-proof your business Strategies for Ensuring the Resilience of Your Business During an Economic Downturn
How to recession
Understanding What is Recession
What exactly is a recession? Briefly, a recession is a significant decline in economic activity that lasts more than a few months. It’s visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
Think of economies as having cycles, much like seasons in a year. Just as there are times of growth and flourishing, there are also periods of drawdowns and reductions — such is the nature of most natural and synthetic systems. Recessions can be the result of various events such as a burst of an economic bubble, an external shock, or even just part of the business cycle.
One very notable period when a recession occurred was during the Great Depression. Though it was some time ago, it remains one of the most critical examples of how devastating a recession can be. Hence, understanding the concept of recessions becomes essential.
Here’s to give you a clearer perspective:
– Financial institutions and markets become unstable.
– The national economy contracts for two straight quarters.
– Unemployment rises.
– Credit becomes scarce.
– The stock market falls.
– Consumer spending decreases.
Causes of a Recession: Digging Deeper
Now that we have a basic understanding of what is a recession, let’s delve into the causes. To simplify, recessions are caused by a widespread drop in spending. This may be triggered by various things such as an unexpected financial crisis, an external trade shock, an adverse supply shock, or the bursting of an economic bubble.
Take, for instance, the 2008 global recession. Mostly, this was due to irresponsible lending practices that led to risky mortgage-backed securities tied to American real estate, as well as a vast amount of consumer debt.
Delving into the causes, we can note:
– Interruption of economic activity through an external trade shock
– Mismanagement of finances leading to a financial crisis
– An abrupt end to an economic bubble
– Poor government policies which sow instability and lack confidence in the market
– Negative behavioural economics from consumers leading to decreased spending
– Adverse supply shocks that may lead to rising costs
Coping With Recession: A Survival Primer
Having understood what a recession is and its various causes, it’s essential to know how to cope with it. There are several ways individuals, businesses and governments can use to survive and even thrive during a recession.
Consider this, during the 2007–09 recession, Silicon Valley tech giants like Facebook, Google, and Apple not only survived but thrived. Firms resilient enough to face down an uncertain economy can buy time to reorganise, rethink strategy, invest for the future, and come out stronger on the other side.
Now let’s explore some possible coping strategies:
– Individuals can create a budget, focusing on needs rather than wants.
– Business should plan ahead, preparing for potential economic downturns.
– Having an emergency savings account to fall back on.
– Consider investing when the stock prices are low.
– Businesses might want to diversify their products or services.
– Governments will often resort to policies such as reducing interest rates to stimulate growth.
The Role of Government During a Recession
In the face of a looming or occurring recession, the government plays a crucial role in curbing downward spirals and restoring confidence in the economy. To accomplish this, they may use strategies such as lowering taxes and increasing government spending to stimulate economic growth.
For instance, during the Great Recession, US Federal Reserve played a significant role by lowering the federal funds rate nearly to zero and embarked on a massive quantitative easing program to help stimulate the economy and restore confidence in the financial markets.
The roles of the government during a recession include:
– Lowering interest rates to encourage borrowing and investing.
– Injecting money into the economy via quantitative easing.
– Decreasing taxes to increase available income for individuals and corporations.
– Boosting government spending to stimulate economic activity.
– Implementing fiscal stimuli such as increased infrastructure spending to spur job growth.
– Regulating and overseeing financial institutions to maintain consumer trust.
|Understanding Recession|Causes of Recession|Coping With Recession|Role of Government During a Recession|
|A significant decline in economic activity|Drop in widespread spending.|Budget and prepare ahead.|Lowering taxes and increasing government spending|
|Lasts more than a few months.|Triggered by financial crisis, external trade shock, etc.|Maintain an emergency savings account.|Implementing policies to stimulate economic growth|
|Visible in industrial production, employment, real income and wholesale-retail trade.|Result of mismanagement of finances or poor government policies.|Invest when stock prices are low.|Regulating financial institutions to maintain trust|
In conclusion, surviving a recession takes understanding, planning, and adaptability. Whether you’re an individual, a business, or a government, it’s essential to remember that recessions are part of the economic cycle, and with the right strategies, it’s possible to weather the storm and emerge stronger on the other side.
We are a leading digital reference platform for personal finance management tips and tools. From learning how to effortlessly track your cashflow and gain insights that’ll help you see easy opportunities to information on how to save and find the best deals and discounts we have you covered. Our categories include Budgeting, Job Hunting, Groceries, Credit Cards, Credit Scores, Home & Home Buying, Investing, Retirement Planning, Car Related, Medical Related and much more...