Recession:

Recession: The Newspaper Definition

The standard newspaper definition of a recession is a decline in the Gross Domestic

Product (GDP) for two or more consecutive quarters.

In economics, a recession is a business cycle contraction, a general slowdown in economic activity over
a period of time. During recessions, many macroeconomic indicators vary in a similar way. Production as
measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization,
household incomes, business profits and inflation all fall during recessions; while bankruptcies and
the unemployment rate rise.

Recessions are generally believed to be caused by a widespread drop in spending. Governments usually
respond to recessions by adopting expansionary macroeconomic policies, such as increasing money
supply, increasing government spending and decreasing taxation.

Recession? Depression? What's the difference?

How do we know if we're in one?

There is an old joke among economists that states:

A recession is when your neighbor loses his job.

A depression is when you lose your job.

The difference between the two terms is not very well understood for one simple reason: There is
not a universally agreed upon definition. If you ask 100 different economists to define the terms
recession and depression, you would get at least 100 different answers. I will try to summarize
both terms and explain the differences between them in a way that almost all economists could
agree with.

Depression

Before the Great Depression of the 1930s any downturn in economic activity was referred to as a
depression. The term recession was developed in this period to differentiate periods like the
1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple
definition of a depression as a recession that lasts longer and has a larger decline in business
activity.
The Difference

So how can we tell the difference between a recession and a depression? A good rule of thumb
for determining the difference between a recession and a depression is to look at the changes in
GNP. A depression is any economic downturn where real GDP declines by more than 10
percent. A recession is an economic downturn that is less severe.

By this yardstick, the last depression in the United States was from May 1937 to June 1938,
where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the
1930s can be seen as two separate events: an incredibly severe depression lasting from August
1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then
another less severe depression of 1937-38. The United States hasn’t had anything even close to a
depression in the post-war period. The worst recession in the last 60 years was from November
1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and
Indonesia have suffered depressions in recent memory using this definition.

Impacts of recession
Unemployment
The full impact of a recession on employment may not be felt for several quarters. Research in Britain
shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a
downturn. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall
back to its original levels.

Business
Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The
variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-
competitive mergers, with a negative impact on the wider economy: the suspension of competition
policy in the United States in the 1930s may have extended the Great Depression

Social effects
The living standards of people dependent on wages and salaries are more affected by recessions than
those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact
on the stability of families, and individuals' health and well-being.

Impact of recession in India:

Global economic meltdown has affected almost all countries. Strongest of American, European and
Japanese companies are facing severe crisis of liquidity and credit. India is not insulated, either.
However, India’s cautious approach towards reforms has saved it from possibly disastrous implications.
The truth is, Indian economy is also facing a kind of slowdown. The prime reason being, world trade does
not functions in isolation. All the economies are interlinked to each other and any major fluctuation in
trade balance and economic conditions causes numerous problems for all other economies.

According to official data, industrial growth in august has plummeted to mere 1.3% compared to the same
month in 2007. That definitely is cause of concern for policy makers and industries. This data also raised
fear of low GDP growth of India. It is being suspected that, our country will face huge problems in
achieving even 7.5% growth rate in this fiscal.

1.3 percent industrial growth is the lowest IIP (index of industrial production) data ever registered since
last ten years. April-august industrial growth rate is 4.9% which is also the lowest for the first five months
of a financial year in 14-year period except 1998 and 2001. To make matters worst, a member of the
PM’s economic advisory council and director of the National Institute of Public Finance and Policy have
confessed that India is going through industrial recession.

Several crucial sectors of Indian economy are likely to face serious problems in coming months. Foremost
among them is real estate sector. The demand for houses have reduced significantly and property prices
across India has registered 15-20% fall. Things are likely to get worst as another 20 percent drop in prices
is quite possible in coming six months. The woes of real estate have spread to construction industry as
well. Because of less demand for houses, construction companies are going to suffer big time. Financial
services segment is also likely to be a major victim of economic slowdown because of less demand for
credit and reduced liquidity in market.

These three segments account for almost one third of services GDP and because of their current and
impending plight, attaining 7.5% GDP growth in this current year is quite improbable. Industrial slowdown
will also affect transport services. Transport companies are likely to witness drastic fall in their business
and profits. Global recession will also lead to less tourists coming to India. That will negatively affect tours
and travels industry.

Survey on Recession:

Labour Bureau of ministry of Labour and Employment has released the findings of a study on
the effect of economic slowdown on employment in India.

• A sample size of 2581 units covering 20 centres across 11 states was taken up for the
survey.
• Eight major sectors like textile and garment industry, metals and metal products,
Information Technology and BPO, automobiles, gems & jewellery, transportation,
construction and mining industries were also included in the survey.
• 5 Lakh people were rendered jobless between October to December 2008.
• Exporting units had observed a higher decline in employment with gems & jewellery
sector shedding 8.43% of its work force.
• This is followed by metals and textile sector which laid off 2.6% and 1.29% of their work
force respectively.
• Among the domestic sector units, gems & jewellery sector again witnessed the maximum
decline in employment with 11.9% of their work force losing jobs.
• This was followed by automobiles and transport sectors who shed 4.79% and 4.03% of
their work force.