Economic Recession

Economic Recession: Definition, Causes and Impact

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In measuring the development and progress of a country, of course the main reference or indicator is how much economic growth is.

Meanwhile, the level of economic growth can be seen from the value of the Gross Domestic Product (GDP) in the country.

If the GDP is low and continues to decline for months, it can trigger an economic recession . What is an economic recession?

Understanding Economic Recession

A recession or slump is a condition marked by a decline in the wheels of the economy due to the weakening of the value of Gross Domestic Product (GDP) for six consecutive months in the same year.

A recession is marked by a significant decline in economic activity that lasts for several months. An economic recession can also be defined as a major slowdown or contraction in economic activity.

Recession is marked by the value of economic growth reaching 0% and can even reach minus in its worst condition. This condition can certainly disrupt the economic system and threaten the survival of the community.

A recession can be characterized by high unemployment , falling retail sales, and a prolonged contraction in manufacturing earnings.

Characteristics of an Economic Recession

This economic disaster certainly has certain characteristics, the following are the characteristics:

  1. Gross Domestic Product (GDP) continues to decline.
  2. The real income of the people is decreasing.
  3. The decline in sales and manufacturing production , many goods are not sold and piled up in factories.
  4. The unemployment rate is getting higher, while there are fewer jobs.
  5. People’s purchasing power or consumption is low.
  6. Economic growth has slumped for two consecutive quarters.

Causes of the Economic Recession

This decline in economic conditions and GDP is certainly caused by many factors, including:

1. Inflation

Inflation is a condition in which the price of goods increases continuously. This is actually not a bad thing, but if this price increase occurs excessively or significantly, it will certainly have an impact on society and cause a recession.

If the price of goods for public needs continues to soar to the point where people are unable to carry out consumption activities and cannot fulfill their needs, then this can be a disaster for the country.

2. Deflation

The opposite of inflation, deflation is a condition in which the price of goods continues to experience a significant decline. This will have a similar impact, because if production prices fall, wages will also fall and suppress market price stability.

Deflation has more of an impact on business owners. If this condition continues, many companies will not be able to continue their business and lead to bankruptcy. This will certainly have an impact on the destruction of the economic system.

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3. Asset Bubble

An asset bubble is a situation where the impact can be enormous. This condition occurs because there are many investors who are competing to buy shares when the value is high, and competing to sell them when the economy is in disarray.

Another name for this situation is irrational excitement. This joy comes when investors make decisions to buy stocks and real estate when the economy is good. It’s that fun that inflates the stock market and residential assets.

Until in the end the bubble burst because the economy was in a downturn, then they would destroy the market by selling all the assets they had. This then triggers a recession.

4. Economic Shock

This condition can be many things. Starting from a pile of individual debt, to companies. The more debt you have, the higher the repayment fee will be. In fact, this can get to the point where the debtor is unable to pay off the debt.

Economic shocks can also occur due to natural disasters , political and social instability, terrorism , war , or in times of pandemics such as those that have occurred since 2020 until now.

5. High Interest Rates

High interest rates can also cause prolonged economic problems . A high nominal can indeed protect the value of the currency, but it can also burden the debtor and cause credit faltering. If this problem occurs continuously, it is not surprising that many banks close and collapse.

6. Loss of Investor Confidence

In economic development, investment is the key. Therefore, it is necessary to have a conducive and safe climate so that investors are interested and believe in pouring their money.

If many investors lose confidence and withdraw their investment, then the economy will be weak, production will decrease, unemployment will increase and of course the country will experience an economic recession.

7. Imports are Bigger than Exports

When countries bring in more of their basic needs from abroad and are not matched by sales of domestic products to foreign countries, this will trigger a recession.

It is clear that the expenditure for obtaining imported goods is greater than the income from selling local products to foreign countries. This will of course lead to a deficit in the state budget.

Impact of the Economic Recession

The economic recession will certainly have a big impact on all. At least this impact will be grouped into 3 groups, namely:

1. Government

An economic recession can cause a reduction in the state budget that comes from taxes and non-taxes. This is because people’s income and property prices have decreased.

Not only that, the recession also causes high unemployment rates. Of course, the government must find ways to open up the widest possible employment opportunities for those in need.

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Not surprisingly, this condition can make countries apply for loans to foreign banks and increase the amount of state debt.

2. Company

Recession is one aspect that can lead to business bankruptcy . When the company is not strong enough to face losses and economic problems that hit the market, the solution is to go out of business.

Of course, that’s not a good way out. Because this causes massive layoffs that lead to low economic activity in the community due to poverty.

3. Workers

They are the worst affected in the event of a recession. Workers will be threatened with losing their jobs and having difficulty meeting their daily needs. If their income is nil due to layoffs, then the impact will no longer only be on the economy, but will also spread to social problems and so on.

Example of an Economic Recession

The world has changed dramatically in the three months since our last update of the World Economic Outlook in January. A rare disaster, a coronavirus pandemic, has resulted in a tragically large number of human lives being lost. As countries implement necessary quarantines and social distancing practices to contain the pandemic, the world has been put in a Great Lockdown. The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes.

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Difference Between Recession and Economic Depression

In addition to the economic recession that threatens the survival of the community, there is also the term economic depression. Here’s the difference:

  • Scale. The occurrence of a recession is usually limited to one country, while an economic depression affects the global economy. An economic depression is a much more severe condition of the economy and its effects are worse than a recession.
  • GDP levels. The level that marks the onset of a recession is that its GDP fell in the range of minus 0.3-5.1%. While depressed, its GDP was at minus 14.7%-38.1%.

Period of time. A country is considered to be in a recession when its economy has deteriorated for 6 to 18 months in a row. In depression, the effects are much more severe and long lasting. The slump in economic conditions in the economic depression can last for more than 18 months.

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Economics Student of Universitas Gadjah Mada, Indonesia.