When the economy becomes less active, it is called a recession. Many corporate shares are depreciating in value. One definition is that a recession begins when the gross domestic product falls for two quarters in a row. Between 2007 and 2009, the Great Recession occurred.
What happens when there is a recession?
- A recession is a period of economic contraction during which businesses experience lower demand and lose money.
- Companies begin laying off people in order to decrease costs and halt losses, resulting in rising unemployment rates.
- Re-employing individuals in new positions is a time-consuming and flexible process that faces certain specific problems due to the nature of labor markets and recessionary situations.
In a downturn, who benefits?
Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.
A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.
- Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
- Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
- Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
- Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
- It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
- Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
- It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR
The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.
Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.
After the Lawson boom and double-digit inflation, the 1991 Recession struck.
Efficiency increase?
It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.
Covid Recession 2020
The Covid-19 epidemic was to blame for the terrible recession of 2020. Some industries were particularly heavily damaged by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).
Profitability hasn’t kept pace with Amazon’s surge in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.
Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.
The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics effect the firm as well as aggregate demand.
How long do economic downturns last?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump. Since 1854, there have been 33 recessions. 1 Recessions have lasted an average of 11 months since 1945.
With an example, what is recession?
There have been five such periods of negative economic growth since 1980, all of which were classified as recessions. The worldwide recession that followed the 2008 financial crisis and the Great Depression of the 1930s are two well-known examples of recession and depression. A depression is a severe and long-term economic downturn.
How do you get through a downturn?
But, according to Tara Sinclair, an economics professor at George Washington University and a senior fellow at Indeed’s Hiring Lab, one of the finest investments you can make to recession-proof your life is obtaining an education. Those with a bachelor’s degree or higher have a substantially lower unemployment rate than those with a high school diploma or less during recessions.
“Education is always being emphasized by economists,” Sinclair argues. “Even if you can’t build up a financial cushion, focusing on ensuring that you have some training and abilities that are broadly applicable is quite important.”
In a recession, do housing prices drop?
In a recession, do property prices fall? During a recession, home values tend to plummet. So, if you’re looking for a place to live, you’re likely to come across: Homeowners eager to reduce their asking prices. Short sales are used by homeowners to get out from under their mortgages.
What difficulties does a recession cause?
High unemployment, falling average earnings, greater inequality, and increased government borrowing are all hallmarks of a recession (a drop in national income). The severity of a recession is determined by how long it lasts and how deep the drop in output is.
Who is most affected by a recession?
Those who lose their jobs or have their hours/self-employed income drastically reduced will be the hardest hit.
It also relies on the type of recession that is occurring. The financial industry was the hardest damaged by the recession of 2009. Many well-paid ‘white-collar’ employees were laid off. Large-scale losses and earnings declines were experienced by banks. It had a significant impact on the housing market. The recession of 2020 will be different. The Coronavirus will have an especially negative impact on low-wage workers in the leisure and tourism industry. It will also depend on whether the worker is able to work from home (as a writer) or has a job in the physical economy, which would be hit harder. (For example, selling coffee) The impact will also be determined by the level of government assistance and whether or not they are eligible for benefits or rent relief.
Unemployment
Unemployment in the UK grew to almost 2.6 million during the recession of 2009, yet considering the severity of the recession, you might have anticipated it to be even higher (e.g. in the 1980s, unemployment rose to over 3 million). However, unemployment in several European countries has skyrocketed. Countries like Greece, Spain, and Portugal have over 20% unemployment rates.
Unemployment estimates could be understating the genuine degree of unemployment. In a recession, for example, the self-employed may face a significant drop in income yet are not considered unemployed.
Unemployment soared from 0% to 25% in three years during the Great Depression, when GDP fell rapidly.
Lower wages
In a downturn, businesses will aim to save expenses by keeping wages low. Some workers (particularly contract workers) may face wage decreases. This was a major element of the 2008-12 recession, which was exacerbated by rising living costs (e.g. higher taxes/oil prices). At the very least, cost-push inflation will be low in 2020, thanks to lower oil and commodity prices.
Underemployment is another factor that contributes to lower pay. Some employees may keep their jobs, but their hours will be reduced. Rather than working full-time, they choose to work part-time (e.g. 20 hours a week). As a result, while the growth in unemployment may be limited, many workers may face significant drops in effective income.
Self-employed people are particularly sensitive to economic downturns. During a downturn, self-employed people may experience a cash-flow shortage immediately and struggle to make ends meet.
Higher government borrowing
- As a result of the lower profit margins, the government receives lower corporate tax revenue.
- Stamp duty revenue is reduced due to decreasing house prices and fewer housing transactions.
- Government spending on social benefits, such as unemployment benefits, housing assistance, and income support, is on the rise.
A recession tends to raise the budget deficit and overall government debt due to decreased tax receipts and rising welfare payments (automatic fiscal stabilisers).
Following the crisis of 2008/09, the US budget deficit increased dramatically. The estimate for 2021 is incorrect. Borrowing in the United States will increase in 2021 as a result of the Coronavirus and the impending recession.
Because they rely on property and banking sector tax receipts, many countries saw their budget deficits skyrocket following the 2008 credit crisis. The property market’s decline had a greater impact on tax revenues. VAT receipts have a lower cyclicality.
A budget deficit may also rise as a result of the government’s decision to adopt an expansionary fiscal policy in order to boost economic growth. The UK government, for example, reduced VAT in 2010.
Falling asset prices
Because demand declines during a worldwide recession, oil prices tend to fall. The 2020 Coronavirus resulted in a significant decline in oil prices as well as a drastic collapse in stock prices. It’s a measure of how much the recession is expected to hurt, according to analysts. The economy’s downward spiral is aided by falling asset prices. House prices falling produce a negative wealth effect, lowering confidence and encouraging more spending cuts. In 2020, we are expected to see a decrease in housing prices.
Bond Yields
Government bond yields usually decline during a recession. This is because, during a recession, people tend to save more and choose the safety of bonds over the stock market. Bond rates in the United States have plummeted to near-record lows in 2020. The yield on a two-year US Treasury bill is 0.46 percent.
If markets believe that the recession will pose major issues for the government and a liquidity shortfall, bond yields may climb. For example, due to genuine concerns about the Italian economy collapsing, Italian bond yields began to rise in 2020. Much will be determined by the ECB’s reaction and whether or not they will generate money to supply liquidity.
Lost Output
A recession causes lower investment, which might harm the economy’s long-term productive capability. If the recession is brief, the amount of lost output may be minimal economies can recover. However, in a prolonged recession, the amount of lost output increases. Because of the depth of the recession and structural deficiencies, the 2009 recession resulted in a permanent loss of output.
Impact on Workers
Unemployment can have long-term consequences. To begin with, unemployment is extremely stressful and can negatively impact a person’s morale and even health. Areas with significant unemployment have a higher rate of social problems. High unemployment can contribute to social unrest, resulting in issues such as rioting and vandalism. Unemployment in large numbers might jeopardize a country’s social fabric.
Unemployed people miss out on opportunities to learn new skills and receive on-the-job training. Long-term unemployment might make it more difficult for a worker to find work in the future; it can even lead to people giving up and leaving the labor market entirely.
Unemployment and recession can lead to an increase in social/health issues including depression and suicide.
Impact on firms
Demand will decline, resulting in lower profitability for businesses. Some businesses may begin to lose money and eventually go out of business. This could be due to intrinsic inefficiency, but it could also be owing to cyclical causes, such as an inability to borrow enough money to make it through the recession. Some businesses will be hurt harder than others during a recession. In a recession, demand for luxury items (international vacations) and high-end sports automobiles plummets, making these companies more vulnerable.
If a corporation has sufficient reserves, it will be able to weather the storm, even if it suffers a temporary loss. Price wars and cost-cutting may be pursued by a company during a recession.
- Firms frequently engage in price wars in order to maintain market share. As a result, drastic price cuts are implemented, substantially reducing the company’s profitability.
- Companies will be obliged to look closely at decreasing expenses and maybe eliminating unproductive portions of the business as a result of declining profitability. Companies may be forced to lay off employees in order to cut costs.
Are there any potential positive effects of a recession?
- The collapse of Chinese manufacturing in early 2020 resulted in a significant reduction in air pollution, which will help to reduce mortality attributable to air pollution.
- Surprisingly, some recessions have been shown to extend life expectancy. During the Great Depression, death rates in the United States declined in places where there was a lot of unemployment. People spent less money on alcohol and cigarettes, both of which are harmful to one’s health. In addition, there has been a decrease in traffic accidents. (NPR – Lower mortality rates due to the Great Recession)
What are the telltale symptoms of a 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.