Economic recession

What is the economic recession?

The economic recession is the phase of the economic cycle characterized by the decreased activity, of job and the production. Investment may also decrease and there may be a trend towards deflation (or a decrease in inflation).

An economy is considered to be in recession when its GDP has fallen for 2 consecutive quarters. Let us bear in mind that the measurement of GDP is in charge of the country's authorities, but it can also be carried out by private firms or international organizations.

Characteristics of the economic recession

The common characteristics of the economic recession are as follows:

• The consumption decreases, especially the purchase of real estate and vehicles, as well as those associated with loans.
• The investment it is very sensitive to recessions and tends to have really important drops during these periods, especially due to the expectations of future agents, who prefer to suspend them and wait for the economic condition of the country to improve.
• Due to the drop in consumption, companies must produce fewer goods and services so that there is not an excess supply, for this reason they lay off workers to adjust their production and thus increase the unemployment.
• Inflation. In periods of recession it is usually low due to the low demand for the products.

Causes and consequences of economic recession

Causes

An economic recession can be caused by different factors associated with the shifts in aggregate demand, among them:

• Natural phenomena: hurricanes, earthquakes, floods, etc. they can cause damage to infrastructure and cause a country's economy to suffer and not be able to produce enough.
• Armed conflicts: Armed conflicts create very negative expectations regarding the future outlook of an economy, which is why, to a large extent, it contracts.
• Decrease in consumption: it can be due to changes in consumption patterns, negative expectations that make people save more, etc.
• Investment: The fall in investment can lead to an economic recession, which will lead to an even more pronounced fall in investment in the future.

Consequences

Recessions are a natural part of the economic cycle, therefore, if they are not serious they should not have serious consequences on the economy, especially when they are addressed correctly to correct them.

However, in some cases economic recessions are not corrected and can extend over time, having consequences on the population. The main issue is that the household income decreases, you consume less and you have a lower life condition than you had before the contraction.

Prolonged recessions also create uncertainty around the country and its economic policy, making it less attractive to invest and conditioning the expectations that economic agents form around it.