All About : Technical Recession | UPSC
What is a technical recession?
WHY IN NEWS:
Hot from RBI’s Press release.
SYLLABUS COVERED: GS 3: Economy : RBI
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 .
WHAT IS A RECESSION?
- 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.
- A recession is a period of declining economic performance across an entire economy that lasts for several months.
- A variety of economic theories have been developed to explain how and why recessions occur.
- 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.
- 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?
- 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.
- 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.
- 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”.
- 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.
WHAT IS A TECHNICAL RECESSION?
- The basic idea behind the term “recession” — significant contraction in economic activity .
- 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.
- 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.
HOW LONG DO RECESSIONS LAST?
- Typically, recessions last for a few quarters.
- 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.
- Technical recessions are usually short in duration and mild in severity.
SOURCES: THE IE | All About : Technical Recession | UPSC