“The world is likely headed for a deep recession” says Paul Krugman 2008 Nobel Prize Laureate for Economics. But what is recession? Many mistake economic slowdown for recession. Textbooks define recession as a period of two consecutive quarters of negative economic growth as measured by a country’s GDP and is expected to last anywhere between six and 18 months. Slowdown, on the other hand, is just a slower growth in economic activities. While a slowdown is industry specific, a recession results in a wide ranging impact.
How did this happen?
Trouble started with the sub-prime crisis in the US. Lending against homes to borrowers of doubtful quality resulted in debt defaults. to collapse. The defaults led to a fall in property prices as home loans were foreclosed and the property was put on sale. This set off a chain reaction. Securities that were based on repackaged loans and held by a wide range of financial institutions lost value, triggering massive losses and finally bankruptcies. The final blow came in the form of Lehman Brothers’ bankruptcy. These apart, since the beginning of 2008, Dow Jones and Nasdaq have seen a 29 per cent fall in their respective values.
Falling property prices and a sudden squeeze on liquidity and credit have set off fears about job losses and its subsequent impact on consumer spending in the US. For example, Pepsi, a consumer company, has in this quarter, reported a loss for its US operations, indicating a dip in consumer spending. A vicious cycle of fall in sales, fall in profits and decline in economic growth, ultimately results in unemployment and lower consumer spending, the key reflector of recession.
Not just the USIf you thought that the US alone is vulnerable to recession, think again. Global economies today are interdependent. If America sneezes, the rest of the world catches a cold. America is the largest producer of natural resources. So when prices of oil and gas increase, there is a global impactMany Asian countries such as Taiwan, China and South Korea are major exporters of consumer goods to the US. Similarly, a good proportion of global consumption for goods and services is accounted for by the country.
India’s position
Is India vulnerable to a recession too? As of now, evidence points only to a slowdown in growth and not to recession. Though India is not an export-reliant economy, the impact of inflation and global recession is being felt here too. Inflation is now hovering at over 11 per cent. There are concerns that infrastructure spending may see delays. Worries about earnings have seen the Sensex plunging to new lows in this period. But it is early days yet to call it a recession in India, because companies still boast of decent profit growth.
Every economy is sure to go through repetitive cycles of boom, slowdown and recession. Maybe its just time to redo some economics lessons!
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