Recession Final

8/3/2019 Recession Final

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Sterling College of Arts, Commerce and

Science

Topic:

Global Recession and its Contagious

Effects



Group Members :



Acknowledgement

Through this acknowledgment, we express our sincere gratitude to all

those people who have been associated with this assignment and have

helped us with it and made it a worthwhile experience.

Firstly we extend our thanks to the various people who have shared their

opinions and experiences through which we received the required

information crucial for our project.

Finally, we express our thanks to our Managerial Economics Professor Mr.

Swapnil Redekar who gave us this opportunity to learn the subject in a

practical approach and he guided us and gave us valuable suggestions

regarding the project.



INDEX

Topic

1. What is Recession?

2. Definition

3. Main Cause of Recession

4. Definition

5. Global Recession

6. The US Sub-prime Crisis

7. Main Cause of Recession

8. Effect of Recession



What is Recession?

In economics, a recession is a business cycle contraction, a generalslowdown in economic activity. During recessions, many macroeconomicindicators vary in a similar way. Production, as measured by grossdomestic product (GDP), employment, investment spending, capacityutilization, household incomes, business profits, and inflation all fall, whilebankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending,often following an adverse supply shock or the bursting of an economic

bubble. Governments usually respond to recessions by adoptingexpansionary macroeconomic policies, such as increasing money supply,increasing government spending and decreasing taxation.



Definition

According to the National Bureau of Economic Research (NBER),

recession is defined as "a significant decline in economic activity spread

across the economy, lasting more than a few months, normally visible in

real gross domestic product (GDP), real income, employment, industrial

production and wholesale-retail sales". More specifically, recession is

defined as when businesses cease to expand, the GDP diminishes for two

consecutive quarters, the rate of unemployment rises and housing prices

decline.

Economists officially define a recession as two consecutive quarters of negative growth in gross domestic product (GDP). The National Bureau of

Economic Research cites "a significant decline in economic activity spread

across the economy, lasting more than a few months" as the hallmark of a

recession.

Both definitions are accurate because they indicate the same economic

results: a loss of jobs, a decline in real income, a slowdown in industrial

production and manufacturing and a slump in consumer spending -

spending that drives more than two-thirds of the U.S. economy.

Many factors contribute to an economy's fall into a recession, but the major

cause is inflation. Inflation refers to a general rise in the prices of goods

and services over a period of time. The higher the rate of inflation, the

smaller the percentage of goods and services that can be purchased with

the same amount of money. Inflation can happen for reasons as varied as

increased production costs, higher energy costs and national debt



Main Cause of Recession

It all started from USA housing crisis (sub-prime crisis). The USA financial

institutions went on lending to people for house construction without

bothering to verify their repaying capacity. The houses were pledged with

the financial institutions. When the prices of house properties crashed and

the loners failed to repay the loan, the financial institutions repossessed the

properties but could not sell as prices had crashed. This resulted in huge

loss which crippled the USA financial sector. Many financial institutions

went bankrupt. On the whole the entire USA economy was in turmoil and it

went in to recession. As the globalization has made the world trade

interlinked n as the USA is the richest economy in the world; the countries

which were dependant on USA economy also suffered. Gradually this slow

down spread to all parts of the global economy. This in nutshell is the main

cause of global economic slowdown.



Global Recession

A global recession is a period of economic slowdown. The International

Monetary Fund (IMF) takes many factors into account when defining aglobal recession, but it states that global economic growth of 3 percent or

less is "equivalent to a global recession". Defining a global recession is

more difficult, because developing nations are expected to have a higher

GDP growth than developed nations. According to IMF, the real GDP

growth of the emerging and developing countries is on an uptrend and that

of advanced economies is on a downtrend

http://www.arifanees.com/wp-content/uploads/2010/02/global_recession8.jpg



The global economic depression has impacted on development towardsthe reduction of child mortality. The decrease in government and familyrevenue has involved kids’ access to health care facilities. In turn, it hasmade kids more susceptible to morbidity and mortality. The World Bankforecasted in February 2009 that approximately 200,000 to 400,000 morechildren may die from 2009 until 2015 among developing countriesbecause of the effects of global financial crisis.



The global recession has slowed development and progress towardsachieving the Millennium Development Goals (MDGs). The InternationalMonetary Fund estimates that the global economy contracted by 0.6 per cent in 20091and the implications of this have been severe for many.Economic growth in developing countries was only 1.7 per cent in 2009compared with 8.1 per cent in 2007. However, if China and India areexcluded, the economies of developing countries actually contracted by 1.8per cent3. The World Bank has estimated that an additional 64 millionpeople will be living in extreme poverty on less than US$1.25 a day by theend of 2011 as a result of the global recession.

The capacity of developing countries to respond to the crisis varied

considerably. Countries with a heavy reliance on export revenue and

foreign investment were most exposed to the impacts of the downturn.

Those with stronger economies resources were able to implement effective

policy responses to support the economy and weathered the global

recession relatively well.



Effects of Recession

Recessions have the tendency to touch sore spots of business. Those

which are no longer viable are shut off. For instance publications that are

now low on subscription, advertising and sales get the first cut. Mostcompanies spend large sums on advertising in print and electronic media.

The PR companies have to work on tighter budgets with maximum

mileage. Chances are that different agencies that were used for different

products are now merged. A single agency is given the job to do. Staff in

the office faces retention as now the work load is divided between only the

most necessary employees. The ones left can also forget about the raise in

salaries and also work hard.

As USA faces a visible recession in current times, it is evident that

economists are in overdrive to review the fiscal statistics and give expert

opinions. The stock markets have already created a panic situation in the

country. The biggest lenders are now facing a cash crunch and for the first

time they are also admitting it.

Most of the credit has gone into housing, car, security and insurance

schemes. Americans who have invested in such schemes have only their

stocks to offer as collaterals and now are facing the brunt with

embarrassing foreclosures. Does this recessive situation warrant a soul

search amongst the other nations who are depending and banking their

economies on Uncle Sam’s federal reserve’s? The answer is yes. There

has been no sustainable development in major sectors like housing,

medical, small scale business. The US economy has reached its peak and

is slowly going downhill.

Jobs are being outsourced to other countries while Americans arethemselves jobless. As Asian countries are getting more employment, even

expatriates are returning home. India and China are major outsourcing

backyards for the US.



The US Sub-prime Crisis

The US Subprime Crisis has not only resulted in US economy recessionbut its ripple effects have touched the countries like UK, Spain, Japan and

Singapore as well. Emerging economies like China and India are alsoaffected by the negative influence of the US Subprime Market Crisis. Atpresent it seems that this subprime crisis of US is going to generate aglobal recession by affecting the major countries of the world.

The US Subprime Market Crisis has already resulted in US EconomyRecession. The countries like Britain, Spain, Japan, and Singapore aregoing to bear the negative effects of US economy recession. Emergingeconomies like China and India are also suffering from the ill effects of theUS Subprime Crisis. All these countries together form a major part of theglobal economy. So, it can be said that the US Subprime Market Crisis isgoing to affect the global economy as a whole. As all the countriesmentioned above are being influenced in a negative way by the USeconomy recession, it is expected that the growth rate of the worldeconomy would experience a significant fall. According to Alan Greenspan,the Former Federal Reserve Chairman, Global Recession is surely going totake place in some form or other .



Effect of Recession in India

Certainly there is a lot of effect of US recession on Indian economy. US

recession has a chain affect as US imports many things from other

countries which includes India. Primarily this has impact on export industry

in India which includes textile industry, granite processing industry, tobacco

exports and so on. It is said that already 5 lac people have already lost their

job in Indian textile industry.

This is not the end of the story. Now it has also started showing its direct

effects on all other industries as well which include IT and ITES. Proactively

many of the companies have started taking proactive steps to protect them

self from the gloomy future. Many small companies were closed and readyto close, increasing the unemployed people. This will have lot of impact on

peoples spending abilities and the supply chain effect carries forward.

Is everyone in India affected??

Yes, but many people may not realize it or may not have any direct effects.

Especially people living in cities will are more exposed to this and people in

towns are less exposed to this situation. This is especially because number

of employees working in private firms are susceptible to this situation and

people working for govt. and self employed are less (these people will have

impact only at later stages).

What’s the other side of the coin? Frankly it’s a overall loss to everyone.

But this is the right time for govt. to attract good talent to join in govt.

organizations. That way government can increase its efficiency and also

help country to face this situation. But government has to act quickly for

filling already vacant positions and creating new jobs.



A Recession is characterized by

Rising Unemployment

It takes time for the unemployment to rise but even when the economy is

recovering it takes time for unemployment to fall. The full impact of a

recession on employment may not be felt for several quarters. Research in

Britain shows that low-skilled, low-educated workers and the young are

most vulnerable to unemployment in a downturn. After recessions in Britain

in the 1980s and 1990s, it took five years for unemployment to fall back to

its original levels. Many companies often expect employment discrimination

claims to rise during a recession.



Rising Government Borrowing:

A recession is bad news for the government budget. A recession leads to

lower tax revenues and higher government spending on unemployment

benefits. The UK is forecast to borrow 60 billion Euros. This borrowing

means higher taxes and higher interest payments in the future

Falling share prices:

Generally a recession leads to lower profitability and lower dividends.

Therefore shares are less attractive. Share prices often fall in anticipation

of a recession. E.g. the recent fall in share prices are largely because themarket expects a recession soon. During the actual recession share prices

often increase in anticipation of the economy recovering

Business

Productivity tends to fall in the early stages of a recession, and then rises

again as weaker firms close. The variation in profitability between firms

rises sharply. Recessions have also provided opportunities for anti-

competitive mergers, with a negative impact on the wider economy: thesuspension of competition policy in the United States in the 1930s may

have extended the Great Depression.

Social effects

The living standards of people dependent on wages and salaries are more

affected by recessions than those who rely on fixed incomes or welfare

benefits. The loss of a job is known to have a negative impact on the

stability of families, and individuals' health and well-being.

Recession Final

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