Recession and Its Impact

8/8/2019 Recession and Its Impact

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RECESSION DEFINITION

According to investopeda.com a recession refers to Recessionis a normal (albeit unpleasant) part of the business cycle;however, one-time crisis events can often trigger the onset of arecession. A recession generally lasts from six to 18 months,and interest rates usually fall in during these months tostimulate the economy by offering cheap rates at which to

borrow money.


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N ational Bureau of Economic Research ( N BER) defines arecession as the time when business activity has reached its

peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it iscalled an expansionary period. By this definition, the averagerecession lasts about a year.


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OVERALL IMPACT OF RECESSION

y Rising Government Borrowing.y Lower Inflation.y

Falling investment.y Rising unemployment.y The collapse in house prices


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THE IMPACT OF RECESSION ON

BUSINESSESy A recession will make it difficult for new firms who have just

entered the market.y

Increased Monopoly Power.y Hysteresis.y Fall in Productive Capacity.


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FINANCIAL CRISIS 2007

y T he financial crisis of 2007 to the present was triggered by aliquidity shortfall in the United States banking system. It hasresulted in the collapse of large financial institutions, the

bailout of banks by national governments, and downturns instock markets around the world. In many areas, the housingmarket has also suffered, resulting innumerous evictions , foreclosures and prolonged vacancies. It isconsidered by many economists to be the worst financialcrisis since the Great Depression of the 1930s.

y T he collapse of the housing bubble , which peaked in the U.S.in 2006, caused the values of securities tied to real estate

pricing to plummet thereafter, damaging financial institutionsglobally.


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REASONS FOR HOUSING BUBBLE

y Easy credit conditionsy Sub-prime lendingy Predatory lending


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HOW TO SURVIVE IN SUCH A

RECESSION T hese are some of the effects of recessions and how to deal

with them.y More difficult T o Borrow.y Unemployment.y Falling profitability of Business.y Falling Stock Market.y Consumer Confidence.


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GOOD INVESTMENT FOR A

RECESSION y Housing Markety Share Pricesy

Mineral Pricesy Government Bonds


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Any other benefit Benefits of a

recession?y L ower interest rates. Good for borrowersy L ower inflation rates. Good for saversy

Sometimes difficult times can force us to reevaluate our financial situation. It can make us look for new businessavenues and new ways to cut costs and spending. Although itmay be temporarily unpleasant, the important thing is not to

panic but try to make the best of any situation we findourselves in.


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SOME GREAT COMPANIES WENT

BANKRUPT OR WERE ACQUIRED


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EFFECTS OF PRESENT RECESSION

ON USAy T he worlds largest economy shrank 4.1 percent from the fourth quarter of

2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books.

y Household spending fell 1.2 percent in 2009, twice as much as previously projected and the biggest decline since 1942.

y the jobless rate doubled, reaching a 26-year high of 10.1 percent in October,y L ehman Collapsey Median household income the level where half make more and half

make less fell 2.9% from $51,726 in 2008 to $50,221 last year y T otal home equity :- $13 trillion at its peak in 2006, had dropped to $8.8

trillion by mid-2008 and was still falling in late 2008.


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PO LI IES D OP TED BY U.S.

G OV E E T T O FIGHT E ESSI ONy I.M.F. RECOMMENDATION

y UNITED STATES POLICY RESPONSES

y

FEDERAL RESERVE LOWERS INTEREST RATES y AMERICAN RECOVERY AND REINVESTMENT ACT OF

2009


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F ederal reserve rates changes (Just data after January 1, 2008 )

Date Discount rate Discount rate Discount rate F ed funds F ed funds rate

Primary Secondary

rate change new interest rate new interest rate rate change new interest rate

October 8, 2008* -0.50% 1.75% 2.25% -0.50% 1.50%

April 30, 2008 -0.25% 2.25% 2.75% -0.25% 2.00%

March 18, 2008 -0.75% 2.50% 3.00% -0.75% 2.25%

March 16, 2008 -0.25% 3.25% 3.75%

January 30, 2008 -0.50% 3.50% 4.00% -0.50% 3.00%

January 22, 2008 -0.75% 4.00% 4.50% -0.75% 3.50%


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EFFECTS OF RECENT RECESSION ON

E ROPEAN NIONy industrial production fell 1.9 percent in May 2008y European car sales fell 7.8 percent in May compared with a year earlier.y Retail sales fell by 0.6 percent in June from the May level and by 3.1 percent from June in

the previous year.y Ireland in the first quarter of 2008 reported a contraction in GDP of 1.5 percent.y In February 2009, the government announced record unemployment levels in the

country, 1,500 people being laid off daily.y unemployment in Spain has risen by 425,000 over the past year, reaching 9.9 percent.y Spain's factory output slumped 5.5 percent in May 2008y Germany's industrial output was down 2.4 percent.y Industrial output in both Italy and Greece has slumped 6.6 percent.y Other members saw a decline in their economies in the second quartery France by 0.3 percenty Finland by 0.2 percenty Denmark showed a contraction of 0.6 percenty

The entire economy of the European Union declined by 0.1 percent in the second quarter.


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E ESSI

y European stimulus plan amounting to 200 billioneuros

y

Germany and Spain have announced fiscal stimulus of respectively 3.3% (two plans altogether) and 3.7% of their GDP.

y The UK was the only country that opted for a

temporary decline in the standard VAT rate , by 2.5percentage points.


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EFFECT OF RECESSION ON CHINA

y a large number of export-led private enterprises in Chinascoastal provinces have gone bankrupt, with around 20 millionunskilled workers losing their jobs.

y the decline in real estate investments, has led to a decrease inGDP growth from 13% in 2007 to 9% in 2008.


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THE CHINESE GOVERNMENT S

REACTION TO THE GLOBAL CRISISy In terms of fiscal policy, US$588 billioninvestment plan was

released in N ovember 2008.y

loan interest rates have been cut from 4.14% and 7.47% to2.25% and 5.31% respectively.y T he required reserve ratio has declined from 17.5% to 13.5%.y Over 80% of the RMB4 trillion investment package was

allocated to infrastructure and property investments


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EFFECT OF S RECESSION ON IN IA

y the I T Enabled Services sector was the hity T he tourism sector was affected.y

T he manufacturing sector ramped up scale economies.y J OBS IN RECESSION AND INDIAN YOUTH


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H OW H AVE WE RESPON E TO

T H E C H ALLEN E? y G OVERNMENT'S FISCAL STIMULUS :- included additional

public spending, particularly capital expenditure, governmentguaranteed funds for infrastructure spending, cuts in indirect

taxes, expanded guarantee cover for credit to micro and smallenterprises, and additional support to exporters.y These stimulus packages came on top of an already announced expanded

safety-net for rural poor, a farm loan waiver package and salary increasesfor government staff, all of which too should stimulate demand.

y to keep the domestic money and credit markets functioningnormally and see that the liquidity stress did not trigger solvency cascades. In particular, we targeted three objectives.

1) to maintain a comfortable rupee liquidity position2) to augment foreign exchange liquidity 3) to maintain a policy framework that would keep credit delivery

on track so as to arrest the moderation in growth

Documents

Recession and Its Impact