Expanding businesses, technological advances, and high employment are all characteristics of a growing economy. But what do shortages in production, high import bills, slow exports, reduction in foreign reserves, gold stocks, and a high unemployment rate indicate?
All these indicate a negative Gross Domestic Product(GDP). The consistent decrease in GDP and a reduction in employment and manufacturing activities constitutes a recession. So far, there have been six global recessions.
In this article, we will discuss the meaning of recession and how recession impacts the economy in detail.
Recession: What is It?
Every economy has a business cycle. First, the economic system starts to accelerate. Then, the employment rates increase, businesses expand, and the profits reach their peak. Companies start taking on more debt to support expansion. It leads to contracting profit margins, increasing prices of goods and services, thereby raising inflation.
Finally, the unemployment rates go up, productions halt, and the economy goes down. This last stage of a declining economy is known as the Recession. Usually, the economy remains in this period for a couple of months before it bounces back to recovery and acceleration. Thus, we can call it a vicious circle.
However, it does not apply to all businesses. Some businesses like groceries or necessities are recession-proof. As seen in the pandemic, their profits increased multifold during this time.
What are the Causes of a Recession?
Here are the four E’s that are the major reasons behind recessions in an economy :
- Excessive inflation
It refers to an increase in the price of goods and services, which causes people’s purchasing power to decrease. Therefore, there must be a simultaneous increase in wages to compensate for this. However, if they remain inconsistent, then economies are vulnerable to recessions.
- Excessive deflation
You may conclude that if inflation is the problem, then deflation should be the solution. However, excess of anything is not good. Deflation represents a weakening economy, reduction in prices, or closure of production. Thus, people may lose their jobs, and their consumption will decrease. It will eventually lead to an economic recession.
- Economic shocks
COVID-19 was a health and economic shock that shook up the whole world. No one anticipated it. All industries came to standby. Thus, when such unpredictable phenomena happen, recessions are bound to happen.
- Excess debt
The collapse of the housing market, and the failure of financial institutions, were the key factors leading to the Great Recession of 2008. Unregulated lending and excessive borrowing contributed to the crisis. So, excess debt also leads to recession.
In a Nutshell
A recession is something that cannot be avoided altogether. However, you can prepare for it in advance. One way to prepare for it is to diversify your investments with the help of experts.
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