RECESSION IN WORLD ECONOMY- AN INDICATOR TO TAKE LESSONS

RECESSION IN WORLD ECONOMY- AN INDICATOR TO TAKE LESSONS


Nowadays a lot of hue & cry is there about the slow down in economy in various countries. To be frank, I have not understood all this. The slow down in economy is primarily of two types- one is known as depression and another is known as recession. The depression do have a longer time effect as compared to recession for its continuance as well as recovery. The depression has to do with the problems in economy with in infrastructural domain while recession is concerned with market driven economy linked with share market. The share market experts treat recession as a healthy sign for a phase of one to two year after a bullish phase of three to five years. Then the natural question is – If it is so then why so much hue & cry for a normal phenomena which is bound to happen?

To understand this, you may have to first know the forces in play in today’s world which drive a economy. The world economy today is not in that phase which it used to be two or three decades ago. To understand this, take a few examples. The Ford motors used to manufacture cars right from the stage of manufacturing steels to every components of car to their assembling till marketing. Now the Maruti Suzuki gives franchise to various concerns for manufacturing small parts, establishes ancillary units for certain components and remains limited to assembly lines and marketing network. The Boeing company though retains the proprietary rights but a Boeing airliner is assembled from major inputs from partners in seven countries.

Take another example of Nike shoes which is produced by assembling components from independent suppliers from nine countries under Nikes coordination in Asian factories. Nike is “merely” a designer, a coordinator of a global supply chain encompassing 800,000 workers worldwide. Now the pre-requisites is to possess the core competence with proprietary rights and having partners occupying other parts of value chain. Therefore today Nike specialises in designing & marketing only and resorts to outsourcing the production of shoes to other partners.

Dossany & Kenney after concluding their study of US economy while studying the recession in the economy have opined that US needs to move up the workers in its chain the economic ladder to make them to work on creative tasks like design & marketing. Today the industry functions on the fundamentals of co-operations and networking. The outsourcing does not remain limited to a particular areana in a chain of productuion line but it brings along with it the complete gamut of complicacy linking to various subchains , minor production lines, marketing and designing network which are linked to each other like a web.

The outsourcing has resulted into jobs going to foreign countries as assessed for the US economy and the blue collars jobs are being replaced by the jobs demanding specialized skills like designing etc. Today most of the international giant corporations do have their design hub in developed countries or US but the manufacturing is carried out in countries like China , Mexico, Bangladesh etc due to availability of cheap human skilled or semi-skilled labour needed for the job. The internet has played a very significant role in this scenario where a designer is available online to do a similar job at the tenth of the cost with same efficiency and is able to send the designs very quickly online. The leading economies while formulating the blue print of diversification & decentralization of production line had decided to retain the designing and marketing expertise had failed to appreciate the potential of internet web which may crash their economy by snatching the specialized white collar jobs and paralyzing their economy.

Today the fear psychosis is playing in the mind of developed countries to loose the future jobs of designing and the core competence to the internet generated market if it is not checked in time for the reason that the production line has already been outsourced to developing & under developed countries. It would not help them even if they restore back the production line to the developed countries since it would not be commercially viable due to reduced cost of production on account of cheap labour available in second or third world countries to do the manual jobs. Though the immigration policy of developed countries have been able so far in keeping job seekers from developing world out of developed world but how would they check the invasion of internet snatching their white collar jobs.

The above deliberation highlights few salient features of modern day economy-

a) The economy of various countries are linked to each other inseparably today and are susceptible to the inter transfer of good or bad happenings from one economy to another.

b) The outsourcing has increased the role of developing & under developed economies in today’s world.

c) The developed countries are going through a fear psychosis that their specialized and white collar jobs would be lost to the third world countries. These sentiments are high in the share markets and uncertainty prevails in the mind of investors.

Now the need is to understand the role of share market in the world economy. Today every company raises money through public participation by issue of shares . It is needless to say that the public sentiments do affect the share market. The rise or fall of price of a share is primarily governed by the demand and supply equation of share purchase or sale which is linked to prevailing sentiments in the market. The role of media is also important because they have the capability to spread the news which subsequently shapes the public opinion. The cost of shares in the market governs the market capital of a company. Though there are yardsticks to assess the book value of a share but P/E component ( price of share to earning per share) is totally dependent on the demand and supply of shares rather than the demand & supply of goods being manufactured by the company. That’s why we see that a particular share trades at 10 or 15 times of its valuation regardless of the actual profit. The cost of the production has very little role in determining the trading price of a share which ultimately governs the overall valuation of share market in a given country.

Hence it is clear that performance of a company is always based on the performance of shares in the market though it is not the actual representative of the assets of company. The growth of economy as reckoned in public sentiments today is more based on the market driven factors rather than the other financial yardsticks. When the market was in the bullish phase and market sentiments were high on positive notes then no one had bothered that the production , demand of products has not been raised as many times as the valuation of company and cost of shares has arisen. Then the GDP of country was also rising with ever high growth rate in economy. But when the market has entered in bearish phase and the market sentiments are negative , the share prices have crashed in all the countries so do the various countries economies then every body appears to make noises about it. Does this downfall in economy real? I can answer in short that the downfall is as much real as the rise was.

No one would dispute that the market sentiments do affect the production of industries because if market sentiments are hurt then the demand of product decreases. But does the demand really decrease in the same proportion the share has reduced in its valuation? The answer is no, never. We have to understand that the demand in shares depends upon the number of times a share is sold & purchased which means that if somebody rotates this cycle ten times then it would be counted as demand of ten units in share market while in reality the demand of product in market would be that much unit which is actually sold after manufacture. This applies to service sector also like IT industry, Consultancy etc but to the limited extent because here the human skills is concerned and no materialistic evaluation can be carried out as in the case of FMCG, OIL& GAS sector etc. It is clear that in share market the virtual demand is generated which results into hyped share prices and therefore any valuation of worth of a company or soundness of economy based on share market prices is bound to generate a virtual money, virtual assets as well as virtual growth which is bound to be different from the real growth, factors. This virtual money is like a bubble which has volume but not the weight so it is bound to be deflated.

The role of traders, lending rate prevalent in a country, interest rates payable on loan and bank deposits, role of FII, role of international mutual & hedge funds do also contribute to drive the prices of shares in market which has very little to do with the valuation based on the actual demand/supply of product and cost of production. The component of black money in circulation in a given country and avenues available for its investments do also have a role to play in the valuation of trading prices of shares. But all these factors do not contribute towards actual growth of economy. It is also now being realized that though the outsourcing of blue collar jobs by developed countries to third world countries reduces the cost of manufacturing, raises the profit component per share but it does not creates jobs. This a important factor to indicate that in today’s world economy the employment is not generated though the cost and valuation of economy keeps on rising to the great extent, if market is in bullish phase.

The testimony to this virtual phenomena is that the second & third world economies are least affected by the present meltdown and the economies of the first world are worst affected. Whosoever had gained more has lost more too in the downward trend of market. The market valuation of worth in trading of shares in every country has been down from half to one fifth of the peak valuation. It means that money has been lost in every country and in total in this world. Then the first concern is that where from that much money was generated when market was at peak and then afterwards where has it gone when market is plummeted. Does it mean that value or amount of money lost in capital has been taken away by some ALIENS out of this world? Definitely not. Then what is the fun all about this?

I can conclude that money has gone to the same place where from it had come earlier which means it was virtual money with virtual gain and the loss is also virtual. But such phenomena do affect adversely the world economy because a common investor when calculates his prices of shares from the peak valuation ,he thinks that the difference in valuation has been his loss interalia this phenomena shakes the confidence of a common investor and the markets goes into the bearish phase due to the negative sentiments and loss of confidence in the market/economy. The U S market controls approximately 25 percent of world GDP therefore any rise or fall in US economy do affect other countries. In today’s world of media & internet connectivity vis- a -vis dependence of various countries on US economy due to outsourcing, it is seen that any negative sentiments in public in US do influence other economies with cascading effects. Therefore the rise and fall are very steep and linked to US economy. Presently the US economy is passing through very bad phase of recession generated due to its policies of outsourcing to third world countries , investment in the law and order situation of other countries, diplomatic investments in certain countries and failure to sustain the desired economic growth in their own country. Their inability to fight the increasing unemployment accentuated due to loss of white collar jobs of specialized skills and inability to retain effectively the core competence of the value chain being lost to the other country due to internet invasion has further worsened the public sentiments in US.

The restoration of US economy and the positive sentiments of US people would again pull their economy out of recession and may indirectly contribute towards the positive sentiments of people of other countries in the market. This may again result into the cascading effect of generating confidence in investors rescuing the world market and putting it again on bullish phase and growth. Then slowly the loss of money in the world economies will start recovering and probably higher peak then the previous one would be achieved by the market but this is the time to take lessons, take remedial measures and be aware of the pitfalls of share market driven world economy. Untill this happens, world economies and world market would remain in the melted down state with valuation of market and shares in the devalued form.