There is an old joke among economists that states:

A Recession is when your neighbour loses his job. A depression is when you lose your job.

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Outline

Business Cycle What causes to recession? History Of Recessions How Fiscal & Monetary policy affect economy? US Recession Macro Economic Measures and its impact in USA Japanese Bubble 4/21/12

Business Cycle

The business cycle is the periodic but irregular up-anddown movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables A business cycle is identified as a sequence of four phases:

Contraction (A slowdown in the pace of economic activity) Trough (The lower turning point of a business cycle, where a contraction turns into an expansion) Expansion (A speedup in the pace of economic activity) (The upper turning of a business cycle)

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Recession

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What is Recession ?

A recession is a contraction phase of the business cycle. The official agency in charge of declaring that the economy is in a state of recession is the National Bureau of Economic Research (NBER).

They define recession as a "significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

For this reason, the official designation of recession may not come until after we are in a recession for six months or even longer Some economists also suggest that a recession occurs when the natural growth rate in GDP is less than the 4/21/12

Contraction Period

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What Causes Recession ?

An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for 4/21/12 goods and services, which in turn leads to

History of Recession
Name Panic of 1907 Date Durati Causes on 1907 1 year A run on knickerbocker Trust Company deposits on 1908 October 22,1907 set events in motion that would lead to a severe monetary contraction. Severe Hyperinflation in Europe took place over production in North America. It was a brief but very 1918 3 sharp recession and was caused by the end of 1921 years wartime production, along with an influx of labor from returning troops. This in turn caused high unemployment.

Post World War I Recession

Stock markets crashed worldwide, and a banking Great 1929 10 collapse took place in the United States. This sparked Depression 1939 years a global downturn, including a second, more minor recession in the United States, the Recession of 1937. After a post-Korean War inflationary period, more Recession 1953 funds were transferred into national security. The 1 year 4/21/12 1954 of 1953 Federal Reserve changed monetary policy to be more

History of Recession
Recession of 1957 Monetary policy was tightened during the two years preceding 1957, followed by an easing of policy at the 1957 end of 1957. The budget balance resulted in a change 1 year 1958 in budget surplus of 0.8% of GDP in 1957 to a budget deficit of 0.6% of GDP in 1958, and then to 2.6% of GDP in 1959. A quadrupling of oil prices by OPEC coupled with high 1973 2 government spending due to the Vietnam War led to 1975 years stagflation in the United States.

1973 oil crisis

The Iranian Revolution sharply increased the price of oil around the world in 1979, causing the 1979 energy crisis. This was caused by the new regime in power in Iran, which exported oil at inconsistent intervals and Early 1980s 1980 2 at a lower volume, forcing prices to go up. Tight recession 1982 years monetary policy in the United States to control inflation led to another recession. The changes were made largely because of inflation that was carried over from the previous decade due to the 1973 oil crisis and the 1979 energy crisis. 4/21/12

History of Recession
Early 1990s 1990 Industrial production and manufacturing-trade sales 1 year recession 1991 decreased in early 1991. The collapse of the dot-com bubble, the September Early 2000s 2001 2 11th attacks, and accounting scandals contributed to recession 2003 years a relatively mild contraction in the North American economy. 2008 2008 The Subprime mortgage crisis.

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Recession Or Not ?

According to numbers published by Bureau of Economic Analysis in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggest this indicates that the U.S. economy was not in a recession at the time However this estimate has been disputed 4/21/12

Causes Of US Recession

The general consensus is that a recession is primarily caused by the actions taken to control the money supply in the economy and fall in aggregate demand which is not supplemented by price adjustments The Federal Reserve is responsible for maintaining an ideal balance between money supply, interest rates, and inflation When the Fed loses balance in this equation, the economy can spiral out of control, forcing it to correct itself Relaxed policies in lending practices making it easy to borrow money.The economic activity became unsustainable resulting in the economy coming to a near halt 4/21/12

How Fiscal & Monetary Policy Affect the Economy

Monetary Policy : Expansionary Monetary policy helps lower interest rates, boosting investment spending and interest sensitive consumer spending. It also lowers the international exchange value of currency which also boosts exports and imports Fiscal Policy : Expansion of budget deficit also boosts aggregate spending. Undertaken through higher govt. 4/21/12 spending, tax cuts etc.

U S Recession

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Primarily remembered for simultaneous rise in both inflation and unemployment rate. Reasons : Rise in oil prices from $2.6/barrel to $11/barrel which lead to rise in inflation. To counter this Fed Reserve increased fund rates from 5% to 10%. Also, it was preceded by poor performance of the 1970s. Measures : To counter recession expansionary Monetary and fiscal policy was adopted. Fund rate cuts from as high as 13% to 5.25% was also implemented. 4/21/12

Stagflation Recession 1970s

Stagflation Recession 1970s

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Recession 1980s

It was one of the deepest & longest recession of the post war period Reasons : In attempt to reduce the inflation which was 11.1% Fed Reserve decided to increase fund rate from 10.5% to 17.5 and finally to as high as 19%. Secondly, due to Iranian revolution oil prices rose from $13/barrel to $37/barrel
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Measures :

Recession 1980s

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Dot Com Collapse

Different of all recession till now which had unexpected reasons. Reasons : Dot com bubble Terrorist attack resulting in undermined public confidence which leads fall in spending and thus fall in aggregate demand GDP which grew at average 4% in mid 4/21/12 90s fall to 1.1% in 2001

Crisis In The US

The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value In February, 63,000 jobs were lost, a 5-year record. In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to September of 2008 On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US
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Crisis in the US

Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Major banks have landed in trouble after people could not pay back loans The housing market soared on the back of easy availability of loans The realty sector boomed but could not sustain the momentum for long, and it collapsed under the gargantuan weight of crippling loan defaults Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the economy

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Liquidity Crisis

In early July, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac - the largest mortgage lender in the US was seized by federal regulators. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures During the weekend of September1314, Lehman Brothers declared bankruptcy after failing to find a buyer Bank of America agreed to purchase Merrill Lynch, the insurance company AIG sought a bridge loan from the 4/21/12

Liquidity Crisis

The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual The year 2008 as of September 17 has seen 81 public corporations file for bankruptcy in the United States, already higher than the 78 in 2007 Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals The year also saw the ninth biggest bankruptcy with the failure of IndyMac Bank On September 29, Citigroup beat out Wells Fargo to acquire the ailing Wachovia's assets will pay $1 a share, or about $2.2 billion
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Measures to Tackle Recession

Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. Fed Reserve has Fund rates from 6% to 1% now. The government also hikes its spending to create more jobs and boost the manufacturing and services sectors and to prop up the economy. The government also takes steps to help the private sector come out of the crisis In the current case, the Bush government has proposed a bailout, of the cost of the Treasury of $700 billion U.S. dollars Other Fiscal policy measures and stimulus proposed.

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Japanese Recession

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The Japanese Story

The robust growth that Japan had experienced since the end of World War II came to an end when Japan`s bubble economy collapsed at the beginning of the 1990s In 1989 the Bank of Japan changed to a tight-money policy 1990 the Ministry of Finance requested banks restrict their financing of property assets New land taxation laws (landholding tax) Financial institutions suffered from nonperforming loans Companies` three excesses: Excess capital investment Excess employment
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Excessive debt

The Lost Decade

1991 1995:

Asset deflation Reversed wealth effect : Vicious cycle 1995 1996: Yen Appreciation Massive fiscal expansion 1997 1999: Fiscal contraction
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Vicious Cycle

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The Slump
Output Growth, Unemployment, and Inflation, Japan 19902001 Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 4/21/12
Output Growth Rate

(%)

Unemployment Rate

(%)

5.3 3.1 0.9 0.4 1.0 1.6 3.5 1.8 1.1 0.8 1.5 0.7

2.1 2.1 2.2 2.5 2.9 3.1 3.4 3.4 3.4 4.1 4.7 5.0

Inflation Rate (%) 2.4 3.0 1.7 0.6 0.1 0.4 0.8 0.4 0.1 1.4 1.6 1.6

Japan Price Level

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The Rise and Fall of the Nikkei

There are two reasons for the increase in a stock price:

1.

A change in the fundamental value of the stock price, which depends on the expected present value of future dividends. A speculative bubble: Investors buy at a higher price simply because they expect the price to go even higher in the future.

2.

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The Rise and Fall of the Nikkei

Stock Prices and Dividends,in The increase Japan, 1980stock prices in the 1980s and the 2001

subsequent decrease have not been associated with a parallel movement in dividends.

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The Rise and Fall of the Nikkei

The fact that dividends remained flat while stock prices increased strongly suggests that a large bubble existed in the Nikkei. The rapid fall in stock prices had a major impact on spendingconsumption was less affected, but investment collapsed.

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The Rise and Fall of the Nikkei

GDP, Consumption, and Investment Growth, Japan, 19881993
GDP (%) 6.5 5.3 5.3 3.1 0.9 0.4 Consumption (%) 5.1 4.7 4.4 2.1 2.2 2.5 Investment (%) 15.5 15.0 11.5 4.4 7.3 11.6

Year 1988 1989 1990 1991 1992 1993 4/21/12

The Failure of Monetary and Fiscal Policy

Monetary policy was used, but it was used too late, and when it was used, it faced the twin problems of the liquidity trap and deflation. The Bank of Japan (BoJ) cut the nominal interest rate, but it did so slowly, and the cumulative effect of low growth was such that inflation had turned to deflation. As a result, the real interest rate was higher than the nominal interest rate.

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The Failure of Monetary and Fiscal Policy

The Nominal Interest Rate and the Real Interest Rate in Japan, 1990Japan is now in a 2001 trap: The liquidity

nominal interest rate is close to zero. Deflation implies that even at a zero nominal interest rate, the real interest rate is positive.
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The Failure of Monetary and Fiscal Policy

Fiscal policy was used as well. Taxes decreased at the start of the slump, and there was a steady increase in government spending throughout the decade. Fiscal policy helped, but it was not enough to increase spending and output.

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The Failure of Monetary and Fiscal Policy

Government revenues and spending in Fiscal policy limited Japan, 1990- not the decline, but did 2001 a recovery. In lead to
the absence of increased government spending, output would have declined even more.

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Why Didnt Macro Policy work

Tax Cuts No one to give tax cuts:

60% of the total tax payers were not paying taxes after series of tax cuts -- To high minimum taxable income

Monetary Policy Not effective especially in late 90s -- Liquidity Trap

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What Comes Next?

Policy recommendations for the Japanese economy include:

Create inflation: More inflation is good because the real interest rate would decrease, thereby stimulating spending and output. Clean up the banking system: Too many bad firms continue to be financed by the banks, thereby preventing the good firms from obtaining financing at reasonable terms.

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Comparison

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Comparison

Japan also had a stock market bubble, which burst a year earlier than that in property. This hurt banks, because they counted part of their equity holdings in other firms as capital. But its impact on households was modest, because only 30% of the population held shares, compared with over half of Americans The Bank of Japan (BoJ) began to lower interest rates in July 1991, soon after property prices began to decline. The 4/21/12

GDP Growth Rates

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Comparison

Americas inflation rate of above 5% is an advantage. Not only are real interest rates negative, but inflation is also helping to bring the housing market back to fair value with a smaller fall in prices than otherwise But in another way America is more exposed than Japan was. When its bubble burst in 1991, Japans households saved 15% of their income. By 2001 saving had fallen to 5%, which helped to prop up 4/21/12

Comparison

America is spreading the costs of its housing bust across other countries. Foreigners hold a large slice of American mortgage-backed securities. Sovereignwealth funds have provided new capital for American banks. And Americas booming exports have helped to support its economy, thanks to the cheap dollar. In contrast, the yens sharp appreciation after Japans bubble burst hurt exports at the same time as domestic demand was 4/21/12

Japanese Mystery !!!

Monetary and fiscal relief were necessary but not sufficient to revive Japans economy The missing ingredient was a clean-up of the banking system. Japanese banks hid their bad loans beneath opaque corporate structures, and curtailed new lending to profitable businesses. A vicious circle developed, whereby banks bad loans depressed growth which then created more bad loans. In Japan it took a long while before the political will was there to use taxpayers money to plug the banking system The Expenditure by the Japanese govt. in public works, regional infrastructure projects, was of little help because relatively little of the money spent reached those who have been made unemployed. And the massive outlay means government borrowing has 4/21/12 reached 180% of GDP, higher than any other industrialised

Bad Loans Are Bad !

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Questions ???

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What is Recession?
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In economics, the term recession describes the reduction of a country's gross domestic product (GDP) for at least two quarters.

The usual dictionary definition is "a period of reduced economic activity"

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The United States-based National Bureau of Economic Researc (NBER) defines economic recession as: "a significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment, industrial production, and wholesale-retail sales.

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That private organization defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months. In macroeconomics, a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year
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History of recessions

July 1980 - November 1982: 2 years total July 1990-March 1991: 8 months March 2001-November 2001: 8 months December 2007-current: 15 months as of March 2009

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Causes of recessions

Currency crises Energy crisis

Under-consumption Overproduction Financial crisis

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Causes of recessions
Currency crises A currency crisis, which is also called a balance-of-payments crisis, occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. It is a type of financial crisis and is often associated with a real economic crisis

Energy crisis An energy crisis is any great bottleneck (or price rise) in the supply of energy resources to an economy. It usually refers to the shortage of oil and additionally to electricity or other 4/21/12 natural resources. An energy crisis may be

Underconsumption In underconsumption , recessions and stagnation arise due to inadequate consumer demand relative to the amount produced Overproduction In economics, overproduction refers to excess of supply over demand of products being offered to the market. This leads to lower prices and / or unsold goods Financial crisis The term financial crisis is applied broadly to a variety of situations in which 4/21/12

The Impact of Recession on Employment

As, the impact of recession is unpredictable and depends entirely on the nature of the recession. The lessons learned on past recessions have somehow helped us trace the patterns and given us ideas on how to solve the problem.
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The Center for Economic and Policy Research states that the looming recession will raise unemployment by about 2 to 3 percent depending on the nature of the recession. This means that there will be about 3 to 5 million unemployed Americans in case it happens. 4/21/12

On the other hand unemployment data doesnt represent the educated workforce. For them, the truth is there are more available jobs than there are candidates and the unemployment rise affects mainly the low-skilled workers.
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STRATEGIC ROLE OF HRM DURING RECESSION

The recession is about the creative Human Resources Management. The HRM Function is asked to bring new ideas, to change the HRM Processes and to develop or change the procedures. And this effort has to be cheap or it has to cut the costs of the organization. The HRM Innovation is easy in times of the business growth, but the recession is not good for big 4/21/12 innovative HRM Initiatives.

The point has to be focused by HRM during recession are as follows:

To optimize the manpower strength. To take strategic initiatives to increase the productivity and efficiency of the entire organization. To work on compensation benefits. Redesign training and development programs. Ensure your organizations policies and handbooks are up to date.
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Layoffs. Ensure you are familiar with your legal responsibilities in a lay off to minimize your organization's risk. Be sure that you have properly defined the criteria you are using to determine who will be let go. Redirect Your Employees to Other Departments (Job Rotation) Listen to Your Employees Keep Them Motivated and Busy (Communicate-Communicate and Communicate)
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Managerial Economics Presentation O n Recession In India

Presented By:
Amarjeet Singh (GJU09022) Ashok Kumar (GJU09009) Mridul Kumar Pathak (GJU09363) Ramesh Gakhar (GJU09202)
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So what is a recession?

RECESSIONS ARE the result of reduction in the demand of products in the global market. Recession can also be associated with falling prices known as deflation due to lack of demand of products. Again, it could be the result of inflation or a combination of increasing prices and stagnant economic growth in the west. A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.
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History of Recession
However in the great depression of 1930s Keynes was very critical of this classical view he said that the long period of negative growth showed that markets do not automatically clear he argued that this was for various reasons. Wages are sticky downwards, Firms should cut wages to reflect lower prices but in reality workers are very resistant to cuts in nominal wages If wages were cut in response to unemployment workers would have less spending power therefore AD would continue to fall. 4/21/12 recession people have low confidence and In a

The recession of 1981 was caused by:

v v

High strength of the pound which made exports more expensive and reduced AD.This recession particularly effected British manufacturing. High interest rates, The govt was committed to reducing the inflation of 27% they inherited. They maintained a tight monetary policy which reduced inflation but at a cost of falling spending, investment and outpur. Tight Fiscal Policy, To control inflation the govt were committed to reducing the levels of Government borrowing. This was influenced from Monetarist beliefs that controlling excess government borrowing was essential to the economy

The recession of 1991 was caused by

v

BOOM and BUST. In the 1980s economic growth was too fast and unsustainable therefore inflation increased, to reduce it the govt deflated the economy. Joining the Exchange Rate Mechanism. The govt wanted to maintain a high value of the pound this required high interest rates of 15% which caused a big fall in AD. 4/21/12

Cause Of Current Recession

The financial crisis has been linked to reckless and unsustainable lending practices resulting from the deregulation and securitization of real estate mortgages in the United States. . The emergence of Sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in 4/21/12 massive public financial assistance.

Effects Of Recession

A global recession has resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices.

Credit crunch - shortage of finance Falling house prices - related to shortage of mortgages and credit crunch push inflation squeezing

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Effects Of Recession In India

UNEMPLOYMENT:Nearly 50,000 to 150,000 Indian workers, most of them from the Gulf countries, have probably returned to the country due to the global economic slowdown, Minister for Overseas Indian Affairs Vayalar Ravi informed parliament Wednesday. In his written reply to a question, Ravi told the Lok Sabha that the workers in the United Arab Emirates seemed to 4/21/12 be most affected.

Oil is extremely important for any country and 2008 witnessed highest ever increase in oil prices. Due to high oil prices, food prices also increased significantly. Crude oil prices rose to $ 147 per barrel from $ 80 per barrel in a span of 6-7 months. IT Industries, financial Sectors, Real Estate owners, Car Industry, Investment Banking and other industries in India suffered from heavy losses due to the fall down in the global economy. The Textile, Garment and Handicraft Market are worse affected as Recession is the result of reduction in the demand of products in Indian Market
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How to tackle the global slump?

The following measures can be adopted to tackle the recession: Tax cuts are generally the first step any government takes during slump. Government should hike its spending to create more jobs and boost the manufacturing sectors in the country. Government should try to increase the export against the initial export.
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The way out for builders is to reduce the unrealistic prices of property to bring back the buyers into the market. And thus raise finances for the incomplete projects that they are developing. The falling rupees against the dollar will bring a boost in the export industry. Though the buyers in the west might become scarce. The oil prices decline will also have a positive impact on the importers.