What is recession ??

Recession is caused by low GDP (Gross Domestic Product), Low Production, Falling Housing prices, rising unemployment, Stock markets crashing in bearish mood. Moreover recession itself causes further recession. Every recession has its own causes. The US recession in 2008 was due to fall in reality prices. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Types of Recession
1. Boom and Bust Recession.

Many recessions occur after a previous economic boom. In the economic boom, economic growth is well above the long run trend rate of growth; this rapid growth causes inflation and a current account deficit and the growth tends to be unsustainable. Examples of boom and bust recession
o

1973 recession in UK following Barber boom of 1972.

Features of Boom and Bust Recessions

Can often be short lived If caused by high interest rates, reversing rate increases can cause economy to recover Can be avoided by keeping growth close to long run trend rate and inflation low.

2. Balance Sheet Recession

A balance sheet recession occurs when banks and firms see a large decline in their balance sheets due to falling asset prices and bad loans. Because of large losses, they need to restrict bank lending leading to a fall in investment spending and economic growth. Example

2008-09 recession. In 2008, bank losses led to a fall in bank liquidity and banks found themselves short of cash. This led to a fall in bank lending and it was difficult to get funds for investment. Combined with collapse in confidence, the economy went into recession despite interest rates being cut to zero.

Features of Balance Sheet Recession

Can last a long time Cuts in interest rates may fail to cause economic recovery due to liquidity trap No quick recovery More susceptible to a double dip recession To avoid a balance sheet recession, we need to avoid a credit and asset bubble. Targeting inflation is not sufficient.

3. Depression

A depression is a prolonged and deep recession, where output falls by over 10% and very high rates of unemployment. A balance sheet recession is more likely to cause a depression because falling asset prices and bank losses have a long lasting impact on economic activity.
Example The Great Depression of the 1930s is the best example of the far-reaching economic and social impact a depression can have. 4. Supply Side Shock Recession

A very rapid rise in oil prices could cause a recession due to the decline in living standards. In 1973, the world was highly dependent on oil. The tripling in the oil price caused a sharp fall in disposable income and also caused lost output due to lack of oil. Features of Supply Side Shock Recession

Not very common. The world is less dependent on oil than in 1970s. The rise in oil prices in 2008 was only a minor factor in causing 2008 recession. Supply side shock causes Short Run Aggregate Supply (SRAS) to shift left. Therefore, we get both lower output and higher inflation. Often known as stagflation

Example
Canada went into recession during 2008-09 Demand Side Shock Recession

An unexpected event that causes a sharp fall in aggregate demand. For example, the short lived recession of 2001 (GDP fell only 0.3%) was partly caused by fall in consumer confidence as a result of 9/11 terrorist attacks (and also end of dot com bubble). Examples of demand-side shocks might include

A capital investment boom e.g. a construction boom or rapid growth of spending on ICT

A pre-election government spending spree or an unexpected reduction in taxation (e.g. the government opting for a fiscal policy expansion before an election) A significant rise or fall in the exchange rate affecting export demand and having effects on output, employment, incomes and profits of businesses linked to export industries A change in the rate of growth in one or more of our major trade partners which affects exports An unexpected cut or an unexpected rise in interest rates (i.e. a monetary policy shock)
when Hurricane Katrina hit in 2005 and had a detrimental effect upon the oil and gas industry.

Features

A number of demand side shocks can directly affect planned spending in the economy. These include: 1. Shocks affecting household or corporate spending, such as changes in unemployment, savings, confidence, wages, and profits. 2. Shocks associated with changes in liquidity and the availability of consumer and business credit, as in the recent credit crunch. 3. Changes in spending associated with changes in house prices, share and bond prices, called wealth effects. 4. Shocks affecting investment spending, including changes in bankruptcies, business confidence, and profit levels. 5. Changes in government finances, brought about by wars, and changes in unemployment. 6. Shocks directly affecting exports or imports, such as the economic collapse of a trading partner. 7. Other demand side shocks affect planned spending indirectly, such as changes in: 1. Interest rates, which affect both consumer and investment spending. 2. Tax rates, which also affect consumer and investment spending. 3. Exchange rates, which affect exports and imports.

SHAPES OF RECESSION

V-shaped recession
V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. V-shapes are the normal shape for recession: "There is a strong historical snap back relationship between the strength of economic recovery and the severity of the preceding recession. Thus, recessions and their recoveries have a tendency to trace out a V shape."[2]

A clear example of a v-shaped recession is the Recession of 1953 in the United States. In the early 1950s the economy in the United States was booming, but because the Federal Reserve expected inflation it raised interest rates, tipping the economy into recession. In 1953 growth began to slow, in the third quarter, the economy shrank by 2.4 percent. In the fourth quarter the economy shrank by 6.2 percent, and in the first quarter of 1954 it shrank by 2 percent before returning to growth. By the fourth quarter of 1954, the economy was growing at an 8 percent pace, well above the trend. Thus GDP growth for this recession forms a classic v-shape.[citation needed] More importantly ; The GDP graph itself has a V shape.

U-shaped recession
A U-shaped recession is longer than a V-shaped recession, and has a less-clearly defined trough. GDP may shrink for several quarters, and only slowly return to trend growth. Simon Johnson, former chief economist for the International Monetary Fund, says a U-shaped recession is like a bathtub: "You go in. You stay in. The sides are slippery. You know, maybe there's some bumpy stuff in the bottom, but you don't come out of the bathtub for a long time."[3] The 197375 recession in the United States can be considered a U-shaped recession. In early 1973 the economy began to shrink and continued to decline or have very low growth for nearly two years. After bumping along the bottom, the economy climbed back to recovery in 1975.[1]

W-shaped recession
In a W-shaped recession, (also known as a double-dip recession), the economy falls into recession, recovers with a short period of growth, then falls back into recession before finally recovering, giving a "down up down up" pattern resembling the letter W. The early 1980s recession in the United States is cited as an example of a W-shaped recession. The National Bureau of Economic Research considers two recessions to have occurred in the early 1980s.[4] The economy fell into recession from January 1980 to July 1980, shrinking at an 8 percent annual rate from April to June 1980. The economy then entered a quick period of growth, and in the first three months of 1981 grew at an 8.4 percent annual rate. As the Federal Reserve under Paul Volcker raised interest rates to fight inflation, the economy dipped back into recession (hence, the "double dip") from July 1981 to November 1982. The economy then entered a period of mostly robust growth for the rest of the decade.

L-shaped recession
An L-shaped recession occurs when an economy has a severe recession and does not return to trend line growth[citation needed] for many years, if ever. The steep drop, followed by a flat line makes the shape of an L. This is the most severe of the different shapes of recession. Alternative terms for long periods of underperformance include "depression" and lost decade; compare also "malaise". A classic example of an L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990. From the end of World War II throughout the 1980s, Japan's economy was growing robustly. In the late 1980s a massive asset-price bubble developed in Japan. After the bubble burst the economy suffered from deflation, and experienced years of sluggish growth; never returning to the higher growth

Japan experienced from 1950-1990. Because the late-2000s recession in the United States followed a similar economic bubble (the United States housing bubble) some economists fear the U.S. economy could enter a prolonged period of low growth even after recovering from the recession.[5]

Possible causes of a recession 1. Major negative demand-side shocks hitting the components of AD a. A global economic slump or a deep recession in the country of a major trading partner such as the countries of the EU (60% of UK trade) and the United States (15% of UK trade) b. A sharp fall / collapse in asset prices e.g. share prices, property prices c. A credit crunch where financial institutions cut back the amount of credit they are prepared to lend to households and businesses and raise the interest rate on these loans d. A large appreciation of the exchange rate which hits demand for exports, raises import demand and causes the trade balance to worsen 3. Risks of recession arising from deflationary macroeconomic policies such as higher interest rates or increased direct and indirect taxation a. If interest rates are raised to counter higher inflation from the domestic economy or from overseas this can cause a fall in confidence, less spending and a downturn in output and jobs b. Taxes may have risen to counter a budget deficit squeezing real disposable incomes and demand or perhaps damaging business investment A severe slowdown can quite easily become a recession because of 1. Negative multiplier effects arising from less consumption on goods and services 2. The accelerator effect less consumption less incentive to invest in new capital 3. A drop in consumer and business confidence / worsening expectations can lead to more saving and cost-cutting by firms rising unemployment

Government responses
Recession stuck, and the share brokers, analysts, economists, experts, theoreticians and politicians were taken unawares! Share market proved again that is doesnt bow before anyone and it is the master of its destiny. To a great extent India survived recession and for that whom do you wish to give the credit? The political leadership? The Reserve Bank of India? The giants of industries in India? None of this.One may try to prove issues through statistics and quote the best of the economic theories to convince you that recession has been contained through prudent economic policies. Such policies have provided marginal help to contain recession. You need to give credit to the poor of India, about 70% of the total population, and the corrupt population of India, which could be any figure between 15 to 20%. And for the rest, recession did impact to some extent.

For the poor in India, what happens in the stock market, what happens about the space research, which car models are introduced, how many Mercedes cars are sold, are of no consequence. He is concerned with his dal-roti. If he cant afford dal, he will carry on with potato, which is normally cheap. If he cannot afford potato, he eats roti with onion, chili or even salt. He has great capacity to come to terms with life! Poor man has no purchasing power so how can recession affect him? The poor mans personal life can never be into recession in India as it was always under recession for the last several decades. His economic position is stationary like the polestar. No credit can be given for the politicians and planners of India to brag about halting the recession. The vehicle has not moved at all. Where is the question of applying breaks? It goes to the credit of the mindset of the Indian poor people. Did the corrupt which are about 20% of the population of India (broad assumption), as mentioned above, suffer from recession? They will also never suffer. This population mainly consists of politicians and their henchmen, those associated with the drugs and peddling/selling other goods of addiction, rich bureaucrats, and corrupt employees in the government departments etc and the flamboyant executives of top industrial houses that have lost touch with the common man, and are busy partying in the five-start hotels. These people live by Uoopar ki Amdani and save their salary. They have enough money earned through corrupt sources. Whether cauliflower costs Rs.20/- per kg or 80/- per kg, doesnt bother them. Some have so much money which is sufficient for the next 7 generations to come, even if they are not gainfully employed or do any business. But there is the brighter side that continues to have positive impact on the Indian economy, and influences to check recession. We are not totally dependent for export/import on U.S or other countries that suffered to a great extent due to recessionary trends. So the tremors are not felt in India when the economic earthquake shakes those countries. This is due to the IT and other sectors whose market is spread over in a number of European countries, apart from the domestic market. The employment position also remained steady. Outsourcing by the companies from foreign countries, to fulfill their own economic needs, has a favorable impact on the Indian employment situation. What if low salaries, the educated youngsters are getting some employment, to cover up their day to day expenses. Nationalization of 20 important commercial banks about 4 decades ago also helped to some extent to avert recession. Government banks wont crash and majority of them are run efficiently procedure-wise. State Bank, which is the biggest Commercial Bank in India, is a state-owned bank. Indias economy is not totally unbridled, just like some western countries.