The Great Recession ended in the year 2009, but the gut-wrenching situation and the havoc created by it are, to date, engraved in everyone’s mind. A recession may last for a few months, but its after-effects stay on for much longer. After hearing the term “recession,” many questions might bundle up inside your mind; you might wonder as to what causes such a downfall in the economy or what consequences you will have to face. We have prepared the ultimate guide to help you get the answers you are looking for. Scroll down to learn more about the causes and consequences of a recession.
What Does a Recession Mean?
A recession typically means a fall down or decline in economic activity. It may be visible through industrial production, employment, and other factors. Business and consumer activity slow down simultaneously during a recession, resulting in negative growth measures such as Gross Domestic Product (GDP) and other statistics.
The National Bureau of Economic Research tracks the changes in business cycles and other factors to determine whether the economy is facing a recession or not.
What Causes a Recession?
A recession is generally caused by a combination of factors that result in a significant decline in economic activity over a sustained period. The causes of a recession are three-fold. It includes real economic, psychological, and financial factors. Let’s take a look at a few causes of the recession.
- A decrease in consumer spending: Consumer spending makes up a significant portion of the economy. A drop in consumer confidence or a decrease in disposable income can lead to decreased spending. This can cause businesses to cut back on production and employment, leading to a recession.
- A drop in investment: Investment is another critical component of the economy, and a drop in investment can lead to a decline in economic activity. This can occur due to factors such as market uncertainty or government policy changes.
- Global economic factors: A recession can be caused by factors outside of a country’s control, such as a global economic slowdown or financial crisis. Economic interdependence between countries means that events in one part of the world can have far-reaching effects on other country’s economies.
- Natural disasters or other unforeseen events: Natural disasters, pandemics, or other unforeseen events can also trigger a recession by disrupting supply chains, causing business closures, and reducing consumer confidence.
- Technological advancement: With the advent of new technologies like robots and artificial intelligence, employment is being replaced. This also acts as a cause of a potential recession.
Recession: The Scarring Consequences
After evaluating the causes of a recession, it is necessary to be aware of how it might impact the economy and you as an individual. Listed below are a few consequences of the recession.
- Rise in unemployment: During a recession, businesses may cut back on production, reducing the workforce. This can result in higher unemployment rates and individuals struggling to find employment.
- A decline in housing prices: Housing prices may decline during a recession, leading to homeowners having negative equity in their homes. This can also lead to a decrease in consumer spending as homeowners may reduce their spending due to the decline in their home’s value.
- Reduction in government revenue: During a recession, government revenue may decline as a result of lower tax revenue and increased spending on social welfare programs. This can lead to budget deficits and potentially require austerity measures to balance the budget.
- Increase in poverty and inequality: The economic impacts of a recession can be particularly harsh on those who are already struggling economically, leading to an increase in poverty and inequality.
- Tightening of credit: Banks and other lenders may become more cautious about lending money during a recession, making it harder for individuals and businesses to access credit. This can make it difficult for businesses to invest in new projects or hire new workers.
The recession has had a significant impact on businesses, workers, and even the government. This downfall in economic activity results in a decrease in tax and non-tax revenues. This is due to the fact that the financial situation of the economy sees a depreciation and fall in the prices of property.
Furthermore, many companies might need to cut their operational costs and shut down their business operations. As a result of which, the lives of the workers are hampered, causing social instability.
Recessions do have a long-lasting impact, and it is imperative that you are aware of the impacts and signs of a recession. It helps you stay prepared and act efficiently during times of crisis. You can also opt for passive income options that might prove to be helpful in the long run as a backup. If you wish to expand your horizon and looking for diversification of your investment portfolio apart from equity & mutual fund, you can head over to the Bhive Alts website.