Dec 4, 2008

World - Impact of US recession

The National Bureau of Economic Research (NBER), a body of economists responsible for tracking the business cycles in the United States, has pronounced that the country’s economy has been in recession since December 2007. In doing so, it has only formally recognised the ground reality, the impact of which has been felt across the world. The economic downturn, which has already exceeded the average duration of all recessions since the Second World War, may well set a new record. It may also end up inflicting more pain than any other recession since 1980-81. Significantly, the NBER has not taken into reckoning the fact that the economy actually grew, albeit marginally, during the first two quarters of 2008. Most other factors, notably employment and personal income, continued to be on the decline. The methodology is relevant for India too, in that the growth story, if judged by the quarterly GDP data alone, can mask, for instance, declines in specific sectors. With the NBER’s announcement, the world’s largest economy officially joins the 15 Euro zone countries as well as the United Kingdom and Japan that are in recession. Its assessment seems to affirm the prognosis of the World Bank and the IMF that the economies of the developed countries would contract during 2009. In contrast to the developed countries, the developing ones, such as India and China, are expected to perform better. Their economies, although witnessing a disturbing slowdown, would end up with relatively higher growth rates. The theory that developing economies are “decoupled” from the developed ones seems quite misleading in this context.

The sharp slowdown in the U.S. economy has had several deleterious consequences especially for trade and investment. In November, the WTO scaled down its forecast of global trade growth from 5.5 per cent to 4.4 per cent. For the first time in seven years, India’s merchandise exports, expressed in dollars, fell during October. The flight of foreign institutional investors from Indian stock markets is largely attributed to the financial sector crisis, the precursor to the global economic slowdown. The official acknowledgment of the U.S. being in recession has had its biggest impact on investor sentiment. Led by the Dow Jones index, which dropped by about 680 points, stock market indices around the world, including in India, closed sharply lower on the day the news broke. Even at the global level, stock market sentiment has been weak for a long time. Now with the official stamp of recession on the U.S. economy, investor and market sentiments are unlikely to improve in the near future.

1 comment:

Income Insurance said...

There are a lot of factors that can cause a recession. What's important is that we should be able to invest and spend money wisely.