degree of a recession. Economists usually teach that to some
degree recession is unavoidable, and its causes are not well
understood. Consequently, modern government
administrations attempt to take steps, also not agreed upon, to
soften a recession. They are often unsuccessful, at least at
preventing a recession, and it is difficult to establish whether
they actually made it less severe or longer lasting.
Present Recession
According to the International Monetary Fund’s World Economic
Outlook, October 8, 2008, the world economy is “entering a
major downturn” in the face of “the most dangerous shock” to
rich-country financial markets since the 1930s.
The current crisis stems from our changing level of confidence,
from temptations, envy, resentment, illusions, and, especially,
from changing stories about the economy—stories that first
glorified financial “innovation” and then represented it as a con
game.
Recession has moved to emerging economies
With the financial crises in advanced economies having passed
"through strongly and rapidly" to emerging economies
including India, the International Monetary Fund (IMF) on
16th April 2009 called for a coordinated policy response, since
"reducing individual country vulnerabilities alone cannot
insulate emerging economies from a major financial shock in
advanced economies", ahead of World Bank-Fund Spring
meeting.
"Financial crises in advanced economies have passed through
strongly and rapidly to emerging economies, with financial
linkages a key channel of transmission," the report said in a
chapter on "How Linkages Fuel the Fire".
The extent of transmission of financial stress is related to the
depth of financial linkages between advanced and emerging
economies, notably through bank lending, it said. On average,
stress in emerging economies moves almost one-for-one with
stress in advanced economies, but there is significant cross-
country variation.
Is it really so with regard to India and China?
However according to another report brought out by British
Financial Services Major Barclays Bank, India, China no longer
witnessing slump and this will lead the global recovery.
"The slump in activity in emerging Asia is over. We believe the
region returned to positive growth of the aggregate level in the
first quarter of 2009 -- driven by China and India -- and the
recovery is broadening to the more open industrial economies
in 2009," says Barclays.
Recession: Worse not yet over, says RBI Governor
However we have different point of view from a different
quarter. Warning that the worst may not be over yet, Reserve
Bank Governor D Subbarao has said the global economic
recession may not only continue through 2009 but could
prolong to the next year as well.
"Even with current levels of policy intensity, the trough of the
global recession is not seen until the end of 2009 and could get
pushed out further if the policy responses fail to gain traction,"
Subbarao said at the International Monetary Fund-World Bank
spring meetings.
Calling for a quick and internationally coordinated approach to
"a daunting, but not an insurmountable challenge", he stressed
on empowering IMF's capacity to grapple with the crisis. He
also suggested a radical shift within IMF in tune with the
changing world.
"While the recession has intensified in the advanced
economies, emerging economies have been dented by the
collapse in external demand and commodity prices, the
tightening constraints on access to external financing and the
retrenchment of capital flows."
Usual Government responses to recessions
Governments usually respond to recessions by adopting
expansionary macroeconomic policies, such as increasing
money supply, increasing government spending and decreasing
taxation. Most mainstream economists believe that recessions
are caused by inadequate aggregate demand in the economy,
and favor the use of expansionary macroeconomic policy
during recessions.
Strategies favored for moving an economy out of a recession
vary depending on which economic school the policymakers
follow.Monetarists would favor the use of expansionary
monetary policy, while Keynesian economists may advocate
increased government spending by the government to spark
economic growth. Supply side economists may suggest tax cuts
to promote business capital investment. Laissez faire minded
economists may simply recommend that the government not
interfere with natural market forces.
Present status of present recession
a. Present recessionary conditions
Thomas Donohue, President and CEO, American Chamber of
Commerce predicts economic growth to pick up from Middle of
2009 and get firmly established by end of 2009.
However, RBI Governor Subba Rao has opined in the
International Monetary Fund – World Bank Spring meetings
yesterday that the worst may not be over yet. He feels that
Even with current levels of policy intensity, the trough of the
global recession is not seen until the end of 2009 and could get
pushed out further if the policy responses fail to gain traction.
b. Prediction of strong economic growth
Goldman Sachs on April 13 reported better-than-expected
earnings as a surge in trading revenue outweighed asset write
downs - $1.81 billion profit in the first quarter of 2009.
Wells Fargo & Co., the second-biggest U.S. home lender, said
last week it had about $3 billion in first-quarter net income, up
from $2 billion a year earlier.
Driven by India and China, the emerging Asian economies no
longer witness slump, which will lead the global recovery,
British financial services major Barclays said.
In a research paper, Barclays Capital expected the recovery
in Asiato arrive slightly earlier than the rest of the world,
reflecting relatively stronger balance sheets and the significant
fiscal and monetary stimulus.
c. Effective regulatory regime
Support extended by almost all major economies to their
banking system to overcome problem accounts and Newer
regulatory prescription in risky areas.
d. Safe leveraging ratios
Goldman Sachs shows a decline in leveraged finance activity,
fewer mergers and share offerings, about 30% in the first of
quarter of 2009 – a move towards safe leveraging ratio.
f. Rapid expansion of trading volumes
In the first quarter of 2009, J P Morgan Chase & Co, the second-
largest U.S. bank by assets, reported profit that beat analysts’
estimates as fixed-income trading revenue rose to a record.
Revenue in the investment-banking unit was a record $8.3
billion, including $4.9 billion from fixed-income trading alone.
The business generated $3 billion in the same period a year
earlier. Investment-banking profit was $1.61 billion, compared
with a loss of $87 million in the first quarter of 2008.
Citigroup Inc., the U.S. bank rescued by $45 billion
in U.S. taxpayer funds, ended a five- quarter losing streak with
a $1.6 billion profit on trading gains - The bank reported $4.69
billion of fixed-income trading revenue in the quarter,
compared with a trading loss of $7.02 billion a year earlier.
Stock-trading revenue was $1.9 billion, a 94 percent increase.
g. Cost of capital at historic levels
The interest rates prevailing all over the world is at historically
low or near low levels – This should stimulate credit growth and
expansion.
Conclusion
There is a view termed the halfway rule according to which
investors start discounting an economic recovery about halfway
through a recession. In the 16 U.S. recessions since 1919, the
average length has been 13 months, although the recent
recessions have been shorter. Thus if the 2008 recession
followed the average, the downturn in the stock market would
have bottomed around November 2008.
McKinsey Report - ECONOMIC CONDITIONS SNAPSHOT, APRIL
2009:Executives are slightly more positive about the bigger
economic picture than they were six weeks ago, and some see
hope for their companies toward the end of 2009. Strong
majorities support international coordination of responses to
the crisis and say protectionism would harm their nations'
economies.
We can hopefully conclude that we will get over this recession
very soon and once again our global markets will begin to
perform.
(Sources: IMF, RBI, Barclays Bank, McKinsey, Bloomberg,
Wikiepedia)