The Importance of Recession for an economy

Every economy goes through a vicious circle of expansion, peak, recession, or contraction and trough. Recessions are known for high unemployment, low economic growth, low investments, failed jobs, slow businesses, etc. Many unfavourable circumstances arise, affecting everyone, from business owners to small retailers. Nevertheless, all these negatives may have a silver lining. The fact is, it may even be necessary now and then. In this article, we will discuss how a recession impacts the economy positively.

Why is a Recession necessary?

The Austrians and some other financial schools regard recessions as healthy and necessary. They believe that attempts to avoid recessions can prove to have more negative effects. Here are some reasons why it is considered necessary. 

  • Readjust the economy 
  • Every economy, once in a while, needs a readjustment. A rising economy leads to booming businesses that will result in higher prices for goods and services, causing inflation. Due to this, the currency loses its value. Hence, an economic  system needs a readjustment to correct all these. A recession does that. 
  • Streamline processes
  • When businesses are flourishing, it is natural for them to expand their production and operations with advanced technologies and inventory. T hus, companies may incur more overhead than they need. Also, they may not focus on efficiency.
  • However, in a declining economy, companies will be forced to cut costs and streamline their operations. This also prevents the misapplication of investment. Companies will, thus, invest and focus more on their efficiency and productivity. 
  • Promotes savings
  • As the economy grows, inflation rises, which affects the currency value. So, people will spend more in the present rather than in the future. Thus, there are no savings left in case of emergencies. However, with job cuts, people will automatically resort to saving as much as possible.
  • Longevity of some businesses 
  • In the recession, many business operations come to a halt. However, as seen in the pandemic, necessities, like groceries and confectionaries, will never go out of business. One can even call them recession-proof.
  • Future Ready 
  • Recessions allow businesses to take a pause and reflect on their operations. By assessing the direction of their business growth, they can take the necessary steps for the same. In addition, with changing market trends, the step back will help businesses research what it takes to stay in business and beat their competition.

In a nutshell 

It is evident that recession does have its positive effects. It allows businesses to reorganize their investments and explore alternative sources of income. Investing in stocks, commodities, IPOs, and more can be one such opportunity. 

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