2. RECESSION
A Recession is a contraction phase of the business cycle. In
Economics , the term recession generally describes the
reduction of a country's Gross Domestic Product (GDP) for at
least two quarters.
3. ECONOMY CONTRACTION
Q1
(JAN-
MARCH
)
- 2.7 It felt like a recession, even with slight growth,
Exports made it seem that growth was better,
Revisions revealed the recession had already
begun
Growth was negative for the 2nd time in a year. It
was due to a 3.1% decline in consumer spending,
the first since 1991 and the largest since 1980.
That was driven by a 6.4% drop in purchases of
clothing and food, the biggest since 1950.
The worst drop since Q1 1982, when GDP fell ..
Q2
(APRIL-
JUNE)
Q3
(JULY-
SEPT)
Q4
(OCT-
DEC)
+2
- - 1.9
- -8.2
QUARTE
R
GDP
FALL/UP
ANALYSIS
5. CAUSES OF US CRISES
1) SUB PRIME MORTGAGE CRISES .
2)RISING OIL PRICES @$100 EACH .
3)GLOBAL INFLATION .
4)HIGH UNEPLOYMENT .
5)DECLINING DOLLAR VALUE .
6. GLOBAL INFLATION
When price hikes for goods such as food, gas,
and clothing begin to rise faster than wages,
it becomes more difficult for consumers to
maintain their spending habits, causing
business growth to slow. Plus, these
escalating prices increase the cost of inputs
7. Crude crises
1. During 2003, the price rose above $30,
2. reached $60 by 11 August 2005,
3. peaked at $147.30 in July 2008.
These price increases due to many factors,
including Middle East tension, soaring demand
from China,[the falling value of the U.S. dollar,
reports showing a decline in petroleum reserves
worries over peak oil and financial speculation.
8. UNEMPLOYMENT
Yea
r
Jan Feb
Ma
r
Apr
Ma
y
Jun Jul Aug Sep Oct Nov Dec
200
7
4.6 4.5 4.4 4.5 4.4 4.6 4.7 4.6 4.7 4.7 4.7 5.0
200
8
5.0 4.9 5.1 5.0 5.4 5.6 5.8 6.1 6.1 6.5 6.8 7.3
200
9
7.8 8.3 8.7 9.0 9.4 9.5 9.5 9.6 9.8 10.0 9.9 9.9
9. Banks short of liquidity
The scale of bank losses started to increase and it
became more difficult for banks to borrow money on
money markets. This caused banks to reduce loans
and mortgages. Because banks were losing money, it
became very difficult to get credit and liquidity. Some
banks lost so much, they were running out of money.
In several countries, such as UK, Ireland and US,
major banks had to be bailed out by the government.
But, the realisation banks were short of liquidity
harmed consumer and investor confidence. The fall in
confidence led to lower spending and investment.
10. DECLINING DOLLAR VALUE
A declining dollar can also mean that the value of U.S.
Treasuries falls. This drives up Treasury yields, and therefore
interest rates.
A weaker dollar buys less in foreign goods. This increases the
price for imports, contributing to inflation. As the dollar
weakens, investors in the benchmark 10-year Treasury and
other bonds sell their dollar-denominated holdings. A weaker
dollar will also drive up oil prices
11. SUB PRIME MORTGAGE CRISES
1) Rate of interest was very very less (1% and appreciation was
14%)
2) Mortgage paper with
bank
3) Sell that mortgage paper to third parties i.e. big investment
institution
investor looking at high return and low risk security( T-bills were
not that much profitable)
4) MORTGAGE BANK SECURITIES
5) HOME PRICES GOING UP AND UP
( Because of lax lending requirement & low interest rates increase high
mortgage paper which made the mortgage back securities much better
than any other securities .
12. Cont.
6) It is common understand that if a person default even then also the
bank has super value house with them to sell
7) Rapid increase in value of house and people stop paying loan &
interest
8) Bring back the houses to sell in market back . , but no buyers was
available ( some people were having very high loan as compare to the
real value of the house )
9) Subprime lenders were getting stuck with the bad loans
10) This lead to crash of stock market . ( govt help in solving
the liquidity crises by bank bailout .)
15. Impacts
1) Indian companies have major outsourcing deals from the US
2) India's exports to the US have also grown substantially over the
years ,
For the first time in five years, India’s export growth has turned
negative. Exports for October 2008 contracted by 15%
16. Monetary policy
1) increasing cash reserve ratio and interest rates to fight against inflation
reversed its monetary policy from Oct. 2008.
2) The RBI took several steps to prevent fast depreciation of Indian rupee
due to massive capital outflow by FIIs by selling billions of dollars in the
foreign exchange market from its reserves.
3) to increase liquidity of the banking system, RBI cut cash reserve ratio
(CRR) four times in 0ct.2008 to January 2009 by 400 basis points (i.e.
by 4 percentage points) from 9 per cent to 5 per cent. With this the RBI
infused liquidity of Rs. 1, 60,000 crores in the banking system.
4) it was felt that to fulfill the needs of credit of the companies, mere
infusion of more liquidity was not enough unless the lending rates of
banks were lowered to reduce the cost of borrowing.
17. Fiscal policy
Besides easy monetary policy it was emphasized that a fiscal stimulus
to overcome recession and slowdown in economic growth was needed.
1) To keep growth momentum and to ensure 7 per cent growth rate in
2008-09 the Indian Government came out with three fiscal
stimulus packages which involved increase in Government
expenditure and cut in indirect taxes to boost both
consumption demand and investment demand.
2) The first fiscal stimulus package announced on Dec. 6, 2008
involved increase in Government expenditure by Rs. 30,700 crore. This
increase in Government expenditure was meant to help growth of
infrastructure, textiles (which is a major employer of labour force)
exports, housing, automobiles, and small and medium enterprises.
18. India export/import with USA
Month Exports Imports Balance
2007-2008
crores
TOTAL 2007 14,968.8 24,073.3 -9,104.4
Month Exports Imports Balance
2008*2009
TOTAL 2008 17,682.1 25,704.4 -8,022.3
Month Exports Imports Balance
TOTAL 2009 16,441.4 21,166.0 -4,724.6
