Recession Explained indepth

What is Recession?

Before, understanding “Recession”, we need to understand the market economy; A] TWO STAGES OF MARKET ECONOMY B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A1] Growing Market Economy A2] Declining Market Economy A] TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy Starting Point = Willingness to buy

A2] Declining Market Economy Starting Point = Unwillingness to buy

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; B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY Producer Price Consumer Price 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;

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 C] What is Recession? 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; C] What is Recession?

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; C] What is Recession?

RECESSION = WHEN YOUR NEIGHBOR LOSES HIS JOB There is a joke that economists quote to explain the Difference between “Recession & Depression” C] What is Recession? DEPRESSION = WHEN YOU LOSE YOUR JOB

Growing economy has to come down if the production rate of goods & services was more than the actual consumption; D] What is a Business Cycle? What goes up; Has to come down;

E] Why Recession happens? E1] OVER PRODUCTION E2] LOW CONFIDENCE LEVEL

A situation in which the supply exceeds the nation’s ability to consume what has been produced; Supply > Demand E] Why Recession happens? PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS COMPANIES PRODUCED MORE E1] OVER PRODUCTION

Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming down, Companies’ bankruptcy, etc E] Why Recession happens? 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; E2.1] Word of mouth E2.2] Assignable Cause E2.1] Word of mouth E2] LOW CONFIDENCE LEVEL

Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming down, Companies’ bankruptcy, etc E] Why Recession happens? 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; E2.1] Word of mouth E2.2] Assignable Cause E2.1] Word of mouth E2] LOW CONFIDENCE LEVEL Producers do not stock materials, they reduce their productions, gets into the cost reduction activities, worried about the profitability, etc…

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; E] Why Recession happens? E2.2] Assignable Cause

Terrorists’ Attack on 11 th September in US Created fear in people People cancelled their travel plans Airlines & Hotel Industries badly hit Resulted in low occupancy rates 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

Terrorists’ Attack on 11 th September in US i] Reduce No. of flights ii] Lay off people iii] Salary reduction to “ Not laid off people” In flight meals reduced Low or No income to spend and buy goods They became careful due to the fear of loss of job Meals supplying company got the hit Catering company now, lays off people Demand for other goods come down Started saving money instead of spending Demand for other goods come down Airline & Hotel Industries started “ Cost Reduction” activities

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;

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
F] How to know 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 G] How to come out of recession?

Government has 2 plans Fiscal Policies (By Govt.) Monetary Policies (By RBI) Hence, Government does not have direct control on Producers’ & the Consumers’ behavior; But, they can influence millions of Producers & Consumers with Government’s policies; Government influences the economy by changing how it (Government) spends and collects money RBI manipulates the available supply of money in the country G] How to come out of recession?

G] How to come out of recession? Government influences the economy by changing how it (Government) spends and collects money 1] Tax cuts for businesses or for individuals More money available for spending Demand picks up; Market can recover; 2] More Spending by Govt. to create jobs Individuals get salary and spend money 3] Automatic fiscal policy; Unemployment Insurance Some income to unemployed people to spend Fiscal Policies

G] How to come out of recession? 1] Reduce reserve ratio More money available for bank to give loans Demand picks up; Market can recover; Government manipulates the available supply of money in the country Monetary Policies 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”

G] How to come out of recession? 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 Government manipulates the available supply of money in the country Monetary Policies

G] How to come out of recession? 1] Reduce reserve ratio More money available for bank to give loans Demand picks up; Market can recover; 3] Use its own reserved money to buy Govt. bonds It becomes an income to Govt. to inject money into the market Government manipulates the available supply of money in the country Monetary Policies 2] Lower the interest rates Individuals take more loan

I] WOW!!!!!!!! RBI’s Power or Government’s Power is double-edged sword; Sometimes, their policies to recover from recession can be counter-productive and it may further worsen the situation; Nation’s recession is controlled by the actions of everybody living in that country; 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?

Most of the developing Economies like China, India; Currently, Slow Down Stage; Not yet in Recession Currently, in Recession Most of the developed Economies like US, Japan, Germany, etc GDP Growth Rate Down; But, Still expected to be Around 6% in India GDP Growth Rate Negative; I] WOW!!!!!!!!

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)

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Recession Explained indepth

by Fasil Mohamed on Mar 20, 2009

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Recession Explained indepth — Presentation Transcript