Recently, the United States of America has announced a de-growth in its Gross Domestic Product of 1.6% for the first quarter of Financial Year 2022-23 i.e., January to March period. As per the general definition, if any economy continuously posts 2 negative quarters, then the economy will be formally declared in Recession. So, let’s discuss whether the US is in recession, and Will India’s economy will follow the same path as well. Let’s start.
What is a Recession?
The significant decline of the economic activities in the economy is termed a Recession. As per the National Bureau of Economic Research (NBER), if the Gross Domestic Product (GDP) of an economy remains negative consistently for 2 quarters, then it is called a Recession.
How does an Economy enter into a Recession?
- The whole instance of recession roots back to the time of the Covid-19 pandemic when there was financial distress across the globe, which enabled the Fed Reserve and other Central Banks to print more money to ensure the affordability of goods and services for citizens. This increased the liquidity.
- The increased liquidity led to more money which further resulted in more demand. But the supply of goods and services was limited.
- Further, when the demand increases against the ideal supply level, it leads to the condition of inflation which the world is currently witnessing.
- Moving forward, Central Banks raises interest rates to control inflation to manage the demand-supply equation.
- With the interest rate hikes and curbs by Central Banks, the money supply reduces which bring the demand equivalent to supply. The reduced demand then leads to a reduction in supply.
- Finally, the reduced supply results in the decline of economic activity, and hence Recession takes place.
What are the parameters to determine a Recession?
- Negative GDP
- Increased Unemployment
- The decline in Retail Sales
- Slow-down in Manufacturing
- Diminishing Income
- Inverted Yield Curve.
How Long Does a Recession Last?
- There is no thumb rule or fixed period for the tenure of recession in the economy.
- For Example in the year 2008 during the Housing Market Crash, the recession lasted for 1.5 years, while during the Covid-19 period in 2020, it lasted for 2-3 months.
How Deep is a Recession?
- At the time of the Housing Market Crash, the recession lasted for 1.5 years, but the unemployment rate was comparatively lower at 6%.
- But in the case of 2020 during Covid Lockdown, the unemployment rate rose to 14% in such a short period.
What is the Difference Between a Recession and a Depression?
- Depression is the worst situation than a Recession, where the GDP declines steeper, the unemployment rate touches higher levels, and it takes a long period of recovery.
Is the US Economy Entering in Recession?
- United States of America (USA) recorded negative GDP of 1.6% during the January to March 2022 quarter, while for the next quarter of April to June 2022, the GDP Growth figure is not out yet.
Will Indian Economy Enter in Recession?
- During January to March 2022 quarter, India recorded positive GDP growth of 4.2%, whereas the figure for April to June 2022 is yet to come. And since the Indian Economy has not yet recorded negative growth, we can say that India is currently not in Inflation.
- Indian Economy has not gone into recession since 2008, despite facing high inflation figures of 12% during FY14, keeping aside the Covid-19 lockdown period.
What Should Investors Do?
Indian Economy is better placed currently as compared to the global economy specifically the US, the high GST collections representing normalization of economic activities are some positive indicators for the Indian Economy. Further, there are no indicators of a Recession taking place in India currently. New Investors who are starting investing now are having a good time starting their journey as the market is at quite a low level while existing investors should follow a staggered manner of investing.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.