What is the nature of the present global recession? What are the reasons for it?

The world economy is going through a turbulence phase. In the last decade, economists explained that we are going through the worst economic crisis after the Great Depression.

Whatever may be the controversies related with measurement of the present crisis, one thing is sure -the problems of the Great Recession started from financial crisis of 2007 is yet to be abated.

At present, we are not witnessing the financial crisis of 2007 type. We got many lessons and now we are steadying our financial markets. Rather, we are experiencing the pains of slow and steadily declining GDP growth in most of the countries.

What is the nature of the present economic crisis?

The underlying nature of the present economic problem is that the heavyweights of the global economy are experiencing a recession or very low and growth rate. What is more important is that there is no momentum in many of the western economies as hope for revived economic activities are almost zero.

How slow growth rate in other economies affects us?

The major economies like the US, UK, Japan, France- all were great consumers and were big importers as well in the past. Now with their GDP growth coming down, their imports are also decreasing. Remember their imports are our exports.

The logic behind the connection between their import of a country and its economic growth (or income) is that

                                                                              m = f (Y)

Here, m is our tendency to import, Y is our national income. The equation says that our import tendency (marginal propensity to import) is a function of our income. The higher our income or growth, higher will be our imports.  

If gigantic economies like the US are reducing their imports, its spread impact on the rest of the world will not be little. The higher the size of an economy, higher will be its ability to influence other countries through the channel of trade (export and imports). Remember India has experienced thirteenth month consecutive decline in its exports recently.

Why the economies of the West are facing recession or slow down?

The reason for the present recessionary phase in the West is structural. Economic history says that the high growth phase in an economy will be supported by a highly productive and consumption oriented population. In the advanced countries they are facing the problem of ageing. Europe is ageing and in Asia, Japan is a sick man. Higher percentage of the old people reduces the economy’s ability to produce more and consume more. As a result, overall economic activities come down. This is the reason why Europe is half happy to receive migrants from Middle East now. The economic stimulus of additional and working age population is sizable.

All these indicate that the problems of the advanced countries can’t be solved with cosmetic or ad-hoc measures.

Commodity price fall

Now another negative development is the fall in commodity prices like crude, coal, iron ore etc. Developing countries are the exporters of these commodities. Hence their income falls. Economies like Russia and Brazil are in serious trouble now and the concept of BRICS has lost relevance.

Chinese economy’s slow growth

China is a major importer of commodities from other developing countries. With the decline in Chinese exports and growth, their imports from other small developing economies also will come down. In this way, the developing countries are adversely affected by the slowdown of the Chinese economy.  

The phenomenon of interconnectedness

How the economic problems in somewhere in the world affects us? The IMF has coined the term ‘interconnectedness’ to explain this sharing of misery of one country by the rest of the world.

According to the Fund, there are different channels of interconnectedness – trade, finance and confidence are the major one.

Slow growth of the US economy reducing US imports and thus our exports is the trade channel.

Secondly, slow growth of the US economy may create financial stress and thus may lead to reduced capital flows from there to India. This is the capital or finance channel.

Confidence channel indicate that loss of business momentum in other countries depress investment sentiments in India as well.

So, in this highly interconnected and globalised world economy, pains and pleasures are shared rather than personalized.