What happens in a recession and its impact on the economy?

What happens in a recession and its impact on the economy?

What happens in a recession and its impact on the economy

 Last time there was a global recession, was in the late 2000s. The scale and timing of that Great Recession, as it is now known, varied from country to country. But worldwide, it was the worst financial crisis after the Great Depression. Now a decade passed, some economists are worried the next worldwide downturn maybe just around the corner.

What is a recession?

There is no specific definition of a recession; technically recession is a decline of Gross Domestic Product (GDP) for 2 consecutive quarters. This means the value of all the goods and services produced in a country went down for 2 quarters straight.

How to calculate recession?

The U.S. National Bureau of Economic Research, This department tracks the start and finish of each U.S. recession, says a recession can begin even before that. The department calculates and collects monthly data for 4 other areas in addition to GDP: manufacturing, employment, real income, employment, and retail. If these economic indicators decline, it is likely GDP will too. Now, a recession is not the same as stagnation that is simply a period of low or zero growth.

Between 1960 and 2007, there were 122 numbers of recessions in 21 advanced economies. This may sound like a lot, but those economies were really only in recession for around 10% of the time. Each and every recession is unique, but they have to share several characteristics. Recessions usually last about a year, and a country’s GDP typically falls around 2%, although in some severe cases that decline can hit by 5%. Imports Investments and industrial production normally drop and financial markets frequently face turbulence. All this can have a very negative impact on a country is population. Many people lose their jobs and if they can afford their mortgages, they lose their homes and house prices drop. They also have less money to spend on restaurants and shops. It means businesses make less money and leads bankruptcy. So is there any formula or method to identify a recession before it hits? Some economists emphasize the number of people working in the manufacturing sector. In the world of manufacturing, orders are often booked months in advance. When a business or company get fewer orders, they will decrease hiring new workers and potentially throw out some existing workers too. Other experts examine the govt bond market, to know how willing investors are to lend money to governments over an extended period of time. When investors are concerned the economy might be slowing down, they often sell their shares in public companies and instead loan their money to governments by buying bonds. That is because bonds are usually seen as a less risky investment. So those are the warning signs of a recession.

What happens in a recession and its impact on the economy

But what actually, causes recession?

A healthful economy has a large amount of money pouring through it. Entrepreneurs are pouring money into their business and hiring more employees. Consumers are spending money on their services and products. But if the producers and the consumers stop spending their money, so less money flows through the economy and which leads to slow growth. There are some other factors that can block that flow of money. One of those is high-interest rates. When rates are high, people get more money for putting their savings in a bank account, but they also end up having to shell out more to get a loan. This can encourage the consumers and the producers to save more and borrow less which is the main cause for their fall in spending. Consumer confidence is a way to measure people is a psychological approach to money. Economists track this closely. Low levels of consumer confidence mean people are worried about the economy and that can cause them once again to hold on to their money, rather than invest or spend it.

 For example a stock market crash is one of the most sure-fire ways to shake up consumer confidence, but inflation may be the biggest factor. Because of this, the prices of goods and services increase. If your paycheck isn’t growing with it that means you will have to cut off your expenditure and buy fewer things. When this situation arrives, Consumers and producers once again tend to reduce their spending and save more.

What happens in a recession and its impact on the economy

An economic slump that starts in a country can spread beyond its borders which creates a domino effect. Let us explore an example, the 1997 financial crisis in East and Southeast Asia. It began in Thailand when the value of the country is currency, the Thai Baht collapsed. Investors had lost confidence in the country, because of this lack of confidence contaminated the rest of the region. Travelers face strict limits on the currency they can take out of the country. Other Asian currencies like the Malaysian ringgit and Indonesian rupiah began to lose value too. Soon, investors around the world had become reluctant to lend money to any developing country.

 More recently, the trade war between the U.S. and China has also affected every part of the world. These two economic superpowers produce and sell about 40% of all global output, and economists worry about the knock-on effects from their continued conflict could create the next major international recession. Take Germany for instance. Its economy is largely built upon exports. It is a source to make money by building machinery and equipment and export it abroad like China. But if China expects less demand for its products from the U.S. because of the trade war, it is going to order less of that machinery from Germany to make them. Germany is the biggest economy in the Eurozone, which means if it goes into a recession, the rest of Europe will likely suffer too.

Some experts say that the financial crisis in 2008 ushered in a new era of deglobalization. That means nations and states are likely to less focus on international trade, and more focused on their domestic economic agendas. They say all this could lead to more frequent recessions. And because of that, these experts believe we should reconsider what constitutes economic success in developed countries. Total debt burdens will rise. Populations will fall, as will the productivity of our workers. And so it is unrealistic, they say, to think that growth rates can continue to rise in the way they did in the second half of the 20th century. They suggest an alternative approach is to focus on economic satisfaction and contentment, with a number like per capita income growth. This essentially measures how much money the average person makes. While the warning signs are there for another global recession, geopolitical tensions and deglobalization make it even more difficult to predict the future.

But one thing is for sure, we are living in a new age of uncertainty there will be a recession in 2020-21.

Thank u