A recession is when the GDP growth rate of a nation is negative for two consecutive quarters or more. However, a recession can be gauged much before the gross domestic product reports are out, on the basis of key economic indicators like decline in employment levels and incomes. As Kavan Choksi Wealth Advisor says, a recession has far-reaching and interconnected impacts that extend beyond economic indicators. It affects the daily lives of individuals, the functioning of businesses, and the stability of financial markets. Policymakers should try to implement effective measures to mitigate the negative effects of recession and promote a robust and sustainable recovery
Kavan Choksi Wealth Advisor sheds light on the causes and impact of recession
Recessions may occur due to a number of factors and reasons, some of which are even connected with sharp changes in the prices, which may lead to a steep drop in spending by both the private and public sectors.
Certain recessions, such as the 2008 global financial meltdown, are majorly rooted in the problems in the financial market. The rapid expansion of credit and sharp rises in asset prices commonly coincide with debt accumulation. As households and corporations get over-extended and experience problems in meeting their debt obligations, they generally lower consumption and investment. This, in turn, leads to a decrease in economic activity. While not all credit booms end up in a recession, but if they do, the recession may end up being more expensive than others.
In nations that have strong export sectors, recessions might be the result of a decline in external demand. The adverse impact of recession in large countries like the United States, Japan and Germany, is rapidly felt by their regional trading partners, particularly during globally synchronized recessions. Certain recessions are also caused by global shocks like the Covid-19 triggered lockdowns.
One of the most immediate and visible impacts of a recession is the rise in unemployment. Businesses cut costs to survive, leading to layoffs and hiring freezes. Individuals who lose their jobs face financial hardships, and those entering the job market may struggle to find employment. The decline in income levels exacerbates economic inequality and poses challenges to households trying to cover basic needs.
During a recession, consumer confidence often plummets. Fears about job security and economic uncertainty lead people to cut back on spending. This reduction in consumer spending, which is a significant driver of economic activity, can further contribute to the economic downturn. Businesses, in turn, face declining sales, leading to more layoffs and a vicious cycle of reduced demand.
Businesses tend to scale back investment during a recession due to lower demand and increased uncertainty. Capital expenditures, such as infrastructure projects and technology upgrades, are postponed or cancelled. This decline in business investment not only affects the companies directly involved but also has ripple effects throughout the supply chain and the broader economy.
As Kavan Choksi Wealth Advisor mentions, recessions can trigger significant volatility in financial markets. Stock prices may experience sharp declines, and investors may move their assets to safer options, such as bonds or cash. The banking sector may face challenges as defaults on loans increase, leading to a tightening of credit conditions.
