Causes And Effects Of Recession
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A recession refers to a period of negative economic growth that according to economic research experts lasts for two consecutive quarters. It presents through a reduction in the gross domestic product, income, increased unemployment and low production and sales. Many factors underwrite the occurrence of a recession and resulting in various effects.
The primary precipitator of recession is inflation. Inflation is the overall upsurge of prices of goods and services in a short period due to factors such as high rates of production, heightened energy costs, and the national debt. Inflation consequences in recession as when it rises, the quantity of goods and services that people can purchase at similar prices as before reduces. Thus, people cut back on their spending on goods and leisure activities and in turn save up their income. Consequently, businesses experience a reduction of revenue, which forces them to reduce the workforce to lessen their operation costs, thereby resulting in a recession.
High-interest rates precipitate a recession. An increase in interest rates is problematic as it gives people the incentive to save most of their income, which reduces their spending and discourages borrowing as loan payment attracts unreasonable interests. Hence, by more people letting their money accumulate in banks, fewer people buy products, ensuing is a decline in company sales. Subsequently, the face a reduction in profits that precipitates the firing of employees, further reducing spending power. Accordingly, a decrease in the amount of money circulating in a country and the availability of cash to finance various investments occur, causing a downward trend for economic growth.
The customers’ loss of confidence in an economy can trigger the collapse of markets creating a recession. Customers are the major driving force of an economy through their investments and continued spending. However, if customers feel that an economy is bad, they become less probable to spend their money on the said economy. Additionally, they can withdraw their capital investments from various business causing a bear market that subsequently results in a market crash creating a recession.
Due to the above factors, a recession ensues consequencing in different effects. First, is the increase in the rates of unemployment. When the business market experiences a reduction in the purchase of their products and profits, they adopt various measures aimed at promoting their survival in the market and limiting expenses. Hence, reducing the workforce is a primary strategy utilized causing the massive loss of jobs particularly among the low-skilled workers.
Second, the occurrence of recession affects businesses negatively. It does so by initially dropping their yields and productivity accordingly, pushing weaker corporates out of business. Similarly, during recessions, stronger companies take advantage of the economic turmoil and struggling businesses to take over them or institute mergers causing the loss of jobs. As a result, the competitive environment in business becomes ruined causing artificial and real scarcity of products that drive prices high.
Third, society suffers immensely. Due to a recession, scores of people become jobless, which makes it difficult for them to provide vital necessities for their families. Consequently, these individuals turn to the government for support through various social services. However, since the government is also grappling with reduced revenue, it becomes less likely to meet these needs such as medical services, food, and education. Moreover, plans for the future such as attending college, buying homes, and starting businesses become impossible to meet. Thus, these deficiencies result in a helpless and miserable society.
A recession is a weighty aspect in a country’s economy whose cause and effects results in detrimental effects. Thus, a government should strive to develop measures to curb its occurrence, depending on its root, thereby, cautioning the economy and the people.
