Blog
06th June 2022
The term recession is the most common term we hear in the news today, and one of the early indicators of a recession is rising unemployment. According to the International Labour Organization (ILO) data, the unemployment rate in the United States of America has increased by 5.2% in 2022Q1 compared to 2021Q4. The global growth rate is expected to slow down to 2.9% in 2022 from 5.7% in 2021. The World Bank forecasted a 4.1 percent growth for 2022 last January.
Billionaire investors such as Carl Icahn and Leon Cooperman were among the first to raise concerns about the increased likelihood of a U.S. recession, but now former Federal Reserve officials and leading investment banks are joining the clamor. Investors had mostly assumed that the Federal Reserve will raise interest rates by a half-percentage point next week and again in July.
What is a recession?
During a recession, there will be a significant decline in a country's economic activity that lasts for months or even years. Financial experts can declare a recession when a country's Gross Domestic Product (GDP) decreases or when it experiences negative growth. GDP is the measure of the total monetary value of all goods and services a nation produces in any given quarter (three-month period) or year. A recession can lead to unemployment, lower production in industries, and a decline in wholesale-retail trade.
Are recession and depression the same?
The answer is NO. Depression is a severe recession where the country's GDP drops over 10% or more, and it lasts for more time than a recession. Depressions are more destructive and weaken the economic activity of a country and its ability to recover. One of the significant economic depressions in history is the Great Depression of 1929. It began in the United States of America in 1929 and lasted until about 1939. The Great Depression was the most severe depression experienced by the western world. Although it started in the United States, the Great Depression had its effects on almost every country in the world.
The Great Depression of the United States was caused by various factors, such as a massive decline in aggregate demand and rising interest rates. The Federal Reserve raised interest rates to reduce the rising inflation in 1928 and 1929. The Fed, between the years 1924 and 1927, made open-market purchases. These purchases helped recover from the recessions in the United States that occurred during that time and supported the international gold standard. In 1928, the Federal Reserve turned towards the US stock market, which was booming and sold government securities and increased the discount rates. The economists theorized the leading causes of the Great Depression were Household Debt, Failure of the Federal Reserve, and The Gold Standard.
Why does the recovery take ten years?
In the United States, recovery began in early 1933, but it took over a decade to return to 1929 Gross National Product (GNP), and the unemployment rate remained over 15% in 1940, albeit lower than the high of 25% in 1933. Most economists agree that Roosevelt's New Deal policies either caused or expedited the recovery, albeit they were never aggressive enough to pull the economy out of recession altogether. The Banking Act of 1935, which effectively boosted reserve requirements, causing a monetary contraction that slowed the recovery, was one contributing policy that reversed reflation. In 1938, the GDP began to rise again.
In 1939, Europe was engulfed in conflict. When the United States' neutrality ended, Britain and France bought large amounts of war materials. As a result of this and Congress's war-readiness spending, manufacturing reopened and hiring increased dramatically in the United States. After the attack on Pearl Harbour in 1941, the military draught aided the drop in unemployment from 14.6 percent in 1940 to 4.7 percent two years later. The United States was spending $90 billion per year on the war by 1945.
When the USA entered the war in 1941, it ultimately wiped out the last vestiges of the Great Depression, bringing the unemployment rate in the United States to 10%. Massive military spending in the United States increased economic growth rates, either disguising the impacts of the depression or effectively ending it. Despite the rising national debt and additional taxes, businesspeople redoubled their efforts to increase output in order to take advantage of lucrative government contracts. When World War II ended, the United States was the world's economic powerhouse.
What exactly causes recession?
There are many factors in play in a complex combination. The factors included are high-interest rates, stagnant wages or reduced real income, lower consumer spending, and other elements such as bank runs and asset bubbles. But the 1973-1975 recession in the western world was caused by the oil crisis. Financial experts determine whether a country's economy is in recession by looking at the indicators such as rising unemployment, a rise in bankruptcies, rising interest rates, lower consumer spending, and many more.
Which was the worst recession in history?
The most significant recession in history is the Great Recession of 2008. The factors that caused this recession are a combination of an asset bubble with a bank run. The banks in the USA took loans from borrowers and then combined thousands of these loans into a single collection. As long as every borrower didn't default at once, the collection would collect monthly payments. When the housing bubble burst, many borrowers defaulted all at once, and payments stopped in the collection. Banks such as Accredited Home Loans or Freedom Mortgage Company could not honor their obligations without these payments. After the housing bubble burst, the spending in the economy decreased, and prices dropped in the housing market, automobiles, and other assets. It made it even more difficult for borrowers to repay the loans.
How did the USA overcome the Great Recession of 2008?
Several monetary policies fixed the Great Recession of 2008. The Federal Reserve System lowered the interest rate to nearly zero to promote liquidity and provided banks with $7.7 trillion of emergency loans in a policy known as Quantitative easing (QE). Along with the liquidity done by the Fed, the U.S. Federal Government embarked on stimulating the economy under the American Recovery and Reinvestment Act. President Barack Obama signed Dodd-Frank Act to give regulatory power to the government over the financial sector. The recession lasted from December 2007 through June 2009. The policies mentioned earlier helped in recovering the economy.
Will there be an impact on the petrochemicals industry?
Surely, yes. Chemicals are needed in practically every product, and the cost of petrochemicals has been falling since peaking in 2021. The war in Ukraine has caused price volatility in chemicals and sectors associated with them regularly. Government officials in India believe that current oil prices are unsustainable in the long run. Still, they also agreed that rather than waiting for oil prices to fall, it was critical to take fiscal measures to keep inflation under control. India's federal government decided on May 21 to lower the excise charged on gasoline and diesel in an effort to combat excessive inflation. It was the second duty reduction in less than six months. Higher domestic retail fuel prices on the basis of rising crude took a toll on gasoline, diesel, and LPG demand, and India's prolonged upswing in oil consumption came to a halt in April, slipping into the negative from March levels.
The outlook for China's domestic petrochemical market has improved, with demand likely to rebound following the conclusion of Shanghai's two-month lockdown. On June 1, 2022, Shanghai, China's largest metropolis, a financial center, and an automotive production center, was released from its lockdown. Shanghai has been on lockdown since March 28, aggravating supply chain problems and affecting global petrochemical demand as downstream companies have been forced to reduce output or shut down owing to raw material shortages. Since February, China's crude consumption has slowed as industrial production has been hampered by pandemic-related restrictions in place, despite the government's refusal to abandon its zero-COVID goal. Analysts believe that these changes are early indicators of a recession, with few indicating the probability of a recession in 2023 or 2024.
Is India on the verge of recession?
Two significant factors are in play now following the COVID-19 pandemic.
These have disrupted the supply chain all around the world. The primary economic concern in India now is inflation. The inflation was around 7.8 percent in April 2022, the highest in the last eight years. The Indian rupee is weakening against American dollars, and supply chain costs are increasing due to logistics issues and high fuel prices. The stock market is plunging to top it all.
Reserve Bank of India (RBI) raised its lending interest rate to commercial banks by 40 basis points, increasing it to 4.40 percent from 4 percent. It is the standard fiscal measure any central bank would use to tackle inflation and make the cost of money dearer. When the borrowing cost increases, there is less money to spend, and the demand falls, which slows down the economic growth, and in theory, prices should fall.
However, the global economy is unlikely to stable its track in the near future. If the Ukraine war continues further, the price of fuel and other imported commodities will continue to remain high. It will lead to the usage of India's forex reserves, leading to the weakening of the Indian rupee, and with the imports being more than the exports, the Indian rupee might likely depreciate further.
In June 2022, the Reserve Bank of India raised its key interest rate for the second time but by 50 basis points now, taking the repo to 4.9 percent. The current fiscal year's inflation forecast is 6.7 percent, significantly beyond the top end of the 2 to 6 percent goal. If market expectations are correct, the central bank will raise rates again in August, bringing the repo rate above the pre-pandemic level. Analysts additionally anticipate the RBI to lessen liquidity, reinforcing its combat towards inflation and increasing its attempt to go back to financial situations to what they have been like earlier than the COVID-19 pandemic induced radical movement to stimulate the economy.
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