GLOBAL RECESSION

2007DHRUV KHURANA- 416RADHIKA JAIN -391CHITRITA ARORA - 489SALONI BEHL - 386SUSHANT YADAV - 1017DHANANJAY -465

• Recession – definition

• Navigating through global recession

• Ares affected

• Fallout in the US

• EUROZONE crisis

• Impact on INDIA

• Conclusion

INDEX

According to IMF’s definition of a global recession, which is a decline in annual per capita real world GDP ( purchasing power parity ) , the recession began in 2009 ; It began as a national recession in United states in December 2007, but only met the criteria for being a global recession in the calendar year 2009.

A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP).

WHAT IS RECESSION?

• The global financial and economic crisis that began in 2007 in the US has now led to the first global recession since world war II .

• There is no consensus on the causes of this once in a lifetime crisis .

NAVIGATING THROUGH THE GLOBAL RECESSION

FROM TILL TIME SPAN

JULY 1980 NOVEMBER 1982

24 MONTHS

JULY 1990 MARCH 1991 8 MONTHS

MARCH 2001 NOVEMBER 2001

8 MONTHS

DECEMBER 2007

JAN 2010 25 MONTHS

• It was a major global recession characterized by various systematic imbalances and was sparked by the outbreak of the US subprime mortgage crisis and financial crisis of 2007-8.

General Causes of recession:

a. War Situations

b. Energy Crises

c. under Consumption and Over Production

d. Trade deficits and declining global trade volume.

e. Financial Crises; Breakdown in corporate governance ; ill risk management by leading financial institutions.

According to the International monetary fund , The

global economy declined by 1.3% in 2009, in the first

global recession since World War II.

AREAS AFFECTED

• UNITED STATES OF AMERICA• EUROZONE• INDIA

Areas Covered

UNITED STATES OF AMERICA

U.S. ECONOMYQ

3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

2004 2005 2006 2007 20081.0

0.0

1.0

2.0

3.0

4.0

5.0

1

•Failure of Major Banks

2

• Liquidity and Credit Crunch

3

• Subprime Mortgage Crisis

4• U.S. Housing Crisis

WHY THE CRASH?

Liquidity Crunch - A crisis that occurs when a business experiences a lack of cash required to grow the business, pay for day-to-day operations, or meet its debt obligations when they are due, causing it to default.

Credit Crunch - a sudden reduction in the availability of loans (or "credit") or a sudden increase in the cost of obtaining a loan from the banks, and interest rates are high

Subprime Mortgage – It’s offered/issued at a higher interest rate to persons who do not qualify for prime rate loans. With the following perks:•No down payment required•Credit Rating Ignored•Credit history Ignored•No proof of employment required•No proof of ability to pay mortgage (income)

SUBPRIME CRISIS

U.S. HOUSING CRISIS

• Biggest economy in the world

• Constitutes 27% of Global GDP

• World’s biggest debtor country

• Biggest Importer of Oil 27% in 2007

IMPACT OF U.S.

Australia2%

Brazil2%

Canada3%

China

5%France5%

Germany6%India2%

Italy4%

Japan9%

Korea2%Mex-

ico2%

Russian Federa-tion2%

Spain3%

UK5%

USA27%

Rest of

the Worl

d21%

Global GDP

1. Nationalisation of some banks

2. Fiscal Policy• Tax cuts/rebates• Establishment of new govt jobs• Unemployment insurance

3. Monetary Policy• Reduce the reserve ratio • Lower the federal funds rate • Lower the discount rate • Use its own reserve money to buy government bonds • Changes in who can borrow

THE FIX

“When the United States Sneezes, the rest of world

may well catch a cold”

-By Rich Miller

EUROZONE

• The Eurozone crisis is an ongoing crisis that has been affecting the countries

• It is a combined sovereign debt crisis ,a banking crisis and a growth and competitiveness crisis

• It made some countries impossible to repay or refinance their government debt without the assistance of third parties

• Banks in the Eurozone were under capitalized and had faced liquidity problems

Eurozone Crisis

The EUROZONE CRISIS resulted from a combination of complex factors :

Causes

• Financialization : Process that attempts to reduce all value that is exchanged with either financial instruments or derivative of financial instrument . Financialization had become a major part of financial sector which had adversely affected the economy by giving no real benefits to the investors

• Easy credit during the 2002 – 2008 period that encouraged high risk borrowing practices .

• Real estate bubbles burst where the real estate prices declined sharply .

• Trade imbalances and budget deficiencies played a major role in the financial crisis :

Survey undertaken in 2009 found that most firms in particular, small and medium sized enterprises and new firms had been affected by increased costs of trade finance , more stringent requirements including guarantees to obtain more trade finance ,higher down payments , more stringent collateral requirements and higher interest rates became a major obstacle for exports.

The following highlights the impact of the global recession on GDP for the Eurozone economies

Table 1 highlights the impact of the global recession on GDP for the eurozone economies. As you can see, the impact of the slump on the overall level of output varied considerably across the individual member countries hitting some nations much harder than others. The length of the recession also varied significantly and ranged from the relatively short 3 quarters in the case of Belgium to a staggering 12 quarters, or 36 months, for Ireland.

All three of Europe’s biggest economies entered into recession at the same time but the slump lasted for four quarters in Germany and France and five quarters in Italy. In terms of the impact on GDP, the more open economies of Germany and Italy suffered steeper declines in output (–6.6% and –7.0% respectively) than France where real GDP fell by 3.9%.

Interestingly, Greece’s economy, after peaking in the third quarter of 2008, was the last eurozone economy to topple into recession. But, instead of following the old adage of last in, first out, Greece will likely be the last of the eurozone countries to climb out of recession. The economy has now been contracting for over two years and GDP has fallen by 8.9%. Finally, Spain’s recession persisted for seven quarters during the course of which GDP declined by 4.9%.

There is little question that the recovery remained weak in most eurozone countries and, as the risks to the outlook continued to multiply, the ability of policy makers to speed-up growth was unfortunately virtually non-existent. Indeed, with a lacklustre recovery, there was a real danger that as the austerity measured, including tax hikes and sharp cuts to public spending, start to bite. This will further push down growth rates.

Moreover, when one adds in the mix of rising interest rates, volatile oil prices, and an appreciating euro, then it becomes glaringly clear that any near-term prospect of a resurgence in growth vanishes. Given this toxic environment, several of the eurozone economies including Spain, Portugal, and Italy could find themselves sliding back into recession and dragging down the region. Not a happy picture. 

INDIA

India escaped the direct adverse impact of the Great Recession of 2008-09, since its financial sector, particularly its banking, is very weakly integrated with global markets and practically unexposed to mortgage-backed securities.  However, India’s “real economy” is increasingly integrated into global trade and capital flows. It thus did suffer “second round” effects when the financial meltdown morphed into a worldwide economic downturn.

IMPACT ON INDIA

Why did India suffer so little in the Great Recession that laid low the biggest economies of the West?There were many factors that saved the Indian economy from dire consequences of the global recession. Indian banks and financial institutions had almost entirely avoided buying the mortgage-backed securities and credit default swaps that turned toxic and felled western Financial institutions. India's merchandise exports were indeed hit by the Great Recession but Service exports did not fall - computer software and BPO exports held up well. Foreign direct investment remained high in 2008-09 despite the global financial crisis. Financiers reversed Flows into India, but long-term investors in plant and factories completed their ongoing projects. Monetary policy was accommodating in 2008. The RBI lowered interest rates and expanded Credit. The government cut excise duties to stoke demand. All these factors cushioned the shock to the economy.

Indian exports fell in line with global trade flows. This should firmly dismiss the decoupling myth for the Indian economy. Collapsing foreign trade, capital flows, and exchange rate movements all transmitted negative impacts to the Indian economy

Imports of goods and services

India’s oil imports which had been growing robustly at around 40% (2007-08) saw a decline in growth of about 17% during 2008-09. India’s merchandise imports started contracting from November 2008 onwards on a year on year basis along with oil imports whereas the contraction in non-oil imports started from January 2009. During the period from October 2008–September 2009, imports have contracted more (22%) than exports (20%).

The Indian trade collapse

Indian exports and imports fell in line with global trade flows. In terms of year on year growth rates, the export contraction started from October 2008; imports started contracting a little later, from December 2008. During the core period of the crisis, the average contraction in exports and imports has been around 20% in the first phase (October 2008-September 2009) and 28% in the second (December 2008-September 2009).

Given that the coming period is most likely to see a relatively weak recovery of global trade, India will have to try and achieve a robust growth in its exports by expanding its share in major markets rather than simply depend on the previous growth of global trade. This will require a major overhaul of the country’s export promotion mechanisms. The focus should shift to addressing the binding constraints currently imposed by physical infrastructure, skill shortages, procedural complexities and inadequate access to commercial bank credit especially for the small and medium exporters.

ROAD TO RECOVERY

CONCLUSION

As recovery stalled and stagnation set in, several observers warned of the possibility of a second recession. Since the US economy has not fully recovered from the last recession, any resumption would be considerably more painful.

The IMF stated in September 2010 that the financial crisis would not end without a major decrease in unemployment as hundreds of millions of people were unemployed worldwide. The IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending. Governments should also invest in skills training for the unemployed and even governments of countries like Greece with major debt risk should first focus on long-term economic recovery by creating jobs.

Thus , the need of the hour is to fight recession globally by co-operation of all the recession hit countries , rather than fighting it individually.

Thank You