Effects of a Recession

A recession hurts an economy, in many ways: 

Reduction in Purchasing Power

A recession not only results in a reduction in the purchasing power of the common people but also increases unemployment. The reduction in purchasing power of the people decreases the demand in the market and thus manufacturing companies also limit their production which also leads to decline in the GDP of a nation. However, this decrease in demand due to a reduction in purchasing power also helps an economy to recover from the recession. 

High Unemployment Rate

As a recession occurs, companies and businesses start cutting their cost, and the most commonly adopted way of doing it by many companies is laying off employees. However, as the unemployment rate increases, the cash flow in the market reduces, thus helping the economy to recover faster. However on the other hand higher unemployment rate increases poverty and decreases the economic output of the country as well.

Fall in Interest Rates

Short-term interest rates tend to fall rapidly during a recession, however, the long-term doesn’t get much affected but has a significant impact on interest rates as well. In the short term, investments are quite risky and get easily affected by market volatility and recession. Short-term investments are badly affected by inflation and usually require a larger investment and thus come with a higher risk. 

A decline in Economic Output

The economic output tends to fall during a recession as the demand falls, and supply also falls, thus companies limit their manufacturing capacities, leading to declining economic output of the nation. Companies start cost-cutting during a recession and limit their production, but still, their condition is not as bad as the luxury industry. 

Recession is one of the major factors that can disrupt the continuous economic growth of a nation. A large-scale, widespread economic downturn that hurts a nation’s economic growth is known as a recession. The standard rule of thumb is that an economy is said to be in a recession if it has a negative GDP for more than two consecutive quarters. However, even though this short period of recession, causes great damage to the country’s economy, as it results in unemployment, leading to increased poverty.