Last Updated on March 9, 2021 by Filip Poutintsev
In 1929, The stock market crashed and ended a decade of rapid economic growth in America and by 1932, roughly a quarter of workers were unemployed, half of the nation’s banks had failed and stocks had lost 80 percent of their value. -Analysis by the University of Illinois at Urbana-Champaign
What Actually Happened?
The Great Depression, starting from the United States of America was a worldwide economic depression, meaning the decline of the global economy. Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%.
Recession and Depression:
Recession is a business cycle contraction when there is a general decline in economic activity which lasts at least 6 months. A depression, on the other hand, is more severe as it lasts for several years.
The recent recession was from December 2007 to June 2009, lasting for about 18 months. Whereas, the recent depression was in 1929-39, lasting for about a decade. To date, there have been thirty-three recessions in our global economic history.
How are Recession/ Depressions Caused?
Recessions are generally unpredictable and uncertain, these can happen overtime with a new outbreak or a major change in a country’s or global economy. The most common example can be when the entire global economic market decides to shut down until no foreseeable time.
Recessions can result from a cluster of business errors being realized simultaneously. Firms are forced to reallocate resources, scale back production, limit losses and, sometimes, lay off employees.
Those are the clear and visible causes of recessions. It is not clear what causes a general cluster of business errors, why they are suddenly realized, and how they can be avoided. Hence, the cause of recessions is always unique to each new case.
However, the most common events to start recessions are:
- Financial crisis
- Supply shock
- Inflation: rise in the prices of goods and services over a period of time
Effects of Recession:
Whenever a recession is triggered, governments always have to take measures to counteract the negative aspects of recessions, sometimes my lowering inflation or by decreasing taxes but nevertheless, a recession always leaves a deep crater in the economic history of a nation and there are always consequences,
Here we have 10 Disadvantages of Recession
Disadvantages of Recession
1. Employee Issues
Recessions directly affect civilians as unemployment goes up. People are no longer able to sustain their jobs or sustain their jobs. The paycheck, income, and wages can lower significantly.
2. GDP Goes Down
Gross Domestic Product or GDP is the first thing in check when a recession undergoes. is a monetary measure of the market value of all the final goods and services produced in a specific time period.
When a country is established in the global market, the GDP of the country is likely to go significantly higher with all the goods exported by the nation. But, when GDP starts to lower by a margin, there is always a chance of a recession.
3. Recession Deepening into Depression
Government finances are always ruined in recession. People pay fewer taxes because of higher unemployment and there is more expenditure on unemployment benefits. This deterioration in government finances can cause markets to be worried about levels of government borrowing leading to higher interest rate costs.
This rise in bond yields may put pressure on governments to reduce budget deficits through spending cuts and tax rises. This can make the recession worse and more difficult to get out of. This was particularly a problem for many Eurozone economies in the aftermath of the 2009 recession.
4. Falling Asset Prices
In a global recession, prices fall as demand falls. Common example: COVID-19 pandemic in 2020 has caused a sharp drop in oil prices and also a dramatic fall in share prices. It is an indication of the extent to which analysts expect the recession to hurt.
Falling asset prices contribute to the downward spiral in the economy. Similarly, falling house prices create a negative wealth effect, reducing confidence and causing further falls in spending. We are likely to see a drop in house prices in 2020.
5. Quality of Services
To make a comeback, it is always essential to increase both income and expenditure simultaneously. In an attempt to cut costs to improve bottom lines, a company may compromise the quality of the products it produces.
For example, The quality of food being produced by any company may also be cut, compromising flavor unnoticeably in mass productions.
6. Falling Share Prices
As the recession continues, stock market crashes, with lots of those negatives and red markings. Share values go down, money spent to buy those shares are lost. Every civilian involved in the stock market has a very likely chance to lose what they invested.
Meanwhile, this could be a good time to buy some of those cheap stocks but nevertheless, it is very uncertain which companies are able to recover and even if they do, up to what extent.
7. Exchange Rate
Along with stock market crises, Forex loses its value as well. Currencies tend to devalue in a recession because, in a recession, people expect lower interest rates and so there is less demand for the currency. However, if there is a global recession and all countries are affected this may not occur.
Family budgets in a common family, may not accommodate short and long-term non-residential investments during a recession. Families may put investment accounts on hold, hoping to catch-up at a later date.
Families may also be tempted to invest money because of the reduced expense of stocks, but without any expendable income, investing may not be feasible. This can have devastating effects on retirement accounts and savings accounts. It may also become necessary to tap into investments and retirement funds for cash.
In response to a global downturn, countries are often encouraged to respond with protectionist measures (e.g. raising import duties). This leads to retaliation and a general decline in trade which has adverse effects. Protectionism is the practice of shielding a country’s domestic industries from foreign competition by taxing imports.
Hysterias during global events like a recession is very likely to occur. Fake news portals spread rumors and plant false mindset into people dealing with the recession. This creates further panic and exaggerates civilian problems. So, it is very important to remain calm and deal with what comes further.
Recessions are likely to occur when pandemics and inflation break down. When a likely recession happens, it resets the economic growth of a country. But slowly, as recovery starts are practiced, there is a slight chance the borderline between the economic situation of two nations comparatively is pushed even further.
It is very important to keep track of the downfall and rise of stocks, inflation or any diseases or likely epidemic to foresee a recession and be prepared for the minimal loss possible.