You may have heard some talk recently about the possibility of a recession and while we’re not there yet, let’s talk about what that actually means.
So what’s a recession?
Basically, it’s a period of time where economic activity declines and many industries experience poor economic growth. People stop spending, business profits decrease, and manufacturing decreases due to reduced demand. Inflation and interest rates can decrease and the price for goods and services can stagnate for a short period, usually a few months to a year or so.
What causes a recession?
Most recessions are caused by a combination of things. High interest rates can trigger a recession because they limit the amount of money people can borrow. Inflation, the general increase in prices of goods and services, can also be a trigger for a recession because as things cost more typical incomes can buy less. Low consumer confidence can also impact whether a recession occurs because if people (consumers) think the economy is bad they spend less money.
What happens during a recession?
During a recession, the unemployment rate increases and wage growth can halt. People are also more at risk of experiencing bankruptcy or defaulting on loans during this time. Businesses experience decreased sales and profit because people have less money to spend and this decrease in demand decreases manufacturing. Interest rates as well as the value of everything produced by a country (called the gross domestic product) can fall too.
The economy will recover and there will be increased economic activity again. During the recovery phase after a recession Government will usually create policies that address the causes of the recent recession and reallocate resources to support people and businesses.
