What Are the Causes of Recession in an Economy?

The term recession demonstrates a slump in the economic activity of a nation. Usually, this phenomenon lasts an average period of 10 to 12 months; however, the economy takes many years to get back on its feet. Generally, recessions are instigated by various factors such as financial crises, adverse supply shocks, external trade shocks, natural disasters, etc. To know more about the causes of global recession, continue reading.

Some of the common factors that are responsible for causing an economic recession in a country are as follows:

• High Inflation: Inflation is a common economic phenomenon wherein the prices of certain goods or services tend to increase continuously. This price escalation causes a severe impact by weakening an individual's purchasing capacity. Simultaneously, it leads to a reduction in the total outputs of goods and services. If such a situation persists for a long-time, it can lead to high unemployment, poverty, and a recession.
• Extreme Deflation: Deflation is the opposite phenomenon of inflation, wherein the prices of certain goods and services tend to decrease. This motivates consumers to halt their purchases and wait until the costs diminish. Like inflation, deflation also has an adverse effect that can trigger a recession. In this situation, the price of products and services drops periodically, eventually causing a reduction in wages. Also, during this period, even though an individual's purchasing power decreases, business owners become forced to lessen the costs of manufactured products which can cause a loss of business.
• Disparity Between Production and Consumption: The discrepancy between consumption and production is another important reason for recession. Goods and services manufactured in surplus despite people's reduced purchasing power or market consumption can be highly upsetting for producers. This eventually raises corporate spending and reduces profits. It may become difficult for them to continue their operations this way for a long time.
• Unexpected Economic Shock: Another thing responsible for recession is a sudden economic shock like a stock market crash and liquidity crisis in the financial market. This can also occur due to reduced purchasing power caused by financial problems and other issues like too much debt. This amassed debt will affect the interest rates and ultimately cause the inability to repay it or default.
• Effects of War: Wars or battles are also one of the leading causes of the global recession that affect the economy. Under such circumstances, a severe economic slowdown appears. It may take quite a long time to recover from the situation.
• Collapse of Stock Market: In a bearish market condition, investors pull out money from the stock market. As a result, there is an exhaustion of capital from the businesses. In case several firms in the economy experience the impact of a stock market collapse, you can see the signs of recession, including layoffs and an increase in the price of commodities.
• Economic Scandals and Scams: Large establishments and even government organisations sometimes adopt illicit and illegal practices to enhance profitability. With the appearance of such unlawful scandals and schemes, the nation's economy gets severely affected.

Recessions lead to standard monetary and fiscal impacts that comprise decreased credit availability, reduced short-term interest rates, increased unemployment, etc. This results in the reduction of consumption rates, which declines inflation rates. The following are four signs that signifies recession in an economy of a nation:

• Rise in Cost of Living: During a recession, household items like food, clothes, fuels, groceries, and medicines become more expensive than their general price. As the costs escalate, it becomes challenging for individuals to buy those items. Inflation also erodes the ability of people to spend for commodities as the hike in the price of necessary items becomes greater compared to their earnings. This means it raises the cost of living. Hence, consumers narrow their spending list and avoid buying unnecessary or difficult-to-afford items.
• Unemployment and Job Loss: During a recession, businesses lay off their employees and stop hiring new candidates to reduce overhead costs. Besides reducing employees, companies also stop new employment, resulting in the increased unemployment status of the economy. Unemployed individuals are forced to cut their expenditures to deal with this critical slump situation.
• Increase in Government Debt: One of the noteworthy signs of recession is that it increases government expenditure on different aspects, including income support/generation, providing unemployment benefits, public welfare activities, and so on. All these increased expenditures lessen the revenue of government earnings. In a nutshell, a recession is defined as a significant and long-term crash in an economy. High inflation, persisting deflation, economic shocks, etc., are some of the major causes of the recession. Such an economic condition affects the common people directly as their purchasing power falls and unemployment increases significantly for a prolonged period.
• Poor Business Growth: In an economic recession, both small and large-scale businesses experience a drop in their production, sales and profits. Their desperate efforts to reduce its expenses and increase profitability caused an increased number of layoffs and a reduction in the spending on capital marketing and research. Therefore, recessions may restrain credit access and increase business bankruptcies.