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Into the jaws of a growth-eating monster

A US recession appears more or less certain. Talk is now of how long will it last, and how much it will eat away, reports Gaurav Choudhury.

business Updated: Mar 25, 2008 00:51 IST
Gaurav Choudhury

The unfolding economic disquiet in the world’s largest economy, the United States, has caused concern among economists, policy makers and currency administrators across the globe. Macro-economic managers are grappling with policy dilemmas as they struggle to contain prices and maintain high growth in national incomes as the spectre of a recession in the United States and hardening of global commodity prices loom large.

In pure technical terms, an economy goes through a recession when the country’s national income (gross domestic product) registers negative growth in two consecutive quarters of a year. In other words, during recession the GDP would actually fall as compared to previous periods, unlike an economic slowdown where the GDP would grow at a very small pace.

Analysts say a US recession appears increasingly inevitable.

“Increasingly, the debate has shifted from speculation over the possibility of a recession (in the US) to, predicting the extent of such an imminent eventuality. A spate of adverse incoming economic data pertaining to employment, consumer confidence and production have led various analysts to project two successive quarters of degrowth,” an analyst report by banking group HSBC said this month.

The last time the US experienced a severe economic downslide was in the wake of the Internet “dot-com” bust in 2000-2001 when companies had made too much or misplaced investments in technology companies. This resulted in a stock market crash that depressed investor mood. The September 11 terrorist attacks in New York also added to the mood of gloom in 2001.

The impact was so severe that the GDP growth did not reach over 3 per cent until September 2003.

Reasons change, but recessions recur. This time round, it is not the Internet, but “sub-prime” lending by banks to house purchases by poor-quality borrowers that has caused the slump. People bought houses on borrowed money but home prices have crashed, making it difficult or impossible to pay back loans by selling the property in question.

Projections by Paris-based Organisation of Economic Cooperation and Development (OECD) have pegged growth of the US economy for the second quarter of 2008 at zero, indicating that America is inching towards a recession.

“It may be premature to declare a recession, but with the pace of activity so far below potential, economic slack is widening rapidly,” the OECD said in a recent report. According to OECD, besides the sub-prime crisis, the slowdown is also due to rising food and energy prices. “The effects on demand are likely to be significant but are hard to gauge,” it said.

Analysts believe that 2008 may well turn out to be the most difficult year for the world economy. “Global commodity prices are at an all-time high, and the growth of the world economy could moderate and India is no exception,” T.K.Bhaumik, Chief Economist of Reliance Industries Limited, said.