WHAT IS RECESSION?

Author: DivyaVeerabhadra

Before, understanding Recession, we need to understand the market economy;

TWO STAGES OF MARKET ECONOMY TWO FACTORS OF MARKET; - DEMAND & SUPPLY

TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2] Declining Market Economy

Growing Market Economy

Declining Market Economy

TWO FACTORS OF MARKET; - DEMAND & SUPPLY

Producer wants his demand always to be high Consumer wants his buying cost always to be low Actually, Demand is the price at which consumer is ready to buy and producer is ready to sell;
Usually, we think; Demand = Quantity But, here Demand = Price; This is because, Price decides the Quantity of Sales; Competitive Price = More Demand; In competitive Price = Less Demand;

Producer Price

Consumer Price

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)}

C = Consumables, I = Gross Investments, G = Government Spending, X = Exports, M = Imports

GDP is a good indicator of economy; Other indicators could be; -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc.. If GDP is growing, then market is growing due to increased demand;

GDP is a good indicator of economy; Other indicators could be; -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc..
If GDP is growing, then market is growing due to increased demand; Note: If the recession continues for next quarter, (>6 months) then we go through DEPRESSION Economy;

There is a joke that economists quote to explain the Difference between Recession & Depression
RECESSION

= WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRESSION

= WHEN YOU LOSE YOUR JOB

What is a Business Cycle?

What goes up; Has to come Growing economy has to come down if the production down; rate of goods & services was more than the actual consumption;

Why Recession happens?

E1] OVER PRODUCTION

E2] LOW CONFIDENCE LEVEL

OVER PRODUCTION
PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS

A situation in which the supply exceeds the nations ability to consume what has been produced;
Supply > Demand

COMPANIES PRODUCED MORE

Why Recession happens?

E2] LOW CONFIDENCE LEVEL

E2.1] Word of mouth

E2.1] Word of mouth

Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming down, Companies bankruptcy, etc

E2.2] Assignable Cause

Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reduction in demand in the market; Consumers start saving money instead of spending money; This is a downward spiral in the economy;

LOW

Word of mouth

CONFIDENCE LEVEL Word of mouth

Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming down, Companies bankruptcy, etc

Assignable Cause
Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reduction in demand in the market; Consumers start saving money instead of spending money; This is a downward spiral in the economy;

Producers do not stock materials, they reduce their productions, gets into the cost reduction activities, worried about the profitability, etc

Why Recession Happens?

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 impact;

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

Airline & Hotel Industries started Cost Reduction activities

i] Reduce No. of flights In flight meals reduced

ii] Lay off people Low or No income to spend and buy goods

iii] Salary reduction to Not laid off people

They became careful due to the fear of loss of job Started saving money instead of spending Demand for other goods come down

Meals supplying company got the hit

Catering company now, lays off people

Demand for other goods come down

So, you can see how the hit on Airline and Hotel industries can affect Un-related industries in the end;

One industry can hit many other industries when the confidence level of millions of consumers & producers drastically comes down;

How to know recession?

Indicators to say a nation is in recession;

People buying less stuff Decrease in factory production Growing unemployment Slump in personal income An unhealthy stock market

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

Hence, Government does not have direct control on Producers & the Consumers behavior; But, they can influence millions of Producers & Consumers with Governments policies;

Government has 2 plans

Fiscal Policies
(By Govt.)

Monetary Policies
(By RBI)

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

RBI manipulates the available supply of money in the country

Fiscal Policies
1] Tax cuts for businesses or for individuals 2] More Spending by Govt. to create jobs

Government influences the economy by changing how it (Government) spends and collects money More money available for spending Individuals get salary and spend money

Demand picks up; Market can recover;

3] Automatic fiscal policy; Unemployment Insurance

Some income to unemployed people to spend

Monetary Policies
1] Reduce reserve ratio

Government manipulates the available supply

of money in the country More money available for bank to give loans

What is Reserve Ratio? Each bank has to keep a high % of their assets in RBI (Reserve Bank of India). These assets do not earn any interest to banks. This money kept in RBI is called Reserves; RBI sets certain ratio of this reserves and it is called Reserve Ratio

Demand picks up; Market can recover;

Monetary Policies

Government manipulates the available supply of money in the country

1] Reduce reserve ratio

More money available for bank to give loans

Demand picks up; Market can recover;

2] Lower the interest rates

Individuals take more loan

Monetary Policies
1] Reduce reserve ratio

Government manipulates the available supply of money in the country More money available for bank to give loans Individuals take more loan It becomes an income to Govt. to inject money into the market Demand picks up; Market can recover;

2] Lower the interest rates 3] Use its own reserved money to buy Govt. bonds

WOW!!!!!!!!
RBIs Power or Governments Power is double-edged sword; Sometimes, their policies to recover from recession can be counter-productive and it may further worsen the situation;
If we advise our people to save money, then, the multiplication effect is that the demand will not pickup and recession will continue; Very peculiar!!!!! But, I am not misguiding you; Just think from a macro level, if everybody in the country stops spending, what will happen?

Nations recession is controlled by the actions of everybody living in that country;

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 GDP Growth Rate Negative;

Currently, in Recession

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)