Friday, September 26, 2008
US recession looms large
• Just a song before we start…
What goes up must come down; the only two things that don’t follow this set rule are age and experience. US have followed the same path till now; the post-WWII America has gifted its people an enjoyable life, have given them the freehand of wasting for pleasure (so cheap were food, gas and similar other things), but of recent, Asia and the neighboring developing countries have been noticed climbing up the success ladder. The world doesn’t catch a cold now when America sneezes like the previous years and The American Dream is now turning to a nightmare. And joining the league of American Presidents is currently being considered as the stickiest job of all.
• What is recession?
The world seems to have gone paranoid talking about a recession, chances of which are now looming over the United States and being reflected to the max in the form of a worldwide economic slowdown. So how come the weakening of the American economy is affecting the rest of the world? To know that, we must have a clear concept of what a recession is.
Recession is defined as a decline in a country's GDP (gross domestic product) growth over consecutive quarters of a fiscal year. If these quarters are noticed to be slowing down, a recession might be imminent.
There can be several factors triggering a recession; it could be due to an economy slowing down after a period of steady growth. This could occur following the trend a normal economic cycle follows, which is a six month to twenty-four months recession occurring after a 6 to 10 years of steady growth. It may also happen if the consumer sections start losing confidence in the way the economy is growing and become tight fist, thereby hampering the demand for goods and services. This eventually leads to a decreased production rate, loss of job and an increased unemployment rate. As a result, investment sectors also head for a toss since people fear to put their money in fear of reduced stock values and the stock markets also start gathering negative sentiments.
• Current crisis in US
Despite the Bureau of Economic Analysis’ denial from declaring a recession, the world fears an overall slowdown of the global economy. Is Asia one of the continents to suffer the same way? To know the results of how the US slowdown shall impact the Asian market, it’s paramount that we get an idea of the crisis US is facing currently. That is to say, the prime causes and the effect they are bringing in.
The sub-prime mortgage market in the US exhibits more number of defaulters now than before. The home-loan defaults are now a major crisis; this also proves that there re more number of people with poor credit-worthiness/unstable incomes than the well to do. The nose-diving sub-prime market has thus led major banks into trouble; what was thought before would take the housing market to new heights, backfired the schemes of making home-loans easily available. The boom was a flash-in-the-pan; it failed to sustain the momentum. Inevitably, the colossal loan defaults made the sector collapse. Foreclosures became the most common thing that joined forces with the rising oil prices ($100/barrel).
• How will US slowdown hit the Asian market?
The stock markets follow the economy that is currently traveling downhill. That’s affecting the economic buoyancy and In India, the stock markets crashed due to this slowdown. The Sensex went down almost 13% in January but a bounce-back occurred as soon as the US Fed reduced the interest rates. That’s better than before but Indian investors don’t seem too happy with the current stock prices waning.
Fears are also looming over the outsourcing sectors, of which, Asia holds the lion’s share. If US has less money to spend, the outsourcing industry that has grown substantially all these years is going to decline; the Indian economy alone is likely to go down as much as by 2% in the 2009-2010 fiscal year. Profit margins shall shrink drastically.
• Impact of recession
As for the other exporters, the strengthening of the rupee against the dollar is heralding long-term, stable prospects; it shall make foreign money enter more to Indian markets and reduce the oil prices. That’s definitely bringing down inflation. Overall, either entire Asia would be falling victim to a recession triggered by the US economy, unless it becomes totally independent from the rest of the world.
• How to fight recession
Proposals are on for a lowered tax structure as the first step; it amounts to a $150-billion bailout package. Moreover, the US government has taken initiatives for creating more vacancies in the job sectors (new jobs as well) to boost both manufacturing and services sectors with special attention been given to the private sectors to avoid the ill-effects of the current crisis.