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Technical Recession

Technical Recession

Recessionary phase:

At its simplest, in any economy, a recessionary phase is the counterpart of an expansionary phase.

When the overall output of goods and services — typically measured by the GDP — increases from one quarter (or month) to another, the economy is said to be in an expansionary phase. And when the GDP contracts from one quarter to another, the economy is said to be in a recessionary phase.

Together, these two phases create what is called a “business cycle” in any economy.

A full business cycle could last anywhere between one year and a decade.

The line graph accompanying this article maps India’s quarterly real GDP growth since 1951. As one can see, this line goes up and down. The peaks and troughs show the different expansionary and recessionary phases of the economy.

As the graph shows, there have been several expansionary and recessionary phases in India’s history.

A recession:

  •  When a recessionary phase sustains for long enough, it is called a recession. In other words, when the GDP contracts for a long enough period, the economy is said to be in a recession.
  •  There is, however, no universally accepted definition of a recession — as in, for how long should the GDP contract before an economy is said to be in a recession. But most economists agree with the definition that the National Bureau of Economic Research (NBER) in the United States uses.

According to NBER, “During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year”.

What is a technical recession?

While the basic idea behind the term “recession” — significant contraction in economic activity — is clear, from the perspective of empirical data analysis, there are too many unanswered queries.

Unanswered queries:

For instance, would quarterly GDP be enough to determine economic activity? Or should one look at unemployment or personal consumption as well? It is entirely possible that GDP starts growing after a while but unemployment levels do not fall adequately.

  •  During the 2008 global financial crisis, NBER pegged June 2009 as the end date for the recession but some metrics did not recover for much longer. For instance, “non-farm payroll employment, did not exceed the level of the previous peak until April 2014.
  •  To get around these empirical technicalities, commentators often consider a recession to be in progress when real GDP has declined for at least two consecutive quarters.
  •  That is how real quarterly GDP has come to be accepted as a measure of economic activity and a “benchmark” for ascertaining a “technical recession”.
  •  By this definition, as the data in the table shows, India entered a recession at the end of September.
  •  The UK is in its third quarter of recession.
  •  Brazil and Indonesia are also in recession while South Africa has evaded it until now, but only marginally.
  •  China, where the pandemic began, has bucked the trend.

Typically, recessions last for a few quarters. If they continue for years, they are referred to as “depressions”. But a depression is quite rare; the last one was during the 1930s in the US.

In the current scenario, the key determinant for any economy to come out of recession is to control the spread of Covid-19.

Source : ” Indian Express ”.