Special report on recession by capital height

Are we going into a

Double Dip Recession?

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Contents

Introduction

What is a Recession?

Traits of Recession

Types of Recession

Double dip recession

Why worried for recession?

Japanese Economy

Employment

Private Investment

Public Investment

Consumer Price

Small Enterprises

Demand Trend

Export & Import

Leading Economy Indicators

Impact on World Markets

DJIA Technical Chart


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INTRODUCTION

What is double dip recession?

Before knowing about double dip recession, firstly what is a recession?

In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. 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, business profits and inflation all fall during recessions; while bankruptcies and the unemployment rate rise.

Recessions are generally believed to be caused by a widespread drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Traits of recession

A recession has many traits that can occur simultaneously and includes declines in component measures of economic activity (GDP) such as

Consumption Investment Government spending and Net export.


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These summary measures reflect causal drivers such as

Employment levels Household savings rates Corporate investment decisions Interest rates Demographics and Government policies.

Types of recession

“V” shaped recession

“U” shaped recession

“L” shaped recession

“W” shaped recession

Now what is a Double Dip Recession?

Double dip recession, also known as “W–shaped” recession, means when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. The causes for a double-dip recession vary but often include a slowdown in the demand for goods and services because of layoffs and spending cutbacks from the previous downturn. A double-dip (or even triple-dip) is a worst-case scenario. Fears that the economy will move back into a deeper and longer recession makes recovery even more difficult.


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Why are we worried about double dip recession?

In today’s scenario most of the economies are integrated with each other to some extent & we are scared of a double dip recession because of the slowdown in the third largest economy of the world that is Japanese economy and the weak European & U.S. economic data posted in the last month. Economies were struggling to recover from the recent recession of 2009 due to sub prime mortgage when the Greece debt crisis surfaced and now after some quarters Japan has failed to maintain its growth & continues with a long deflationary period.

Investors demonstrated their fear that Japan is in danger of falling into a new slump by selling off shares, taking the benchmark Nikkei average below the psychological level of 9,000.

The yen’s rise is aggravating existing problems of slowed exports growth and stalled domestic consumption. A stronger yen hurts exporters by reducing their competitiveness abroad and cutting the value of their overseas revenues.

The signs of a slowdown were evident in preliminary figures for real gross domestic product in the second quarter, which showed slower than expected Japanese economic growth, at an annualized 0.4 per cent. Consumption, which had been driving growth earlier, was flat in those three months. The ECRI (Economic Cycle Research Institute of USA) leading indicator has collapsed to a 45 week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction in economy within three months.

In the short term, there appears to be no respite on either the export or consumption front.

World witnessed a double dip recession of United States in the early 1980’s, because of interest rate raised by the Federal Reserve to overcome the inflationary period. That time government failed to increase the employment figures from the past recession.


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JAPANESE ECONOMY

Japanese economy is the third largest giant economy in the world after U.S. & China, currently struggling to maintain its position.

Employment

The employment situation is severe, the total unemployment rate floated at a high 5.2% in May, an increase of 0.1 percentage points from the previous month. The total unemployment rate of those aged 15 to 24 was 10.5%, an increase of 1.2 percentage points from the previous month.

The number of employees has been almost flat now no new jobs are coming from the markets. Industries are asking for overtime working in spite of hiring new employee, Industries do not want to indulge the new investment in the market.

Private Investments

Business investment is leveling off. The Quarterly Financial Statements Statistics of Corporations by Industry, demand-side statistics, show that business investment increased in the October-December quarter of 2009, before decreasing in the January-March quarter of 2010. Capital goods Shipments, supply-side statistics, are increasing.

According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2010 is expected to increase for the first time in three years for both large manufacturers and large non-manufacturers. The figures for Orders Received for Machinery, a leading indicator, are showing movements of picking up.


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Public Investment

Public investment has been generally lackluster. The amount of contracted public works in June 2010 and public works orders received in May 2010 were lower than in the previous year. As for short-term prospects, public investment is expected to be generally sluggish in view of the budget situations of the national and local governments.

Consumer Price

Consumer prices, in terms of "general, excluding fresh food, petroleum products and other specific components", continue to decline. Consumer prices (core core) are expected to remain on a downward trend. Taken together, these movements show that the Japanese economy is in a deflationary phase and the decline in prices will continue.

Small enterprises are cautious

On quarterly basis small manufacturers and small non-manufacturers' judgments on current business conditions improved slightly. However, firms, especially small enterprises, are cautious about the immediate future. The number of bankrupt companies has been almost the same as last month while large & medium enterprises showed slight improvement.

Demand trends (consumption and investment)

There is no appreciation in real income of employees and it remains almost the same as last month. The Synthetic Consumption Index which synthesizes demand-side statistics and supply-side statistics has also been decreasing continuously on monthly basis, though private consumption has picked up due to the effects of policy packages.

Export and Import

On yearly basis export has increased slightly but on monthly basis it is declining. By region, exports to Asia & U.S. are increasing moderately on yearly basis but worry is on the monthly side & the same with the Imports to the country. There is no change in international trade balance because of the same movement in export & Import. The better data on a yearly basis is the result of government aid provided to overcome the recession.


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LEADING ECONOMIC IINDICATORS

Contents 2009/Q4 2010/Q1 Q2 2010/Apr. May Jun. Jul.

Sales of household electrical appliances

4.6 14.1 1.8 -1.2 -3.9 1 N.A.

Value of public works contracted

-4.9 -6.5 5.2 15.1 -5.7 -3.4 N.A.

Real exports 7.6 5.2 9.5 6.6 1 -0.3 N.A.

Real imports 1.1 2.5 6.5 3.2 7.3 1.1 N.A. Industrial production 5.9 7 1.4 1.3 0.1 -1.5 N.A.

Shipments 5.9 7.2 1.5 1.4 -1.7 -0.2 N.A.

Inventories -1.5 1.1 3.4 0.6 2 0.7 N.A. Real GDP 1.1 1.2 N.A. N.A. N.A. N.A. N.A.

Index of all industry activity

0.1 1.4 N.A. 1.9 0.2 N.A. N.A.

Ratio of job offers to applicants

0.43 0.47 0.5 0.48 0.5 0.52 N.A.

Unemployment rate 5.2 4.9 5.2 5.1 5.2 5.3 N.A.

Number of employees -1.4 -0.3 -0.3 -0.2 -0.4 -0.1 N.A. Number of regular

employees -0.2 0.1 0.2 0.1 0.4 0.2 N.A.

Nominal wages per person

-4.1 0 1.2 1.6 0.1 1.5 N.A.

Domestic corporate goods price index

-5.2 -1.7 0.3 -0.1 0.5 0.5 N.A.

Consumer price index -1.8 -1.2 -1.2 -1.5 -1.2 -1 N.A. Corporate services price

index -1.6 -1.6 -1.3 -1.5 -1.2 -1.2 N.A.

Number of corporate bankruptcies

1,176 1,156 1,108 1,154 1,021 1,148 1,066


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IMPACT ON WORLD MARKETS

The Japanese market Index Nikkei 225 is currently trading below 9000, 16 month low, U.S. DJIA is also continuously falling for the last three weeks traded below 10000 and touched the one and half month low of 9942, lost around 700 points from the high of the month & showing the bearish trend for the near future.

European Markets currently trade in bearish mode, German DAX currently trading below 6000 level and moving to touch three month low, French Stock Index CAC 40 broke 3500 level & continues to fall, corrected around 325 points in the current month only. The table below shows the changes in the month of August for various indices, the base is taken as the first working day of August.

Indices Country Date Index Net Change Change (%)

Hang Seng Hong Kong 26-Aug-10 20,595.71 -817.08 -3.82

Jakarta Composite Indonesia 26-Aug-10 18,224.04 82.76 2.71

Nikkei 225 Japan 26-Aug-10 5,474.15 -663.83 -6.94

KLSE Composite Malaysia 26-Aug-10 3,141.74 37.66 2.76

Straits Times Singapore 26-Aug-10 8,906.48 -90.11 -2.99

FTSE 100 United Kingdom

26-Aug-10 1,401.26 -279.86 -5.19

Nasdaq United States 26-Aug-10 2,924.66 -153.82 -6.70

DJIA United States 26-Aug-10 5,117.24 -614.32 -5.76

S&P 500 United States 26-Aug-10 2,141.54 -70.53 -6.26

DAX Germany 26-Aug-10 5933.26 -358.87 -5.70

CAC 40 France 26-Aug-10 3484.64 -267.39 -7.13


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DOW FUTURE WEEKLY CHART

Technically speaking Dow futures is showing weakness as it is forming a Head & Shoulders pattern, which indicates that it could further fall till the level of 8055. It has also failed to cross the 61.8% retracement level above which we would have got a confirmation of a reversal in Dow, and currently it is trading even below the 50% retracement level. A similar weakness can be seen in major European as well as most of the Asian indices. Especially the Japanese economy can be the catalyst for the second of the two recessions which may form the double dip recession.

The fear of a double dip recession possibility has been doing the rounds lately and renowned economists have expressed their concern, including the Nobel prize winning economist Joseph Stiglitz who had predicted the US subprime mortgage fiasco. Other economists include Paul Krugman, Gary Becker, Richard Posner and many more.


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Special report on recession by capital height

Economy & Finance

Transcript of Special report on recession by capital height