Any state is developing in fairly dynamic conditions. Business performance is constantly changing. An economic downturn is usually a temporary phenomenon, which is characterized by certain negative consequences. It is usually replaced by a lift. However, this cyclical nature is characteristic of a market economy. Fluctuations in supply and demand lead to an increase or decrease in prices for a particular product.
What phases the cycle consists of
It must be understood that the economic downturn is one of the phases of the cycle.
There are four main periods.
- Ascent is recovery after reaching the lowest level. It is distinguished by a gradual increase in production volumes. It is assumed that at this stage, inflation is low.
- Peak is the pinnacle of business activity. The unemployment rate in this period reaches its minimum value. Sometimes at the peaks, inflation increases to some extent.
- Recession is an economic recession, which is characterized by a decrease in production volumes and commercial activity. It is for this reason that unemployment begins to grow.
- The bottom is the lowest point at which economic activity has the lowest economic indicators. Usually this phase does not last too long.
What is a period of economic downturn?
In economics, recession (recession) is a negative trend leading up to the crisis. This period has a cyclical nature, therefore, occurs in any system of economic activity. The recession involves a slowdown in production over time.
During the economic downturn, there is a negative or zero dynamics of GDP indicators. Commercial activity is noticeably reduced, the pace of development is significantly slowing down. A decrease in GDP means a decrease in production and consumption.
Recession is an inevitable period. In the modern world, the duration of one economic cycle averages from 10 to 15 years. This can be verified by taking all financial crises as a basis.
The main causes
The duration and destructiveness of the recession depends on the level of development of the state. For countries actively engaged in mining, the reason for the economic downturn is to reduce the cost of oil, natural gas and other exported resources.
In order to compensate for the losses, tax rates are usually raised, spending on social needs is reduced. However, such actions often lead to a greater decline in production.
In developed countries, recession occurs due to changes in technological patterns. For example, processes of search, collection and processing of information appear and begin to develop there. In this case, the technological structure means the level of development of scientific and technological progress as a whole.
The listed causes of the recession cannot be influenced, since they are a consequence of objective economic laws. In any case, the recession will occur at the level of state economic activity. However, a recession within one country may result in a drop in economic performance in other regions.
There are other reasons, largely dependent on market participants. The phase of economic downturn may be related to difficulties in the banking environment. For example, commercial institutions sometimes give out too many loans for which simply no payments are received.In this case, financial institutions have to raise rates.
A country’s economy may fall into a recession phase due to extraordinary circumstances such as the outbreak of hostilities or a significant change in energy prices. The way out of this situation is possible with the direct participation of the state, which will invest money, supporting certain sectors and the national currency.
Possible recession effects
There may be the following problems due to the economic downturn:
- unemployment;
- decrease in production volumes;
- increase in interest rates on loans;
- a significant decrease in incomes of the country's population;
- falling GDP growth and stock quotes.
Unemployment is growing due to the recession. The need for a large number of workers is significantly reduced. Against this background, there is a wave of multiple layoffs. Due to low incomes, the population begins to consume less products.
The debt of individuals and legal entities to banking institutions is significantly increasing. Loans are issued on more stringent conditions. In the industrial and scientific fields, the volume of investment flows is reduced, therefore, innovative development is completely slowed down.
After these events, cash is depreciated, that is, inflation occurs. This leads to discontent of the population and a decrease in the quality of life of people. The state is trying to find funds, but at the same time external debt is increasing significantly.
About the global economic downturn
There are several reasons for the recession in the world.
- The appearance of excess financial resources in the United States could gradually lead to an overheating of the economy.
- The existence of a huge number of dollar bills in cash and cashless circulation.
- After a slowdown in stock market growth, inflationary potential could spill over into the industrial economy in a short period of time.
- Loans are becoming more expensive than before. Interest rates are gradually rising.
- The virtual economy has grown significantly compared to industry.
- There is a crisis of overproduction, due to which the products go directly to the warehouse.
Existing Interventions
It became absolutely clear that the economic downturn is a temporary phenomenon. How can this period be shortened?
- In regional markets, it is necessary to arrange weekly monitoring of the main parameters of the state of the economy.
- Stop issuing national currency.
- Freeze prices for basic commodities.
- Minimize tax levies on import-substituting industries.
- Develop other principles for the operation of commodity and commodity exchanges.
- Start shaping jobs in the new infrastructure.
- Revise the basic rules for the functioning of state structures.
There are a lot of options.
In conclusion
The economic downturn in the cycle is just a phase. However, in time this period can be short, medium or long. The regression process can last 2-3 years and even 50-60 years. It all depends on what measures the government of a given state will take.