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Recession and its repercussions - Views on News from Equitymaster
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  • Jan 20, 2009

    Recession and its repercussions

    They say that the worst is ahead of us...
    The Organisation for Economic Co-operation and Development (OECD) and the World Economic Forum (WEF) in their respective releases have pointed out the threat of further deceleration in the economies of India and China due to inter-linkages with the developed world and the distress underway therein.

    The OECD has a composite leading indicator (CLI) that identifies turning points in several economies. Early signs of economic expansion or slowdown can be seen from this indicator. The CLI has been predicting not just a slowdown but a downturn in the Indian economy of a severity not witnessed before.

    The WEF has also predicted that the massive government spending to support ailing financial institutions hit by the credit crisis could sow the seeds of more problems in the future. These problems, the seeds of which were sown in the developed nations, would then percolate to the developing economies. The report also sounded a warning about the consequences of a hard landing for the Chinese economy, which could magnify the deficit problems for economies across the globe.

    But this is what has already happened...
    Collapse of financial institutions: The year 2008 saw 24 of them in the US. The first month of 2009 has already seen 2. Yes we are talking of bank collapses in the US as reported by the FDIC (Federal Deposit Insurance Corporation). Among the 17 banks which failed since September, the most prominent was Washington Mutual (better known as WaMu), US' largest savings and loan entity. As per FDIC, prior to 2008, the largest number of bank failures took place in 2002, when 11 entities went belly up. Moreover, official statistics reveal that the number of banks in America have steadily been declining since 1990. FDIC data show that the number of commercial banks in America has come down by over 5,000 in the past 18 years.

    While we in India have been lucky to not witness any bank collapse in the past year, the vigilance of the Reserve Bank of India (RBI) and other governing bodies will be necessary to avoid such mishaps in the near future.

    Hoarding of commodities: In a bid to make profits on their trades, banks, commodity traders and suppliers have been seeking new ways to hoard the commodities that have lost considerable value in the past few months of economic slump. This has been particularly true in the case of crude oil prices which have dropped by more than US$ 100 a barrel from their peak. In fact, companies like British Petroleum are reportedly hoarding enough crude at sea to supply the world for almost a day. As per Bloomberg, Morgan Stanley has even hired a supertanker to store crude oil in the Gulf of Mexico, joining Citigroup and Royal Dutch Shell in trying to profit from higher prices later in the year.

    Job losses: The US economic data has projected loss of another 2 m jobs in 2009, on top of the 2.6 m already lost in 2008. Obama's economic team has put forth a plan, which involves hundreds of billions in capital spending to save or create 3 m jobs. It in fact seems that in the US, the Wall Street's loss has been the US Army's gain. As a rule, when unemployment rates climb so do military enlistments. In November, the army recruited 5,605 soldiers, 6% more than its target and in December, when the jobless rate reached 7.2%, the army saw similar increases in recruitments. This phenomenon of massive job losses have also become commonplace in countries like India and China.

    We wonder whether the economic bodies which are playing the role of doomsayers are doing so at a time when most of the problems have already surfaced, instead of signaling the problems before they erupted.



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