The global economy is not out of the woods yet. A precarious situation looms large over the fragile recovery that we see. Unwieldy government deficit, demanding tax regimes, circumspect consumer demand and a feeble job market could contrive to create the perfect storm – double dip recession. This is an economic jargon, which means an economic downturn that apparently ends with a period of economic growth, but in reality gives rise to another, possibly bigger, dip.
What will the consequences be for the global recovery in case a double- dip recession occurs?
How will countries like India and China react to this threat?
Is this term for real or just a figment of the economists’ imagination?
Think and think hard, and post your reply on this site in less than 250 words. The last date for entries is Sunday 1st August, 2010 till 23:59:59 PM. The best two entries as selected by the judges stand to win certificates.
In case double dip recession takes place there will be major shift in economic policy of Developed nations. They will get involved into high interest rate regime as well as the life on credit lifestyle will no more be available. Taxes will be lowered as well as people will restrain from over spending. Thus reasonable savings will help economy gather back some strength as well as excess of production around the world will be checked. This would affect China which is main exporter of manufactured goods. China would be forced to develop the living standard of its population and stop catering to uncontrolled exploitation of environment. India would see reduced inflow of funds due to increase in interest abroad. Also reduction of exports would divert surplus production to domestic market. Hence food inflation will come down.
ReplyDeleteThis appears to be to good a situation and hence will not happen attitude of developed nations cant change otherwise the recession would not have occured hence 'double dip recession' is a figment of economist's imagination.
A double-dip recession is a dip—an economic downturn that technically ends with a fleeting period of growth, but is quickly followed by a second dip—another period of unsavoury economic declines. The consequence of this may be more severe than 2008 recession in terms of increasing inflation rate, unemployment rate, and interest rate. There may be decrease in consumer spending, exports.
ReplyDeleteIndia and china with other countries is the potential nominee for getting into double dip recession. The inflation rate(touching 10%) would impact India on sharp reduction in demand from other which could impact Indian export negatively, shortage of export and other credit. For china, the inflation rate(approx 3%) is almost stable but the Asia as region whole will impact negatively on china’s export (only differentiator to other countries). In this anticipation, both governments could take following steps a)keep mopping up forex inflows and tie up operation contracts to maintain inflows b)it would better for any country to make their oil and gas prices to international prices and slashing fuel subsidy(the action is going to be taken in shape of deregulation of oil prices) c) curtail government expenditure.
The IMF MD is not completely denying on slowdown in last two quarters of 2010-11 but will be too far from any kind of double dip. This sounds definitely strange and contradictory with existing countries’ growth figures.
The consequent opportunity cost of not having insurance mechanism and pushing for reforms could be higher as usual as happened in many European countries.
Anxiety, speculation, De leveraged - these are the words behind double recession dip if it takes place. Customers are anxious about the volatile prices and (in some case) constantly increasing prices of the commodities. Financial and other investors are speculating something amiss in existing markets and last not least entrepreneurs are de leveraged to invest in new businesses. These all have one common thing - monetary contraction.
ReplyDeleteConsequences would be lower amount of spending by consumers, deflation, reduced interest rates by RBI, depreciation of rupee, Excessive cost cutting in Businesses, layoffs, decline in per capita consumption of developing countries like India and China and what more......
But the important thing being a management student would be to think of preventive measures like
1) Well now is the time to focus on growth (for government - inclusive growth)
2) Invest when times are tough and move out when time clicks that is “catch the wave"
India and China can learn from the lessons of Greece and surely not follow that way. India will be quite insulated to the double dip recession as there is saving mentality among the people. Savings will prepare the economy for new growth. Also proper monetary and fiscal policy to prevent economic contraction from RBI is necessary.
China on other hand should decrease dependence on its exports. Finding niche domestic market for its goods would be the best possible option. This is will ensure China to be insulated from foreign currency fluctuations as it has very high reserves of foreign currency.
Ultimately, the risk resides largely in social psychology. It is the fear of fear itself.
According to the technical definition of recession economy should decline with negative growth for more than two quarters, but this is not the case with India & China. Due to the recent financial crisis America & other European countries are actually going through recession while developing countries like India & China face a setback in terms of slowing down growth. (For China it was double digit over the last decade it was only 8% for last year, same is the case for India also with 6.5% of GDP).
ReplyDeleteIn case double recession snowballed into a great depression the impact would be very fatal, not only for the developed nations but also for the developing countries.
GDP will fall drastically with increased rate of unemployment (probably much higher than the rate during 1930’s depression). Arid financial system without money will choke the corporate entities and then they are forced to cut down the production. Less production will result in less trade between the countries and finally this situation will help to aggravate the inflation.
The world’s fastest growing economy is facing a unique problem. China is staring at the vacuum created in the demand of good & services globally and facing huge surplus with global partners like US. China should develop the local market to maintain the GDP growth and should develop a risk management frame work to avert future enigma. Diversification in business is required to maintain the cash flow in the business during recession.
Today India’s economy is twelfths largest in the world and one of the fastest growing; its size pegged at over US$ 1300 billion. This figure highlights the fact that what India has achieved is appreciable but much more challenging is yet to be achieved. Growth in agriculture sector is very much required (currently 2% to 2.5%), Management of international economic issues related to Indian economy, Proper balance between growth and Inflation, Huge investment in Infrastructure, policies promoting the use of Green Power to reduce the dependency on petroleum products are some of the point that are critical for India to achieve & maintain the double digit growth rate and avoid recession.
USA just reported its second quarter growth rate which is 2.4% as against 3.7% in the first quarter.USA unemployment rate hitting as high as 10% is dilly dallying around 9.5%. The consumer spending which once rose is again ebbing down. There are many facets associated with Double dip recession, firstly the spending part, the consumer needs to spend to keep economy moving. secondly if there is a recession then governments worldwide will be forced to provide stimulus to the economy, this stimulus which can be in form of various tax breaks can make a dent in governments income plus they need to shell out extra money to keep economy moving. This measure will add to the growing deficit of all the nation concerned. The debt and deficit level must be properly monitored so we don't get yet another European sovereign debt crisis like situation. Interlinked with this process is job creation,only when economy grows then only new jobs will be created,only then money can be earned by an individual and spent so as to add to the growth of economy.
ReplyDeleteTill now developing countries were growing because the developed parts were consuming the products produced by developing world.Double dip will make the developing world nations to rethink their growth strategy which was hugely export dominated.Internal consumption of developing nations must be voluntarily raised up rather than Governments pushing for the same.Saving rates which were high in developing nations and low in developed nations, this will change and this change has already begun. To accustom this and many associated changes monetary and fiscal policies will now be more dynamic than previous days.FDI will take a beating having repercussions through out world.
A W-shaped recession or "double dip" recession, occurs when the economy has a recession, emerges from the recession with a short period of growth, but quickly falls back into recession.Firstly,this term is undoubtedly for real.The Early 1980s recession in the United States is an example of this.The economy fell into recession from January 1980 to July 1980,
ReplyDeleteshrinking at an 8 percent annual rate from April to June of 1980. The economy then entered a quick period of growth, and in the first three months of 1981 grew at an 8.4 percent annual rate.
Globally,the stimulus packages which have been integral to economic improvement in large nations, including China, are likely to be withdrawn this year. In many cases it is because the cost of the programs is raising national deficits at an alarming rates and in certain nations such as the UK, this is because their deficits are so high compared to GDP.In most Western countries like US,UK and EU ,recovery is still fragile , the economy is still very slow and this is most likely to be fueled by high unemployment and that this joblessness will dampen consumer spending which is about two-thirds of GDP.Since the consumers won't enough money to spend,the demand is going to decrease(in fact it has decreased considerably in the west).Also,events like the Greek financial crisis,B.P. oil spill etc. have added to these problems. Hence their is a
greater risk of 'deflation' then there is of 'inflation'.
The problem China faces here is that these Western nations are its trade partners , and if demand for its goods from its these countries drops sharply, the engine of much of China’s GDP growth disappears.And to deal with this China paused its appreciation of the Yuan against the dollar.The currency is undervalued by as much as 40 per cent, giving Chinese goods an advantage in international trade.
As for India,the risks include , sharp reduction in OECD demand which could impact Indian exports negatively and shortage of export and other credit.India ,though had managed to contain the impact of the global turmoil due to fiscal stimulus and a parallel economy(i.e. the black market trading and saving mentality); should still be ready for any such threats.India should push for the GST implementation as soon as possible and should increase its Forex reserves to reduce the deficit.
The industrialized nations which have been performing way behind their potential ,should refrain from simultaneously withdrawing the economic stimulus despite concerns over the high debt levels as circumstances are not normal and private demand is still weak.These countries should not succumb to protectionist pressures and go for trade liberalization negotiations.
The unexpected double dip will happen unexpectedly....... just my view
ReplyDeleteGanes Pandya