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For the most prolonged period now, most of the world’s most notable economies like the US, Japan, and Europe, there has been witnessed massive unemployment levels, dwindling company profits, tumbling financial markets as well as a collapse in the real estate sector (Claessens & Kose, 2009). The global financial crisis and other economic crises have resulted in sharper consumption and investment activities decline. A recession is a pertinent reduction in the overall economic activities of a country that could be witnessed in a broader array of areas like production, employment, and interest rates (Claessens & Kose, 2009). The recession could go on for an unspecified amount of time, translating to an overall economic trounce. Economic recession is majorly a result of such indicators as employment, productivity, and income levels.
Reasons behind Economic Recessions
There are a good number of reasons for recessions. For instance, it could result from dramatic alterations in the overall prices of inputs used for producing goods and services (Claessens & Kose, 2009). A good example would be a pertinent increase in oil prices that would render energy expensive. As energy becomes expensive, a significant rise in the prices of goods and services would translate to a sharp drop in overall demand. A recession could result from a nation’s decision to decrease overall inflation by adopting extensive monetary and fiscal policies (Siegel & Wright, 2022). Intensive adoption of these policies could result in a reduction of demand for all commodities and services, which then result in a recession. Recessions could also be attributed to issues resulting from financial market instabilities (Claessens & Kose, 2009). For instance, intense increases in asset pricing and a speedy expansion of credit could translate to robust debt accumulation. As businesses and households face overextension and, therefore, experience issues with servicing their debt commitments, they would try to rectify this situation by decreasing investment and consumption. The reduction in these aspects would thereafter translate to a decline in overall economic activity, resulting in a recession.
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Another fundamental rationale behind recession is when nations with stringent export sectors experience a notable decline in demand for their goods and services (Claessens & Kose, 2009). Countries like Japan, Germany, and the US would likely face recessions whenever there is instability in their regional trading agreements. Since recession could translate to a broader number of issues, predicting its occurrence is a considerable challenge. It is, therefore, proper to continuously analyze and interpret a good number of economic variables like credit volume, asset pricing, and interest and unemployment rates of a given economy to ensure that they remain at par with stable standards across the globe or economic region. Any mishaps in these indicators should be treated with concern. The economic recession facing the US and Europe is directly linked to Russia’s war in Ukraine, which has resulted in a massive increment in energy and food prices. It could also be linked to the aftermath of the lockdowns witnessed during the COVID-19 pandemic.
Consequences of Recession To Individuals & Businesses
An economic recession significantly impacts both an individual and overall basis. At the individual level, a recession could result in a broader number of people losing their jobs, finding it harder to progress in their careers, and further decreasing household disposable income (BBC, 2022). An economic recession could result in higher-than-anticipated inflation rates, which could be witnessed in massive price increments for goods and services. For people already employed, an economic recession would not guarantee a stay at their jobs, and even when they do, they will struggle to bargain for future pay hikes successfully.
At the societal level, investments in stocks, bonds, and other securities would most likely lose money, declining the savings rate and distorting retirement plans (Terrones, Claessens & Kose, 2011). There is a higher chance that people who lose jobs during a recession would be exposed to home and property confiscation.
At the business level, economic recessions would translate to fewer sales, which cuts profits and cash flow capacity, thereby translating to a forced bankruptcy. Since recessions render more people unable to meet their bills, most lenders tend to tighten standards and policies for accessing all financing. People and businesses need a better credit score or even an enormous down payment before qualifying for a loan (Rodeck, 2022). This would primarily curtail most business operations and limit economic activities like entrepreneurship.
In sum, an economic recession is majorly a result of such indicators as employment, productivity, and income levels. At the individual level, a recession could result in a broader number of people losing their jobs, finding it harder to progress in their careers, and further decreasing household disposable income. An economic recession could result in higher-than-anticipated inflation rates, which could be witnessed in massive price increments for goods and services.
- BBC. (2022). what is a recession, and how could it affect me? https://www.bbc.com/news/business-52986863
- Claessens, S., & Kose, M. A. (2009). Back to basics: what is a recession? Finance & Development, 46(001).
- Rodeck, D. (2022). What is a recession? Forbes. https://www.forbes.com/advisor/investing/what-is-a-recession/
- Siegel, R& Wright, E. (2022). What causes a recession? Washington Post. https://www.washingtonpost.com/business/interactive/2022/what-causes-a-recession/
- Terrones, M. M., Claessens, M. S., & Kose, M. A. (2011). How do business and financial cycles interact? International Monetary Fund.