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Recession is a dreaded phenomenon in the world. It connotes economic misery for the people during its onset as well as its existence. It can be described as a period when economic activity in a country or a region, measured in terms of its Gross Domestic Product (GDP), declines and such a decline persists for at least two quarters. A recession is a business cycle contraction resulting in a general slowdown in the economic activity. It is understood as a period in which an economy achieves negative growth of its GDP.
Economic growth is primarily measured in the value of GDP achieved by the economy over a particular period as compared to the earlier period of similar duration. When the economic expansion is positive, as compared to the previous period, the period is considered as that of a positive growth. However, if growth falters and enters in the negative territory in a period as compared to the immediately preceding period, that period is called as a recessionary period. Most countries in the world, majority of the times, achieve positive growth of GDP, which is generally measured on month-on-month, quarter-on-quarter or year-onyear basis. The recessionary periods, wherein a country is not able to achieve GDP equal to or more than its last comparable period of measurement, generally indicates that there is something seriously wrong in the state of affairs of the economy, as the GDP is not able to grow, which is expected to be its natural movement in today’s world. In a period of recession, as the economy slows down, there is a slowdown of demand due to reduction in disposable income in the hands of the consumers in the economy. This reduction in demand has a negative effect on business activities in the economy. The decrease in the economic activities may lead to increase in unemployment and consequentially, may reduce liquidity and purchasing power in the hands of consumers, which is very essential for sustenance of demand in an economy. A recession can lead to a vicious circle of negative growth and may cause substantial economic misery, on the back of sustained high unemployment, unless intervened by the Government directly. Such intervention can be done by easing liquidity, by increasing money supply, by increasing public spending or by a combination of monetary measures to boost the economy. In the under-developed and even the developing countries, it can be achieved by liberalising trade and promoting foreign investment. Everybody dreads the recession because it brings in dissatisfaction and unhappiness amongst the people affected by it. It generally results in increase in unemployment, liquidity drying off, fall in per capita income, reduction of new investment and clouding of the investment climate in the economy. It may result in an increase in the stress levels in the minds of the people and can cause harm to the morale of the subjects of a country. A prolonged recession may even destabilise the political equation in a country. Therefore, recession is considered as socially and even politically a dangerous phenomenon by one and all across the globe.
A double dip recession is a rare phenomenon, wherein after continuing in recession for a short period, an economy bounces back and there is positive growth for a while. But the economy is not able to sustain the positive tempo of growth. It again buckles under recession and it registers negative GDP growth. Generally, a double dip recession denotes negative growth of an economy for a while, a turn around after the phase with a positive growth for a short while and thereafter another period with negative growth before the economy decisively comes out of recession with positive growth numbers. Typically, the second dip of the recession creeps in suddenly when the economic numbers are looking on an upswing. There occurs a sudden slippage and it is realised only after passage of some time. The second dip of the recession is not as severe as the first one, but the upward movement from the former happens more gradually as compared to the first dip. Further, during the period of the second dip, the sentiment in the economy is more deteriorated as compared to the period during the first dip.
In the case of a double dip recession, movement of the GDP numbers are somewhat like shown in the diagram on the next page. Movement of GDP numbers: The graphical representation of a double dip recession on a chart is like the alphabet ‘W’ with an uneven bottom level, but it can take various shapes depending upon whether the recovery out of the second dip is ‘V’ shaped, ‘U’ shaped, ’J’ shaped or ‘L’ shaped. In the ‘V’ shape, the recovery is swift. In ‘U’ shape, it is slower than that of the ‘V’ shape but which catches momentum after some time. In ‘J’ shape the initial recovery is slow, and the improvement is gradual. In ‘L’ shape, the recovery after the dip is slow and painful. The rate of recovery flattens out at the bottom of recession and the upward movement does not start quickly enough.
History of double dip recession: A double dip recession is rare. In the 150 years of economic history, it is said that double dip recession has happened three times. In the recent years since World War II, there was a double dip recession during the period 1980-1982 in the US. The economy was in recession in second and third quarter of 1980. It then recovered but fell back into recession in the fourth quarter of 1981 and remained in recession in the first quarter of 1982. Since then, there has not been any double dip recession in the developed world, but the fear of such a phenomenon lingers on even today.
Factors which contribute to a recession and a double dip recession:
1. Inflation: High inflation can erode the investors’ confidence in an economy, which may result in the exodus of funds from the economy, especially those of the foreign investors. It may make even the local investors lose their faith in the economy. Though they may not have many good options for investment of their funds and may be restricted from taking their investible funds out of the country, they would like to reduce their risk. In such a situation, they may prefer to invest more money in debt or fixed income earning instruments as compared to equity or new businesses, though the post of tax returns on investments may be lower than the rate of inflation. High inflation causes uncertainty for investors and increases their risk aversion. Reduction in the rate of fresh investments can slow down an economy. If the economy is already growing at a low rate, a marginal change in the investment sentiment may push it in recessionary conditions.
2. Unemployment: Unemployment can slow down consumption. High level of unemployment is not only politically troublesome, but it can even be economically disastrous. High unemployment reduces the earnings of the subjects of a state and also reduces the consumable money in the hands of the society. Availability of lesser money for consumption can reduce the demand for food and consumer goods. It can also reduce the demand for value added products and services. The reduction in demand may prove to be deterrent for the capital goods industry as well. Sustained high unemployment levels can reduce the consumption in an economy and cause a possibility of recession.
3. Consumer confidence:Consumer confidence is purely a psychological factor. An upbeat sentiment can influence an economy positively and a downbeat sentiment can have negative impact. A low consumer confidence can cause reduction of spending by the consumers as they would like to save their earnings or surplus for a future about which they are not certain. Level of the hold back of consumption is based on the perceived risk which is a matter of sentiment. The reduced level of consumption in an economy can cause economic slowdown due to inadequacy of demand and result in reduction of economic activities. Such a slowdown in an economy having already a low growth rate can push the economy into a recession.
4. Stock Market:
The stock market movements have a positive correlation with the consumption in an economy. A decline in stock markets can add fuel to the fire of slowing consumption. If the immediate future of the stock market is pointing towards a bear market, then it is likely that the consumers in the country may reduce their spending, not only of the essentials but on durables as well. Falling stock market may affect the sentiment in the housing sector as well, as buying of houses may get postponed. The reduction of spending can reduce the demand of capital goods which are used for capacity building to cater to expected consumption. Low demand means low turnover and low profits for the businesses, and even to the corporate sector in the economy. Lower corporate profits can further dampen the sentiments in the stock markets and further slowdown the economy. In fact, the stock market can be a lead indicator of a recessionary period as the professionals operating in the market are able to sense the economic future in a much better way than the common public and many a time even better than the Government and the policy-makers.
5. Natural catastrophe:
If an economy gets subjected to a major national catastrophe, such a catastrophe can lead to a slow down and the economy may face a recession. This cause of a recession is generally out of the control of any individual or group of individuals or even the policy-makers. Not only major natural calamities such as flood, drought and tsunami can cause a recession; but even man-made cause such as a war can lead an economy to a recession. When an economy has just come out of a recession, a major natural calamity can push back its growth to a negative zone and the economy may face a double dip recession. In the early phase of recovery, an economy is fragile and does not have adequate strength to deal with adverse conditions. So the economy remains vulnerable to double dip.
6. Misguided economic regulations:
Misguided economic regulations such as major embargoes on import-export, stringent exchange controls and curbs on foreign investment can cause economic pain and can lead the economy into a recession. Such regulations can hamper free trade in the country, deter the new domestic as well as foreign investments and spoil the sentiments. If damaging regulations are not reviewed and amended, they can cause serious detriment to the prospects of an economy over a short as well as long term. If the damaging regulations are introduced in the initial period of economic recovery, they may force the economy into a double dip recession.
7. Failure of economic policies:
A country takes number of initiatives to improve its economy so that the best growth rate can be achieved. In recessionary days, policies are devised to curb the recession and to get out of it, as fast as possible. To stimulate growth in a sagging economy; rate of interest may be reduced, the rate of taxes may be pruned, the Government may increase spending, liquidity may be pumped into the economy or any other stimulant measures may be taken. These are described as the policy measures and they may be implemented and regulated by the Government directly or through designated authorities. These measures may have their negative side effects. As a direct result of these policy measures; the budgetary deficit in an economy can increase, there can be noticeable increase in inflation rate and the currency of the nation can be volatile or can weaken. To over-come the side effects of the policy measures, the Government may change the policies prematurely which can give a jerk to the slowly improving economy. Ill-conceived changes in policies can push the economy back in to recession. If these changes are made at an inappropriate time when the economy has just struggled out of recession, then it may even cause a double dip recession.
8. Untimely withdrawal of stimulus or concessions:
Many weak economies and even some developing economies are habituated to various concessions given by their respective Governments and continued over a period. In today’s world, more and more countries are under pressure from the developed countries to create a fair play in their economies by reducing curbs and concessions so that the goods and services can flow easily across economies and give best deals to the consumers. Such changes, when initiated in an economy, can slow down the economy on a temporary basis and they can cause recessionary conditions. Similarly, when an economy which was in recession, is struggling to get out of the recession with the help of stimulus given by its Government, the untimely withdrawal of the stimulus due to inflationary pressure or any other political or socio-economic reasons may push the economy back into recession, thereby causing a double dip recession. When an economy is coming out of recession, the task of the policy-makers is extremely critical and any error of judgment in decision making may prove to be costly for the struggling economy.
The GDP numbers, which decide the growth rate, may fluctuate from period to period. An economy may post higher or lower GDP numbers from period on period as a normal phenomenon. The monthly or quarterly fluctuations are not given so much significance in ordinary situations. However, if the growth number goes into a negative territory or even goes to a low level and fails to bounce back, it is a serious matter of concern for the economy. A failure to hold on to the economic growth after a recession can lead to a double dip recession. A fluctuating chart pattern with double or triple dips much above the baseline of zero rate of growth does not cause any alarm bells in an economy, but its movement just below the par line is described as recession and becomes a major cause of concern. A double dip recession has always to be understood as unique phenomena and should not be confused with the fall in economic growth over a short to medium term.
Occurrence of double dip recessionary conditions in certain sectors of economy is not an uncommon phenomenon. While the economy may grow in totality, certain sectors of it may be in recessionary conditions at various times and for various reasons. Such conditions are usually not glaring as they are restricted to a limited segment of the overall economy and the country is not seriously affected by such situations as the negativity is more than balanced by the positive growth in other sectors. The factors causing such conditions and the remedies to the same are similar to those applicable to a double dip recession. Therefore understanding of the rare phenomenon of double dip recession is important for economists and the policy-makers of a country.
There was a great hue and cry about the impending double dip recession in various economies across the globe in the third quarter of 2010. After a painful recessionary period during 2008-2009, and a fragile recovery in early 2010 this was a dreaded phenomena. Fortunately, the current indicators are that the world has overcome the possibility and fear of a double dip recession for the time being and from here onwards most of the economies are likely to grow in positive territories for some years to come. Country-specific minor recessionary trends such as the one noticed in the UK in the last quarter of 2010, cannot be ruled out, but by and large it seems that the world will not face the phenomena of double dip in the near future. The concentrated efforts of the Governments of all the countries and their central banks have helped the world to surmount this major catastrophe and it is a great achievement.
