FinanceRecessions: Causes and Effects

Recessions: Causes and Effects

In the economic cycle, a recession is a period of decline. When GDP declines for two consecutive quarters, a recession is considered to have occurred. Household earnings decrease, prices increase, a large number of businesses fail, unemployment increases, social tensions increase, etc. during a recession.

Recessions are inevitable: the economy is cyclical, so a phase of growth is always followed by a phase of decline. No one can predict exactly when this or that phase will come, and when you may have to borrow 50 dollars to live till your next paycheck.

What Is a Recession?

When defining a recession, economists take into account declining gross domestic product (GDP), industrial production levels, real incomes and expenditures of the population, as well as the unemployment rate. Recessions are considered an inevitable part of the business cycle that occurs in an economy.

During a recession, the economy enters a vicious circle: spending cuts → production cuts → rising unemployment → loss of income → drop in retail sales → drop in production.

In the 1920s, the US National Bureau of Economic Research (NBER) referred to periods of decline as depressions. However, as the downturns in economic activity became less severe, the agency introduced the term “recession”. The bureau made the first publication about the change in the business cycle in 1929.

A recession is one of the phases of the economic cycle, it follows the boom and can turn into a depression (a severe form of recession). There are no specific criteria for declaring depression. The Great Depression in the United States in the 1930s was characterized by a fall in GDP of more than 10% and an unemployment rate that reached 25%. Simply put, depression is a severe decline that lasts for many years.

Before a recession or at some stage of it, the economy can go into a state of stagnation. Unlike a recession and its variety of depression periods, when there is a change in macroeconomic indicators, albeit negative, during stagnation, production and trade stagnate for a long period of time, that is, the indicators stand still or remain close to the values ​​for previous periods.

Recession In USA

US GDP declined by 0.9% year on year compared to the first quarter of 2022, although American experts expected that the country’s economy would show growth by 0.3 percentage points. This is the second decline in the indicator for the year – in the first quarter, it fell by 0.3 p.p.

At the same time, the Ministry of Commerce reports a 7.8% year-on-year increase in GDP at current prices, as well as an increase in exports and personal consumption spending. Consumer spending in the II quarter increased by 1%. Business fixed investment fell 3.9%, while federal government spending fell 1.9%. The volume of exports jumped in the last quarter by 18%, while imports increased by only 3.1%.

Economists at Deutsche Bank say that the dynamics of the futures markets make it almost 100% likely to expect a recession in the US economy before the end of 2022. The International Monetary Fund believes it will be “increasingly difficult” for the US to avoid a recession.

How To Recognise a Recession

Real GDP is the most crucial recession indicator. The United States’ total output, as measured by real GDP, includes both individual and company output. Because the impacts of inflation are eliminated, it is called “real.”

A recession may begin when the real GDP growth rate initially declines, but occasionally growth may decline one quarter and then increase the following. It’s challenging to tell whether you’re in a recession based solely on GDP because the Bureau of Economic Analysis might modify the estimate in its upcoming report.

The NBER tracks the following monthly statistics as a result. These provide a more up-to-date estimate of economic growth. GDP will decrease as soon as these economic indicators do. If you want to know whether the economy is in a recession, keep an eye on these indicators:

Real income: Personal income that has been inflation-adjusted. There are no longer any transfer payments like Social Security and welfare. Demand from consumers and consumer spending both decrease when real income does.

Employment: Together, the employment rate and real income provide the commissioners with information about the state of the economy as a whole.

Manufacturing: The commissioners examine the Industrial Production Report’s assessment of the state of the manufacturing industry.

Inflation-adjusted retail sales show commissioners how businesses are responding to customer demand.

Real Gross Domestic Product: The NBER also examines GDP projections supplied by economists like Macroeconomic Advisers each month.

World Recession

Germany will have a recession in 2023, according to economists at Deutsche Bank. The risk area will include Italy and Austria because of their reliance on imported energy. According to the European Commission, Estonia and Lithuania may have a recession in 2022.

For the past 40 years, “Gazprom” has kept the European Union’s fuel supply to a minimum. The world is geared up for a winter without Russian gas. The downfall of the European economies might quicken in such a scenario.

Inflation in the EU is still running at an all-time high of 8.9 %. The key rate had to be increased by the European Central Bank as well. The European Union’s financial system will be put to the test by this.

Brexit has made the situation in Great Britain a little bit more challenging. The pandemic and the major war in Ukraine occurred at the same time as the breach between the British economy and the EU. In actuality, the UK is experiencing a perfect storm and is in economic peril.

Conclusion

As you can see, the recession is a rather complex but predictable phenomenon. It is difficult to overcome it, especially in the conditions of a globalized world, when the economies of different countries depend on each other. If you properly prepare for the recession, its impact will not be too painful, but it will be felt.

Also Read: Automating Financial Analysis Using Python

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