There is no universally accepted definition for Recession. It’s a heated debate among economists for ages. Generally, it is believed that a decline in the country’s GDP for two consecutive quarters (6 months) may cause a Recession.
A recession is a mild decline in the economic activities of a country that lasts from months to years. There are countless variables for economic health and equal variables for recession too. So it is difficult to pinpoint specific causes. Let’s examine some of the key reasons for the recession.
The interest rate is the rate at which the debt is taken by the borrower. The loan interest rate has to be paid until the principal amount is paid off.
Low-interest rates cause companies (borrowers) to take more debt as it is available at a lower rate and invest the same into different projects. Companies make efficient production and the operating cycle runs well. At lower interest rate times people don’t tend to invest their money as the return on it is small and so they start spending the amount and the economy flourishes with money flow.
Other way round if the interest rates were high then the companies take low debts which instantly disturbs the operating cycle resulting in lower output. People start investing more money, as now they can earn higher returns and so spends less.
Inflation means an increase in the cost of goods and services which increases the cost of living. But inflation isn’t a bad thing because it is thought that lower inflation boosts up the economy. Whereas higher inflation should be matched with high demand or else the economy may go down. Inflation stops people from spending more which in turn holds the free flow of money into the economy.
Interest rates and inflation rates were managed by the government and central bank to keep it in place by implementing Expansionary/Contractionary monetary policies based on the current business cycles. At worst cases government starts printing money to keep the supply of money in the market. The value of the country’s currency drops if over-printed.
DECLINE IN GDP
Gross Domestic Product is the total market value of finished goods and services with in the country’s border. Interest and Inflation rates highly impact GDP and it turns downward.
If the operating activities of an industry or sector weaken it can no longer manage the risk and starts laying off the employees. This is the reason why many people lose their job during the recession.
DEMAND AND SUPPLY DISRUPTION
Due to the above-mentioned reasons at times there will be higher supply and lower demand or vice versa. A negative disruption between the demand and supply occurs which can also affect the foreign trade and no foreign currency enters the country making it an even difficult situation to handle.
The fear of recession makes people to pull back their investments which freezes the money flow in the economy. This kind of behavior can be easily spotted at the turmoil phase of stock markets.