5 Causes & ways to overcome "Recession"

  What is an Economic Recession?

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

What are the factors that causes economic recession ?

Loss of Confidence in Investment and the Economy

Loss of confidence leads consumers to stop buying and move into defensive mode. Once a critical mass moves toward the exit sign, panic sets in. Retail sales slow. Businesses run fewer employment ads, and the economy adds fewer jobs. Manufacturers cut back in reaction to falling orders—the unemployment rate rises. To restore confidence, the federal government and the central bank must step in.

High-Interest Rates

When interest rates rise, they limit liquidity, which is money available to invest. In the past, the biggest culprit was the Federal Reserve, which often raised interest rates to protect the value of the dollar. For example, the Fed raised rates to battle the stagflation of the late 1970s, which contributed to the 1980 recession

Post-War Slowdowns

The economy slowed down after the Korean war.This caused the 1953 recession. Similar reductions after World War II caused the 1945 recession.

When Asset Bubbles Burst

Asset bubbles occur when the price of an item such as gold, stocks, or housing become inflated beyond its sustainable value. The bubble itself sets the stage for a recession to occur when it bursts

A Stock Market Crash

The sudden loss of confidence in investing can create a subsequent bear market, draining capital out of businesses.

Economic crisis could involve

1. Lack of economic growth/recession
2. High Unemployment
3. Long-term structural deficits
4. Lack of confidence in finance and consumer sector.
5. Rapid devaluation  

Solutions to economic recession

1. 
   Fiscal policy – When the government influences demand through changing spending or taxes.
   • Government investment in new infrastructure (e.g. New Deal in the 1930s) helps to stimulate demand and creates jobs.
   • Income tax cuts – increasing the disposable income of workers, encouraging them to spend.
2. Monetary policy –  When Central Bank influences demand and supply of money.
   • Cutting interest rates – makes borrowing cheaper and should increase the disposable income of firms and households – leading to higher spending.
   • Quantitative easing – when Central Bank creates money and buys bonds to reduce bond yields and
   • Helicopter money – when the central bank creates (prints) money and gives it to everyone in the economy.
3. Supply-side policies – Long-term policies to try and improve productivity and efficiency in the economy.
   • Free market supply-side policies – reducing government intervention in the economy, e.g. lower taxes
   • Interventionist policies – government spending on education and training
4. IMF bailout – IMF give money to stem the loss of confidence and implement structural adjustment policies, e.g. better tax collection, privatisation, price liberalisation.
5. Government bailout of industries/banks. To prevent loss of confidence in financial sectors.

Deepest global recession since World War II

The global economy has experienced 14 global recessions since 1870: in 1876, 1885, 1893, 1908, 1914, 1917-21, 1930-32, 1938, 1945-46, 1975, 1982, 1991, 2009, and 2020. The COVID-19 recession will be the deepest since 1945-46, and more than twice as deep as the recession associated with the 2007-09 global financial crisis. 

Global per capita GDP growth

written & published by: 

Smith pandya