Recession is usually defined as a decline in the gross domestic product (GDP) of a country, which lasts more than two quarters. GDP is used to measure the total output of all companies in the country and the national income. Thus, judging by the decrease of companies’ production we can make a conclusion of a recession in the country, if the recession lasts more than a year and entails severe consequences, it is called economic depression. Recession is differently accepted by economists and businessmen. On the one hand, there are opinions that recession is an essential component of a business cycle. On the other hand, recession always leads to the worsening of life standard in the country and to stagnation in economics. The aim of this paper is to find out the causes of recession, its consequences and effects on the economic situation in a country and the ways of its avoidance.
Recession is quite a general notion and can be interpreted differently by people; therefore, there is a special agency that declares the state of recession. It is the National Bureau of Economic Research. According to its definition recession is a significant decline in economic activity lasting more than a few months (Recession.org).Â Typically, all the attempts to find out the causes of recession cause heated arguments. However, there is a common opinion that the major cause of recession is usually the result of actions taken in order to control the money supply in the country. When the balance between inflation, money supply and interest rates is lost and the economy goes out of control, the attempts to improve the situation by adding more money to the market can be counterproductive and lead to the stagnation of economy. Recession is usually characterized by the decrease in purchasing capacity of people due to growing unemployment of people and reduction of people’s income, decline in factory production, and problems in a stock market. Since the phenomenon of recession is rather vague, it causes many questions and it is impossible to define precisely the characteristics of recession.
It is very hard to predict recession in economy. Still there are some features that can be signs of coming recession. Thus, in the United States, the tumble in the stock market has been often followed by a recession though it was not always. Another possible indicator of a soon recession is a low level of employment during three months. The Index of Leading Indicators might also be a predicator of recession. A non-governmental organization the conference board calculates this index in order to predict the development of economy for the future.
This index includes such indicators as a number of applications for unemployment insurance, an average number of hours, worked by manufacturing workers per week, a number of new orders for goods from manufacturers, consumer sentiment index, the speed of delivery of new products from providers to sellers etc. However, this index can not be absolutely relied upon as there were many cases when the predicted recession did not happen or the period between the possible time of recession, shown by the Index of Leading Indicators and the time of real recession was very long (Allen, 2000).
Recession influences various kinds of market differently. It has already been mentioned that stock markets might sometimes predict future recession. The majority of recessions were preceded by a stock market crash. Housing markets are also subject to the influence of recessions. However, it takes them much longer to recover from it and they stay in decline long after the end of the recession. Such spheres as pharmaceuticals, financial services, tobacco are usually less influenced by the economic crisis. However, in case recession turns into depression, these sectors might also suffer considerably.
Thus, the effects of recession become apparent. Stock markets experience difficulties, the level of unemployment rises, and the level of manufacturing of goods and of delivering the services decreases. Since the income of people lowers, their purchasing capacity diminishes and there is no demand for goods and services. Many factories and enterprises close, which contributes to the increase of unemployment.
The reduction of working manufactories leads to the aggravating instability of the balance between money supply, inflation and interest rates.
Despite the opinion that recession is an essential part of economic development and it is difficult to predict it, it is always necessary to find the ways to overcome it. It is usually the government that is responsible for the finding a way out of the recession, while the economists might only advise different possible solutions. Here the opinions differ. For example, economists, advocating Keynesian principles, stand for the deficit spending. In this case, the government increases its purchases and thus it creates a market for business production, consequently, the income increases and stimulates consumption expenses, which creates demand for the business output. This contributes to the rise of the Gross National Product and so to the end of recession.
Another way of ending a recession is a supply-side approach. It bases on the principle of giving an incentive to people to produce more goods and deliver more services. Usually it is gained by tax reduction. The best results are achieved by adjusting tax rates for those companies that have high revenues and capital investments. Thus, these companies are stimulated to increase supply, which contradicts the opinion of Keynesian economists, who claim that tax cutting should be aimed at the increase of demand, not supply.
There are economists who advise government to interfere as minimally as possible into the economic processes. This so-called laissez-faire theory implies minimal intervention of government into the economy, free markets and low taxes. Some economists advise to measure the ability of customers to resist the recession and to match the offer of goods and services with their demands.
As it has already been mentioned the approaches to recession are quite different and many people see its positive influence on economics, arguing that those firms are able to survive the recession can make a good contribution to the further development of the country, while those which have closed, just could not manage their costs and incomes properly.
Those who see the recession as having had the effect of cutting out the fat’ will expect to find that the most able firms have weathered its storms with relative ease, and that such firms have been able to increase their control over costs and bring forward major investments in plant and equipment, training and R&D. By contrast, those who fear that the recession has cut into muscle’ expect to observe firms making short-sighted decisions to control costs, and postponing or abandoning major strategic investments in technological, human and physical capital which promote long-run competitiveness (Geroski and Gregg, 64).
To make a conclusion, recession is quite difficult to predict and to measure. It consists in considerable decrease of GNP, rising unemployment rate and decline in stock markets and factory production. Long recession might result in economic depression. However, it is possible to find ways out it. Economists propose different solutions, which include tax cuts, side supply laissez-faire methods.