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Presentation On Global Economic Cycles: Presented by

The document provides an overview of global economic cycles, including: 1) It defines economic cycles as periods of prosperity and depression in a country's production, employment, and income, measured by GDP growth rates. 2) It outlines the typical phases of economic cycles - expansion, peak, recession, and trough - and notes recessions the global economy has faced since the Great Depression. 3) It discusses the subprime mortgage crisis in the U.S. that helped trigger the global recession from 2007-2009 and factors that could lead to a potential "double dip" recession.

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Gupta Chandan
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40 views

Presentation On Global Economic Cycles: Presented by

The document provides an overview of global economic cycles, including: 1) It defines economic cycles as periods of prosperity and depression in a country's production, employment, and income, measured by GDP growth rates. 2) It outlines the typical phases of economic cycles - expansion, peak, recession, and trough - and notes recessions the global economy has faced since the Great Depression. 3) It discusses the subprime mortgage crisis in the U.S. that helped trigger the global recession from 2007-2009 and factors that could lead to a potential "double dip" recession.

Uploaded by

Gupta Chandan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 25

Presentation

on
Global Economic Cycles

Presented By:
Chandan Kr. Gupta

1
Flow of Presentation

• Definition

• Phases

• Various Recessions faced

• Sub-Prime Crisis

2
What is an Economic Cycle ????

• The term business cycle(or economic cycle) refers to the


fluctuations in production, employment and income of the
people of a country.

• It is associated with alternating periods of Prosperity and


Depression.

• These fluctuations are often measured using the growth rate


real Gross Domestic Product (GDP).

• The business cycles consists of four phases.

3

4
Economic Cycle Phases
• Expansion/Growth: During this phase of the business cycle, consumer
and business spending rise. Unemployment will drop during this
phase, which will further aid consumer spending.

• Peak: After a period of growth, an economy will reach a peak, where


business is producing at or near full capacity, and the economy is at or
near full employment.

• Recession: This is a phase when real GDP begins to decline.


Consumers and business reduce their spending, unemployment rises,
investment declines, and pessimism about the economy is likely to
grow.

• Trough/Depression: This is the lowest point of the business cycle.


Factories will be operating below capacity, allowing unemployment to
reach high levels. Jobs are difficult to find in this phase, and many
businesses may fail. 5
Factors shaping Business Cycles
• Volatility of Investment Spending

• Momentum

• Technological Innovations

• Variations in Inventories

• Fluctuations in Government Spending

• Politically generated Business Cycles

• Monetary Policies

• Fluctuations in Export and Imports


6
Great Depression
(Longest and most severe economic depression ever experienced)

• It began in the U.S. soon after the New York Stock Market
Crash of 1929 and lasted until about 1939.

• By late 1932, stock values had dropped to about 20% of their


previous value and by 1933 11,000 of the U.S.’s 25,000 banks
had failed.

• Reasons: Monetary policy mistakes and adherence to the gold


standard.

• Consequences: Much-reduced levels of demand and hence


production, resulting in high unemployment (by 1932, 25 –
30%) 7
Recessions Post Great Depression

Start-End 
Post world war II recessions
Duration
Nov. 1948 - Oct. 1949 11 months
July 1953 - May 1954 10 months
Aug. 1957 - April 1958 8 months
April 1960 - Feb. 1961 10 months
Dec. 1969 - Nov. 1970 11 months
Nov. 1973 - March 1975 16 months
Jan. 1980 - July 1980 6 months
July 1981 - Nov. 1982 16 months
July 1990 - March 1991 8 months
March 2001 - Nov. 2001 8 months
Dec. 2007 - July 2009 20 months

Source: National Bureau of Economic Research


8
Will Discuss now Shapes of Recession
Mainly of four types:

1. V – Shaped

2. U – Shaped

3. W – Shaped

4. L – Shaped

9
V – Shaped Recession

• V-shaped recession, the economy suffers a sharp but brief


period of economic decline with a clearly defined trough,
followed by a strong recovery.

• V-shapes are the normal shape for recession


10
U – Shaped Recession

• A U-shaped recession is longer than a V-shaped recession.

• A less-clearly defined trough. GDP may shrink for several


quarters, and only slowly return to trend growth.
11
W – Shaped Recession

• A W-shaped recession or "double dip" recession, occurs when


the economy has a recession, emerges from the recession
with a short period of growth, but quickly falls back into
recession.
12
L – Shaped Recession

• L-shaped recession occurs when an economy has a severe


recession and does not return to trend line growth for many
years, if ever.
• The steep drop, followed by a flat line makes the shape of an
L.
13
Sub Prime Crisis

14
US Mortgage Market

1. Prime – Consisting of Rich people mainly businessmen.


Having a FICO score of > 620.

2. Jumbo – Consisting of Rich people having luxurious homes

3. Alt-A – Having not much of bank balance, but enough


property.

4. Target VH – Government employees

5. Sub-Prime – Consisting of students, small businessmen

15
US Mortgage Market

Sub-prime
20%

Prime , 45%
Target VH
3%

Alt-A
20% Jumbo
12%

16
What actually happened

• Post 2001, the US government had encouraged US banks to


lend money to people, to encourage spending & investing
mainly for the purpose of buying houses.

• These banks granted loans to large number of borrowers


despite having lower income levels, unsure employment
status, unscrupulous credit history, etc.

• Huge number of borrowers availed of bank credit without


evaluating their repayment capacities. The economy was
flushed with liquidity & stock markets were booming.

17
Burst of Housing Bubble

• A silent storm brewed in international financial markets with


origins in the US housing market, which witnessed an
unprecedented boom since 2001.

• The boom was led by rising housing prices, low interest rates
& aggravated by financial innovation viz. MBS, CDO and CDS.

• Housing prices in USA began to drop in 2006. Rising interest


rates & falling housing prices led to rise in sub prime
mortgage delinquencies & resultant foreclosure.

• Result: The housing bubble burst in Aug 2006.


18
Sequence of Events

19
Video

20
Next Recession

21
Double Dip on Cards
Reasons:
• U.S. orders for durable goods fell 1.0% in June. Economists expected
them to rise 1.0%. Inventories rose for the sixth month in a row,
indicating goods are being produced, but they're not moving out the
door.

• Industrial output in China fell 2.8% in June.

• The ECRI (Economic Cycle Research Institute) weekly leading indicators


index has fallen as low as minus 10.5 in July.

• After a sharp drop in June, U.S. consumer confidence fell even more in
July. The Conference Board's latest reading was 50.4. A reading of 90 or
above indicates a robust economy.

22
Reasons Contd.

• The U.S. trade deficit widened in July. This happened even though oil
imports fell over 9%.

• U.S. weekly unemployment claims refuse to drop below. Even though


companies are reporting huge earnings increases and raising estimates
for next quarter, more and more workers continue to lose their jobs.

• The Federal Reserve Chairman, Ben Bernanke, gave a gloomy report on


the U.S. economy in the last week of July in his bi-annual testimony. Bank
of England Governor, Mervyn King, has also recently stated, "Britain can't
be confident that a sustained recovery is under way."
23

24
Queries ????

25

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