Technical Recession

Context: The Reserve Bank of India made a forecast in its latest monthly bulletin that India is in a technical recession.

Background: The Reserve Bank of India’s (RBI) in its recent monthly bulletin dedicated an article titled ‘An Economic Activity Index for India’, to provide a broad picture of some important economic indicators, as a part of exercise, RBI in a ‘nowcast’, which means, a forecast that estimates the outcome of a near-term event, and the very first “nowcast” predicts that India’s economy will contract by 8.6% in the second quarter (July, August, September) of the current financial year.

Though the contraction is considerably slower than the 23.9% decline in the real gross domestic product (GDP) during the first quarter (April, May, June), the contraction of Q2 is crucial because it implies that India has entered a “technical recession” in the first half of current financial year 2020-21 for the first time in its history.

GDP had shrunk by 23.9% in the first quarter, according to the National Statistical Office’s estimate in August.

Recessionary Phase

A recessionary phase, in simple terms, is the counterpart of an expansionary phase. In the economy, when the overall output of goods and services, typically measured by the GDP is increases from one quarter (or month) to another, the economy is said to be in an expansionary phase. And when the GDP contracts from one quarter to another, the economy is said to be in a recessionary phase.

Together, these two phases create what is called a “business cycle” in any economy. A full business cycle could last anywhere between one year and a decade.

In any economy, a line graph showing the business cycle goes up and down, depending on the GDP of the country. The peaks and troughs show the different expansionary and recessonary phases of the economy. There have been several expansionary and recessionary phases in India’s history as well.

Recession

When a recessionary phase sustains for long enough, it is called a recession. In other words, when the GDP contracts for a long enough period, the economy is said to be in a recession.

However, there is no universally accepted definition of a recession as in, for how long should the GDP contract before an economy is said to be in a recession. But most economists agree with the definition that the National Bureau of Economic Research (NBER) in the United States uses.

According to the NBER, During a recession period, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.

The NBER’s Business Cycle Dating Committee typically looks at various variables, including employment, consumption etc. Apart from GDP growth to arrive at a decision, it looks at the depth, diffusion, and duration of decline in economic activity also to determine whether an economy is in a recession or not.

For example, in the case of the most recent dip in economic activity in the US, which started in February 2020 as a result of the Covid-19 pandemic, the drop in activity has been so great and so widely diffused throughout the economy that the downturn would have been classified as a recession even if it had proved to be quite brief.

Technical Recession

The technical recession is to occur, when GDP decline for two consecutive quarters. In the case of a nation’s economy, the term usually refers to back-to-back contractions in real GDP.

Significant difference between a ‘technical recession’ and a ‘recession’ is that while the former term is mainly used to capture the trend in GDP, the latter expression encompasses an appreciably more broad-based decline in economic activity that covers several economic variables including employment, household and corporate incomes and sales at businesses.

Another key feature of a technical recession is that it is most often caused by a one-off event (in this case, the COVID-19 pandemic and the lockdowns imposed to combat it) and is generally shorter in duration.

Technical Recession in Other Major Economies

The ongoing COVID-19 pandemic has badly impacted almost all big and small economies. Indonesia, for instance, downed to a recession for the first time in two decades, as its real GDP shrank to 3.49% in the three months ended September.

This was on the back of a 5.32% contraction in the preceding quarter. The country had last experienced consecutive contractions in the wake of the Asian financial crisis in the late 1990s.

The U.K. entered a recession when its economic output contracted by a record 21.7% in the April-June quarter. Britain’s GDP shrank by 1.6% in the first quarter of 2020.

Brazil’s economy also experienced a 11.4% contraction in the three months ended June, following a 0.3% fall in output in the first quarter, pushing it into a recession.

Conclusion

As soon as the lockdown was announced in March, due to COVID-19 pandemic, most economists expected the Indian economy to go into recession. In fact, most estimates expect the economy to contract for at least one more quarter, that is October to December.

The RBI’s in its bulletin mentioned that economic activity in India has recovered and the contraction is weakening with gradual normalisation in activities.

RBI added in its bulletin, a article, titled ‘State of the Economy’, that prognosticated, based on data for the month of October and signs of an uptick in consumer and business confidence, of considerable improvement and revival of economic activity.

If this upturn is sustained in the ensuing two months, there is a strong likelihood that the Indian economy will break out of contraction and return to positive growth in the third quarter.

Connecting the Article

Question for prelims : With reference to the technical recession, consider the following statements:

1. It results from the decline of real GDP for two consecutive quarters.
2. India recently faced technical recession.

Which of the statements given above is/are correct ?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Question for Mains : The Central Bank in its recent monthly bulletin prognosticated of technical recession. What influence this is expected to have in the long run on India's economy ?