Wednesday, May 7, 2008

Recession in US and its Effects Worldwide

What's a recession? How will US slowdown hit India
The fear of a recession looms over the United States. And as the cliche goes, whenever the US sneezes, the world catches a cold. This is evident from the way the Indian markets crashed taking a cue from a probable recession in the US and a global economic slowdown.

Weakening of the American economy is bad news, not just for India, but for the rest of the world too.

So what is a recession?

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.

What causes it?

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 goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.

Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

Stock markets & recession

The economy and the stock market are closely related. The stock markets reflect the buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of Economic Analysis, but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in the US economy.

The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The markets bounced back after the US Fed cut interest rates. However, stock prices are now at a low ebb in India with little cheer coming to investors.

Current crisis in the US

The defaults on sub-prime mortgages (homeloan defaults) have led to a major 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 (See: Subprime pain: Who lost how much)

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.

How to fight recession

Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. In the current case, the Bush government has proposed a $150-billion bailout package in tax cuts.

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.

Past recessions

The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture, mining, and logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. This was followed by Black Monday in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record.

From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.

Impact of a US recession on India

A slowdown in the US economy is bad news for India.

Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70.

Between January 2001 and December 2002, the Dow Jones Industrial Average went down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. In contrast, the Sensex was down 45 per cent.

The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the world, say experts.


'Risk of a US recession high, India to be hit'

Stephen S Roach, chairman of Morgan Stanley Asia, warned that Asia and India will be hit hard due to a likely recession in the US in 2008, saying "if US sneezes, Asia will catch a cold."

Predicting a significant correction in emerging market equities, which would also not spare the fast rising Indian stock markets, Roach, who is regarded as one of the Wall Street's most influential economists, said he did not believe in the global de-coupling theories.

"The risk of a recession in the US in 2008 is high and rising. If the US goes into recession, you are going to feel it in Asia, you are going to feel it in India," he said.

Roach was in Mumbai to speak on the subject 'Subprime: Canary in a coal mine?' at a lecture organised by Asia Society India Centre.

Roach, who was until recently Morgan Stanley's chief economist in charge of the firm's global team of economists, said Asia as a region, and developing Asia in particular, remains very much an export-led region.

He, however, agreed that India may be little bit less export-dominated compared with other typical Asian economies.

The share of exports in China's GDP is as high as 36.6 per cent. Exports to the US alone are as high as 21 per cent. Same for Japan, the share of exports to US is 22.5 per cent. For Korea, the share of exports to GDP is 36.7 per cent, and US share at 13.3 per cent.

He said Eastern Asia and China would be the biggest victims of a US recession. He added the subprime crisis in the US would serve as a wake up call for central banks around the world.

"I think there could be a significant correction in emerging market equities that certainly could hit the Indian stock market quite hard," he said.

Check ur IQ

Question 1:
Write an English sentence where all English letters come A-Z.

Question 2:
Dark with white markings, And smooth like a rock.
Where learning occurs, I help convey thought.
What am I?

TATA NANO In Gujarat

Tata Nano comes to Gujarat

It’s now confirmed that Gujarat is now the new home of Tata Nano.

Gujarat CM Narendra Modi has done it again. He managed to impress Ratan Tata with his government’s swift actions and Tata has confirmed their plans to setup the Nano plant in the state.

A state official spoke about what they had to do to get this project: “We had to relax our rigid stand considering the fact that other state governments were going all out to roll the red carpet for the Nano plant. Losses due to concessions would be offset by the immense positivity created around the investment climate in Gujarat.”

The government has already started the procurement of land for the plant and looks like Tata is going to face no more problems establishing their plant here to quickly roll out the world’s cheapest car!

Sensex goes down.........

100 Year Dow Jones Industrials Chart

Wednesday, December 28, 2005 | 09:00 AM

Have a look at this 100 year (actually, 105-Year) chart. I colored each "Market" appropriately -- Green for Bull, and Red for Bear -- to more clearly show what happens.

Bull markets get ahead of themselves. At their ends, they tend towards excesses that take a very long while to recover from.

When a long Bull runs end, it takes quite a while before the next one begins. Some of this is related to the destruction of capital crashes cause; Much of it has to do with the psychological damage suffered by investors. As we have seen more recently, that damage -- plus 46 year low interest rates -- helped push former market investors into real estate. We have yet to see their unbridled love affair with sotcks rekindled. What will be the catalyst to get them back into equities? My best guess is a sustained move upwards.

Regardless of the actual cause, in the past century, every Bull Market has been followed by a significant refractory period. From the looks of the time-lengths of red, it appears almost generational in nature. The damage is repaired when a new crop of investors -- without crash scars -- finally appears.

>

click for larger version
100_year_dow_bull_bear_periods



Is it possible that an 18 year Bull market (1982-2000) could be followed by a 2 1/2 year Bear (March 2000 peak to October 2002 low), and then launch into another multi-decade (2003-2018) Bull? Sure, anything is possible. But as the chart above plainly shows, it would be historically unprecedented.


One other thing worth noting: The steepness of the gains from 1924-1929 are very much parallel to the 1996-2000 moonshot. Both ended with near 80% drops (Dow for 1929, Nasdaq for 2000).

It took 25 years -- until 1954 -- for the Dow to regain its 1929 highs. I don't believe it will necessarily take that long for Nasdaq -- but I am aware of the outside possibility.


In India
Sensex retraces 10000-mark

MUMBAI: Snapping its three-day losing spree, the Bombay Stock Exchange sensitive index (Sensex) regained the 10000-mark on Monday on buying support in IT and banking stocks, though a cut in short-term lending rate by the Reserve Bank of India did not exactly trigger a selling spree as was widely expected.

After breaching the crucial 10,000-mark at the opening, the Sensex settled at 10223.09, a rise of 247.74 points, or 2.48 per cent against 9975.35 last Friday.

The selling pressure in the last three days saw Sensex losing a hefty 1508 points, or 13 per cent, and plunged to below the 10000-level on Friday. The 50-share Nifty of the National Stock Exchange also gained 48.45 points or 1.58 per cent to close at 3122.80. Marketmen attributed the early rise to firm trends in Asian and European bourses.

The Sensex touched a high of 10538.05 but dropped to a low of 10023.28 soon after the announcement about RBI’s rate cut. Brokers said hectic buying by domestic institutional investors was alternated by profit selling.

Elsewhere, Asian indices ended up by about 2-5 per cent while European markets were up by about 2 per cent in morning trading.

U.S. stocks rally

U.S. stocks rallied on Monday on signs of easing credit and after Federal Reserve chief Ben Bernanke threw his support behind another stimulus package to kick-start the economy. The Dow Jones Industrial Average leapt 127.04 points (1.44 per cent) to 8979.26 in early trading. The Nasdaq composite index edged up by 3.51 points to 1714.80 and the Standard & Poor’s 500 index climbed 12.80 points (1.36 per cent) to 953.35. — Agencies