Technical recession

#GS3 #ECONOMY #RBI

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

 

  • 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. 
  • By doing so, a hallowed tradition that began with the first issue of the Bulletin in January 1947, but interrupted during the period 1995 to date, will be revived.
  • 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”. 
  • And 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.

 

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 — typically measured by the GDP — increases from one quarter (or month) 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.

Technical recession

  • While the basic idea behind the term “recession” — significant contraction in economic activity — is clear, from the perspective of empirical data analysis.
  • 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, commentators often consider 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.
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