You must have heard multiple headlines stating that our world is heading toward a recession. Every news channel and newspaper makes this headline. But what exactly it means to enter a recession? we shall understand what recession is, the factors that lead to this, and its impact on your life.
What is a recession?
GDP which stands for gross domestic product, tells us the market valuation of all the products produced within a country in a given time. Simply it tells us how well the market of a country is performing. Higher GDP represents high economic activity in a country and it is a good indicator. But if the GDP value goes in negative, then we say that a country has entered into recession.
Every country and institution has its definition of recession but they vary marginally. Generally, when economic activities shrink such as low production in factories, export, etc it marks the beginning of the Recession.
what causes recession?
A sudden economic disruption
A country might face a situation off guard which could push it towards recession. For example, if from tomorrow all the oil dealers from which India imports oil double their price without any notice then this would create a sudden cash crunch. It would disrupt the budget of a nation. In this case either the country would need to borrow more money or reduce import supply. This will have a major impact on people’s life in terms of high fuel costs and shortage of fuel.
Another recent example would be the coronavirus pandemic. Globally no government was prepared for this. Overnight the entire market closed down.
Excessive debt
Borrowing money is essential to run a country. It helps to develop infrastructure. But if the debt is crossed beyond a limit then it will have a negative impact. If a nation is borrowing much higher than its capability to repay then it directly headed for a recession.
High inflation
Inflation refers to the rising prices of commodities. Many economists state that a small rate of inflation is good for the economy. But if it goes out of hand then it can have a serious impact on the economy. This one factor can be controlled. Central banks usually raise interest rates to limit and slow down economic activity to reduce inflation.
Technology
New technology always comes with its ups and downs. New technology can boost production and speed up the economy. On the other hand, it also holds the potential to wipe away thousands of jobs in a very short period. With the advancement of AI and robotics, many economists believe that they will eliminate multiple categories of jobs leaving millions of people unemployed in a short time frame.
Financial bubble
When it comes to real estate and stocks, a lot of investment decision involves emotions. For example, if people are optimistic about the development of a location then they will invest more in real estate in that location. This triggers a chain reaction and soon more and more people will be investing. Similarly, investors invest more in the stock market when they see the economy is growing. But if for any reason this bubble breaks then it could trigger a recession. The financial bubble is also referred to as the Asset bubble. This bubble could break due to major changes in government policies or any other sudden disruption.
How does the recession affect me?
Recession is inevitable, but there is a silver lining to it. No recession can last forever. It is not easy to survive a recession but once you pass that phase there is promising economic growth.
Conclusion
Recession is inevitable, but there is a silver lining to it. No recession can last forever. It is not easy to survive a recession but once you pass that phase there is promising economic growth.