Recession – Its causes and effects
Everyone is talking about recession in the present US market. We cling to newspapers, televisions, news channels, and financial reports to find out what’s going to happen next in the recession period. Technically speaking, when a recession occurs, there is a decline in the GDP of a country for two consecutive quarters. This has a gruesome effect in real income, employment, industrial production, and wholesale-retail sales in the economy.
As per the National Bureau of Economic Research, there have been ten recessions since 1945. There are various factors that flush an economy into the weird state of recession but inflation is the main factor which contributes more towards the situation. Inflation is the condition in an economy when the prices of goods and services rise immensely over a certain period of time. The higher the rate of inflation, the smaller the percentage of goods and services can be purchased with the same amount of money. It may be because of the increased production costs, higher economy costs and national debt. When the prices of goods reach to the higher stage, people tend to cut down their spending habits and restrict themselves towards their necessities only and save as much as possible during this period. As a result, GDP declines when people cut down their expenditures in order to cut down costs. . This makes the companies to cut their costs as well and they chuck out workers which brings unemployment.
- There are certain factors that push an economy towards recession…
1) Credit crunch, which means shortage of finance.
2) Falling house prices. This is related to shortage of mortgages and credit crunch.
3) Cost push inflation squeezing incomes and reducing disposable income
4) Collapse in confidence of finance sector causing lower confidence amongst real economy.
Recession has a serious impact on the global economy. One of the major effects of recession is inflation. Recession comes into effect with inflation while on the other hand, it is one of the after effects of recession. Commodities will reach to their highest prices and people will cut down their costs. Hence, inflation becomes the major effect left out by recession. Another strong effect of recession is lower income. As people cut down their costs, they buy less items which reduces their income and as a result, fewer profits or no profits. Mortgage rates also go up during the recession period. Lenders will increase the mortgage rates so that they can cover some of the losses experienced during the recession period. Employment opportunities are also one of the major targets when the economy is burning under recession. In order to reduce the costs, companies cut down the employment opportunities thereby creating more and more unemployment in the economic market. When an economy enters into recession, companies experience very less or marginal profits during this period. The reason is that the tendency for price wars to develop in a recession. Firms get encouraged to cut down the prices due to the low sales and falling sales leads to lower revenue.