Recession (from lat. recessus – digression) – what is it? From an economic point of view, this is the phase of the economic cycle characterized by a moderate, non-critical decline in production in the country. Also, a recession is called a slowdown in the growth rate of GDP or its decline, accompanied by an increase in unemployment, a decrease in bank lending and a decrease in investment in fixed assets. As a rule, this is a period of transition to a crisis in the economy.
Technical recession fixed in the event that there is a recession in the economy of a particular country within 1 year.
Why is there a recession?
The reasons for the recession may be:
- natural development in the economy, when after strong growth, having exhausted the opportunities for upward movement, the economy needs correction and respite, therefore, a recession begins;
- wars and civil strife;
- a sharp change in the prices of commodities, in particular – oil;
- undermining customer confidence;
- uncertainty of entrepreneurs and investors;
- growth of internal and external debts (a possible consequence – default);
- falling stock prices and capital.
Depending on the reasons, there are three types of recession:
- Unplanned. This type of economic recession occurs as a result of some unexpected events: wars, a sharp drop in the world price of oil, gas and other minerals. As a result, there is a deficit of financial budgetary funds and a decrease in the level of GDP. This kind of recession is the most dangerous due to the impossibility of predicting it in advance, as well as difficulties in determining an effective method for getting out of it.
- Recession at the political or psychological level. This type of decline in the level of the economy arises as a result of the increased distrust of the population, which is a consumer, entrepreneurs and capital holders. It is a consequence of a decrease in purchasing activity, a decrease in investment and a decrease in the value of securities. It is enough to overcome this type of recession simply by returning consumer confidence, which is done by lowering prices, interest rates and by putting into practice various psychological techniques.
- As a consequence of the country’s external debts. As a result of such debt, there is a decrease in prices and an outflow of funds from the country. This recession is recognized as the most dangerous and can last for many years.
How is the recession characterized?
The characteristic features are:
- Gradual, without sharp jumps, rise in the unemployment rate.
- The volumes of industrial production are falling, but the enterprises are functioning, producing products in smaller volumes.
- Falling stock indices.
- Growth in inflation indicators.
- Growth of capital outflow abroad.
In a modern economy, a recession is characterized by an uncritical drop in key indicators over the course of two quarters.
When does a recession occur in the economy?
The economic cycle consists of four phases:
- growth (rise in all major areas),
- stagnation (stabilization, lack of any sharp dynamics),
- recession (decline in economic activity),
- crisis (depression).
The duration of the economic cycle in the current realities is 10-15 years, while the duration of each phase may differ depending on the specific situation.
Financial markets are very sensitive to news of a possible recession, especially when its technical probability begins to reflect in economic indicators. The exchange rates and securities in the stock market of such countries are beginning to feel pressure due to the withdrawal of investors from these risky assets.
What are the consequences of the recession?
The main characteristic consequences of the recession in the economy are:
- Falling production volumes in the state,
- The collapse of financial markets
- Reducing the number and size of loans issued by banks,
- Growth in interest rates on loans,
- Rising unemployment rate
- Reduced income of citizens,
- Rising inflation,
- Systemic rise in prices,
- Increase in public debt,
- Falling GDP.
Despite the rather unpleasant state of the economy both for production and for the population, recession is it is a completely natural state that allows the state to readjust to the current market, political and other realities in order to function more efficiently. In the markets, we often observe similar conditions in the form of trend correction, which not only do not frighten, but also provide an opportunity for making money with the correct strategy – for example, to buy assets at more favorable prices. A recession can also be a good chance to build up long-term assets in order to generate future profits.
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