Recession doesn’t seem to be calling it a day! Indications from all over Europe, Japan and China are not at all encouraging. US is the only market which seems to be on a good growth path. Mr. Abe has won the mandate in Japan but Abenomics doesn’t seem to be cutting ice. It therefore seems the recession phase hasn’t hit the trough as yet.
Boom and Trough
The business cycle is a fundamental feature of a market economy. Governments can lessen the effect of the cycle. – J.M. Keynes, British Economist
The business cycle is caused by governments distorting interest rates. Government interventions worsen recessions. – Ludwig von Mises, Austrian School Economist, Sociologist, and Classical Liberal
Business Cycle is a definite phenomenon which normally completes a cycle in 10 years. If we look at Indian encounters with the recession in the recent past, the first cycle was 87-88 to 97-98, second 98-99 to 08-09 and the third cycle started in 09-10. In the first cycle, the trough was hit after 5 years and in 92-93, the Govt had to mortgage gold to finance its oil imports. Then the upward swing started and economy hit the boom in 97 -98. 98- 99 the next cycle started and it hit the trough in 2002-03 when even the PSU banks went for retrenchment. The boom year was 07-08. This cycle the recession started in 09-10 for India and 14-15 should be the worst year! The following graph of Sensex gives a clear picture of the different phases of last few cycles of recession.
India is considered fairly isolated from the global recession for variety of reasons. Will hitting the trough in 14-15 hit us too! Chances are it will. A substantial part of GDP is today from overseas – be it exports or Indian Subsidiaries operating in overseas markets. Global recession hitting the trough will certainly have an impact on this. The second factors, perhaps more worrying, is the overseas debt element. According to some estimates, the overseas debt today has become one and half time of foreign currency reserve. Recession going bad will dry the possibility of further debts and also mount pressure of recovery on the existing debt.
Europe is yet to come out of recession – A closely monitored survey shows the eurozone economy ended 2014 on a tepid note, raising concerns that the region may slip back into recession this year. Except for Germany all the countries are still struggling to come out of the recession.
China’s trade performance slumped in January, with exports falling 3.3 percent from year-ago levels while imports tumbled 19.9 percent, far worse than analysts had expected and highlighting deepening weakness in the Chinese economy.
Japan economy struggling for momentum: Overall growth for the year was zero. According to recent data released, the current quarter and the next quarter would deliver lower than the last year performance during the same period.
Like global warming affecting the climate, perhaps supports by Governments is effecting the recession cycle as Ludwig mentions. Some observers feel that we are moving again on a recession path without hitting the Boom! If this is the case, then the Business Cycle theory will undergo a change – right in the beginning of starting the recession it will hit Trough then move to recovery, hit Boom and then hit the Trough again! Cutting the 10 years cycles to 5 years and no gap between the Boom and Trough! There are a few unseen changes happening in the nature as well. Birds which made rare presence are the regular one in the rural landscape and the regular ones have become the rare one! This is also true of flora and fauna – species presence in jungles are a regular site in the cultivated lands. We could be in for a big surprise on the economy cycle as well!