What Is A Technical Recession?

Two consecutive quarters of declines are considered a technical recession. Mexico’s GDP grew by 5% for the full year of 2021, according to new figures, after contracting by 8.5 percent in 2020, the country’s worst recession since the Great Depression of the 1930s. [Reuters/Luis Cortes/File]

What exactly is a technical recession?

With improvements in manufacturing, construction, and agriculture, the Indian economy has emerged from technical recession, growing at 0.4 percent in the third (October-December) quarter of 2020-21.

In the April-June and July-September quarters, respectively, the Gross Domestic Product (GDP) dropped by 24.4 percent and 7.3 percent, indicating a technical recession in the aftermath of the Covid-19 outbreak.
A technical recession occurs when a country’s GDP continues to fall for two quarters in a row.

Key Points

The National Statistical Office (NSO) has forecasted an 8 percent shrinkage for the entire fiscal year (2020-21), which is higher than the Economic Survey’s (7.7%) and Reserve Bank of India’s (RBI) estimates (7.5 percent ).
The third quarter’s real GDP growth is expected to be 0.4 percent (2020-21). The GDP expanded by 3.3 percent in the same quarter last year.
The contraction numbers for the April-June quarter (Q1) and the July-September quarter (Q2) were revised from 23.9 percent to 24.4 percent and 7.5 percent to 7.3 percent, respectively.
Industry grew by 2.6 percent in the third quarter, compared to a decline in the first two, thanks to stronger performance in manufacturing, power, and construction.
However, with a 0.9 percent year-on-year decline, services, which account for the greatest share of GDP at 57 percent, remained in contraction territory.
Financial, real estate, and professional services rose 6.6 percent in the third quarter, compared to 9.5 percent decline in the previous quarter and 5.5 percent growth the year before.
Mining, trade, hotels, transportation, communication and broadcasting services, and public administration services all continued to contract in the third quarter, with contractions of 5.9%, 7.7%, and 1.5 percent, respectively.
Even while the other five sectors contracted, India’s eight key sectors saw a meager 0.1 percent increase in output in January 2021, boosted by 5.1 percent growth in power, 2.7 percent growth in fertilizers, and 2.6 percent growth in steel manufacturing.
In January, coal, crude oil, natural gas, refinery products, and cement all saw declines.
The Index of Industrial Production is made up of eight key industries, which account for 40.27 percent of the total.
Agriculture grew by 3.9 percent in October-December, compared to 3 percent in July-September and 3.4 percent in the same quarter previous year.
The recovery in investment demand (Gross Fixed Capital Formation – GFCF), which climbed by 2.6 percent in the third quarter after several quarters of stagnation.
GFCF: It stands for gross fixed capital formation. It’s part of the Expenditure Method of GDP Calculation.
This is the result of the government’s unwavering efforts to resuscitate investments through the Atma Nirbhar Bharat package’s many measures.
The growth stimulus included in the Union Budget 2021-22, as well as supplementary measures such as the Production-Linked Incentive (PLI), will contribute to a robust recovery path in the next years.
The comeback of Government Final Consumption Spending (GFCE) in Q3 and the Centre’s capital expenditure climbed by 129 percent in October, 249 percent in November, and 62 percent in December, compared to the same period last year.
The GFCE is an aggregate transaction amount on a country’s national income accounts that represents government expenditure on goods and services used to directly satisfy individual wants (individual consumption) or collective needs of community members.
The third-quarter GDP figures confirmed the government’s initial policy of deregulation “Life trumps livelihood.” “As a result of savvy handling of the lockdown and a calibrated fiscal stimulus, the swift V-shaped recovery has been powered by recoveries in both Private Final Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF).
PFCE: It is defined as the expenditure on final consumption of goods and services by resident households and non-profit institutions serving households (NPISH), whether made within or outside the economic region.
Domestic Consumption: Disaggregated data reveal that domestic consumption continued to shrink in Q3, falling to 58.6 percent of GDP from 60.2 percent in the previous fiscal quarter.
Government Spending: According to the GFCE, government spending fell a smidgeon to 9.8 percent of GDP in Q3 from 10% in Q2.
GVA Estimates: The growth rate in terms of gross value added (GVA) which is GDP minus net product taxes and represents supply expansion is expected to slow to 6.5 percent in 2020-21, down from 7.2 percent and 3.9 percent the previous year.
Gross Domestic Product (GDP) in Nominal Terms: It is predicted to be (-) 3.8 percent in 2020-21 after accounting for inflation.

What is the distinction between a technical and a real recession?

1. A recession is defined as a period of economic contraction that lasts for a long time. When a country’s GDP falls for two quarters in a row, it is said to be in a technical recession. 2.

What are the three distinct sorts of economic downturns?

A recession is defined as a time in which the economy grows at a negative rate. Economic contraction, on the other hand, can have a variety of causes and types. The length, depth, and impacts of the recession will vary depending on the type of recession.

Boom and bust recession

Many recessions follow a period of economic expansion. Economic growth is well above the long-run trend rate of growth during an economic boom; this rapid growth creates inflation and a current account deficit, and the expansion is unsustainable.

When the government or the Central Bank notices that inflation is out of control, they respond by enacting strict monetary (higher interest rates) and fiscal policies (higher taxes and lower government spending)
Furthermore, an economic boom is frequently unsustainable; for example, corporations may be able to temporarily increase output by paying workers to work extra, but this may not be the case in the long run.
In addition, consumer confidence tends to rise during a boom. As a result, the savings ratio tends to shrink, and private borrowing to finance increasing consumption rises. Rising debt is fueling the economic boom. As a result, when economic fortunes shift, consumers drastically alter their behavior; rather than borrowing, they strive to pay off their debt, and the saving ratio rises, resulting in a decrease in spending.
Following the Barber boom of 1972, the UK experienced a recession in 1973. (Though the 1973 recession was also triggered by an increase in oil prices.)
The Lawson boom of the late 1980s was followed by the 1990-92 slump. In the late 1980s, the UK’s yearly growth rate surpassed 5%, prompting inflation to reach double digits. Interest rates were raised in response, housing prices fell, and consumer confidence plummeted, resulting in the 1991-92 recession.
Reversing rate hikes, if triggered by excessive interest rates, can help the economy recover.
Keep growth close to the long-run trend rate and inflation low to avoid this.

Balance sheet recession

When banks and businesses experience a significant reduction in their balance sheets as a result of decreasing asset prices and bad loans, a balance sheet recession ensues. They must restrict bank lending due to substantial losses, resulting in a drop in investment spending and economic development.

We also witness decreasing asset prices in a balance sheet recession. A drop in property values, for example, reduces consumer wealth and raises bank losses. Another element that contributes to slower growth is these.

The Great Recession of 2008-2009. Bank losses in 2008 caused a drop in bank liquidity, leaving banks cash-strapped. As a result, bank lending decreased, making it difficult to obtain financing for investment. Despite interest rates being cut to zero, the economy slipped into recession due to a loss of trust.
Because of the liquidity trap, interest rate cuts may not be enough to spur economic recovery.
We must avoid a credit and asset bubble in order to avert a balance sheet recession. Inflation targeting is insufficient.

Depression

A depression is a lengthy and deep recession in which output declines by more than 10% and unemployment rates are extremely high. Because decreasing asset prices and bank losses have a long-term influence on economic activity, a balance sheet recession is more likely to result in a depression.

Supply-side shock recession

A sharp increase in oil costs might trigger a recession as living standards fall. The globe was heavily reliant on oil in 1973. The tripling of oil prices resulted in a significant drop in discretionary income as well as lost output due to a lack of oil.

This is a rare occurrence. In comparison to the 1970s, the globe is less reliant on oil. Oil price increases in 2008 were merely a modest contributor to the 2008 recession.
Short-run aggregate supply (SRAS) shifts left when there is a supply-side shock. As a result, we have lesser output and more inflation. It’s also known as’stagflation.’

Demand-side shock recession

An unanticipated incident that results in a significant drop in aggregate demand. For example, a drop in consumer confidence as a result of the 9/11 terrorist attacks contributed to the short-lived recession of 2001 (GDP decreased only 0.3 percent) (and also the end of dot com bubble).

Different shaped recessions

W-shaped recession a double-dip recession occurs when the economy enters a second downturn after rebounding from the first.
After an initial drop in GDP, an L-shaped recession refers to a period of slow recovery. Even though the economy is growing at a positive rate (e.g., 0.5%), it still seems like a recession because growth is moderate and unemployment is high.

What is Upsc, or technical recession?

A state of Technical Recession occurs when the Indian economy contracts for two consecutive quarters, resulting in a decline in the country’s GDP.

What causes a technical downturn?

A recession is defined as a series of business and investment failures that occur at the same time.
Why they happen, and why so many enterprises might fail at the same time, has been a major focus of economic theory and research, with various opposing answers.
The origins and effects of recessions are influenced by financial, psychological, and real economic factors.
The influence of COVID-19, as well as the preceding decade of extraordinary monetary stimulation, contributed to the economy’s vulnerability to economic shocks in 2020.
The pandemic-related recession, according to the National Bureau of Economic Research (NBER), lasted only two months.

What are the distinctions between a recession and a depression?

A recession is a natural element of the business cycle that occurs when the economy declines for two consecutive quarters. A depression, on the other hand, is a prolonged decline in economic activity that lasts years rather than months.

In a downturn, who benefits?

Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.

A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.

Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR

The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.

Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.

After the Lawson boom and double-digit inflation, the 1991 Recession struck.

Efficiency increase?

It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.

Covid Recession 2020

The Covid-19 epidemic was to blame for the terrible recession of 2020. Some industries were particularly heavily damaged by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).

Profitability hasn’t kept pace with Amazon’s surge in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.

Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.

The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics effect the firm as well as aggregate demand.

In a recession, do housing prices fall?

In general, real estate values fall during a recession because there is less demand for residences or investment properties.

With an example, what is recession?

There have been five such periods of negative economic growth since 1980, all of which were classified as recessions. The worldwide recession that followed the 2008 financial crisis and the Great Depression of the 1930s are two well-known examples of recession and depression. A depression is a severe and long-term economic downturn.

What occurs during a financial downturn?

A recession is a period of economic contraction during which businesses experience lower demand and lose money.
Companies begin laying off people in order to decrease costs and halt losses, resulting in rising unemployment rates.
Re-employing individuals in new positions is a time-consuming and flexible process that faces certain specific problems due to the nature of labor markets and recessionary situations.