What is Recession?

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

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

A1] Growing Market Economy Starting Point = Willingness to buy

A2] Declining Market Economy Starting Point = Unwillingness to buy

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

C] What is Recession? 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 GDP = MONEY VALUE OF {C + I + G + (X – M)} C = Consumables, I = Gross Investments, G = Government Spending, X = Exports, M = Imports

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;

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

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

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

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

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

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

Terrorists’ Attack on 11th September in US Created fear in people People cancelled their travel plans Resulted in low occupancy rates Airlines & Hotel Industries badly hit 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 11th September in US Airline & Hotel Industries started “Cost Reduction” activities 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 Demand for other goods come down Started saving money instead of spending Catering company now, lays off people Demand for other goods come down

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;

F] How to know recession? 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

G] How to come out of 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? 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 has 2 plans Fiscal Policies (By Govt.) Monetary Policies (By RBI) RBI manipulates the available supply of money in the country Government influences the economy by changing how it (Government) spends and collects money

G] How to come out of recession? Fiscal Policies 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

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

G] How to come out of recession? Monetary Policies Government manipulates the available supply of money in the country 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 3] Use its own reserved money to buy Govt. bonds It becomes an income to Govt. to inject money into the market

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; 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? Nation’s recession is controlled by the actions of everybody living in that country;

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

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)

What is Recession?