What is a recession?
A recession is a decline in economic growth; more specifically, it is when the economy declines for two consecutive quarters, which occurs when gross domestic product declines compared to the previous quarter.
A recession occurs when GDP declines for two consecutive quarters and is composed of consumer spending, business investment, government spending, and net exports, so a decline in any one of these can be a factor in a recession.
Although there are often fears of a recession because of the impact of reduced consumer and business spending on confidence in the state of the economy in terms of employment and consumer demand, this is not actually the case. This, in turn, will affect the company's sales forecast.
Recession Outcomes
Many consumers have been affected by the recession and are unaware of it. Life may go on as normal, but it has far-reaching effects that indirectly affect everyone. For example, the 2008 recession resulted in large budget deficits and a massive expansion of the money supply, followed by austerity measures across Europe and a reduction in the supply of public goods, with far-reaching effects that continue to this day. Among the effects of the recession :
Fiscal deficits
In a recession, workers lose their jobs permanently as aggregate demand declines. This increase in unemployment means less payroll taxes, less revenue for these workers to spend on more goods, and less revenue for the government from consumption taxes.
In addition, the government of the welfare state will spend more on unemployment insurance, so total spending will increase, revenues will decrease, and the government will end up spending more than it earns, resulting in a budget deficit.
Company Closures
Economic stagnation is associated with a decline in aggregate demand. In an environment of declining aggregate demand, companies sell fewer goods and services. This places significant cost pressures on firms, and some firms are unable to benefit from economies of scale, which may result in higher unit costs.
In addition to high unit costs, there are also fixed costs, such as rent, that must be paid even if the number of sales is low; if these costs are too high, companies will go bankrupt.
Lower real earnings
During a recession, workers are forced to accept lower wages in order to keep their jobs, or wage increases do not keep pace with inflation. When aggregate demand falls, companies do not have the financial capacity to hire more workers and pay them higher wages, so employment opportunities disappear, and conversely, workers have little choice but to accept stagnant or falling wages.
Low exchange rate
When a recession hits, central banks tend to lower interest rates to stimulate demand for credit from consumers and businesses, but lower stock prices and profits encourage capital flight out of the country, and economic uncertainty reduces foreign direct investment, contributing to weak demand and currency depreciation.
Falling asset prices
When a country falls into recession, people lose their jobs, profits decline, companies go bankrupt, and consumers generally have less disposable income, causing asset values such as housing and stock markets to fall, leading to stock market panic and consumer unrest.
The uncertainty created by the recession is being passed on to asset prices. Investors and consumers alike are beginning to question the true value of assets and, more importantly, when their value will stop declining.
They do not want to buy when their value falls by another 30%, so they stop buying, thereby reducing demand and creating more panic selling. Only when confidence returns will the price stabilize.
Low-interest rates
A recession is characterized by low aggregate demand, which means that demand from consumers and businesses is falling as consumer demand for fewer goods means that businesses have to cut production, which in turn means that they need fewer workers, while they are prevented from investing in machinery and equipment as future demand remains uncertain.
To try and stimulate aggregate demand, central banks use a number of monetary instruments, one of them being low-interest rates, and by making it cheaper to borrow money, they create an incentive for consumers and businesses to make purchasing decisions, for example, it may cost a consumer $50,000 less to move house because of the lower interest rate, rather than it costing $20,000 less for a more productive machine.
How to deal with the recession
The main cause of economic stagnation is reduced demand in the economy from businesses, consumers, the government, or other countries. Therefore, the most effective solution and response depend on the root cause of stagnation.
If consumer spending remains stagnant, it may be best to cut taxes. This will provide them with additional income and allow them to encourage more spending in the economy. Alternatively, slowing business investment may require lower interest rates to reduce the debt burden. Ways to overcome economic stagnation include:
tax cuts
When governments cut taxes, this comes at the expense of increasing the budget deficit. The government receives less tax revenue but usually keeps its spending at the same level. Thus the economy gets an overall boost, and this increases the budget deficit, but puts more hands in pockets. Simple consumer.
The effectiveness of a tax cut depends on the marginal propensity to consume, in other words, what percentage of that income is spent in the economy as a whole If the propensity to consume is high, consumers can spend all the tax cuts in the shops, and in return, more goods and services are demanded than This creates jobs and stimulates the economy.
Increase government spending
Government spending is itself a component of GDP, so any increase in this area will lead to an overall boost to the economy, but this may come at a cost in the long run through higher rates of inflation or higher taxes, both of which can lead to a significant slowdown in economic growth.
Increased government spending, however, can provide a significant boost to the economy. Public works programs and investments in infrastructure help put money in the hands of workers, who can then spend it and stimulate the economy as a whole. At the same time, these programs are more cost-effective. Since the government does not have to pay welfare to its appointees, it pays wages instead, which means that the actual costs are lower.
quantitative easing
Most central banks use quantitative easing to flood the market with new money to liquidate credit markets, making it easier for financial institutions to lend. The central bank buys government debt from financial institutions and then releases it to make it available to consumers and businesses. Alternatively, institutions can simply buy new government debt if they decide to borrow more.
Financial institutions will have various options for moving new money, although this is not always effective, as we saw during the 2008 financial crisis, banks held newly drawn money in their reserve accounts because the risk of borrowing was too high, however, quantitative easing can increase economic growth if the money is moved to consumers, businesses and possibly the government.
Lower interest rates also mean that companies have to pay back less, which increases a company's cash flow, and these lower interest rates make borrowing cheaper, which creates an opportunity for companies to invest in better equipment.
Comments
Post a Comment