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 general slowdown in economic activity. 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, while bankruptcies 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 adopting expansionary 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 a global 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

The global economic depression has impacted on development towards the reduction of child mortality. The decrease in government and family revenue has involved kids access to health care facilities. In turn, it has made kids more susceptible to morbidity and mortality. The World Bank forecasted in February 2009 that approximately 200,000 to 400,000 more children may die from 2009 until 2015 among developing countries because of the effects of global financial crisis.

The global recession has slowed development and progress towards achieving the Millennium Development Goals (MDGs). The International Monetary 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 2009 compared with 8.1 per cent in 2007. However, if China and India are excluded, the economies of developing countries actually contracted by 1.8 per cent3. The World Bank has estimated that an additional 64 million people will be living in extreme poverty on less than US$1.25 a day by the end 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. Most companies 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 Sams federal reserves? 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 are themselves 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 recession but its ripple effects have touched the countries like UK, Spain, Japan and Singapore as well. Emerging economies like China and India are also affected by the negative influence of the US Subprime Market Crisis. At present it seems that this subprime crisis of US is going to generate a global recession by affecting the major countries of the world. The US Subprime Market Crisis has already resulted in US Economy Recession. The countries like Britain, Spain, Japan, and Singapore are going to bear the negative effects of US economy recession. Emerging economies like China and India are also suffering from the ill effects of the US Subprime Crisis. All these countries together form a major part of the global economy. So, it can be said that the US Subprime Market Crisis is going to affect the global economy as a whole. As all the countries mentioned above are being influenced in a negative way by the US economy recession, it is expected that the growth rate of the world economy would experience a significant fall. According to Alan Greenspan, the Former Federal Reserve Chairman, Global Recession is surely going to take 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 ready to 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). Whats the other side of the coin? Frankly its 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.

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 the market 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 anticompetitive mergers, with a negative impact on the wider economy: the suspension 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.