What defines a Recession in the economy?
A recession in the economy is resultant of many aspects. Which has numerous effects on over-all functioning of the economy and day-to-day life of common man. It modifies running of almost every business, effects employment ruins stock market and calls for immediate policy measures by the administration.
Technically, when two consecutive quarters post negative growth, it indicates a recession in the economy.
In simple words, recession comes when businesses see downtrend and the downtrend appears when spending comes down. It starts with less growth and starts declining towards negative.
Popular causes of a recession
- Reduced spending power
- High inflation rate
- High lending interest rate
- Lesser consumer confidence
The change in spending pattern is influenced by various factors depending on the industry you are in. It can be caused by the public spend, investment by foreign players or it can get triggered by government spend even. The emergency situations like, natural calamity, war, an act of terror, a huge fraud resulting loss to public etc are also activates such cycle. e.g. an unfortunate event of massive earthquake triggers downtrend to many businesses but it also activates spent from various agencies for recovering and hence demand of many object/service goes up after a shorter period.
Influence of Recession
The very first indication of a recession in the economy is that when the opportunity of doing business comes down. A feeling called recession runs down through the psychology of organizations to the human beings associated. Popularly it is known that during a recession, a vicious circle of no demand no investment operates. Organizations’ start becoming unreceptive to new projects, ongoing hiring process to start with, they take a stronger decision to the partial shutdown, manpower cut when the recession deepens. This affects the life of the employees and other business associates. In turn, employees tighten their personal spending and halt planned purchase. In the worst case, the terminated employees may start defaulting loans repayments. The entire process paints a gloomy picture of the entire economy.
The above process initiates lowering demand of all consumables and sometimes lowers the inflation to the extent of deflation. In the initial days, deflation looks good, but slowly with slowing demand and fall of price, companies are forced to reduce / cut production. This leads to severe unemployment throughout the chain or network.
Risk and reward of a business is like two sides of a coin for any business activity. It is mainly dependent on many factors which can be tuned or handled by the business house / owner. But there are factors in every business which is not controllable by a single entity. Every business has its own cyclical nature. Besides your own effort to grow business, it is the overall business cycle which goes through ups and down depending upon various uncontrollable factors. The trend of the cycle (maybe upward or downward) is mostly triggered by demand-supply situation. When a financial crisis is driven by a monetary condition or an economic bubble it slips into recession. The swing of the trend can also depend on the macro-economic policies by the regulator or the government.
The relation between Gross Domestic Product (GDP) and Recession
As stated above, technically an economic recession occurs because of as a decline in the gross domestic product (GDP) for two or more quarters consecutively. Basically, the Gross Domestic Product (GDP) is the measure of the value of economic activity within a country. It is the market value of all goods and services produced in the country within a given timeframe. It normally does not take resale of goods into account e.g. sale of used automobiles. Again, in other words, Recession is lowered demand because of a lowered confidence level of the common man as a whole. This can be wither because of loss of jobs or fear of not performing well in the capacity of a business person.
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Measures to be taken for recession
Being prepared:
Make sure that you always have sufficient fund to survive a normal lifestyle for 6 months at least. Specific saving plan to deal with recession (any point of time) should be in everybody’s portfolio.
Making timely payment of insurance premiums. Life, medical auto insurances are almost compulsory in today’s life. One has to make sure that they pay and plan payment all premiums properly.
Living with a budget. Every person who is financially organized has a budget to control / regulate their spend behaviour. It does not necessarily mean cutting down spend but to know what and where you spend so that analysis can be done whenever required.
Pay your debts in time without fail.
Long term investing in the stock market.
Importantly, keep yourself informed. Read, watch and browse the important updates to keep up with the current affair.
Expected steps from the government
To check recession in the economy, Governemnt should draw and rollout infrastructure development plan. This step quickly inducts the flow of money in the system, increases employment and pushes overall business mood upward. Hence spending grows over the period.
Cut tax. Often govt takes this step as a measure to give sop to the citizen.
Encourage export. To keep foreign currency reserve in good shape.
Reduce the lending rate. This measure encourages new investment either for new business or increase in spending power.
Encourage import of items prices of which are likely to up because of unethical business e.g. black-marketers.
Importantly, keep yourself informed. Read, watch and browse the important updates to keep up with the current affair. Recessions will come and go. One needs to be equipped better to fight the next downtrend which can peep again after a upcycle.
Keep reading the below suggests. These are the world’s best reads:
Recession at Work: HRM in the Irish Crisis (Routledge Advances in Management and Business Studies)
Accelerating out of the Great Recession: How to Win in a Slow-Growth Economy
156 Questions about How to Prevent Recession: Using Ancient Wisdom & Management Ideas
From Crisis to Recovery: The Causes, Course and Consequences of the Great Recession
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