Updated Jan 29, 2022

What is  Recession?

What is  Recession?

Every country goes through periods of growth and decline in its economy. It is rare for any country to maintain positive growth without any setbacks. A recession is a period of economic decline recognizable by the following GDP. It is a time marked by unemployment, low salaries, and a loss in living standards. Most countries in the world have experienced recession at some point.

The decline in the economy for two consecutive quarters indicates a recession. However, the recession begins well before the reports of the two quarters come out. It requires time to determine whether the country has truly gone into a recession. Recession often does not last for a long time but leaves behind a significant impact. Recession affects the following areas in an economy:

1. Real income

Real income decreases during recession periods as companies offer low salaries to employees. In turn, it decreases the standard of living for everyone.

1. Employment

Employment opportunities shrink during the recession as industries close doors. Employment and real income are the factors that indicate the health of an economy.

1. Manufacturing

Because of the shrinking market, manufacturing activity decreases during the recession. Lack of manufacturing leads to an increase in prices, causing an imbalance in the economy.

Recession warning signs

The recession begins in an economy before anyone knows about it. Usually, a quarter of negative growth takes place, followed by positive growth for the few quarters. A recession period is short, lasting around 18 months. It leaves long-lasting effects on the economy.

Leading economic sectors such as manufacturing indicate an impending recession in the economy. Manufacturing companies receive bulk orders a long time before anyone needs them. When companies stop receiving them or the number of orders decreases, it causes a decline in manufacturing jobs. When manufacturers stop hiring new people, other economic sectors also suffer.

A decline in customer demand causes slow growth or negative growth. Eventually, sales go down followed by the number of jobs in that sector. Businesses stop expanding, indicating that recession is underway in the economy.

What causes recession?

1. Real factors

Changes in external economic policies and structural shifts can cause a recession in an economy. For example, automating some jobs can transform the industry. However, it can also cause unemployment due to a large pool of unskilled labour.

1. Nominal causes

The over-expansion of credits during expansion periods also triggers a recession. Insufficient money supply during a period of slow down can send an economy into recession.

1. Psychological causes

The over-exposure to risk capital during a period of expansion can trigger a recession in an economy. Sometimes, there is a lack of investment due to widespread market pessimism in an economy.

How does recession impact an economy?

Unemployment is one of the leading effects of the recession. During the recession, companies experience frequent and massive layoffs. Such layoffs are often unpredictable and impact the lives of people negatively. The low-skilled labor market suffers the most during the reception as there are no companies to hire unskilled labor.

A decline in output and increasing business closures are other effects of the recession. The output drop continues until weak companies get thrown out of the market, after which the surviving firms pick up the output pace.

With companies shutting their doors, more people face unemployment. Because of the rising unemployment, the demand for government-funded schemes increases during the recession. However, governments experience a drop in revenues during the recession. It makes it hard to create new policies for the public, which causes the economy to collapse.

Tips for surviving the recession

Recessions are a part of the economy for most countries. A few tips can help personal survival during a period of recession.

1. Emergency funds

Always keep an emergency fund ready to deal with sudden diseases, layoffs, and other incidents. Preparing such forms can keep you afloat during the time of the session.

1. Paying debts

Paying off your debts while you have the ability can reduce a lot of stress during times of recession.

1. Frugal lifestyle

The best way to reduce costs is by adopting a frugal lifestyle.

1. Diversified income

Unemployment is a common effect of recession. Expanding your skillset and making yourself suitable for employment across different fields can ensure that you find jobs, even during the recession.

The best way to deal with recession is by seeking professional help. Financial experts who understand the nature of the economy can help you survive a recession despite unemployment.