An economic recession occurs when a country's Gross Domestic Product (GDP) is negatively affected due to a tightening of the economy. Apart from the decline in GDP, an economic recession is caused by a variety of factors such a slowdown in manufacturing activity, falling real estate and housing prices and a downward trend in business investment. Economic recession leads to rising unemployment resulting in weakening of the people's spending power. The share prices decline and the stock market enters a bear phase. The National Bureau of Economic Research (NBER) defines recession as "a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
Few of the significant symptoms of an economic recession are:
- The rate of job loss becomes far too alarming
- Many businesses across all sectors suffer a serious decline in sales turnover and their profits shrink
- Borrowers default on repayment of loans and credit card liabilities
- Banking system breaks down as borrowers are not in a position to repay loans
- Prices of food, fuel and other essential commodities shoot up
- Companies offer voluntary retirement programs to reduce their workforce and cut wages
- People foreclose their fixed-term deposits, and sell off other assets to meet their day-to-day expenses.
Apart from some simple causes, there can also be a few complex reasons why economic recessions occur. One primary reason is when consumers lose interest and cease buying products. Prior to an economic recession, there will usually be an overproduction of goods causing supply to exceed the demand. This will drive companies to increase prices, which in turn causes consumers to lose confidence and decide to decrease spending. Certain events that harm specific industries could spur a recession, such as what is currently happening to the banking, credit and mortgage industries. Over consumption or excess buying may also be another reason for a recession. Spending more than what is necessary can lead to debt. Debt can affect the amount people have in savings and their disposable income.
Wrong economic policies pursued by a government can have detrimental effects. If not zealously monitored, these policies could cause the economy to boom and then bust and lead to inflation. The steadily escalating oil prices have a cascading effect and severely impacts the economy. When the policy makers do not pay attention and fail to address the increasing inflation at the beginning of a recession, more and more economic disasters follow and spread world wide.
Over the years, economists have suggested a number of strategies to help an economy to recover from a recessionary phase. The strategy to be adopted may vary depending on the type of economic system followed by a nation's policy makers. While some may favor deficit spending to restart economic growth, others may recommend tax cuts and a few may prefer non-intervention by the government in the market forces of the economy. The only heartening feature is most economic recessions are brief and time-bound.
