GLOBAL FINANCIAL CRISISor

RECESSION

RAGHAV VAIDYA 1620981011

RECESSION

A Recession is a contraction phase of the business cycle. In Economics , the term recession generally describes the reduction of a country's Gross Domestic Product (GDP) for at least two quarters.

ECONOMY CONTRACTION

Q1(JAN-MARCH)

- 2.7 It felt like a recession, even with slight growth, Exports made it seem that growth was better, Revisions revealed the recession had already begun

Growth was negative for the 2nd time in a year. It was due to a 3.1% decline in consumer spending, the first since 1991 and the largest since 1980. That was driven by a 6.4% drop in purchases of clothing and food, the biggest since 1950.

The worst drop since Q1 1982, when GDP fell ..

Q2(APRIL-JUNE)

Q3(JULY-SEPT)

Q4(OCT-DEC)

+2

- - 1.9

- -8.2

QUARTER

GDP FALL/UP

ANALYSIS

GDP IN 4QUARTERS

QUARTER 1

QUARTER 2

QUARTER 3

QUARTER 4

14.314.414.514.614.714.814.9

1514.8895

14.963414.8916

14.557Series 1Linear (Series 1)Series 2Series 3Series 4

CAUSES OF US CRISES

1)SUB PRIME MORTGAGE CRISES .2)RISING OIL PRICES @$100 EACH .3)GLOBAL INFLATION .4)HIGH UNEPLOYMENT .5)DECLINING DOLLAR VALUE .

GLOBAL INFLATION

When price hikes for goods such as food, gas, and clothing begin to rise faster than wages, it becomes more difficult for consumers to maintain their spending habits, causing business growth to slow. Plus, these escalating prices increase the cost of inputs

Crude crises

1. During 2003, the price rose above $30, 2. reached $60 by 11 August 2005, 3. peaked at $147.30 in July 2008. These price increases due to many factors, including Middle East tension, soaring demand from China,[the falling value of the U.S. dollar, reports showing a decline in petroleum reserves worries over peak oil and financial speculation.

UNEMPLOYMENT

Year Jan Feb Ma

r Apr May Jun Jul Au

g Sep Oct Nov

Dec

2007 4.6 4.5 4.4 4.5 4.4 4.6 4.7 4.6 4.7 4.7 4.7 5.0

2008 5.0 4.9 5.1 5.0 5.4 5.6 5.8 6.1 6.1 6.5 6.8 7.3

2009 7.8 8.3 8.7 9.0 9.4 9.5 9.5 9.6 9.8 10.

0 9.9 9.9

Banks short of liquidity

The scale of bank losses started to increase and it became more difficult for banks to borrow money on money markets. This caused banks to reduce loans and mortgages. Because banks were losing money, it became very difficult to get credit and liquidity. Some banks lost so much, they were running out of money. In several countries, such as UK, Ireland and US, major banks had to be bailed out by the government. But, the realisation banks were short of liquidity harmed consumer and investor confidence. The fall in confidence led to lower spending and investment.

DECLINING DOLLAR VALUE

A declining dollar can also mean that the value of U.S. Treasuries falls. This drives up Treasury yields, and therefore interest rates.A weaker dollar buys less in foreign goods. This increases the price for imports, contributing to inflation. As the dollar weakens, investors in the benchmark 10-year Treasury and other bonds sell their dollar-denominated holdings. A weaker dollar will also drive up oil prices

SUB PRIME MORTGAGE CRISES

1) Rate of interest was very very less (1% and appreciation was 14%)

2) Mortgage paper with bank

3) Sell that mortgage paper to third parties i.e. big investment institution investor looking at high return and low risk security( T-bills were not that much profitable) 4) MORTGAGE BANK SECURITIES

5) HOME PRICES GOING UP AND UP ( Because of lax lending requirement & low interest rates increase high mortgage paper which made the mortgage back securities much better than any other securities .

Cont.

6) It is common understand that if a person default even then also the bank has super value house with them to sell

7) Rapid increase in value of house and people stop paying loan & interest

8) Bring back the houses to sell in market back . , but no buyers was available ( some people were having very high loan as compare to the real value of the house )

9) Subprime lenders were getting stuck with the bad loans

10) This lead to crash of stock market . ( govt help in solving the liquidity crises by bank bailout .)

Balance of payments

IMPACT OF RECESSION ON INDIA

Impacts

1) Indian companies have major outsourcing deals from the US

2) India's exports to the US have also grown substantially over the years ,

For the first time in five years, India’s export growth has turned negative. Exports for October 2008 contracted by 15%

Monetary policy

1) increasing cash reserve ratio and interest rates to fight against inflation reversed its monetary policy from Oct. 2008.

2) The RBI took several steps to prevent fast depreciation of Indian rupee due to massive capital outflow by FIIs by selling billions of dollars in the foreign exchange market from its reserves.

3) to increase liquidity of the banking system, RBI cut cash reserve ratio (CRR) four times in 0ct.2008 to January 2009 by 400 basis points (i.e. by 4 percentage points) from 9 per cent to 5 per cent. With this the RBI infused liquidity of Rs. 1, 60,000 crores in the banking system.

4) it was felt that to fulfill the needs of credit of the companies, mere infusion of more liquidity was not enough unless the lending rates of banks were lowered to reduce the cost of borrowing.

Fiscal policy

Besides easy monetary policy it was emphasized that a fiscal stimulus to overcome recession and slowdown in economic growth was needed.

1) To keep growth momentum and to ensure 7 per cent growth rate in 2008-09 the Indian Government came out with three fiscal stimulus packages which involved increase in Government expenditure and cut in indirect taxes to boost both consumption demand and investment demand.

2) The first fiscal stimulus package announced on Dec. 6, 2008 involved increase in Government expenditure by Rs. 30,700 crore. This increase in Government expenditure was meant to help growth of infrastructure, textiles (which is a major employer of labour force) exports, housing, automobiles, and small and medium enterprises.

India export/import with USA

Month Exports Imports Balance

2007-2008crores

TOTAL 2007 14,968.8 24,073.3 -9,104.4

Month Exports Imports Balance2008*2009

TOTAL 2008 17,682.1 25,704.4 -8,022.3

Month Exports Imports Balance

TOTAL 2009 16,441.4 21,166.0 -4,724.6