I am a firm believer that recession is more in the minds of people than it is on ground. Yes, we have had global downturn, but the evasive actions that we take to counter recession are responsible for deepening of recession to a very large extent.
I am sure you must have read this story:
The Story is about a man who once upon a time was selling Vada-Pavs by the roadside. He was illiterate, so he never read newspapers. He was hard of hearing, so he never listened to the radio. His eyes were weak, so he never watched television. But enthusiastically, he sold lots of Vada-Pavs. He was smart enough to offer some attractive schemes to increase his sales.
His sales and profit went up. He ordered more a more raw material and buns and use to sale more. He recruited few more supporting staff to serve more customers. He started offering home deliveries. Eventually he got himself a bigger and better stove. As his business was growing, the son, who had recently graduated from College, joined his father.
Then something strange happened. The son asked, "Dad, aren’t you aware of the great recession that is coming our way?" The father replied, "No, but tell me about it." The son said, "The international situation is terrible. The domestic situation is even worse. We should be prepared for the coming bad times" The man thought that since his son had been to college, read the papers, listened to the radio and watching TV, he ought to know and his advice should not be taken lightly.
So the next day onwards, the father cut down the his raw material order and buns, took down the colourful signboard, removed all the special schemes he was offering to the customers and was no longer as enthusiastic. He reduced his staff strength by giving layoffs. Very soon, fewer and fewer people bothered to stop at his Vada-Pav stand. And his sales started coming down rapidly, same is the profit. The father said to his son, "Son, you were right. We are in the middle of a recession and crisis. I am glad you warned me ahead of time."
Moral of the story is that recession is more in the minds of people than it is on ground.
Probably the biggest yardstick to measure recession would the be the consumer confidence Index. And there seems to be plenty of light and the end of tunnel especially for India.
According to latest numbers released by Neilsen Consumer Confidence Survey Indian consumers has have shown maximum confidence in growth of their business compared to last quarter.
Consumer confidence in India jumped highest with rise of 13 Index points, 9 points in Japan, South Korea, Hong Kong and Indonesia. Consumer confidence rose 8 Index points in Taiwan and Brazil, and 7 points in Singapore, Turkey, Russia, Philippines and the UK.
The only exceptions to this upswing were in the USA and New Zealand, which held flat in the second quarter, with Germany the only country to register a decline of one Index point.
Through-out the recession, India has fared much better than other nations, even in January when we are at the deep end of recession globally, Indian consumers were quite confident about the prospects in India.
I am making one promise to myself, I am not going to allow myself to get carried away with this “recession” word anymore. We are seriously making a mountain of an ant !
I would say Capex is a leading indicator of ‘out-of-recession’ mentality. More often than not, companies (manufacturing, services or otherwise) generally have an idea of how the business is on-the-ground. If they start planning to allocate Capex (in terms of machines, lands, buildings), we might as well signal that as out-of-recession rather than just consumer confidence index as such. Job losses, no increments/bonuses will obviously lead to lesser expenditure (especially given our Indian mentality of saving) other than essential items.
Better business outlook -> More Capex -> No job loss/more increments -> increase in consumer expenditure -> increase in consumer confidence index.
That in my opinion is the chain. Let’s not get into the age old trap of confusing correlation with causation.
Recession is caused by a slowdown in output. To say that it is all in the minds of people is way too simplistic.
Having said that, I’d agree that consumer spending forms about 70% of the GDP in the US and when that takes a hit, the output falls dramatically. and consumer spending is a function of consumer confidence which in turn is a function of how secure they feel about the future. And when jobs are being lost and incomes are falling, any consumer might not feel secure!
Sage, thanks for the comment.
off course, Recession is caused by the slowdown, however, it is exaggerated due to people perception and thinking.
For me, consumer outlook remains the most important yardstick of measuring which side the economy is generally heading..