What is recession?
What is Recession is frequently discussed in Pakistan, but what is Recession is a query that has a connection with our daily life. The authority of each country is always trying to implement economic policies that encourage the movement of the economy so that it can boost economic growth. Call it building a conducive investment climate, providing economic rewards in the real sector, creating jobs, and so on. However, the realization of economic policy is not always able to achieve the desired results. Rather than attaining a skyrocketing economic growth rate, it actually declined and slumped into a recession.
What is a recession?
Recession is an economic condition that has decreased substantially in a number of months, generally for two consecutive quarters as seen in the negative GDP (Gross Domestic Product) value. An economic condition is said to be a recession when business stops developing, GDP declines in two consecutive quarters, the unemployment rate rises, and the value or price of property reduces significantly.
GDP is a way of measuring economic conditions because it signifies economic activity that occurs in an area of the country. The more developing economic activities of a country which is indicated by the high export activity, the production process of goods and services, and the low unemployment rate, the rate of economic growth in that country will increase. Vice versa.
Slow growth Rate in Recession
When GDP diminishes, but is still positive, it means that economic conditions do not mirror a recession, but a slower growth rate than the previous quarter. However, if real GDP declines and the value is negative for just two consecutive quarters, it may be said that the economy is on the verge of recession.
Factors causing recession
Recession does not come by itself. There are quite a number of factors which are the cause. Some of them are as follows.
Inflation as important recession
This factor is often a scourge for economic growth. Certainly, there are occassions when inflation is needed so that the economy remains stable. However, under certain conditions too high inflation would actually reduce the purchasing power of the people. As a result, the number of goods and services that can be purchased with the same amount of money as before is getting smaller. Inflation is triggered by rising production costs, higher energy costs, and national debt.
Inflation clearly refers to an increase in the price of products or services during a certain period. When inflation occurs, people tend to be more careful in spending money. They will reduce expenses and save more. This expenditure limitation of course has an effect on cutting production costs by producers of goods and services. That is, the unemployment rate is likely to increase as a result of company policy in conducting efficiency. The combination of the effects of inflation is what causes the economy to fall into recession.
Loss of trust in investment
To run the economy and develop it, the authority of each country is demanded to be able to create a conducive investment climate both `in terms of security and strategic projects. The goal is to attract investors to invest. However, what happens if economic growth actually triggers a loss of confidence to invest? Of course many investors will attract funds.
The loss of confidence in investing results in slowing economic growth. The business is sluggish, so many producers reduce the volume of production. This again has an impact on the rising unemployment rate. If this is the case, the government and the central bank must intervene in creating policies that are able to restore investment confidence.
High interest rates
This factor is indeed inseparable from the economic field. On the one hand, the increase in interest rates is intended to protect the value of the currency. But on the other hand, an increase in interest rates that are too high actually burden the debtors, resulting in bad credit. Large amounts of non-performing loans will clearly have a systemic impact on the banking world. When the banking world collapsed, there was a recession.
The fall of the stock market
This factor is related to the loss of investment confidence. When investors lose their trust in the ability of companies to manage capital, including the government’s ability to create a conducive investment climate, large-scale withdrawals of funds or capital from third parties may occur. This could result in a collapse of the stock market. If that happens, then recession can’t be ignored.
The collapse in prices and home sales
Property in the form of houses, land and apartments are assets whose value tends to increase from year to year. No wonder so many people make it an investment. However, there are times when the value of a property falls so that the owner loses equity. This forces the property owner to limit and reduce expenses, because it is unlikely to take out a mortgage or obtain a loan with collateral for the asset.
The fall in prices and home sales due to property values that plummeted not only hurt home owners, but also impact on banks. Banks will lose money on derivatives based on property values. Consequently, this could end in the confiscation of assets, which could be the cause of the recession.
What is Government policy during Recession?
In fact, the government is demanded to try to improve the welfare of its people through economic policies that protect the people’s economy. However, government policies do not always produce prosperity for anyone. That is, there are times when the government is wrong in taking economic policy. So, what is recession also important and you have seen its importance above. Bur everyone should develop the habit of saving whether he or she is at some job or you spend time at home.