USA Economic Recession and its Spillover Effect on Bangladesh

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USA Economic Recession and Its Spillover Effect on Bangladesh

(Macro Economics)

Submitted to:

Submitted by:

DU- FBS-DBI-16011

Date of Submission: 20th March, 2012

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Introduction:
For some recent years, Recession has become a buzz word among people. World economic recession is going on from 2007. It is the result of fall of world's financial and capital market. The main reason of this recession is the crisis of mortgaged loans in the USA. It started in the housing sector. Academics and Specialists define recession in different ways. Among the definitions, the most popular one says: In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Macroeconomic indicators such as GDP, employment, investment

spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. Recessions generally occur when there is a widespread drop in spending, often following 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.

Causes of 2008-Recession in USA:

Various causes are held responsible for the 2008-recession in USA. Here below, the bold causes are presented. Excessive debt levels: In order to counter the Stock Market Crash of 2000 and the subsequent economic slowdown, the Federal Reserve eased credit availability and drove interest rates down to lows not seen in many decades. These low interest rates facilitated the growth of debt at all levels of the economy, chief among them private debt to purchase more expensive housing. High levels of debt have long been recognized as a causative factor for recessions. Housing Loan: After 2005 US government lowered the interest rate and banks and financial institutions highly leaded housing loan to the mass people without considering enough the risk. Since the loan terms and interest rates were very easing, almost every capable person applied for loan for housing. Everyone thought there would be high demand for housing and they could pay the loan by giving their houses on high rent. But the actual scenario was different and there were very few people for buying or taking houses on rent. This has ultimately resulted in high number of debt default. Sub-Prime lending: Sub-prime lending has accelerated the excessive debt levels resulting to great recession. Sub-prime lending is lending money to the debt holders having difficulty to repay their previous debts. This situation led to higher debt default.

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Over-leveraging, credit default swaps and collateralized debt obligations: Another probable cause of the crisis and a factor that unquestionably amplified its magnitude was widespread miscalculation by banks and investors of the level of risk inherent in the

unregulated Collateralized debt obligation and Credit Default Swap markets. Under this theory, banks and investors systematized the risk by taking advantage of low interest rates to borrow tremendous sums of money that they could only pay back if the housing market continued to increase in value. Oil Prices: Another major factor indicating a near-term recession is the sky-high price of crude oil and refined product. Pushed upward by world-wide speculative Middle East war fears and increases in demand (especially from China), increasing energy prices act as an inflationary 'tax' on domestic production and consumption throughout the market economy. Higher costs of production will lower profits; higher prices will reduce some consumption. Reserve Immigration: Reverse migration of illegal immigrants from the US back to Mexico began in 2006, and this has reduced the overall population of the US. Approximately 0.5 million dwellings have become permanently vacant as a result of a reduction in the illegal immigrant population. The greatest impact has been on the California economy, where illegal immigrants comprise approximately 1/3 of the total population. The reduced demand for housing created permanent unemployment for hundreds of thousands of building contractors, realtors, and mortgage brokers.

Effects of USA Recession in Bangladesh:

The impact of the global economic meltdown is visible in most of the countries of the world. Though the crisis originated in developed countries, it has started to bite the economies of even many lowincome countries. Bangladesh is no exception. A lot of debate is now going on among businessmen and economists about the impact of the meltdown on Bangladesh. Bangladesh is not free from this recession. Three million people might lose their job in Bangladesh in this year, so here poverty is increasing. The export sector is potentially the most vulnerable in Bangladesh since it depends heavily on US and EU economies. The readymade garment (RMG) industry accounts for over three quarters of export earnings and depends almost entirely on US and EU markets. There is growing concern that a deep and prolonged recession in the US and EU may reduce consumer spending significantly across the board, thus undermining the demand for Bangladeshi exports.

This recession affected our export. According to Export Promotion Bureau in seven months, the exporting of raw jute decreased by 15.20 per cent, jute goods by 19.80 per cent, leather goods by 31.80 per cent and frozen food by 5.0 per cent. The BGMEA said readymade garments (RMG) export decreased in January by 4.98 per cent and in February by 17.58 per cent as our cloth mostly goes to the USA and Europe. So it has greatly affected our industry. This recession greatly affected our manpower export, as well. In the meantime, many of our workers have come back from Malaysia, Kuwait, Dubai, and Saudi Arabia. Malaysia cancelled the visas of 55 thousand workers. All the countries that import our manpower are going to cut the jobs of our manpower at overseas. As the world recession affected our manpower export, it would impact our remittance earnings. The remittance income would decline particularly from the Middle East. The overall industrial sector of our economy is thus bearing the brunt of the global recession. Our jute, sugar and spinning industries are in dire straits. Our textile is also in a severe trouble. Out of the 80 mills of jute products, 17 have fully stopped production eleven of these mills are functioning partially, while other mills are also are on the verge of closure. Out of 25 million workers, one hundred thousand has lost their jobs. In the spinning mills, 50 thousand laborers are jobless. The unsold goods of spinning mills are worth Tk 30 billion.