What is Recession?

-    Recession is defined as significant decline in economic activity/output 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
-    Its usually preceded by server al quarters of slowing but positive growth.  But when GDP growth slows down, businesses stop expanding, employment falls, unemployment rises, and housing prices decline
-    Recession normally takes place when consumers lose confidence in the growth of the economy and spend less
-    Its natural for countries to experience mild recessions, at is it a built-in/endogenous factor of a society

è    Recession is not due to lack of productive capacity in the economy
è    Real problem is due to insufficient spending to support the normal level of production
Recession is a natural result of the economic cycle and will adjust for changes in consumer spending and consumption or increasing and decreasing of goods and labor

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Multiple Effect

People use the extra income (due to decline in taxes) on consuming extra goods and services.  For example: When one buys more bread from the banker, the baker busy more milk from the milkman, who buys something else, thereby generating an incrase in demand on various levels

Fiscal Stimulus Package results in an ­ in demand: An instant sour of ENERGY

-    Fiscal Stimulus is a potent tool to fight recession, but its crucial to get the following right
o    Timing of the stimulus package
o    Size of the stimulus package
o    This is tricky business since it is almost impossible to figure out where the reversionary period began and where it will end- Wrong timing could spoil things further by increasing fiscal deficit as well as inflation

Timing of the Stimulus Package is crucial; otherwise this it can fuel further problems

Courtesy:  DSP Black Rock Investment Managers, DSP Black Rock Investment Managers

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