Traditional GK

Table of contents:

1. Introduction

2. Definition

3. Why do recessions happen?

4. The Great Recession

5. How is recession different from depression

6. Recession of the COVID-19 pandemic

7. Indian scenario

8. Latest trends in global recession

9. Conclusion

9. FAQs

Introduction

A recession, a drastic decline in economic activities, is likely a financial crisis when it takes place in an economy. Given the exposure of stronger economies of other nations with the practices of trade and other factors, thus, if one nation is hit by the recession, the adjacent nations will likely feel the impact in the long run. As it continues for a longer time, it has a significant influence on other countries, and these opposing effects are caused by the fact that they share trade relations with the world. Besides, the international financial systems chiefly as well as banks, PGM companies, and even the financial world as a whole are also confronted with recovery problems when they interact with each other during the recession period. Through this article it is brought out that the global recession has caused the economy to plunge, and the various consequences ranging from job losses to short-term disruptions. During the recent global recessions, developing countries became the worst affected amid the extreme economic and financial disruptions that were observed in many economies worldwide. Indian banking sector, which is not much integrated with foreign financial system, locked it in prime position that largely bypassed the first round of adverse impacts of global financial crisis that did not affect Indian banks directly.

Despite the many cons of a recession, if it can be valued higher than the losses, it can be helpful in the world’s sustainability of wealth. Imbalance occurs worldwide where a specific country is rich in offerings and others are relatively poor when compared, creating international economic imbalance. The process of eliminating supply surpluses during global economic recessions has a deflationary effect, which is advantageous for nations with limited resources or those facing financial difficulties.

In India, it was believed that the global financial crisis had started in August 2007, when the US first experienced issues with unsustainable mortgages. However, it was thought that India would not be significantly affected since it was not heavily exposed to the global economy. In reality, the Reserve Bank of India (RBI) is thought to have raised interest rates formally to regulate inflation and slow the growth of India's GDP. This was because the Indian economy had grown beyond its potential rate, which was causing inflationary pressures. This RBI action to raise interest rates occurred around August 2008, about a year after the initial signs of the global financial crisis emerging in the US mortgage market. 

Definition
The NBER’s Business Cycle Dating Committee defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” 

The definition of a recession is a topic of debate among economists. Recession, as defined by the Reserve Bank of India, is a period of sustained output declines felt by a large portion of the economy. More specifically, analysts frequently define a recession as having occurred when the real gross domestic product (GDP) has decreased for a minimum of two quarters.

Why do recessions happen?

According to the IMF, it has long been a topic of study in economics to try and figure out what causes recessions. Recessions can occur for many different causes. Certain ones have to do with sudden fluctuations in the cost of the raw materials needed to make goods and services. A recession, for instance, may be predicted by a sharp rise in oil costs. Aggregate demand decreases as energy costs rise and raise the general price level. The choice of a nation to use contractionary fiscal or monetary policies in an effort to lower inflation can potentially set off a recession. Recessions can eventually emerge from overuse of these policies, which can lower consumer demand for goods and services.

Financial market issues are the cause of other recessions, such the one that started in 2007. Debt generally accumulates quickly along with sharp price increases in assets and rapid credit expansion. Economic activity declines as a result of overextended households and firms that find it harder to pay off their debts. This reduces investment and consumption. While not every credit bubble leads to a recession, when it does, those recessions are frequently more expensive than others. A drop in foreign demand, particularly in nations with robust export industries, can trigger recessions. Large economies, like Germany and Japan, experience recessions that quickly affect their regional trading partners. This is especially true during internationally coordinated recessions.

It is difficult to forecast recessions because there are numerous possible causes. Numerous economic variables have been shown to exhibit behavioral patterns around recessions, such as credit volume, the value of assets, and the unemployment rate. However, while these variables may contribute to recessions, they may also be endogenous to recessions, to use the technical term for economic phenomena. None of the many variables used by economists to predict the future course of economic activity has shown to be a reliable indicator of when a recession is likely to occur. Recessions seem to be predicted more correctly by changes in specific variables, such as asset values, the unemployment rate, particular rates of interest, and consumer confidence, but economists are still unable to predict a sizable portion of recessions with accuracy.

The Great Recession

The worst economic crisis to hit the United States since the Great Depression was the Great Recession of 2008–2009. At its lowest point, the S&P 500 was down 57% from its highs, the unemployment rate doubled to more than 10%, the domestic product shrank by 4.3%, and housing prices nearly dropped. Six million households lost their homes as a result of a global crisis that began as a well-known story of greed and lawlessness. Unmatched interventions and changes were consequently put into effect and are still in force today.

Debt and mortgage crisis- The years preceding the Great Recession saw a rise in the predatory lending practices of banks and mortgage lenders. Less criteria were used to guarantee that applicants could repay their mortgages, making them easier to obtain. There was a building boom and significant price increases as more individuals suddenly had access to purchasing power.
Borrowers with poor credit histories, low incomes, and subpar credit ratings were eligible for this new kind of mortgage, known as subprime. In order to attract consumers, these mortgages usually included low down payments—or none at all—and low starting monthly payments. Usually, these borrowers were unaware of the intricate details of their financial agreements and how their interest rates worked.

Failures and Bankruptcies- When the financial markets completely collapsed in 2008, a number of significant financial institutions failed.
JPMorgan Chase bought investment bank Bear Stearns in April 2008 for $10 per share, which was around 94% less than the company's 52-week high. Just eighteen months before, in September 2008, investment firm Lehman Brothers declared for Chapter 11 bankruptcy protection. At that time, its market capitalization was $60 billion.

In order to stop a chain reaction of bankruptcies across the American economy, the U.S. administration was compelled to intervene and implement massive bailouts. The Economic Recovery Act of 2008, that covered $300 billion worth of mortgages, effectively nationalized the government backed home mortgage businesses, Fannie Mae and Freddie Mac, in September 2008.

Credit default swaps- Bondholder insurance products resemble credit default swaps, or CDSs. Investors who promise to reimburse the lender in the event that the debtor defaults on its debts sell CDSs to lenders. The mortgage-backed securities market collapsed when households started to fall behind on their mortgages, resulting in enormous losses for banks and financial institutions. The insurance firms that had sold CDSs to these institutions were also obligated to pay billions of dollars' worth of liabilities at the same time.

End of the Great Recession- The $789 billion American Recovery and Reinvestment Act, passed by Congress in February 2009 under the administration of then-President Barack Obama, contributed to the economic recession's end. $212 billion in tax breaks and $311 billion in investments in infrastructure, healthcare, and education were included in the stimulus package.
Obama unveiled the Homeowner Stability Initiative, a $75 billion initiative designed to keep more than 7 million American homes out of foreclosure, the next day.
The Home Affordable Refinance Program (HARP) was introduced by the Federal Housing Finance Agency in March 2009. It assisted creditworthy homeowners who were underwater on their mortgages in refinancing and taking advantage of lower interest rates. With the implementation of the drastic government stimulus plans, the recession was formally declared over in the third quarter of 2009 when the U.S. GDP grew 1.5% year over year.

How is recession different from depression?

The most recent recession in American history, which lasted from December 2007 to June 2009, was the longest (18 months) and severe (resulting in an approximate 3.7 percent decrease in output) since 1960. Before 2007, the average U.S. recession lasted approximately 11 months and had an output fall of 1.7 percent from the peak to the bottom. Only four of the eight recessions since 1960 have seen a decrease in consumption, despite the fact that investment and production in industry have decreased throughout every recession.

How a recession and a depression, particularly the Great Depression of the 1930s, are comparable is one question that is occasionally posed. While there isn't a specific definition for depression, most analysts define it as a very bad recession with a GDP decline of more than 10%. Since 1960, sophisticated economies have seen very few instances of depression. The most recent occurred in Finland in the early 1990s, when the country's GDP fell by almost 14%. Finland's main trading partner, the Soviet Union, broke up at the same time as that slump. The United States economy shrank by almost thirty percent over the course of four years during the Great Depression. The current recession clearly has a higher output cost than the Great Depression, despite the fact that it is clearly more severe.

Recession of the COVID-19 pandemic

Most nations experienced a recession that started in February 2020. The COVID-19 lockdowns along with additional safeguards implemented in early 2020 sent the world economy into crisis, following a year of slowdown that witnessed a stalling of the economy and consumer spending. Every developed economy entered a recession in less than seven months. Early in 2020, as a result of government limitations and widespread fear of the virus, the COVID-19 pandemic caused a devastatingly abrupt reduction in economic activity and resulted in a significant loss of jobs. Significant job and income losses were suffered by workers in low-wage sectors and jobs that required in-person interactions; these workers were mostly women, people of colour, those without a bachelor's degree, and foreign-born individuals.

During the recession, unemployment rose particularly quickly in a number of nations. The number of jobless cases filed in the United States by October 2020 exceeded 10 million, overwhelming the computer systems and procedures for unemployment insurance financed by the state. In April 2020, the United Nations (UN) projected that 6.7% of working hours would be lost due to worldwide unemployment in the second quarter of 2020, or 195 million employees with full-time jobs. It was anticipated that unemployment would be roughly 10% in some countries, with greater rates in the most badly hit countries.

2021 saw a sharp increase in inflation. While workers in low-paid occupations had real wage gains, overall wage growth was not the primary cause of inflation. Wage metrics were skewed by significant changes in production patterns. Recent price rises were largely driven by corporate profits, with wages accounting for a lower portion of the increase than usual. The Federal Reserve implemented measures to address inflation while preserving high employment.

Indian Scenario

India cannot be expected to be resistant to the worldwide financial crisis or to be cut off from it given its growing economic ties to the rest of the globe. The global crisis has impacted India in three different ways, but it is true that the country's banking industry was mostly immune due to its extremely limited operations outside of India and its exposure to sub-prime lending by foreign investment banks. Trade flows, exchange rates, and financial markets are examples of these channels.

Financial markets: The crisis affected India's financial markets in several ways. The equity markets were directly impacted by the reduced flows of foreign institutional investment. External commercial borrowings (ECBs) that drive corporate investments were also disrupted by the global crisis.

Trade flows: India's exports and imports were affected by the overall slowdown in global trade and economic activity during the crisis period.

Exchange rates: The value of the Indian rupee fluctuated significantly in relation to other major currencies like the US dollar, as global capital flows shifted.

As of 2024, despite the ongoing pressure on the world economy, the Indian economy has proven comparatively resilient throughout these times. However, no nation is exempt in the age of globalization, and these outside challenges may have a negative effect on the Indian economy as well.
The stock markets generally experience large swings in share values due to shifts in investor sentiment throughout the recessionary period. The majority of investors often take money out of the market and put it in safe-haven investments like gold. For instance, in just one year during the US recession of 2008, the NIFTY50 fell by more than 51%.

There has been an impact on Indian exports as well. Recession-ridden nations typically experience poor demand conditions with restrained consumer expenditure. This can have an indirect effect on India's exports to these nations. Over ten percent of India's overall trade is with the aforementioned nations. Germany and the UK are important trading partners, with $21.5 billion in total exports as of FY23. Moreover, from April to December 2023, India's total exports decreased 5.8% YoY. India's services industry is already feeling the effects of the crisis. Due to enterprises reducing their IT spending and trying to save money, the Indian IT industry is experiencing slow development and difficulty landing new contracts.

Latest trends in global recession

The global economic landscape outside of Europe is trending cautiously optimistic, but significant uncertainties remain. In the US, the latest GDP figures were better than expected, showing 3.1% year-over-year growth in Q4 2023. However, an inverted yield curve, a typical precursor to recession, has been in place since July 2022. While US inflation has come down from its peak, it's still above the 2% target.

Europe is still facing severe structural issues, such as changing demographics and rising energy prices. Economic development in the Eurozone is still sluggish; in Q42023, GDP increased by just 0.1% annually. Despite recent decreases, central banks have been forced to maintain high interest rates due to the persistently high levels of inflation in the UK and the Eurozone.

Across Asia, the picture is mixed. China's growth remains sluggish despite stimulus efforts, and the country has slipped into a rare deflationary period. Japan, on the other hand, is experiencing its highest inflation in four decades. India's inflation, while elevated compared to historical norms, is below earlier peaks, and its GDP growth was a robust 7.6% in Q3 2023.

Geopolitical risks, including the ongoing conflict in Ukraine and tensions in the Middle East, continue to loom large, with the potential to disrupt global trade and energy markets.

Despite the cautiously optimistic consensus, the underlying conditions for sustained economic uncertainty and elevated geopolitical risk remain firmly in place. Companies will need to be proactive and adaptable to navigate this complex and volatile environment.

Conclusion

The term "global recession" describes the slowdown in the global economy that is being seen in many countries. While a recession only impacts one nation at a time, the economy of the other countries it affects are significantly impacted if it lasts longer. Events of this nature result in higher unemployment rates as well as higher commodity prices and consumption (oil, per capita investment, etc.). A nation's efficiency increases when it emerges from recession. This fiscal year, the chief economic advisor does not predict a recession in India; nevertheless, depending on how long the Russia-Ukraine war drags on, the world economy may get caught in its throes or see a notable slowdown. India will be affected even if it does not experience another recession if that occurs.

FAQs

1. Is India completely unaffected by the global recession?

Ans. No, that is untrue. India as well, is facing implications due to recession worldwide.

2. What is the main difference between a recession and a depression?

Ans. The difference between a recession and a depression is that a recession is much more severe and longer lasting.

3. What is a positive thing about recession?

Ans. Costs are often lower in recession which includes capital purchase and investments facilitating an increased ROI in the future.