Recession refers to that economic condition where there is general slowdown in the economy leading to fall in profits of the company, rise in unemployment rate and negative growth in various important sectors of the economy. As a rule of thumb if there is negative GDP growth in 2 consecutive quarters then that economy is said to be in recession, however it should not be taken as conclusive proof because recession is much broader and complex concept. Given below are the various features of recession –
- The first and foremost feature of recession is that stock market fall quite badly and that happens usually in advance so stock market fall is anticipatory and not reactive and therefore stock market tend to bottom out in advance and they usually rise before the economy come out of recession.
- In recessionary times private sector spending drops sharply and in extreme cases it goes to zero, it is the government which has to spend or throw money in the market by doing quantitative easing so as to increase the confidence of the people.
- Unemployment is another feature of recession because during recessionary phase companies tend to cut their expenditure and the biggest expenditure of companies after capital expenditure is employees expenses which naturally results in employees being in line of fire as companies resort to large scale downsizing and closure of non profitable departments or units.
- Commodities like gold and silver tend to rise in recession because those people who have money do not want to take risk by investing in real estate or stock market and gold and silver being relatively safe people buy them leading to rise in price of these two commodities.
- Interest rate falls as government through central banks try to induce people to invest more and save less because in recession there is lack of confidence and nobody wants to invest but due to lowering of interest rates fixed deposits become unattractive and therefore it leads to flight of money from saving instruments to investment instruments.
- In times of recession rate of insolvency among companies and borrowers rises sharply and one can safely say that no recession would be complete without hundreds of companies and borrowers going bankrupt.
- Recession also leads to political instability as people tend to blame government which is in power for their and country plight and it usually leads to current government being thrown out of power and new government taking its place although it does not guarantee that country will come out of recession.
As one can see from the above that recession is a very complex and dangerous situation and it should not be treated as only essay subject for students rather it should be understood properly so that one is prepared for it well in advance whenever it happens.