Economics Assignment
Effects of USA Recession on World,
USA Real Estate & Indian IT Industry
Submitted By: Siddharth Shank...
Effects of US Recession
India
• Long term India growth story remains
• Immediate correction cannot be written off
• May af...
Economic recession pulls down the investment levels, results in job cuts, weak
consumer and investor’s sentiment, poor com...
further unemployment, further reduction in income, and further reduction in consumer
spending.
The prospect of a U.S. rece...
Cities like Toronto that have a wide diversity of industries, however, are better insulated
to weather the storm, he said....
new year, with some economists predicting a recession and others forecasting
continued growth.
Pessimists, such as Dean Ba...
"In transition periods, which we are in now, forecasting is very difficult," says Lyle
Gramley, senior economic adviser at...
If home prices were to fall 10%, returning to mid-2005 levels, "Households would feel
worse off and probably would consume...
John Derrick, research director at U.S. Global Investors in San Antonio, says the current
slowdown in the economy is just ...
"The evidence is already in on the housing market," Edward Lazear, chairman of the
White House Council of Economic Adviser...
"The fact that there may be a slowdown in the US means people will become much
more concerned over better value for money....
hiring momentum a tad.
Sources said another trend being noticed is that many people on the bench in large
companies are op...
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Effects Of Us Recession On Real Estate Of Us & It Industry Of India

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Effects Of Us Recession On Real Estate Of Us & It Industry Of India

  1. 1. Economics Assignment Effects of USA Recession on World, USA Real Estate & Indian IT Industry Submitted By: Siddharth Shankar Nath Roll No-26
  2. 2. Effects of US Recession India • Long term India growth story remains • Immediate correction cannot be written off • May affect other asset classes including real estate • Risk premiums will decline • Resurgence of India theme post correction U.S.A. U.S.A. No Longer World's Largest Economy In 2007, the U.S. lost its seat to the European Union as the world's largest economy. The EU's economy produced $14.4 trillion in goods and services, while U.S. GDP came in at $13.86 trillion. Combined, the two produce over 40% of the world's economic power, which totals $65.82 trillion. (Source: CIA World Fact book, Rank Order GDP) These figures are measured using purchasing power parity, which takes into account the standard of living of each country. This provides a more fair and relevant measure of GDP. However, the U.S. still has the largest economy of any single country. The next largest is China, at $7 trillion, followed by Japan at $4 trillion. The largest single EU country is Germany, at $2.8 trillion, which has been surpassed by India, who’s GDP, was $2.965 trillion in 2007. On Search Marketing Industry Possible fear of economic recession is looming over US and subsequently the effects are spreading over the countries, those are net exporter to US like India, Japan. US as well as Asian stocks are plunging on a regular basis showing weak sentiment of consumers and investors. Successive interest rate cuts falling short to boost the investor’s sentiment and expenditure level so that economy can avoid recessionary pressure.
  3. 3. Economic recession pulls down the investment levels, results in job cuts, weak consumer and investor’s sentiment, poor company performance in terms of lower profits, stock market tumbling as investors withdraws their last resorts of investments and so on. Lower interest will flush the economy with money instead of boosting the economy, higher inflation emerges and that will be another problem of Stagflation. The effects will percolate worldwide as each market is interlinked through money market, FII activities. Companies those are dependent on US from the rest of the world, would likely to see a slowdown of their growth as well. Search Marketing firms and companies would receive a serious damage with the effects described above. Search would have no meaning at all if there lesser buyer to shop. Lesser clicks in turn-> Lower customer base-> off line database marketing would also be affected. This may reduce different channels of revenue generation. One step ahead it can be predicted that search marketing would be one of the worst hit as this segment deals mostly with the luxury and semi-luxury products. Listed companies would be affected with lower profitability channels. The internet giants see the threat and penetrating to other emerging economies. They are in fact building the base to overseas as things are developing at a slower pace there. Effects of US Recession On Real Estate Of USA Real estate contributes 10% of the total U.S. economy's output. Us Recession leads to declines real estate in USA, so construction jobs declines, thus unemployment potentially increasing. A declined in real estate sales eventually leads to a decline in real estate prices. This then reduces the value of everyone’s homes, whether they are actively selling it or not. This then reduced the amount of home equity loans the homeowner can get. This, then, reduced consumer spending. Over 70% of the U.S. economy is based on personal consumption. A reduction in consumer spending will contribute to a downward spiral in the economy. This resulted in
  4. 4. further unemployment, further reduction in income, and further reduction in consumer spending. The prospect of a U.S. recession has some homeowners and prospective buyers nervous about the impact on the real estate market in Canada, but one economist says a slowdown could actually boost activity in Canada's housing sector. It's not surprising that economic uncertainty in the U.S. has been the focus of much discussion and speculation in recent days, since Canada has followed the American lead during four of the last six U.S. recessions. But Gregory Klump, chief economist for the Canadian Real Estate Association, said it's still an "open question" whether the U.S. slowdown will turn into a recession -- as defined by two consecutive quarters of negative economic growth. "The chances are about 40 per cent, but the U.S. Federal Reserve is expected to cut interest rates and do so very aggressively to prop up their growth and keep them out of recession," Klump told CTV.ca. "So while they're heading for a soft patch of growth it's an open question whether they'll enter a recession. My own thought is no, they won't." There is a direct link between the economies of the two nations, which are each other's largest trading partner. If the U.S. demand for Canadian exports declines -- as the result of the strong loony or a limping U.S. economy, for example -- the Canadian economy usually follows suit. But even if the U.S. does slip into a recession, there's no guarantee Canada's strong real estate market will lose any steam. In fact it might do the opposite, Klump said. That's because prospects for softer economic growth -- which is "the current sentiment in financial markets and the Bank of Canada" -- usually prompt the central bank to lower interest rates, which can make home ownership more affordable and more attractive, Klump said. "Softer growth means lower interest rates and lower interest rates are positive for the housing market," he said. Possibility of interest rate cuts With that in mind, Klump said he expects the Bank of Canada to cut the interest rate by a quarter-point on Jan. 22, and again when they meet in March, he said. However, he conceded, with the U.S. slowdown expected to continue to reduce Americans' demand for Canadian manufactured exports, housing markets in single- industry towns and regions in Canada that rely heavily on trade with the U.S. are likely to feel the pinch.
  5. 5. Cities like Toronto that have a wide diversity of industries, however, are better insulated to weather the storm, he said. Avery Shenfeld, senior economist and managing director of CIBC World Markets, agrees the negative effects of a U.S. recession would likely be localized. "Real estate markets in areas of the country that are heavily weighted to manufacturing could see softening up but national house prices may not be affected much," he told CTV.ca. He added: "We would see some weakness in house prices; we could see some softening in house prices in areas of the country that are dependent on manufacturing." Market in Canada's largest city Andrew la Fleur, a Toronto real-estate agent and BlogTO.com's resident writer on the subject, told CTV.ca he hasn't seen any impact on the Toronto housing market yet. His clients, he said, aren't rushing to buy or sell and he hasn't heard any convincing arguments that a slowdown is likely to hit Canada's largest city. That being said, he has noticed an increased level of trepidation among people looking to get into the real estate market for the first time -- a sentiment he said is at least partly linked to U.S. economic uncertainty. "I am seeing the issues in the U.S. creeping into the conversation when it comes to 'should we enter into the market or not' or 'what happens if we buy and then the entire market collapses?'" la Fleur said. "But it's nothing new. First time buyers always run all the nightmare scenarios through their minds before making a decision to buy. It's just that right now the hot-button topics seem to be the U.S. economy as well as the usual one heard in Toronto over the past decade -- there are too many condos going up therefore the market is about to crash." In step with Klump and Shenfeld, la Fleur suggested Toronto and other major cities in Canada are insulated, and the impact of a recession will first be felt in manufacturing and export-based regions. "Toronto is primarily a finance-based city and our economy is doing very well, and as long as that continues, the real estate market here should continue to be healthy," he said. Housing has been a key engine of the U.S. economy in recent years. Now that the housing market has slowed, will the economy sputter to a stop? That issue is sharply dividing economists, because no one is sure what impact the slowdown in housing will have on consumers, and thus the broad economy. The difference of opinion is leading to an enormous amount of uncertainty heading into the
  6. 6. new year, with some economists predicting a recession and others forecasting continued growth. Pessimists, such as Dean Baker, co-director of the Washington-based Center for Economic and Policy Research, argue that spillover from the housing slowdown will be great in 2007 as consumers pull back spending. Optimists, such as Carl Tannenbaum, chief economist at LaSalle Bank in Chicago, say the contagion from the declining housing market will be minimal as consumers see their paychecks rise, helping to fuel spending. The good news is that far more economists are in the optimist camp than the pessimist camp. Although a handful, such as Baker, are predicting the economy will slide into a housing-led recession next year, the majority anticipate the economy will continue to grow, albeit at the slowest pace in at least four years. Such a softening in the economy means the unemployment rate will likely edge higher, and inflation will ease. The Federal Reserve may be forced to cut interest rates to buoy the economy, meaning borrowing costs could fall for items such as mortgages and credit card debt. A significant slowdown means that for many Americans, the economy won't feel that great, even if it's not in recession, says David Rosenberg, North American economist at Merrill Lynch. "It's not the flu, it's not pneumonia, but it's still a little bit of a chill," he says. Rosenberg expects the economy next year will grow at just about half the rate as in 2006. Challenge for forecasters There's no doubt the housing market has dropped swiftly. Sales of previously owned homes are estimated to be down 8.6% this year from 2005, while sales of new homes are down 17.7%, according to the National Association of Realtors. Prices, meanwhile, have fallen after posting double-digit gains for years. "No question, housing is in a recession," Global Insight chief economist Nariman Behravesh says. But most economists say that recession will not spread to the overall economy. In a poll of 21 prominent economists conducted by the Securities Industry and Financial Markets Association (SIFMA), the respondents expected economic growth of a median 2.5% in 2007, down from 3.3% in 2006. But the difference of opinion is big. In the survey by SIFMA, the estimates for gross domestic product growth ranged from 1.6% to 2.9%.
  7. 7. "In transition periods, which we are in now, forecasting is very difficult," says Lyle Gramley, senior economic adviser at Stanford Washington Research Group. Housing's impact on consumers is the issue dividing economists. The housing market influences consumers in a number of ways, including acting as a job engine in construction, real estate and other industries. It also acts as a catalyst for consumer spending, which accounts for 70% of U.S. economic activity. Economists differ on the extent of the spending impact. While the economists in the SIFMA survey expect consumers will continue to spend next year, New York University professor Nouriel Roubini, who is forecasting a recession in 2007, predicts the opposite: "While other parts of the economy are in recession, consumption is going to be the last shoe to drop." But housing won't drag down the entire economy, says Ken Simonson, chief economist at the Associated General Contractors of America. "People have exaggerated the importance of housing," he says. "But now we have a lot more areas of strength in the economy." The issues: •Less equity. Consumer spending in the past few years has been supported by homeowners using their homes as ATMs, either in the form of large profits when they sell, by refinancing at higher dollar values and cashing out the difference between the value of the old mortgage and the new one, or by taking out home equity loans reflecting their homes' higher values. With prices flat or falling and sales down, consumers will be taking less money out of their home equity. Mortgage equity withdrawal fell in the third quarter to the lowest level in nearly three years, according to Federal Reserve estimates. •Debt. U.S. households' debts in relation to their income has steadily climbed in recent years, in part as consumers have taken on more mortgage debt, according to the Fed. That ratio will likely increase as homeowners with adjustable-rate mortgages see their payments increase in coming years. •Wealth effect. The decline in home prices is also likely having a psychological effect on consumers even if they don't plan to sell their home or take out a line of credit. Just watching the homes around them sit for longer on the market and go for less money than they did a year ago may make homeowners feel less in a spending mood. But the extent of this so-called wealth effect is up for debate.
  8. 8. If home prices were to fall 10%, returning to mid-2005 levels, "Households would feel worse off and probably would consume less," John Makin, chief economist at Caxton Associates, wrote in a recent paper published by the American Enterprise Institute. He estimates that such a decline would shrink GDP by 0.4%, not counting the direct effects of the drop-off in housing, such as in those who lose jobs in housing-related fields or the fewer furniture purchases as people stay put and have less of a need to redecorate. Still, he puts the odds of a housing-led recession next year at 50-50. Baker, however, is far gloomier. "I don't really see how consumers can maintain their rate of spending," he said in a recent panel discussion on the economy at the Center for American Progress. "I think we might have a very severe recession." Optimists prevailing But the majority of economists are more optimistic. Wachovia's Mark Vitner notes the downturn in the housing market isn't a nationwide phenomenon, instead affecting certain pockets of the economic geography. That means the impact of the housing downturn on consumer spending will be more limited. And LaSalle's Tannenbaum argues that consumers are finding other ways to keep their shopping habits going. A tight labor market means wages are rising. If inflation moderates along with the economy, as expected, that means consumers will have more money to spend, he argues. "For most, this (decline in housing) is not representing a serious detriment to the extent that it is being replaced by good income growth," Tannenbaum says. "I know that housing is coming down," says Tom Adams, CEO of language software firm Rosetta Stone, noting that his wife, Alexandra, is a real estate agent. "I know there is downward pressure," Adams says, "and some of the froth in the economy is going to get taken out. But I still think the potential for (business) is significant." That sentiment was echoed in a recent survey of CEOs conducted by the Business Roundtable. On average, the CEOs anticipated growth of 2.8% in 2007. "Growth seems to be in pretty good shape, just a little bit of a slower range" than in 2006, says Harold McGraw, chairman of the Business Roundtable and CEO of McGraw-Hill.
  9. 9. John Derrick, research director at U.S. Global Investors in San Antonio, says the current slowdown in the economy is just a "normal part of the cycle" that is setting up the economy to continue to expand in coming years. "We're just due," he says, adding that the worst of the slowdown will soon be over. "If we haven't had the recession yet, we're probably not going to have it." Economic strengths There are a number of things working in the economy's favor. •Stocks. Stock prices will add to their gains from this year by rising in 2007, according to a survey of 40 economic forecasters conducted by the Philadelphia Fed Nov. 17-30. Such gains can help boost consumer spending, as investors see gains when they sell and feel wealthier as they see their portfolios expand. "There's a wealth effect throughout the economy, because most all of us have 401(k)s," Jim Steiner, managing principal at wealth management firm Lowry Hill in Minneapolis. "Any small incremental amount leads us to be slightly more confident." •Exports. A decline in the value of the dollar, combined with steady growth in economies around the globe, is expected to boost U.S. exports. Wachovia economists predict net exports will support U.S. GDP for the first time in 12 years. •Profits. Corporate profits rose more than 30% in the third quarter from a year ago, according to the Commerce Department. Strong corporate profits allow businesses to invest and hire, helping to strengthen the economy. Companies and investors are showing a "degree of enthusiasm and optimism" that corresponds with continued profit growth, says Bob Davis, managing general partner at Highland Capital Partners, a venture capital firm, and former CEO of Terra Lycos. "I'm optimistic for the next year," he says. •Interest rates. Although the Federal Reserve raised interest rates 17 times from June 2004 to June 2006, rates are still at a historically low level. Plus, a number of economists, including those at Merrill Lynch, Goldman Sachs and Global Insight, predict that Fed Chairman Ben Bernanke and his colleagues will cut rates at least once in 2007, making borrowing, and spending, easier. "It's easy to borrow money at these interest rates. So there's a lot of money available," Sempra Energy CEO Don Felsinger says. Such positives will keep the economy out of recession in 2007, despite the decline in the housing market, economists say.
  10. 10. "The evidence is already in on the housing market," Edward Lazear, chairman of the White House Council of Economic Advisers, said at a briefing for reporters last week. "We have suffered, actually, very large declines in the housing market, and yet it hasn't transmitted to any other parts of the economy. We know that the economy is robust. We know that the economy is resilient. We know that it's able to offset the declines in one sector." Even some of those who are predicting recession say it might not be that bad. Parsec Financial chief economist Jim Smith, for example, sees a mild downturn, marked by a swift upswing in the economy at the end of 2007. "It's 2001 all over again, which is the mildest recession we ever had," he says. Effects of US Recession On Indian IT Industry US economy is facing a downturn period. The economy that has been the driving force for the economies of other developing nations is in its slump time. The calculations say that this downfall of US will affect the Indian IT industries .Indian It Industry gets around 60% of their revenue from the US & appreciation of the rupee has impacted margin. US Economy Crisis: Recession 2007-2008 United States Economy Slowdown in 2007 - 2008, and its Global Effects. US recession could be good for Indian IT firms India should look at the possible recession in the US as an opportunity as domestic IT companies are more cost effective, Infosys Chief Mentor N R Narayana Murthy said. “The fact that there may be a slowdown in the US means people will become much more concerned over better value for money...we could look at it as an opportunity,” Murthy told reporters on the sidelines of a function here. The Indian IT industry fears that a possible slowdown in the US economy could lead their companies to cut IT spending. As Indian IT companies are earning major revenue from the US, recession is being looked at as having a negative effect on the top line. Murthy said that instead of an adverse effect, it was more likely that India benefits if the US economy, the world’s biggest, witnesses a slowdown. India should look at the possible recession in the United States as an opportunity because domestic InfoTech companies are more cost-effective, Infosys chief mentor N R Narayana Murthy said on Monday.
  11. 11. "The fact that there may be a slowdown in the US means people will become much more concerned over better value for money. . . we could look at it as an opportunity," Murthy told reporters on the sidelines of a function in Mumbai. The Indian IT industry fears that a possible slowdown in the US economy could lead their companies to cut IT spending. As Indian IT companies are earning major revenue from the US, recession is being looked at as having a negative effect on the top line. Murthy said that instead of an adverse effect, it was more likely that India benefits if the US economy, the world's biggest, witnesses a slowdown. "The focus on better allocation of money means a greater opportunity for India," he said, adding that Indian IT companies were reasonably well placed to withstand the shocks, if any. the subprime effect or the fears of a recession in the US. Recruitment — a key indicator of Indian information technology industry’s growth — is slowing down. Hiring across companies, especially the small and mid-sized, has entered into a lull with momentum certainly being downcast. It is estimated that overall hiring is down by 40-50% compared to last year. HR recruiters across the spectrum say the hiring pattern during the last three months is certainly not what it was in the last three years. Given the high dependence of the Indian IT industry on the US economy, companies are increasingly taking a cautious route toward hiring with majority of recruitment now being largely based on work requirement of the firms. Vati Consulting CEO Amitabh Das said the general trend in the market shows that companies are not being very proactive in their hiring plans. The Indian IT/ITES industry is expected to employ around two million people by the end of FY08 as against 1.6 million in FY07. Significant part of the hiring generally comes from large companies such as TCS, Infosys, Wipro, IBM and Accenture among others. The current slowdown in hiring is expected to hit the small and mid-tier companies hard in their ability to attract quality talent. Ad Astra Consultants managing director Nirupama V G said: “Small and mid-sized companies are not hiring as many people at junior and mid level as they did earlier. They are, however, hiring at senior levels with quality becoming very stringent.” At the same time, companies are increasingly utilizing their bench strength to shore up their active resources, unlike in the past. This, in a way, could have bought down the
  12. 12. hiring momentum a tad. Sources said another trend being noticed is that many people on the bench in large companies are opting for mid-sized companies for the same level of salary or even taking a cut in packages, instead of sitting on the bench for six months or more. The slowdown pattern in the industry has had its impact on the salary levels. TVA InfoTech CEO Gautam Sinha said compensation hikes are likely to decrease this year especially for those with generic skill sets, but it may not be the case for those with niche capabilities. This has also impacted people who make movement across companies. According to Nirupama, the hikes in many cases in junior and mid levels are nil while maximum is 15% over earlier packages. The normal norm for such compensation hikes are generally in the 20-30% range with 50% in exceptional cases.

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