'Recession in the US ended in June 2009'

Sep 21, 2010

In this issue:
» India's standard of living leaves a lot to be desired
» Education budgets impacted by the global crisis
» The aim to create 150 m skilled workforce in India by 2022
» Wall Street firms are likely to take a huge beating
» ...and more!!

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The way the US and the European economies are struggling to keep head above water, you would think that recession is still on in those countries. Well, that would be partly wrong and partly right. The National Bureau of Economic Research, based in the US, has stated that the recession fuelled by the subprime crisis ended in June 2009. It was the longest US recession since the Great Depression (1929-1933) as it lasted for 18 months. It has also surpassed the 16 month contractions that were witnessed in 1973-75 and 1981-82.

The reason for selecting June 2009 is that the US economy started recovering gradually since then as a result of the stimulus measures. But even then, one cannot say that the US is completely out of the woods yet. The recovery has not really been sustainable. Unemployment has been raging high over there. More than 8 m workers have lost their jobs as a result of the recession. This may take years to fix given the sheer size of the unemployed that will have to be absorbed into the workforce as and when a more meaningful recovery does take place.

Not surprisingly, consumption as envisaged by the US government has not really taken off. Little wonder then that the government is at its wit's end. None of its solutions have yielded the desired results and it is beginning to run out of options. And the gloomy picture here is forcing investors to look for greener pastures. This has led to the huge inflow of funds into China and India. And has led to the considerable rise in stock valuations sparking fears of bubbles now forming there.

 Chart of the day
India may have been growing at a scorching pace as compared to its developed peers. But this stellar growth in GDP has not translated into higher standard of living for India's population. As today's chart of the day shows, India's standard of living is way below that of its peers. This has been arrived at taking into account consumption per person adjusted for longevity, leisure and inequality. Obviously, the benefits of a robust economic growth has not percolated down to all sections of India's society.

* Consumption per person adjusted for longevity, leisure & inequality
Data Source: The Economist

If there is one thing that the US desperately needs to get its economy back on track, it is the velocity of money. The supply of money is very much there. Infact, the total quantity of money that the US banks are sitting on right now is perhaps unprecedented in its entire history. But money alone does not lead to growth. It has to change hands and quite frequently at that. It is this phenomenon that is called the velocity of money. And nowhere is this drop in velocity as evident as the Wall Street.

A leading daily reports that there has been an unusually sharp slowdown in trading this summer. People are just not flipping financial assets as fast they used to before. In view of this, profit forecasts for major Wall Street firms are likely to take a huge beating. To illustrate further, trading in shares in NYSE was down 11% YoY in July 2009. And at 30% YoY, the decline in August was even sharper. Activity in other financial assets has not been any better. To make matters worse, this could just be the start of a long period of lean years for Wall Street. May be, Wall Street will never be the same again.

Education is essential. We all know that. Governments across the world have set up budgets to ensure that children are provided basic education. Ina recently conducted study, it was estimated that there are currently 60 m children who are out of school in the 60 poorest countries. If these children were educated, then 171 m people could be lifted out of poverty. However, the recent global crisis has played havoc in this plan as well. Most countries have felt the brunt of the crisis. But the poorer countries have felt it more. In light of this, they have had to cut back on their education budgets. Understanding that this would lead to problems in the future, the World Bank has pledged US$ 750 m. This amount would be given as grants to countries in Sub Saharan Africa and South Asia that are lagging behind in their education goals. Let us hope that other international agencies take cue from this and open up their purses for the future generation.

The alacrity of the rise in the Indian markets have put fears about Europe's sovereign debt crisis in the background. No one seems to be talking about the problem anymore. But the fact that no one is talking about it doesn't mean that problem doesn't exist anymore. Mohamed El-Erian, chief executive at PIMCO, opined recently that the US Federal Reserve will cut its growth forecasts in its oncoming meeting. And that Europe's economic bailout is failing. As per a Moneynews report, contracts insuring against default on Ireland have climbed to the most since 2008. Further, this figure is almost 10 times the cost for protecting US debt. We may be busy felicitating the impressive rise in our own markets. But we must take care not to forget the risks that still lurk in global economy. One big negative event can very easily cascade into a series of other negatives. And that can potentially take the global economy by surprise all over again.

Will India's burgeoning population be a boon or bane? Especially the young population. This is a popular theme when it comes to any debate about India's future. Seems like the government is at least taking some steps towards addressing the issue. As per a leading business daily, the National Skill Development Corporation (NSDC) targets to create 150 m skilled workforce in India by 2022. NSDC is a joint venture between the government and industry associations - CII and FICCI. It is developing various projects across the country to help create the required skilled workforce. In our view, it is a laudable target given how the economy needs skilled personnel as much as people need employment. Especially a large and rapidly growing economy such as India's. In fact, as per some estimates the incremental skilled workforce required in India by 2020 will be in the region of 240-250 m by 2022. However, much will depend on the actual implementation of the plans on the ground.

The balancing act between growth and inflation is a tough one. And who would know this better than our RBI governor, D Subbarao. He stated that inflation will help decide the next monetary policy action. However, in line with the functioning of a central bank, the RBI cannot only target inflation. Objectives of financial stability along with price stability need to be addressed, according to him. But, with interest rates now close to pre-crisis (normal) levels, we feel that inflation still has a target on its back.

In the meanwhile, the BSE-Sensex was trading higher by 0.3%at the time of writing. Stocks from the engineering and IT stocks managed to keep the benchmark index afloat as the overall market breadth was negative with there being 2.6 losers for every gainer on the overall BSE. Market sentiments in Asia were skewed towards the positive side with China and Hong Kong ending on a higher note. However, Japan ended with losses of 0.3%.

 Today's investing mantra
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch

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1 Responses to "'Recession in the US ended in June 2009'"

debapriya ghosh

Sep 21, 2010

It is interesting to know that inspite of high growth the standard of living of Indian is lowest among the peer.According to me the major reason for this is faulty taxation policy rather the cascading effect of the taxation policy.I would like to mention the salary and perquiste provided to the ministers of the Indian democracy.

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