All About: Technical Recession

All About : Technical Recession | UPSC

      HEADLINES:

What is a technical recession?

      WHY IN NEWS:

Hot from RBI’s Press release.

SYLLABUS COVERED: GS 3: Economy : RBI

      LEARNING: 

For PRELIMS important terminologies from RBI’s Press Release are very important . You should pay a high amount of focus on such definitions and its significance.

For MAINS try to put down such definitions in your Mains book . If it sounds difficult, try to write such definitions in your own words .

      ISSUE: 

Latest RBI bulletin projects contraction for a second consecutive quarter, which means the economy is in a ‘technical recession’.

WHAT IS A RECESSION?

Technical Recession | UPSC

  • A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region.
  • It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.

KEY TAKEAWAYS

  • A recession is a period of declining economic performance across an entire economy that lasts for several months.

Businesses, investors, and government officials track various economic indicators that can help predict or confirm the onset of recessions.

  • A variety of economic theories have been developed to explain how and why recessions occur.

All About: Technical Recession | UPSC

  Source : RBI estimates : All About : Technical Recession | UPSC

What does it mean, and how is it different from a ‘recession’ and a ‘recessionary phase’?

  • The Reserve Bank of India has dedicated a chapter on the “State of the economy”.
  • The idea is to provide a monthly snapshot of some of the key indicators of India’s economic health.
  • A tradition that began with the first issue of the Bulletin in January 1947.
  • As part of the exercise, the RBI has started “nowcasting” or “the prediction of the present or the very near future of the state of the economy.

The very first “nowcast” predicts that India’s economy will contract by 8.6% in the second quarter (July, August, September) of the current financial year. 

  • While this pace of contraction is considerably slower than the 23.9% decline in the real gross domestic product (GDP) during the first quarter (April, May, June)
  • The contraction of Q2 is crucial because it implies India that has entered a “technical recession” in the first half of 2020-21— for the first time in its history.
  • To better understand the term “technical recession”, one must distinguish it from two other phrases — a recession and a recessionary phase of an economy.

WHAT IS A RECESSIONARY PHASE?

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

  • In other words, when the overall output of goods and services increases from one quarter 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 recessonary phases of the economy.

HOW IS A RECESSION DIFFERENT?

  • 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”.

Technical Recession

RBI estimates : Source: Trading EconomicsAs the graph shows, there have been several expansionary and recessionary phases in India’s history.

  • It also looks at the “depth, diffusion, and duration” of decline in economic activity to determine whether an economy is in a recession or not.

EXAMPLE
in the case of the most recent dip in economic activity in the US, which started in February 2020 as a result of the Covid-19 pandemic.

The drop in activity has been widely diffused throughout the economy that the downturn would have been classified as a recession.

WHAT IS A TECHNICAL RECESSION?

  • The basic idea behind the term “recession” — significant contraction in economic activity .

It is 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, 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.

WAS INDIA’S TECHNICAL RECESSION UNEXPECTED?

  • No. Given the nature of the problem ;the pandemic — as soon as the lockdown was announced in March, most economists expected the Indian economy to go into recession.

In fact, most estimates expect the economy to contract for at least one more quarter — that is October to December, currently under way.

HOW LONG DO RECESSIONS LAST?

  • 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.
  • Finance Minister has expressed hope that India’s recession could be already over and that the economy may register positive growth in the current quarter.

      IASbhai WINDUP: 

A “technical recession” is when you have 2 negative quarters of GDP, but it is due mainly to slowing growth or an isolated event rather than a major underlying cause. 

  • Technical recessions are usually short in duration and mild in severity.
     SOURCES:  THE IE | All About : Technical Recession | UPSC

 

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