Reviewed by Aug 27, 2020| Updated on
Recession refers to a decline in the aggregate economic activity of a country. Recession is a macroeconomic indicator based on the declines in other key measures of activity which include industrial productivity, employment rate, wholesale and retail trade. A recession is generally identified on the back of two consecutive quarters of negative economic growth.
The global business confidence is low due to a variety of factors such as the US-China trade war, geopolitical factors such as the escalating US-Iran tensions and mounting global debt. In an uncertain trade environment, countries across the world are supporting their domestic economies through interest rate cuts. The financial markets are fragile without any support from real growth in GDP and industrial activity. Economists are warning of a looming recession and seeking resolutions to the global trade war.
Key economic indicators for recession:
- The first of the hints of a recession comes from the slide in the key economic activity indicators. The government should initiate measures to check the slide and avoid any looming recession.
- A recession is generally declared by the NBER (National Bureau of Economic Research). The globally accepted definition of a recession is from the NBER, US which says, ""A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.""
- India does not have its own standards for identifying and declaring a recession. The economic indicators in connection with recession are:
- Per capita income including gross national income and net national income. India's measures the growth rate in these indicators on an annual basis
- Private consumption measured quarterly. The growth in private consumption impacts the growth in Gross Domestic Product (GDP)
- The figures for growth in oil consumption release by the Ministry of Petroleum and Natural gas on a quarterly basis
- Bank credit to the non-food sector such as Micro, Small and Medium Enterprises (MSMEs), agriculture, allied sectors and personal loans on a monthly basis
- Growth in capital formation measured quarterly
- Growth in industrial production consisting of mining, manufacturing and electricity on a monthly basis. Growth in electricity generation is also an independent indicator.
- Growth in unemployment including the labour force participation rate, measured on a monthly basis
A study of the growth in the various economic indicators enables determination of growth in GDP. Also, the GDP numbers are aggregated from 8 core sectors to arrive at the quarter on quarter growth in GDP. The sectors are: 1. Agriculture, forestry, and fishing 2. Mining and quarrying 3. Manufacturing 4. Electricity, gas and water supply 5. Construction 6. Trade, hotels, transport, and communication 7. Financing, insurance, real estate, and business services 8. Community, social and personal services While the sectoral numbers indicate the growth in the industry, the aggregate reflects the economic progress of the country. The data helps the industry and investors in making investment decisions.
Countries have to monitor their key economic indicators and take corrective measures for any signs of weakness in growth. Also, external factors such as global trade war, geopolitical tensions have a bearing on economic growth. A business cycle recovery is seen with a correlated increase in output, employment, income and sales, all feeding each other.