Recession

What is recession?

A recession is a significant decline in economic activity across an economy that lasts for an extended period, typically recognized as two consecutive quarters of negative growth in a country's gross domestic product (GDP). During a recession, various economic indicators, such as employment, investment, consumer spending, and industrial production, tend to decline, reflecting a broad-based downturn in economic performance.

Characteristics of a Recession

1. Decreased GDP: A key marker of a recession is a sustained reduction in GDP, indicating a contraction in the overall economic output.
2. Rising Unemployment: As businesses experience lower demand for goods and services, they often reduce their workforce, leading to higher unemployment rates.
3. Reduced Consumer Spending: Economic uncertainty and job losses typically result in decreased consumer confidence and spending, further slowing down economic activity.
4. Lower Investment: Businesses cut back on capital expenditures and expansion plans due to uncertain economic conditions and reduced revenue expectations.
5. Falling Industrial Production: Manufacturing and production activities decline as demand for goods decreases.
6. Deflation or Stagnant Prices: Prices for goods and services may stagnate or fall due to reduced demand, though in some cases, prices can increase if supply chains are disrupted.

Causes of a Recession

1. Economic Shocks: Sudden, unexpected events such as financial crises, natural disasters, or geopolitical tensions can trigger a recession.
2. High Inflation: Rapid increases in prices can reduce consumer purchasing power and lead to a slowdown in economic activity.
3. High Interest Rates: Central banks may raise interest rates to combat inflation, but higher borrowing costs can dampen investment and spending, potentially leading to a recession.
4. Decreased Consumer Confidence: When consumers and businesses lose confidence in the economy, they tend to cut back on spending and investment, contributing to economic decline.
5. Declining Exports: A significant drop in exports due to global economic conditions or trade barriers can negatively impact domestic industries and overall economic growth.

Impacts of a Recession

1. Job Losses: Unemployment rises as companies reduce their workforce to cut costs.
2. Business Failures: Financially weak businesses may close down due to decreased revenues and profits.
3. Stock Market Decline: Investor confidence typically wanes, leading to falling stock prices and reduced market valuations.
4. Lower Household Income: Wages and salaries may stagnate or decline, reducing disposable income and living standards.
5. Government Intervention: Governments often implement fiscal and monetary policies, such as stimulus packages or interest rate cuts, to mitigate the effects of a recession and stimulate economic recovery.