A drop in demand within the economy whether from businesses, consumers, the government, or other countries is the primary cause of an economic recession. As a result, the most effective response will be determined by the recession’s core cause.
If consumer spending is down, it might be a good idea to lower taxes. This will provide them with additional cash and encourage increased economic spending. A slowdown in corporate investment, on the other hand, may necessitate lower interest rates in order to reduce debt burdens.
Reduce Taxes
When governments lower taxes, they frequently do so at the expense of increasing the budget deficit. The government obtains fewer tax revenues but maintains the same level of spending, giving the economy a benefit overall. While this raises the budget deficit, it also increases the amount of money in the hands of the typical consumer.
What will thrive in a downturn?
Healthcare, food, consumer staples, and basic transportation are examples of generally inelastic industries that can thrive during economic downturns. During a public health emergency, they may also benefit from being classified as critical industries.
What causes a downturn?
A lack of company and consumer confidence causes economic recessions. Demand falls when confidence falls. A recession occurs when continuous economic expansion reaches its peak, reverses, and becomes continuous economic contraction.
What is the maximum length of a recession?
The National Bureau of Economic Research (NBER) keeps track of the average length of US recessions. According to NBER data, the average recession lasted 11 months from 1945 to 2009. This is a step forward from previous eras: The average recession lasted 21.6 months from 1854 to 1919. The United States has had four recessions in the last 30 years:
- The Covid-19 Recession is a period of economic downturn. The most recent recession in the United States started in February 2020 and lasted only two months, making it the shortest in history.
- The Great Recession of 2008-2009 (December 2007 to June 2009). As previously stated, a real estate bubble contributed to the Great Recession. Although the Great Recession was not as bad as the Great Depression, its length and severity gave it the same moniker. The Great Recession lasted almost twice as long as other US recessions, lasting 18 months.
- The Dot Com Bubble Burst (March 2001 to November 2001). The United States was dealing with a number of big economic issues at the turn of the 2000, including the impact from the tech bubble burst and accounting scandals at businesses like Enron, all of which were topped off by the 9/11 terrorist attacks. These issues combined to cause a temporary recession, from which the economy soon recovered.
- The Recession After the Gulf War (July 1990 to March 1991). The United States experienced a brief, eight-month recession at the start of the 1990s, which was triggered in part by rising oil prices during the First Gulf War.
What causes the economy to be weak?
Economic growth is defined as a rise in national income or output. If the economy grows at a slower pace, living standards will rise at a slower pace.
Western economies, for example, rose at a rate of 2.5 percent to 4% each year in the postwar period. However, growth rates have dropped since the early 2000s. Secular stagnation is a term used to describe a period of sluggish economic growth.
- Slower rise in living standards – inequity may be more visible among people with lower wages.
- Increased government borrowing for example, if demand for medical care and old-age pensions is outpacing economic growth.
- Unemployment is a possibility if economic growth is insufficient to replace jobs lost to technology.
Slower economic growth has different effects depending on what causes it. Two primary factors could be slower growth.
Diagram showing slower economic growth
Assume the economy used to have a 3% productivity growth rate. Then, from Y1 to Y3, real GDP rises, resulting in strong economic growth.
However, if productivity only grows at a rate of 1.5 percent each year, the economy will only grow from Y1 to Y2.
Slower economic growth due to weak aggregate demand
The other major factor contributing to sluggish economic growth is a lack of aggregate demand. When demand-side forces are weak, the economy is more likely to have a negative output gap, in which real GDP falls short of potential GDP.
There is a slight increase in AD in this situation, but productive capacity grows at a quicker rate. As a result, there is a negative production gap (Y2 is less than Yf)
Slower growth will have similar impacts to a recession if it is caused by poor aggregate demand (e.g., low confidence, rising interest rates, falling housing values). We’ll probably see:
Unemployment has risen. If productivity grows at 3% each year, new technology will allow businesses to produce more output with fewer employees. When new technology boosts labor productivity, it becomes more critical for economic growth to generate new jobs to replace those that have been lost due to productivity improvements. China, for example, has been rising at a rate of over 7% each year, thanks to increased productivity and efficiency. The danger is that if Chinese growth slows below 6%, the country will see increased unemployment as people laid off from inefficient state-owned businesses struggle to find new jobs.
A rise in ‘disguised unemployment’ is an alternative to rising unemployment. This occurs when employees are given less hours than they desire. They only acquire part-time job instead of full-time labor. Although unemployment in the UK has decreased since 2010, the poor rate of economic development has resulted in more part-time and insecure work.
Impact on living conditions. It is easier to ensure that everyone benefits when growth rates are strong. High rates of growth will tend to reduce absolute low income and boost real earnings for everyone, even if inequality rises. However, if economic development is slow, some people may experience stagnant or even declining salaries. The stagnation of real salaries, particularly for those in low-skilled and flexible job contracts, has been a feature of post-2008 growth. Dissatisfaction arises as a result of the fall in actual incomes.
The government budgets for a rate of growth of 2.5 percent to 3 percent when making expenditure and tax plans. As a result, they are able to offer real increases in government spending. Tax revenues will be disappointing if growth is lower than predicted, forcing the government to raise borrowing. The 2017 tax cut in the United States, for example, was not paid for by lowering spending. Tax cuts, the administration anticipated, would result in higher rates of economic growth. Even while the economy is not in a recession, growth rates have been lower than expected, leading to an increase in government borrowing.
Benefits of lower rates of economic growth
- Environment. It will be easier to accomplish carbon emission reduction targets with lower rates of economic growth and lower rates of expanding national output. When expansion is rapid, there is increased demand to produce energy quickly and cheaply, which may necessitate the use of fossil fuels. With lower rates of economic growth, there is a greater opportunity to switch to renewable energy. Lower growth rates will also slow the consumption of nonrenewable resources, which may be good in the long run.
- Inflation should be reduced. Inflationary pressures are reduced when growth rates are lower. This allows the Central Bank to maintain interest rates low, which benefits borrowers, mortgage holders, and government bond buyers. Low inflation promotes a stable environment that may stimulate additional investment.
What are the symptoms of an impending economic downturn?
Real gross domestic product (GDP), or goods produced minus inflationary impacts, is the economic measure that most clearly identifies a recession. Income, employment, manufacturing, and wholesale retail sales are some of the other major indicators. Each of these areas suffers a drop during a recession.
Should I withdraw all of my savings from the bank during a recession?
An FDIC-insured bank account is one way to keep your money safe. You’re probably already protected if you have checking and savings accounts with a traditional or online bank.
If an FDIC-insured bank or savings organization fails, you are protected by the Government Deposit Insurance Corp. (FDIC), an independent federal agency. In most cases, depositor and account protection at a federally insured bank or savings association is up to $250,000 per depositor and account. This comprises traditional banks as well as online-only banks’ checking, savings, money market, and certificate of deposit (CD) accounts. Accounts at credit unions insured by the National Credit Union Administration, a federal entity, are subject to the same $250,000 per-depositor coverage limit. So, if you and your spouse had a joint savings account, each of you would have $250,000 in FDIC coverage, totaling $500,000 in the account.
If you’re unsure whether your accounts are FDIC-insured, check with your bank or use the FDIC’s BankFind database to find out.
For your emergency money, an FDIC-insured account is also a good choice. Starting an emergency fund, if you don’t already have one, can give a cash cushion in the event that you lose your job or have your working hours reduced during a recession.
In general, you should have enough money in your emergency fund to cover three to six months’ worth of living expenditures. If you’re just getting started, put aside as much money as you can on a weekly or per-paycheck basis until you feel more comfortable fully financing your emergency fund. Anything you can put aside now could come in handy if your financial condition deteriorates.