The economic recession is a period of decreased economic activity in which economic growth decreases and there is a contraction in employment, production, income and the main macroeconomic indicators of a country or economic region. In theory, an economic recession occurs when there are two consecutive quarters of negative Gross Domestic Product (GDP) growth.
Causes of an economic recession
The causes of a recession can be multiple, but generally they are due to a decrease in aggregate demand and investment. This may be due to a decrease in consumer consumption due to inflationary effects, a decrease in business investment, or a lag in exports in the trade balance.
However, there are many other factors that act in isolation, but are often interrelated and can reinforce each other to cause an economic downturn.
Capital flight: Refers to the movement of investors who withdraw their money from a country due to a lack of confidence in its economy. When investors consider that a country is not capable of paying its debts or maintaining its economic stability, they usually withdraw their investments and take their capital to another, safer place. This can cause a decrease in investment and economic activity in the affected country, which in turn can lead to a recession.
Economic uncertainty: When there is economic uncertainty, people and companies can become more cautious in their spending and investments, which can cause a decrease in the demand for goods and services. Economic uncertainty can be caused by factors such as changes in government economic policies, fluctuations in international markets, or unforeseen events such as natural disasters or pandemics.
Excessive debt: If individuals, businesses, or governments borrow too much, they may find it difficult to pay off their debts and maintain their financial solvency. If the debt becomes unsustainable, it can cause a financial crisis that affects the entire economy. Excessive debt can be caused by unwise economic policies, such as lending without proper collateral or a lack of control over government spending.
Consequences of a recession
The consequences of a recession are numerous and affect individuals, businesses, and governments alike.
At the business level during a recession, many companies may experience a decline in demand for their products or services, which can directly affect their revenue and profit margins. In addition, organizations may face difficulties obtaining financing to expand or invest in new projects. As a result, some businesses may be forced to reduce staff or even close, which can have a significant impact on the local economy and employment.
On the other hand, economic downturns can have a negative effect on society in general. During a recession there is an increase in unemployment and poverty. In addition, people may face difficulties paying off their debts and maintaining their standard of living, which can lead to an increase in crime and social instability. There may also be a decrease in investment in public services and social programs, which can further aggravate the situation.
How companies and governments act in these periods
During a recession, both businesses and governments often take steps to mitigate the economic impact. Businesses can cut costs, cut expenses, and adjust their operations to stay profitable. Governments can implement fiscal and monetary policies to stimulate the economy, such as lowering interest rates, increasing government spending, and offering tax incentives to businesses. Some of these actions are:
Government Policies: Governments can implement fiscal and monetary policies to stimulate the economy during a recession. For example, they can lower interest rates to encourage consumption and investment, increase public spending on infrastructure and social programs to create jobs and stimulate the local economy and offer tax incentives for businesses to invest and expand. They can also implement direct financial aid programs for people affected by the crisis, such as unemployment benefits or assistance programs for rent or mortgage payments.
Business support: Businesses can look for ways to reduce their costs and increase their efficiency during a downturn. This may include reducing production and expenses, restructuring debt, and seeking new markets and business opportunities. In addition, governments can provide financial support to businesses affected by the crisis, such as loans and subsidies, to help them stay afloat and avoid mass layoffs.
Incentives for consumption: Companies can implement pricing policies and special promotions to attract consumers and stimulate consumption during a recession. For example, they may offer price discounts, bundles of products and services, and other incentives to attract consumers. Governments can also implement incentive programs for consumption, such as the reduction of sales taxes or the implementation of tax incentive programs for the purchase of products and services.
The 2008 recession
The 2008 recession, also known as the Great Recession, was a global financial crisis that began in the United States and spread globally. The main cause of the recession was the collapse of the US housing market due to subprime mortgage lending to unreliable borrowers. The collapse of the housing market led to a financial crisis in which several banks and other financial institutions declared bankruptcy. The resulting recession severely affected the global economy, causing a decline in production, employment, and investment around the world. Both governments and companies took measures to mitigate the effects of the recession, such as the implementation of fiscal policies and cost reduction.