Introduction

In economics, a recession is a general slowdown in economic activity in a country over a sustained period of time, or a business cycle contraction. 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 and business profits all fall during recessions.

Another rule of thumb to identify a recession is two successive quarterly declines in GDP – Gross Domestic Product, a measure of the nation's output. This two-quarter metric is now a commonly held definition of a recession.

How to predict a recession?

Although there are no completely reliable predictors, the following are regarded to be possible predictors. Normally a significant stock market drop has often preceded the beginning of a recession.

Inverted Yield Curve, the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate.

The three-month change in the unemployment rate and initial jobless claims.

How animal spirits destabilize economies?

Five aspects of these animal spirits affect the economy: confidence and the feedback mechanisms that amplify disturbances; the setting of wages and prices, which depend largely on attitudes about fairness; the temptation toward corrupt and antisocial behavior; the “money illusion,” or confusion between the nominal and real level of prices (so that people, for example, often miss the fact that conservative investments may be risky in times of inflation); and the story of each person’s life and the lives of others—stories that in the aggregate, as a national or international story, play an important economic role.

Stock market and recessions

Some recessions have been anticipated by stock market declines. During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better.

Why are financial prices so volatile?

No one has ever made rational sense of the wild gyrations in financial prices—gyrations as old as financial markets themselves.

When the stock market tanks, the authorities try to restore public confidence by insisting that “the fundamentals of the economy remain strong.” The authorities are right in the sense that, almost always, it is the stock market that has changed; the fundamentals haven’t. How do we know that they couldn’t generate these changes? If prices reflect fundamentals, they do so because those fundamentals are useful in forecasting future stock payoffs. In theory, stock prices predict the discounted value of future income streams: dividends or earnings. But stock prices are much more variable than the discounted streams of dividends or earnings they are supposed to predict.

Real estate market and recessions

The origin of the present global recession and resultant credit crisis could easily be traced to the ‘sub-prime crises’. Fraud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding.

The Federal Bureau of Investigation in the United States of America correctly identified the epidemic sub prime crisis could have been averted had the administration acted with even minimal competence.

The sub prime crises resulted in the down fall of the real estate market in the United States. As per previous experiences, the real estate market usually weakens before a recession. In this instant too, it happened exactly the same.

Politics and recessions

Generally an administration gets credit or blame for the state of economy during its time. It is generally assumed that government activity has some influence over the presence or degree of a recession. Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood. Consequently, modern government administrations attempt to take steps, also not agreed upon, to soften a recession. They are often unsuccessful, at least at preventing a recession, and it is difficult to establish whether they actually made it less severe or longer lasting.

Present Recession

According to the International Monetary Fund’s World Economic Outlook, October 8, 2008, the world economy is “entering a major downturn” in the face of “the most dangerous shock” to rich-country financial markets since the 1930s.

The current crisis stems from our changing level of confidence, from temptations, envy, resentment, illusions, and, especially, from changing stories about the economy—stories that first glorified financial “innovation” and then represented it as a con game.

Recession has moved to emerging economies

With the financial crises in advanced economies having passed "through strongly and rapidly" to emerging economies including India, the International Monetary Fund (IMF) on 16^th April 2009 called for a coordinated policy response, since "reducing individual country vulnerabilities alone cannot insulate emerging economies from a major financial shock in advanced economies", ahead of World Bank-Fund Spring meeting.

"Financial crises in advanced economies have passed through strongly and rapidly to emerging economies, with financial linkages a key channel of transmission," the report said in a chapter on "How Linkages Fuel the Fire".

The extent of transmission of financial stress is related to the depth of financial linkages between advanced and emerging economies, notably through bank lending, it said. On average, stress in emerging economies moves almost one-for-one with stress in advanced economies, but there is significant cross-country variation.

Is it really so with regard to India and China?

However according to another report brought out by British Financial Services Major Barclays Bank, India, China no longer witnessing slump and this will lead the global recovery.

"The slump in activity in emerging Asia is over. We believe the region returned to positive growth of the aggregate level in the first quarter of 2009 -- driven by China and India -- and the recovery is broadening to the more open industrial economies in 2009," says Barclays.

Recession: Worse not yet over, says RBI Governor

However we have different point of view from a different quarter. Warning that the worst may not be over yet, Reserve Bank Governor D Subbarao has said the global economic recession may not only continue through 2009 but could prolong to the next year as well.

"Even with current levels of policy intensity, the trough of the global recession is not seen until the end of 2009 and could get pushed out further if the policy responses fail to gain traction," Subbarao said at the International Monetary Fund-World Bank spring meetings.

Calling for a quick and internationally coordinated approach to "a daunting, but not an insurmountable challenge", he stressed on empowering IMF's capacity to grapple with the crisis. He also suggested a radical shift within IMF in tune with the changing world.

"While the recession has intensified in the advanced economies, emerging economies have been dented by the collapse in external demand and commodity prices, the tightening constraints on access to external financing and the retrenchment of capital flows."

Usual Government responses to recessions

Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions.

Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policy, while Keynesian economists may advocate increased government spending by the government to spark economic growth. Supply side economists may suggest tax cuts to promote business capital investment. Laissez faire minded economists may simply recommend that the government not interfere with natural market forces.

Present status of present recession

a. Present recessionary conditions

Thomas Donohue, President and CEO, American Chamber of Commerce predicts economic growth to pick up from Middle of 2009 and get firmly established by end of 2009.

However, RBI Governor Subba Rao has opined in the International Monetary Fund – World Bank Spring meetings yesterday that the worst may not be over yet. He feels that Even with current levels of policy intensity, the trough of the global recession is not seen until the end of 2009 and could get pushed out further if the policy responses fail to gain traction.

b. Prediction of strong economic growth

Goldman Sachs on April 13 reported better-than-expected earnings as a surge in trading revenue outweighed asset write downs - $1.81 billion profit in the first quarter of 2009.

Wells Fargo & Co., the second-biggest U.S. home lender, said last week it had about $3 billion in first-quarter net income, up from $2 billion a year earlier.

Driven by India and China, the emerging Asian economies no longer witness slump, which will lead the global recovery, British financial services major Barclays said.

In a research paper, Barclays Capital expected the recovery in Asia to arrive slightly earlier than the rest of the world, reflecting relatively stronger balance sheets and the significant fiscal and monetary stimulus.

c. Effective regulatory regime

Support extended by almost all major economies to their banking system to overcome problem accounts and Newer regulatory prescription in risky areas.

d. Safe leveraging ratios

Goldman Sachs shows a decline in leveraged finance activity, fewer mergers and share offerings, about 30% in the first of quarter of 2009 – a move towards safe leveraging ratio.

f. Rapid expansion of trading volumes

In the first quarter of 2009, J P Morgan Chase & Co, the second- largest U.S. bank by assets, reported profit that beat analysts’ estimates as fixed-income trading revenue rose to a record. Revenue in the investment-banking unit was a record $8.3 billion, including $4.9 billion from fixed-income trading alone. The business generated $3 billion in the same period a year earlier. Investment-banking profit was $1.61 billion, compared with a loss of $87 million in the first quarter of 2008.

Citigroup Inc., the U.S. bank rescued by $45 billion in U.S. taxpayer funds, ended a five- quarter losing streak with a $1.6 billion profit on trading gains - The bank reported $4.69 billion of fixed-income trading revenue in the quarter, compared with a trading loss of $7.02 billion a year earlier. Stock-trading revenue was $1.9 billion, a 94 percent increase.

g. Cost of capital at historic levels

The interest rates prevailing all over the world is at historically low or near low levels – This should stimulate credit growth and expansion.

Conclusion

There is a view termed the halfway rule according to which investors start discounting an economic recovery about halfway through a recession. In the 16 U.S. recessions since 1919, the average length has been 13 months, although the recent recessions have been shorter. Thus if the 2008 recession followed the average, the downturn in the stock market would have bottomed around November 2008.

McKinsey Report - ECONOMIC CONDITIONS SNAPSHOT, APRIL 2009: Executives are slightly more positive about the bigger economic picture than they were six weeks ago, and some see hope for their companies toward the end of 2009. Strong majorities support international coordination of responses to the crisis and say protectionism would harm their nations' economies.

We can hopefully conclude that we will get over this recession very soon and once again our global markets will begin to perform.