Recession or Depression?


A recession is defined to be a period of two quarters of negative GDP growth. By definition is a national or world event and statistical aberrations or one-time events can’t create it, as for a recession to occur the real economy must decline.

Are we in a recession or depression?
While economists can’t even agree on a definition, the simple answer is no, not yet.

A replay of the Great Depression from the 1930 looks far-fetched, thanks in part to the many measures in place, including: bank deposits guarantees  and provisions of sufficient liquidity to the financial system, indicating a certain willingness on the part of the authorities to print money. However, this could be the beginning of a long-lasting recession.

A recession shades into a depression when it stretches out for 36 months. By comparison, the Great Depression lasted from 1930 to early 1940, just before the U.S. entered World War II. Two other depth readings when it comes to depression: a large drop in economic output – some put it at a 10% GDP drop over a year and a rise in unemployment to more than 11%.  As reports  about job losses emerge in the local press on daily basis and the country’s population is relatively small in comparison to the Western economies, it is very much likely the unemployment rate to have reached over 10% during the past 6 months. However, the U.A.E. economy is expected to grow about 3 per cent this year, with national GDP growth estimated to be between 2.5 per cent and 3 per cent. For Dubai is expected to be slightly less than that, according the Gulf News.

The job losses are the key driver in the feedback loop characteristic of economic cycles. People out of work spend less, sales decline and companies cut payrolls, allowances and bonuses even further.

Another cause for worry: the billions erased from the property balance sheets by the twin plunges in the stock and real estate markets over the last six months. Feeling poorer and less secure about  the future, people spend less and save more. Consumer spending, big percentage of economic activity, droops and price reductions or rate cuts in any stimulus bill will prompt most  residents to stash the money away or pay down their debts on cars, credit cards and home mortgages, rather than spend their way out of the recession.

A potential threat to recovery are the smaller trade and social conflicts. In severe downturns the temptation to throw up barriers is almost irresistible; protect domestic industries by raising the cost of imported goods and services,  or restrict  the opportubities for foreigners. Both measures are regarded negtively.


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