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Recession: Causes & its Impacts

This article is about the causes and impacts of recession, which is essential as per the view of Banking exam &  Interview. How increment in inflation & interest rate, reduction in  wages can have severe impact on the economy,  which in turn leads to drastic unemployment and currency devaluation.

Feb 24, 2016 16:29 IST
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Banking awareness is an important section out of which several questions are framed  in the IBPS/SBI driven exams. Jagranjosh.com has prepared this article on one of the  important banking topic called ‘Recession’.

It is generally relates to a slowdown in economic activity. It lasts in higher unemployment, High inflation and lower GDP of a nation. Recession is totally different from depression and Central Government/Highest administration is highly responsible for it.

Causes of Recessions:

  1. High Interest Rate: - To limit the available amount of money for investment, The Government used to hike interest rate on Loan.
  2. Increased Inflation: - Price rise of goods and services is also responsible for recession because it disrupts Supply and Demand mechanism.
  3. Reduced wages: - Low wages that are paid to the employees, which in turn he is unable to purchase the quantity of goods & services as he is able to do so previously.
  4. Reduced consumer confidence: - Whenever investors show low confidence in investing in the market, then the whole economy generally gets disturbed & may result in recession due to low FDI (Foreign Direct investment).

Impacts of Recession: -   These are as follows: -

  1. A decline in revenue indicates the stock price lowering of manufacturer and dividends is also depressed. Under such circumstances, Shareholders used to sell their stocks and reinvest in other financial services. The sell off and business decline also affects the Employer’s contributions.
  2. As the recession increases, Management and Labor agree to meet mutual concessions to save the company and their jobs respectively. These concessions refer to the wage reduction and reduced employee benefits.
  3. In recession, due to lack of revenues companies are unable to service their debts. This is responsible for further damaging of credit rating and preventing of other borrowings. In this context, if the company does not pay/repay its debts as per agreed terms & conditions then Bankruptcy may take place.
  4. Manufacturer companies lower the quality of products due to low capital and investments.
  5. Due to less investment, firms spend low money on advertising and marketing which results in low consumer confidence to purchase items.

 

 

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