There comes sometimes when the world’s economy or particularly a country’s economy starts falling. The graph of economical growth grows negatively. And this is a recession, In this article, we are going to talk about recession and how it happens and what are the factors. more topics on economics
What is Recession?
A recession is a time of economic downturn, characterized by a rise in unemployment, stock market downturn and housing market decline. The government can announce an official recession if the net amount of goods and services, i.e. the GDP, falls for more than 6 months. In industrial growth, employment, real income, and wholesale trade, it is evident.
The National Bureau of Economic Research (NBER), which officially reports recessions in the United States, says the two consecutive quarters of a downturn in real GDP are no longer how it is characterized. The NBER describes a recession as a substantial downturn in economic activity distributed through the economy, lasting more than a few months, usually observable in real GDP, real income, wages, industrial output, and widescale-retail sales.
The recession is a big economic downturn over more than a few months, typically seen in real GDP, real wages, employment, manufacturing production and wholesale-retail sales. A recession starts shortly after the economy hits its peak and stops until the economy reaches its peak. The economy is expanding between the recession and the top. Expansion is the natural economic state, whereas in a recession economy starts falling. In recent decades most recessions are brief and limited.
What are the factors of Recession?
- Unemployment: The first and foremost reason for a recession is unemployment. During this time unemployment starts rising due to economical downfall. Many people start losing their jobs and new job creation practically comes to a standstill. Unemployment rises above 10% and even sometimes reaches 25%.
- Share Market: Share market or stock market starts crashing due to slow economic growth. Stockholders or shareholders start selling their shares out of fear that in the near future their stock may be of no use or they would lose money. And this panic selling leads to the downfall or crashing of stock markets in a country or across the world.
- Real Estate or Housing: Real estate is another key factor in a recession. As economic slowdown hits the people they stop purchasing real estates and therefore housing comes to a halt. And it greatly affects the economy as the share market has a great tie with real estate and the flow of money stops.
- Gross Domestic Product (GDP): As unemployment rises, stock market crashes then there comes the big blow in the form of Gross Domestic Product (GDP) which enters a negative growth zone. And thus officially a recession begins.
- Interest Rates: Higher interest rates or higher inflation becomes normal. High interest rates restrict the amount of money available for borrowing, which may signal a recession’s start. Inflation refers to an increase in the cost of the daily products and services we buy, such as food, petrol, and household goods.
- Less spending of money: Consumers lose faith as the actual salaries begin to decline. Since they know that their income does not keep up with inflation, they avoid spending as much as they do, which leads to a slowdown overall.
What is going to happen during the recession?
- At first, the Gross Domestic Product (GDP) starts falling.
- Companies or corporates start losing their money which in turn begins the cutting of jobs and which in turn raises the unemployment rate.
- Seeing others losing their jobs people starts fearing that they would also lose their job and that’s why they start less spending money which in turn affects the whole economy.
- Government debt starts rising as it seeks to stabilize the economy.
- Reserve Banks cut interest rates in an attempt to boost the economy.
- The share market starts crashing and loses its value.