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How is an economic recession different from a slowdown?

How is an economic recession different from a slowdown?

The economic downturn has spawned several misconceptions. One such erroneous notion is that the Indian economy is facing recession. Here’s what it means and why it is not correct.

An economic recession signifies a drop in the gross domestic product (GDP), while a slowdown is merely a decline in the growth rate of the GDP. It’s the difference between a salary cut and a smaller increment. While one reduces an individual’s actual income, the other is merely a drop in the growth of that income. A slowdown usually precedes recession, but does not necessarily lead to one.

RECESSION
The GDP is the total value of all the goods and services produced or created in a country in a year. When this value falls, the country’s economy is said to be in recession. It means that the country is producing and earning less than what it did, say, six months ago.

An economic recession is marked by low consumer spending because people lose confidence in the growth of the economy. This decrease in the demand for goods and services, in turn, leads to a decrease in production as companies reduce the output to match the demand. This also leads to lay-offs and a rise in unemployment, as is being witnessed in the US today.

RECESSION-HIT NATIONS
CountryExtent of damage
USGDP expected to decline by 3.3% in Dec 2008 quarter
EurozoneGDP projected to dip by 0.5% in 2009
UKGDP likely to decline by 1.5% in 2009
JapanSept quarter saw GDP fall by 0.4%

 

However, a one-off decline in the GDP does not mean that the economy has slipped into recession. The GDP must decline for two consecutive quarters for it to be called recession. Currently, several countries are facing one.

SLOWDOWN
A slowdown, on the other hand, means that the pace of the GDP growth has decreased. Countries like India and China are currently faced with an economic slowdown. It means the production and earnings of these economies are not growing at the same pace as, say, last year.

SLOWDOWN-HIT NATIONS
CountryExtent of damage
IndiaGrowth likely to slow down from 9% in 2007-8 to 6.5-7% in 2008-9
ChinaGDP growth projected to dip from 11.9% in 2007 to 9.4% this year

 

An economic downturn is normal after sixseven years of fast-paced growth. The Chinese economy, which has grown at a scorching pace in the past few years, is expected to slow down to 9.5% in 2008, the slowest in seven years. Next year, it may slip to 7.4%. As far as the Indian economy is concerned, recession is still a far cry though economists feel that the slowdown may continue for another three or four quarters.

GLOBAL IMPACT
When large economies such as the US, the Eurozone and Japan go into recession, it has a worldwide impact. The countries that depend on these economies to buy their products and services are the worst hit. As Indian software companies have major clients in the US and in the Eurozone, they will see their top lines shrink as their clients cut down on expenses due to the recession. This, in turn, will adversely impact India’s GDP growth. Similarly, the whole of Asia would be hit because it depends on the American economy.This is an interactive section for investors. Do you have a query regarding your investments?

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