Recession is like the proverbial sword of Damocles that dangles threateningly on a country’s economy. You must have read about the great depression of the 1920s in the United States. It may look like a hoary event that happened years ago, however, the sheer magnitude of the recession still manages to send people into a nervous tizzy. The US economy was in doldrums with unprecedented unemployment and a production that was almost zilch. The watershed phenomenon affected important industries like agriculture, mining and logging. There was utter discontentment and poverty among the masses. Cut to the year 2008-09 — the US once again witnessed a severe downturn which created ripples across the world. Almost all sectors bore the brunt of this slump. If you are curious to know what factors lead to the recession in all its formidability, you are on the right page. A recession is when there is a decline in a country’s ‘gross domestic product’ (GDP) for two or more consecutive quarters of a year. This happens mainly when there is an imbalance in the demand and supply of commodities and services and their prices. However, it can also happen because of other reasons as well. Scroll down to know more on what makes an economy plummet into the downward spiral of recession.
Causes Of Economic Recession
The market can at times be flooded with products which can cause an excess supply as compared to the demand of goods and services thereby leading to overproduction. People start losing interest in buying and as a result profits of companies decrease. Companies are forced to increase their rates and this causes recession as once companies increase prices, consumers tend to lose confidence and decide to decrease or stop spending completely.
With more buying power, people tend to spend more than what is required. A country also at times spends excessively for various things such as infrastructure and defense. This increased outlay for consumption purposes can contribute to debt. A case in point is the US which is spending billions of dollars in wars happening in Iraq and Afghanistan. Economists are worried that this can land Americans in heavy debts and eventually bankrupt them leading to another huge depression.
Investment is an important facet of any country as it highlights the future economic developments that help in consolidating its power. Investments are of two types — public investment and private investment. These investments can shrink for various reasons and cause the economy to get majorly strained. If the shrinking of investments continues for longer periods of time, there can be a recession. The people too become tight-fisted and skeptical about investing their money in companies and the blocked cash-flow can further complicate the condition.
Economic policies of the government are made with the sole intention of increasing the country’s growth and keeping the country’s economy safe from untoward problems such as inflation. To prepare effective policies, the government takes into account various foreseen and unforeseen factors. However, sometimes, the government may make errors while framing these economic policies leading to detrimental effects on the economy. If the policy makers do not pay attention and overlook the inflation aspect, a recession is to be anticipated.
Abnormal Unemployment Rates
Unemployment is a scourge for any economy — developed or developing. There are many people, skilled and unskilled, who seek job opportunities but are unable to find employment. Unemployment rate is defined as the percentage of total labor force that is qualified, willing to work and actively seeking employment, but is unemployed. Recession is very likely to occur if the unemployment percentage remains ten or more for more than six months at a stretch.
Rise In Credit Card Purchases
If an economy sees a sudden incline in the number and volume of credit card purchases, it is an indication of dearth of cash in the economy. Increase in credit card holders and usage means that people do not have cash to spend and are resorting to methods to pay for their expenditures thereby risking high interest payments. This is a betraying sign of a nation facing financial desperation.
Sometimes the value of a nation’s currency can become extremely volatile compared to the currency of other countries. This has an adverse bearing on exports and imports, thus causing adverse waves throughout the national economy. This can become serious and trigger an economic depression if left unchecked for long.
Hope this article gave you some insights on the causes of economic recession.