Recession and Its Impact

Understanding the recession and its impact

In the last few years, the word recession has switched from being a mere textbook concept to the most painfully dreaded word today. In terms of pure economics, recession can be defined as a period of sizeable decline in economic activity. A widespread used measure of economic activity or production is GDP (gross domestic product) of an economy. The thumb rule typically used to define recession is a decline in GDP across consecutive two quarters in a financial year. The other macroeconomic indicators too follow a typical pattern. There is a decline not just in production but also industrial production, household incomes, investment spending, wholesale retail trade, business profits and a rise in unemployment rates.

From an economic point of view, a financial downturn is a part of a business cycle bound to occur after a period of boom. However, it has widespread economy wide negative consequences and hence tends to generate an atmosphere of fear among consumers & businesses alike. With a general slowdown in the economy, businesses cut back on production and start lowering their inventory build-up. The shrinking of production capacity translates into job cuts and decline in wage levels. There is a widespread rise in unemployment rates across sectors and industries. Firms also decrease their investment spending in order to manage expenses.

The recession has a deep and resounding impact on the stock markets as well. The business profitability takes a dip, dividends are low or negligible and the overall investor confidence plummets. These factors cause a fall in the share prices and an overall collapse of the equity markets. With falling employment rates and low confidence in the economy, consumers tend to cut back on their spending and save money. As the demand for products lowers and firms indulge in price wars with competitors, there is a fall in the inflation level during a period of recession. Also, interest rates follow a downward trend. It is believed that the sentiments of fear and low confidence in the economy can further aggravate the economic circumstances in such times.

In these times, the government is expected to be the savior and follow expansionary macro-economic policies so as to bring the economy back on track. The government has the option of lowering interest rate levels and increasing the money supply to stimulate investment levels, as propagated by the monetarists. According to the Keynesian school of thought, the government should adopt an expansionary fiscal policy i.e., lower the tax rates and increase government spending to boost the aggregate demand. But also related to recession are lower tax revenues for the government since the income tax and corporation tax collections are falling. Therefore, government faces a double-edged sword of declining revenues and mounting expenditures and must resort to external borrowing. This borrowing implies higher taxation rates and higher interest payments in the future years.

While these may be the general characteristics of a recessionary period, the causes behind the occurrence of a recession vary. It could stem from over production, poor consumption levels, rising prices or a financial asset price bubble as witnessed in the last three years.

Author Bio:-
Sarah Chatherine has many hobbies and interests. As well being a keen blogger and article writer for many sites, she has also recently created a site Avoid Debt.The site is constantly being updated and has articles share portfolio to read.