Recession : Definition, Key Indicators, Causes, Impact & Recovery Strategies

 What is a Recession?

A Recession is a widespread drop in economic activities that affects various aspects of an economy. It is often measured by prolonged decline in Gross Domestic Product(GDP) and tremendous increase in unemployment rates. 

In United States if there is widespread drop in economy for more than five months, then it is declared as a recession. However in United Kingdom , a recession is defined a negative  economic growth for six months. The National Bureau of Economic Research (NBER) examines various indicators like GDP contraction, increasing unemployment rate, inverted yield curve, industrial production and few more recession indicators.

Key Indicators of a Recession 

• GDP Contraction : One key factor to measure recession is by checking the GDP, which is the total value of goods and services produced in the economy. If GDP declines contracts for 6 months, then it is a clear indication that the economy is in recession.

• Increasing Unemployment Rate: Another key indicator of a potential recession is unemployment rate. When the business/industry  are struggling, they often lay off employees. This will increase the unemployment rate, which is the percentage of labour force that are unemployed.

• Inverted Yield Curve: Yield Curve is a line that plots the interest rates on different maturities of U.S. If the curve is inverted, then it means the short-term interest is higher than the long-term interest. The increase in short-term interest is an indication of recession.

• Industrial Production: Industrial production is a measure of output of factories, mines and other utilities. When the production struck-down , it's an indication that businesses are producing less.

• Decline in Retail Sales and Wholesale: Decline in Wholesales & Retail Sales is a major key indicator of recession. This is because consumer spending contributes for about two-third of the U.S economy. The consumer might be not confident about the economy and financial security, thus it end up in limited spending. If consumer spends less, it can have a ripple effect throughout the economy.

What Causes a Recession ?

• Change in Technology : At times, change in economy can also affect the economy. For eg: Rise of Automation and Artificial Intelligence led to layoff of employers, which has contributed to recession.

• Sudden Economic Shocks : sudden economic shocks such as a pandemic, world wars or any natural disasters can lead to recession by disrupting the stable economy.

• Monetary Policy : an immediate change in monetary policy can lead to a recession. For eg: If the central bank raises the interest rates, then it can slow down the economy.

• Fiscal Policy : changes in fiscal policy can cause a recession. If the government cut down spending and raise taxes, then it can lead to a decline in economic activity.

• Structural Changes : structural changes can lead to a recession. For eg: If the interest of people for certain goods & services changes, then it can lead to job losses and decline in economic activity.

• Deflation : Deflation is defined as the fall in price of a product or goods. It can make it difficult for businesses and industries to sell their products, thus leaving a negative impact on economic activity.

• Shortage of commodity : As the demand of a commodity increases and it's supply decreases, the price of the commodity drastically increases. It can lead a negative impact on the economic activity.

Impact of Recession 

• Unemployment: A prolonged decline in economy can cause unemployment. Recession affects businesses and various multinational companies which will force them to layoff there employers, which results into an increase in unemployment.

• Fall in Wages : As businesses afloat the companies cut down the wages of employers in order to reduce their loss.

• Decline in Asset Value : Asset Value drops during recessions due to multiple reason. Investors becomes risk-averse, they sell their assets at low prices, to reduce their exposure to high risk. During a recession home, oil and land value declines.

• Government Borrowing : Government borrowing increases during a recession due to less tax collection from employers. During recession wages will be less or unemployment will be there, which results in to less tax collection.

• Business Declines : Firms won't get much business due to lack of customers to buy their products.

• Poverty : Recession causes inflation and unemployment, which affects the living standard of an individual leading to poverty.

Recovery Strategies

• Education & Skill Updating : Investing in education and updating technical or non technical skills can help individual can adjust to changing economic conditions and enhance their employability.

• Fiscal Policy : Government can implement fiscal policy by increasing government spending and less tax collection.

• Unemployment Stipend : Government can offer a certain amount to people who lost their job due to recession or to people who don't have any jobs during the recession period.

• Monetary Policy : central bank can reduce the interest rates for recession period and can gradually increase once the economy boosts up.

• International Cooperation : During a recession all other countries can come up with a UNO meeting and help the countries affected by recession. They can be helped by promoting trade and coordinating policies.

• Financial Planning : A better financial planning includes risk management, It helps you to protect your assets and income from various risk such as job loss or recession.

Conclusion

Recessions are painful & complex events that have a profound impact on whole economy and society. It can affect the mental health of people, causing a depression among people due to financial condition. Understanding the recovery strategies and implementing it while recession can help mitigate the risks and promote economic stability.