Top Major Reasons for Economic Recession
The definition of recession according to the National Bureau of Economic Research (NBER) is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales.”
An economy in recession has a generally poorer life experience for its citizens. It is a phenomenon that, as much as possible, national leaders try to avoid. This is because a recession entails a stunting of business growth, a high rate of unemployment, and a higher cost of goods and services.
While a recession typically only lasts for a short period of time, it is still best for a country to avoid it as much as possible. And to avoid it, one must know what causes it.
We’ve summarized below the major reasons for an economic recession. Look out for these to be able to prepare accordingly.
Inflation
There are numerous factors that causes economic recession. However, the main cause is inflation. Inflation occurs when the general price of products increase in a given time. And when there is high inflation, there is low purchasing power. This sets off various chains of events that ultimately lead to economic recession. Below are enumeration of these events.
Increase in Unemployed
When goods and services are expensive, companies cut down jobs in order to keep up with the costs of running a company. More people become unemployed. Add to that those fresh graduates who also cannot find a job because of companies not needing employees.
Poor Business Performance
In essence, because there are no jobs that pay salaries, there is no money to spend on goods. Because the citizens are not buying as much as they can, businesses report a poor performance across all sectors. This effectively lowers GDP.
Credit Card Purchases Pile Up
Naturally, if people can’t buy the pricey goods and services because they are low on cash, they use credit cards. This, in turn, results in more debt. With more debt, people have worse daily lives. They are unable to spend on things that they want because they still have to pay for the things that they bought.
Borrowers Default
Low purchasing power also means poor paying habits. Many people default during an inflationary environment because they simply can’t pay back their debts. Cars, homes, and credit cards are all affected. The ultimate result is a country of people with unhappy lives because of the bad economy.
Poor GDP
Naturally, with everything worsening, the Gross Domestic Product of the country goes down significantly. This could be followed by consecutive months of decline and more of the things mentioned above.
Experiencing all of the above means that you are already affected by the recession. Tough days are ahead and you should prepare accordingly.
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