What is the nature of a recession?
A recession is defined as a marked, broad-based contraction of the economy which spans a few months to a few years. If the preceding points were understood, it will be comprehensible that it is a normal, albeit unpleasant, part of the business cycle. Here are some key things to know about the nature of recessions:
GDP contraction. According to technical values, recession means two successive quarters of negative growth rates in gross domestic product (GDP), which is a measure of a country’s total output. Thus, a reduction in the economic output volume is the identifying feature of a recession.
This is through increased contraction of employment opportunities and low wages and salaries offered to employees. In a recession, companies notice that production decreases and they consequently have less profits and revenues. This leads to job losses and an increased unemployment levels within the population. Earnings shrink, people earn less money, and they spend less money, thus, perpetuating the economic downturn.
Downturn across sectors. They see that the recession is detrimental to the economy in general and cuts across sectors such as the financial sector, manufacturing sector, tourism, and retail. Though it is not very common, some sectors are always most affected than others are.
Financial market impact. And as you know, recessions are often associated with bear markets in stocks due to declines in companies’ profits. Similarly, cost of funds in case of bonds and loans are also low as demand lowers down for securities. Credit provision and funds may get pulled back.
Consumer confidence drops. Research indicates that during the period of the recession, consumers become far more bearish about the economic and their personal financial conditions. People begin to save more in anticipation of the worse outcome in the future hence reducing spending which worsens the recession.
Though challenging, most recessions do not last very long, and the market always bounces back and stabilizes. The decline results in a decrease in inflation and this in turn means a decrease in interest rates setting the stage for growth. In this regard, the majority of economists are of the view that government policies can assist in reducing the duration of a recession and the time required for an economy to bounce back. Krugman believes that comprehension of the character of recessions results to right choices at all stages of business cycle.