Economics management assignment on: Recession in economy & Consumer spending

Recession:The definition recession in economics refers to a business cycle which leads to a slowdown within the economy. Some of the indicators which lead to recession are unemployment rate, rate of inflation, GDP, profits earned by the business houses, household income, investment spending, bankruptcies, capacity utilization, etc (The Star Online, 2010).

Recession majorly occurs due to a drop in the levels of spending which might have an adverse effect over the over the entire economy. Some of the main steps which are being taken up by the government in order to tackle the problem of recession is due to the implementation of the various policies, expansionary policies such as increased supply, decrease in the levels of taxation & government spending.Recession takes into consideration various attributes which occur simultaneously & affect the entire economy. Some of the attributes which are associated with recession are unemployment rate, rate of inflation, GDP, profits earned by the business houses, household income, investment spending, bankruptcies, capacity utilization, etc. These attributes measures the reflection of the above mentioned attributes associated with recession. Some of the other drivers related to recession are interest’s rates, rate of saving, government policies, demographics, investment decisions, etc.

According to Richard C. Koo, it shall be reported that in ideal conditions the country’s economy should have its household sector in such a manner which would lead to net savers, etc. Fair relationships shall be made between the net exports & the imports. When the relationship is imbalanced, a pressure is built within the economy which leads to high levels of recession & affect the overall growth of the country. The response of the policy has been designed in such a manner which would lead to an ideal state of balance (The Star Online, 2010).The Malaysian economy was reported with a severe drop down in the levels of GDP of approximately 10% in the recent 3-4 years. This has led to an economic depression within the entire economy thereby leading to economic depression with varied causes & differences. There are various types of recession which is being faced by the Malaysian economy such as V Shaped, L Shaped, V Shaped & W Shaped recessions defining different as well as varied reasons for the same (Samuelson & Marks, 2003).

Indicators & effects of recession:With the current levels of the Malaysian economy, the indicators of recession have led to adversely affect the entire economy. It has been noticed that, the economic business cycle has entered the recessionary phase. This recessionary phase leads to negative impact on the business as well as the economy as a whole. Some of the negative aspects have been discussed in this section of the report. Given below are 7 effects that the economic cycle can have on your business (The Star Online, 2010).

Firstly, the levels of consumer spending might roll down. Due to recession when people would tighten their purses & will not spend the money lavishly there would be a decrease in the overall amount of sales. This will defiantly have an adverse effect over the non essential items. If the levels of sales would be not being controlled, this would ultimately lead to a decrease in the profit margins. Thus, the entire sales head count will decrease & the people in the market will be required to draft new as well as attractive methods to deal with the customers.Secondly, the levels of competition within the existing markets would get fierce in terms of the margin earned. As the economic business cycle would enter the recession stage the levels of competition would be quite high as many competitors would be fighting for the smallest of the smallest pie (Samuelson & Marks, 2003).

Thirdly, the levels of expenses will increase. Apart from the decrease in the levels of sales, the expenses will increase which would lead to an increase in the levels of inflation. With an increase in the rate of inflation, the purchasing or the buying power of the individual will decrease. Hence, it will lead to the tightening of the financial belt as all the business enterprises would enter the downward cycle. It must be seen that, priority shall be given to all those expenses which are directly related to the business.Fourthly, recession will lead to high levels of unpredictability within the business enterprise.  As the economic business cycle would enter the recessionary phase, the business will become quite unpredictable. At some point of time, the business houses will tend to see that the customers have vanished in air whereas at some point of time the business houses would tend to experience boom in the levels of sales.

Fifthly, the rate of interest will fall down to a considerate point. During the recessionary period, the interest rates would droll down. The major problem involved with this that, a liquidity crunch would be seen within the monetary markets which would be quite tough for the lenders to pay off their loans (The Star Online, 2010).

Sixthly, the people would get a chance to explore the outside business & invest in other areas as well. In the recessionary phase, the stock markets as well as the rate of the property decreases at subsequent rates. This would provide the investors to invest in this sector as well. Once the economy would reach its current state, it will enter the boom cycle & the investments made during the recessionary period would be termed as quite beneficial.

Lastly, the employees would demand for higher & better salaries. As the rate of inflation increases, the employees would ask for better & higher salaries so as to maintain their present lifestyle. In this case, the inefficient employees would be required to be kept on the same payroll as well as the same level (Samuelson & Marks, 2003).

Role of consumer’s confidence in economy:Consumer spending is certainly the foundation of many economies. The long boom of the mid to late 1990s was built on buoyant spending – especially in the developing countries, where service industries have long replaced manufacturing as the main economic motor. Policy-makers have queued up to urge consumers to get back to the shops (Pindyck & Rubinfeld, 2001).

To the average person, bamboozled by talk of current-account deficits, exchange rates and bond yields, consumer confidence seems the sort of economies anyone can grasp. Yet few indicators are potentially deceptive or economically crucial.

Gerrit Antonides, professor of economic psychology at Erasmus University in Rotterdam says that while drops in consumer confidence almost never trigger a drop in consumer spending. What it does produce is a fall in spending on durables; consumers put off upgrading their car or buying a new washing machine.

At the same time, they do not take on huge credit, and at least start to think about ramping up their savings. Other goods benefit, notably “comfort products” – everything from chocolate to books and home furnishings. Overall, the amount of money passing through cash tills may not change that much, a fact that makes the wholesale sell-off of consumer-oriented shares seem something of an over-reaction (Mindstorm, 2009).

The consumer’s have a confident role to play in the economy. It has been seen that, the confidence of the consumers in the Malaysian economy have declined drastically due to the adverse affect of recession. The level of confidence declined in the second quarter as per the Consumer Confidence Index. The consumers are less positive regarding the current state of the Malaysian economy. They are quite unsure regarding the financial well being of the economy as well. According to the report, the Malaysian economy has been regarded to be having a bright future along with varied levels of risks attached to it. It has been noticed that, the various types of consumer confidence drops have been seen within the same. Based upon the current forecast which is being conducted by the Malaysian Institute of Economic Research, it has been reported that the levels of growth which was forecasted was about 6%-7% but presently it is only 5.3% in the year 2010 (Katakey, 2010).

Positive effects of recessionApart from the negative effects of recession, some of the positive effects of recession have been highlighted in this part of the assignment. This section will take into consideration, the various benefits of recession as well as the realization of these benefits. They are as follows:

Firstly, with the help of recession in the entire economy leads to a better & a wiser economy. With the help of recession, people will be able to spend as well as save for their brighter future. In the Malaysian economy, consumption has been encouraged therefore, the situation shall be made which would help the economy o save & have sufficient amount of cash for their future use (Hirschey, 2000). With the economic recession, people will not splurge like they used to. People would be willing to pay for what they seriously want to purchase & the amount of spending would be reduced in a considerable manner. During the crisis time period, the levels of employment, poverty, inflation, lack of education would be practiced.

Secondly, recession would lead to out of box thinking amongst the people involved within the Malaysian economy. Economic recession has the power which inculcates each and everybody to think regarding their respective futures. With the help of recession the effected people would use various types of attractive & unusual tricks to save as well as regards every pinch of money which they earn. The beauty of economic recession could be seen with respect to the extra cash which is duly available with the population (Cultural Survival, 2010).

Thirdly, the crises i.e. recession help in the creation of a better decision maker. Economic recession would lead to solve the problems in a much effective as well as efficient manner. This would help to the affected population to think & do something about it. Procrastination will not get anybody anywhere & this is what is being saved from recession.

Fourthly, recession helps in order to appreciate with whatever you have. With an adverse affect of the economy has led to an increase in the power of the people to be satisfied with whatever they have. For example, there are people who always want everything to be on the top. Such as to drive a big car, have a spacious accommodation, etc. But now in such a situation it has been heard from the individuals that, they are lucky to have such type of facilities. Therefore, nobody shall force anyone to do a particular task which you do not like. This will not add on to the levels of success which might be attained. Practice all those things which make you feel comfortable, passionate with the amount of money you currently possess (Colander & David, 2008).

Lastly, recession leads to forceful change which would help to act beneficial along with the other benefits mentioned above. Change has been referred to as constant thing &recession helps to accelerate it. This has helped in order to be more adaptable with the current state of the economy (Binger & Hoffman, 1998).

Recession proof sectors:

TELECOM:

Telecom has been referred to as one of the recession proof sectors. This sector has managed to grow at a very high rate in the recent years. This sector has seen high levels of growth in the Indian as well as the Chinese market.

Specifically the Telecom Sector has seen high levels of growth in the last years with large number of subscribers all across the globe. In terms of growth the Telecom sector has outperformed the various other sectors as well. Despite of the size of the telecom market in the Asian Countries, the penetration of the mobile market is a little lower as compared to the developed countries. This segment within the telecom industry lays high levels of growth opportunity in the future years to come (Galbo, 2010).

HEALTHCARE:The healthcare sector refers to another sector which has been referred to as a recession proof sector as people do not get away from their share of medicines, drugs, medical expenses, general health & diseases at the time of recession.

Some of the renowned hospitals such as Apollo, TMH, Max Health, HCG along with the pharmaceutical chains such as Himalaya, Dabur, Ranbaxy, Pfizer, Zandu, etc are not only doing well in terms of turnover but also in terms of varied developments such as vaccines, medicines, drugs in the modern day diseases. Developments in terms of highly infectious diseases such as Cancer, Tumour, Tumour, etc has been on rise even during the recession times (Galbo, 2010).

FMCG:

The FMCG Sector caters to the perishable items such as soaps, detergents, confectionary items, battery, toffees, biscuits, shampoos, cosmetics, etc. The purchase of such items has not been affected during the recessionary times as well. Though the overall demand for such items decrease, but there is not a real impact on the entire demand of the same (Galbo, 2010).

HIGHER EDUCATION:

The last sector which has been regarded as a Recession Proof sector is the education sector. Even during the times of acute recession students used to seek higher r as well as professional courses in order to enhance their knowledge & skills in a particular subject. This would help the young blood to enhance their job prospects as well as upgrade the resume (Arnst, 2008).

It was see that in the year 2008 at the times of recession approximately 8 lakh students sat for the AIEEE Engineering exams. This number has been expected to rise to 10 lakhs in the years to come. It has been seen that, enrolment in the professional courses such as engineering, Management courses have been on a rise even during the recessionary times (Arnst, 2008).

Summary

Hence, it could be concluded by saying that recession in economics refers to a business cycle which leads to a slowdown within the economy. Some of the indicators which lead to recession are unemployment rate, rate of inflation, GDP, profits earned by the business houses, household income, investment spending, bankruptcies, capacity utilization, etc.

Consumer spending is certainly the foundation of many economies. The long boom of the mid to late 1990s was built on buoyant spending – especially in the developing countries, where service industries have long replaced manufacturing as the main economic motor. Policy-makers have queued up to urge consumers to get back to the shops. Recession will lead to high levels of negative as well as positive effects over the business organization (Ayers & Collinge, 2003).

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