What is Economic Recession and its Causes?

Economic recession and its causes: Economic recession is referred to as a period characterised by a marked decrease in the economic activity of a country. Recession is said to be taking place when the economy experiences negative GDP growth for more than two quarters.

The period of recession is defined by declining growth, reduced spending, economic contraction and high unemployment rates due to cost-cutting.

As there will be reduced demand for goods and services, the manufacturing sector will also take a hit resulting in declined manufacturing.

Causes of Recession

Economic growth and expansion is reduced due to some factors, and these factors are the causes of recession, such as

Economic Shock 

A sudden economic shock can be referred to as a jolt to the economy, which results in heavy financial damage; the recent Coronavirus pandemic is an example of a sudden economic shock.

High Levels of Debt

Whenever any business or individual takes too much debt, the cost of servicing the debt becomes difficult and results in the inability to pay the debt. The result of such a condition is bankruptcy which causes heavy damage to the economy.

High Inflation

Recessions are also brought about by high inflation rates. Inflation refers to the rise in prices of goods and commodities. But with high levels of inflation, the government is bound to increase the rates of interest to control the rising inflation.

The increased interest rates cause reduced economic growth and can subsequently bring about a recession ( if the inflation rate is uncontrolled).

Deflation

Deflation is another reason for recession, as when the prices tend to decline rapidly, it leads to reduced wages which leads to reduced spending. The direct effect of such a situation is a recession.

Technological Improvements

Whenever a new technology is introduced, the short-term impact of such changes causes disruption in employment, leading to the loss of jobs that results in recession.