Recession: Definition, Causes, Impacts, and Signs

One of the issues that is interesting and becomes a hot ball among the people towards the end of this year is the recession. Quite a number of podcasts, discussion forums, and interviews have raised the issue of an economic recession that will occur next year. Are you panicking about this?

Inhale deeply and exhale slowly. Before you panic, it would be better if we understood together what a recession is. What’s the impact? What are the signs?

Recession and Its Causes

A recession is a significant decline in economic activity over a long period of time and is stagnant or continuous. When this condition occurs, to be honest, it is unpredictable, the duration can take months or even years

Then what causes it?

Basically, there are several things that can cause an economic recession, namely:

● Deteriorating Economic Conditions

We cannot close our eyes to the current state of the world economy. The Covid-19 pandemic that occurred in 2020 continues to undermine the finances of various countries. People’s purchasing power is weakening and the country is even experiencing debt accumulation.

● Inflation

Still related to the pandemic in the last two years which has devastated the world economy, inflation due to soaring energy commodity prices has had a real impact on society. As a result, the prices of goods and services are increasing. This high price increase was not accompanied by an increase in wages so that people’s purchasing power was getting weaker.

● Increase in Interest Rates

One of the policies of the world’s central banks this time is to raise the benchmark interest rate. The reason is the continuous inflation fluctuations.

This increase in interest rates actually serves to protect the value of the currency. However, on the other hand, rising interest rates will actually burden borrowers, leading to bad credit.

● Deflation

Not only inflation, deflation can also trigger an economic recession. When deflation occurs, purchasing power may increase. However, providers of goods and services will lose money.

In addition, there is a factor that people will delay purchases until the price reaches the lowest level. This delay could damage the economy as a whole.

● Panic Selling Investors

When unwanted things happen in the economic field, investors usually make rash decisions. One of them is panic selling which destroys the market.

Signs of an Economic Recession

You can see a recession when the following signs appear.

● Imbalance of Production and Consumption

When production is excessive, while purchasing power is low, it can trigger stock buildup. Conversely, when consumption is too high, this can encourage imports. This imbalance can result in uncontrolled spending and lower producer profits.

● Import Value is Greater than Export

One of the activities that affect the country’s economic condition is the amount of imports and exports. When the value of imports is greater than exports, this is a sign of a recession. The risk of imports that are too large can create a deficit in the state budget so that national income decreases.

● Job Opportunities Are Decreasing

The unemployment rate can be an indicator of a country’s weak economy. When many people are laid off and unemployed, the crime rate can increase. This can result in a withdrawal of investors to invest so that various economic activities are also affected.

● Negative Economic Growth

The pandemic factor has made many countries experience consecutive negative economic growth. This is another sign of a recession. There are quite a lot of influencing factors, ranging from spending policies, consumption, unstable investment, and so on.

Impact of Economic Recession

Basically there are three parties affected by the economic recession, namely the government, employers, and also workers. Furthermore, you can see the impact of each below.

● Entrepreneur

Any business sector on average will be affected by an economic recession. This is because people’s purchasing power has decreased and their income has also decreased. This could affect the company’s financial condition and potentially lead to bankruptcy.

● Workers

When economic conditions are unstable or impossible, the company will make efficiency. One of them is by reducing operational costs by closing business areas, laying off employees, and also cutting wages.

● Government

The impact of the economic recession on government is related to tax and non-tax revenues. Low purchasing power among the public has led to a decrease in the amount of VAT paid to the state treasury. Meanwhile, the government must also strive to ensure people’s welfare in various ways.

Recession conditions do look quite scary. However, you don’t need to worry too much. Increase savings and manage finances as well as possible so that we can meet next year better.