Recession

Recession in economic terms is the contraction phase in the business cycle that is generally characterized by a slowdown in the economic activities such as the level of consumption, the real GDP, investments  both local and foreign, Government spending and the net export factors.  Negative effects in an economy that falls when an economy enters the recessionary phase are the rate of inflation. Of course the rate of unemployment and the rate of bankruptcy will increase during the recession.  There are other factors or statistical measure which we use to define a recessionary phase in the economy. One is looking at the performance of the economy in different quarters; if we have an economic slowdown in two or more consecutive quarters then the economy is in the recessionary phase. The other measure is looking at the rate of unemployment in the last twelve months. A percentage increase equal or above 1.5% indicate a recessionary phase. Do not be confused by different definition across different economic blocks, each blocks have different ways of defining the recession. In the European economic bloc recession is defined by a negative performance of the GDP in two consecutive quarters measured by the seasonal adjustments for the quarterly figures.

Recession is a complex economic factor that we cannot precisely predict by looking at the interval from the last occurrence. Some will recur after a year, other a decade and others will take as long as 50 years or even a century. Recessionary effects will last for a period of two quarters to as long as four years in severe cases (depression). Generally, adverse demand shocks leading to a widespread decrease in spending is the first sign of recession. The demands shocks are triggered by financial crisis among other factors. Take for example the 2008 US financial crisis triggered by subprime mortgage factors that started a long recessionary journey that we are yet to fully recover.  The other factors that might trigger recession are external trade distress, adverse effects on supply of goods and services, and a burst in the economic bubble -it happens naturally after a period of economic boom.

According to Economist Richard c Koo an ideal economy should have individual households as net savers, the corporate as net borrowers, economy should operate at an almost balanced budget and the net export should approach Zero. When this idea conditions deviate, recession sets in that country or it puts another country into the risk of plunging into recession. To counter the effects of recession, the government should put in place policy responses to bring back the economy at the ideal state of balance. Other than trying to bring back the economy to an ideal balance, the government should adopt expansionary measure to heal an economy from recession. These policies are increasing the money supply in an economy, increasing its total spending, bailing out key economic drivers in the country, establish economic stimulus programs to spur the economy and decreasing the taxation rate.

Although not a must, it is important to know the different shapes of recession curve, the V shape, U shaped, l shaped and the W shaped.

via:http://www.whatiseconomics.org/recession?utm_source=rss&utm_medium=rss&utm_campaign=recession