This article is written by Devina Poonia from Ansal University, Gurugram. This article focuses on the effects of the novel coronavirus and different perspectives of the country whether they will face recession or not.
As coronavirus has wreaked havoc on the world, people around the globe not only have to take precautions to avoid the scare of this virus but also are losing their jobs or are rendered unemployed. Stress and panic have overpowered the societies as people wonder about the after-effects of coronavirus. Countries like the USA, a big sovereign power, have seen a sharp steep low in the curve of their job and employment rate pushing the country towards recession.
Economic measures taken by the countries in the world’s worst-hit due to the recession are not proving efficient as the opening up of some industries have infected people with the virus and due to lack of infrastructure facilities makes it kind of impossible for the authorities to control the effects of coronavirus on health and economy.
The National Bureau of Economic Research (NBER) defines a recession as: “a significant decline in economic activity spread across the economy, as it lasts more than a few months normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the state of the economy, most recessions are brief and they have been rare in recent decades”.
Indicators of recession
- Stock market: this may not be the most important factor but experts study the stock market inflation it gives them the idea if the economy is headed towards recession or not, it shows the expected earnings of the companies if it thrives then no recession and if not then the companies earn of share is going to decline. The stock market is very vulnerable to manipulation and indicates that economic measures have not been taken into consideration.
- Manufacturing activity: it affects the gross domestic product (GDP), if the GDP increases it means the demand for the consumer good is increasing then the supply also increases but some consumer goods are not up to the customer satisfaction and can be lying in the stock holding which in turn increases the retail sales which is a negative point for the economy.
- Inventory: manufacturers always bulk up their inventory as it is expected for the high demand of the goods in the market for consumption but if it does not see a high demand then the bulk will be unconsumed and the market demand will fall down.
- Retail sales: sales affect GDP directly if sales increase then the companies can hire more employees and manufacture the product, if not then the economy faces recession if sales exactly don’t go up which in turn would be difficult for the companies to pay off debt.
- Unemployment: if the economy goes through recession then companies wouldn’t go on a hiring spree as they won’t be able to cover the costs and no work means no payment to employees which will increase the rate of unemployment.
Recession vs depression
Well, on one side recession lasts between nine months to 18 months on average whereas depression can last over the years. A recession phase is where there is a total decline in the GDP, income, sales, and employment on the other hand depression is when the same factors and indicators of recession lead to a significant decline in income and employment. The thumb rule of recession is to witness two negative quarters of GDP growth. It is more severe than the recession and can witness up to many negative quarters of GDP growth.
In the last few decades, several countries have faced different forms of depression including Japan, Greece, and Argentina, the Great Depression of the 1930s which affected the USA on a vast scale where the production fell 47 per cent and the GDP 30 per cent. Unemployment exceeded 20 per cent, the Great Depression which lasted for 10 years, 1929-1939 it’s effects and repercussions can still be witnessed in the economy and policy.
It was common to witness recession and depression in earlier times because of the lack of resources and technology with the countries, changes in the technological advancements can help the market analysts using new tools and strategies to deliver the outcome and study the market factors and indicators which lead to recession and depression and can help in preventing the same. The government can form new policies keeping in mind the indicators of recession and depression can form a budgetary on fiscal policies or amendments in the tax regime or it could be a relief compensation fund for the labour in case a difficult situation arises.
Investing in companies who have a neutral flow of cash, low debt, and a strong balance sheet can survive in the situation, these companies are resistant to the fall back of the economy and sets a good example for world leaders to look out for the ill effects of recession and depression.
Within a span of 5 months coronavirus has resulted in huge losses to the economy worldwide, Italy the worst-hit country by the deadly virus witnessed a lockdown of consecutive 3 months the northern part of Italy which is the hub of the economy is likely to fall into recession as the pandemic has sought irrecoverable damage to the country with being the number one country in overall death of people due to the virus. The citizens pleaded to the government to reopen factories to prevent an economic catastrophe but as the medical infrastructure is poor in Italy the government could not risk the lives of its citizens. Italy has faced currently three recessions in the past. The big question looms over the head: will it endure the fourth recession?
The answer depends on the fiscal and budgetary policies of the government, Italy which accounts for 6 percent of the GDP with its tourism department has suffered a backlog as such long lockdown procedure can definitely attract the recourse to a recession, 1.7 million people who accommodate industries like food services has seen 75 per cent fall in the output. Italy relaxes its restrictions on the lockdown by allowing industries and cafes to operate to yield production so that it does not put the economy at a halt. With the opening of the work sector, Italy is no more into the trap of recession, and the economy will slowly and gradually raise with the enforcement of tougher restrictions.
The US government reported that the novel coronavirus has risen the rate of unemployment to 14.7 percent last month, from 3.5 per cent in February, the rate of unemployment has surpassed that of world war 2 which was 10.8 per cent. The total number of active cases are reported to be 1.29 million with 77,000 deaths in the US, although the stock market has seen a large cut down to 4 per cent as investors prepare themselves for the worst to hit it is unlikely that the State will go down into recession if it does it will be only for a shorter period of time. California plans to open up the production industry with 70 per cent of the labour available with strict measures taken by the officials to regulate the temperature checks, sanitization, and the permit license acquired by the workforce on the effective testing done by the industry.
Recession and India
With 73,981 active cases and 2,408 deaths and counting, the threat of recession looms over India as the country recently entered phase “Lockdown 4.0” failed to contain the spread of coronavirus and the three zones namely red, green, and orange did not prove effective. Witnessing nationwide lockdown from March 24 and the enforcement of various stricter measures, many companies adopted work from home policy to keep up the workflow. The aviation industry is the worst hit and suffering from the pandemic as there is a halt on the domestic and international flights to stop the spread of the virus. India’s economy largely depends on tourism and aviation and both are not yielding any profits resulting in a 113 billion dollars loss in passenger revenues according to the source by the International Air Transport Association.
Airlines like Vistara and Indigo have sliced down the wages of their cabin crew and ground staff to 30 per cent as the employees are not able to fulfil the criteria of their flying hours. Some companies reported more than 30 per cent drop in domestic travels and the cash reserves are running low and almost on the path to bankruptcy.
The pandemic has pushed Indian industries and small industries towards recession as inflation rate won’t go upwards if there is no cash flow in the economy, disruption of food supply chains and no relief to the migrant workers poses a big threat to Indian economy but in a recent announcement by the Finance Minister Nirmala Sitaraman announced a big relief for the poor by reliving the package of 1.7 trillion to ease the pain of migrant workers, farmers, women, urban and rural poor. In an attempt to secure health insurance, the finance minister also sought relief of rupees 50 lakhs to doctors, nurses, paramedics, and sanitation workers.
India who was facing the threat of recession in the earlier stages of the pandemic has successfully escaped the threat setting an example for the world-leading economies the country recently announced 20 lakh crore package which the Prime Minister called “Mission Self-Reliant India”, which would be based on 5 pillars:
- Our system
Signifying the bold reforms for the Indian industry and MSMEs who pay taxes every year is a special economic package to overcome the ongoing crisis. Recently India began opening several retail shops, small standalone shops, and industry of automobile, factories, and tea plantations ensuring that the economy does not hit a new low and continues to rise gradually by enforcing social distancing rules and regular temperature checks.
The slow growth rate of industries will keep the cash flow and the rates of inflation steady at a minimum so the economy does not slide back to fall in the GDP rate which contracted to 0.4 per cent in the lockdown phase. The chain of industries to supply, logistics, production, and sales will keep the GDP steady rather than allowing the sector with limited activity.
While the countries face the overlooking threat of recession, India and China will escape the present scenario of recession as both the countries have successfully implemented the lockdown procedures while the USA and Italy enforced lockdown when thousands got affected by the coronavirus, with effective implementation of stricter measures and providing the best of medical care to all the patients and introducing tax reforms and fiscal policies will benefit the people in long run.
To overcome recession it is beneficial to cut down on the expenses, create an emergency fund in which a specific amount of money must be deposited from time to time at least for six months, it is advisable that if the recession is foreseeable it is better to pay off all the debts as it will reduce the monthly expenses and avoid payment of the debt on large interest amounts. It is very common that during recession stock prices will fall it is better to invest in foreign exchange or invest in bonds and securities.
The aftermath of coronavirus will prepare countries in the formulation of policies and guidelines which will benefit not only the natives of a country but also the government which will now be self-sufficient in tackling a disease like corona keeping in mind the fallout of economy and measures to be adopted if recession overtakes a country.
The new era will form contracts that will have the famous “force majeure clause” and render commercials on the lookout for more business opportunities. The virus has dynamically changed the industry and post-COVID19 will shape the trends towards a more statistical approach. Economic growth and human welfare go hand in hand and there is a need to ensure equitable, affordable, and timely access to health products and technologies for all.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: