Economic Recession - What is it? Characteristics, and more

Economic recession

The phase of the economic cycle is characterized by a decrease in activity, employment, and production.

What is an economic recession?

The economic recession is the phase of the economic cycle that is characterized by a decrease in activity, employment, and production. Investment may also decrease and there may be a tendency towards deflation (or a decrease in inflation ).

An economy is considered to be in recession when its GDP has fallen for 2 consecutive quarters. Let's keep in mind that the measurement of GDP is in charge of the country's authorities, but it can also be carried out by private firms or international organizations.

Characteristics of the economic recession

The common characteristics of economic recession are as follows:

• Consumption decreases, especially the purchase of real estate and vehicles, as well as those associated with credits.
• Investment is very sensitive to recessions and usually has really important falls during these periods, especially due to the expectations of future agents, who prefer to suspend them and wait for the country's economic condition to improve.
• Due to the fall in consumption, companies must produce fewer goods and services so that there is no excess supply, so they lay off workers to adjust their production and thus increase unemployment.
• inflation. In periods of recession, it is usually low due to low demand for the products.

Causes and consequences of economic recession

Causes

An economic recession can be caused by different factors associated with shifts in aggregate demand, including:

• Natural phenomena: hurricanes, earthquakes, floods, etc. they can cause damage to infrastructure and cause a country's economy to be affected and unable to produce enough.
• Armed conflicts: armed conflicts create very negative expectations about the future outlook of an economy, which is why, to a large extent, it contracts.
• Decrease in consumption: This can be due to changes in consumption patterns, negative expectations that cause people to save more, etc.
• Investment: the fall in investment can lead to an economic recession, which will lead to an even more pronounced fall in investment in the future.

Consequences

Recessions are a natural part of the economic cycle, therefore, if they are not serious they should not have serious consequences in the economy, especially when they are approached correctly to correct them.

However, in some cases economic recessions are not corrected and can extend over time, having consequences on the population. The main issue is that household income decreases, people consume less and their living conditions are lower than they were before the contraction.

Prolonged recessions also generate uncertainty around the country and its economic policy, making it less attractive for investment and conditioning the expectations that economic agents form around it.

 

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