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Ask Mint | Economic recession: a cyclical phenomenon

Ask Mint | Economic recession: a cyclical phenomenon
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First Published: Sun, May 25 2008. 11 56 PM IST

Updated: Sun, May 25 2008. 11 56 PM IST
Whenever there is a recession, our economy starts looking like a merciless jungle. A recession brings hard times for many, mouth-watering opportunity for some and confusion for others.
Jinny: Hello, Johnny! Why are you wearing a shirt with double pockets today?
Johnny: Whenever I am confused, I wear shirts with double pockets. In the right pocket, I keep the official guide and in the left, the unofficial guide.
Jinny: What’s the matter? What is confusing you so much?
Johnny: Well, Jinny, I am confused about the state of affairs of our economy. I hear people talking about recession but I don’t understand what exactly a recession is.
Jinny: It is difficult to understand in abstract what a recession means unless you have experienced it. For different people, recession means different
things. For people leading their life from one month’s salary to the next, recession means loss of their job. For people used to riding the tides of the stock market, recession means a phase of low tide. For people selling exotic products in financial markets, recession means it’s time to start selling noodles. Everybody can have his or her own definition of recession. You can understand the term much more by your common sense than by any official explanation. But some people do rely on an official definition or confirmation to believe that the economy is indeed in recession. That may sound interesting. Why rely on official definition or confirmation? When it is raining, it is obvious to everybody that it is raining. We do not wait for the meteorological department to confirm that. But when the economy is in recession, it is difficult to form a judgement without official confirmation unless you are the ones who have faced it directly.
Johnny: What are the popular symptoms of an economy in recession?
Jinny: In popular terms, a recession is a period during which the economy is slowing down or contracting. This slowdown or contraction should occur for at least two quarters or six months to be considered a recession.
As you are aware, we measure the growth of our economy in terms of the value of the gross domestic product or GDP. You may wonder what slowing down or contracting means. If the GDP is growing at a rate below the normal rate of growth, then we say that the economy is slowing. Slowing does not mean that you actually
Illustration: Malay Karmakar / Mint
produced less than the last year. It means that what you produced this year is less than what you produce during normal times. Unless you know what the normal growth rate is, you cannot be sure whether the economy is slowing or not. We can use scientific techniques for collecting reliable data of all goods and services but analysing this involves personal judgement, and so it may not be very easy to confirm whether the economy is slowing.
However, when the GDP growth rate is actually negative, it is not that difficult to say that the economy is contracting. Contraction means that you actually produced less goods and services than the previous year. Severe forms of recession — where the GDP declines more by 10% — are known as depression. You might have heard about the Great Depression of the 1930s.
Johnny: What causes a recession?
Jinny: Anybody producing or consuming something plays a role in our economy. But, what makes consumers and producers behave in a way that leads to recession? Well, that could be anything and every recession could have its own immediate cause. The bust of the dotcom companies or turmoil in the credit markets, anything could act as a trigger. In the longer term, however, a recession is a cyclical phenomenon. Every boom is followed by a bust. Once the growth cycle reaches its peak, it starts a downward journey. Likewise, when the bust cycle reaches its lowest ebb, things start looking up. The beginning of a recession is called the peak and its end is called the trough.
We have yet to discover a formula that can give us a one-way ticket to everlasting growth. At present, our success lies in how quickly we manage the transition.
Johnny: That’s true, Jinny. A quick transition means cutting a long, unpleasant story short.
What: Recession is a period during which economic growth is slowing or contracting in comparison with growth seen in earlier years
Why: Recession is a cyclical phenomenon in which the economy moves between peak and trough
When: Severe forms of recession, where GDP declines by 10% or more, iare known as depression
Shailaja and Manoj K.Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to both of them at realsimple@livemint.com.
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First Published: Sun, May 25 2008. 11 56 PM IST