Economic Recession and its causes:


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By Sajjad Khan Bangash,
Islamabad, Pakistan.

Economic recession is a part of ‘business cycle’ and it is a period where the economic activity either at national or international tends to contract/decline causing heavy losses to business activities and turns the consumers confidence low which consequently impacts the overall shape of economy either of  a particular country or worldwide. The stock market business crashes with which interest rates increases  impacts the GDP, rise in unemployment, sharp decline in the real estate business and exports low. This further shrinks the economy and overall trend further moves across the globe.

Now, having low confidence at industrial, corporate and consumer level further escalates the economic environment worsen to a level where the interest rates creep high and with high interest rates, the liquid money which is available to be invested tend to be squeezed up. Hence, the consumers are reluctant to buy or their buying capacities are reduced to a level that they either can’t afford to buy or pay higher beyond their capacities to survive at both ends meet. As a consequence, this continuous downfall trend further creates panic and destroys the economy both locally and internationally. It replicates an overall a spiral impact all over the world. The global interest rates rise up and the international consumers buying capacities tend to shrink systematically leads to the worsening of their respective economies where they reside.

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This spiral and grave impact further becomes the source of mass layoffs and higher unemployment resulting in slowdown of retail market. The retail sales reduces and the medium and small businesses become the ultimate victim forcing their intentions to shut down their businesses.  Now, in order to restore this diseased economic condition, the central bank of a particular country takes stringent efforts to rescue and rehabilitate the economy trying to protect the economy falling into complete collapse or bankrupt.
Now, if an economy is going through the phase of economic recession, this systematically brings along several causes such as:

The crash of stock market:
This feeble and continuous demise of confidence in the economic activity subsequently crashes the stock market as more and more investors trying to pull out their capital from the stock and brokerages which hamper the activity at stock market crashed.

Decline in real estate or housing prices and sales:
With the continuous loss of equity, the buyers buying capacity shrinks a lot which further forces their buying capabilities to cut their spending as the mortgages remain stagnant and the banks are unable to lend more home loans to existing as well new customers. Most often, it causes foreclosures and less lending or debt equity lending by the banks to borrowers. This overall declining trends in real estate business tend to keep worsening and the market values of properties keep consistently on a fall.

Rise in Inflation:
Another worst factor that plays a role in recession is that inflation continues to rise. Inflation is a phase where the prices of goods and services rises at exasperated rate hampering the consumer’s buying capacity low as the prices tend to be high while the money available at consumers disposals tends to remain less.

Reduction in manufacturing activities and orders:
This continuous slope downwards in business activity hampers the economic activities within a country or internationally, which systematically slowdown the manufacturing process and orders. As the buyers tend to show less confidence in the market and there is a wave of uncertainty which replicates in less sales and less demands. The demand and supply behave very negatively in such uncertain prevailing economic conditions. A massive slowdown of orders for durable goods was seen in October 2006 which kept kept falling till the Economic recession in 2008 not only in USA but internationally except China which maintained its market presence as Chinese products demands remained consistent throughout the global recession.

Impact on wage market:
A very grave impact and consequence of recession is that it slows down the wage market since the overall condition of economy turns slow or on a continuous demise, this systematically reduces the production level and the manufacturing process hampers thus; the business enterprises, corporations and organizations are forced to layoff their workers and reduce the average wages. They want to operate in a market circle just to survive. The demand and supply of workers for production tends to move negatively downwards.

Incessant rise in unemployment:
Recession causes the production level reduced to a level where the small or medium enterprises and producers to completely wind up their operations within the business market while, the large scale producers again face a reduced production and their capacity is systematically shrink. This collapse gives rise to an incessant level of unemployment and workers demand reduces a lot.

Price Hikes:
The demand and supply under ‘recession’ phase of economy drives a downward slope which means that since the production remains low while the demand of basic necessities continuously rises up sharply which results in low supply and higher consumable items. The market then enters into a trap where provides a lucrative opportunity for ‘profiteering’ to stockpile huge profits and escalates this demand and supply tendency. The consumers will have to buy the basic necessities of life and they have to pay every price tag as they can. Thus, the prices skyrockets. There is no equilibrium between demand and supply exists while the profit margin remains so high since the suppliers exploits this opportunity.

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Causes of 2008 Recession:
In 2008, when the world’s market suddenly squeezed up by sudden collapse in international demand and supply, the housing market enticed so many people to buy houses they could not afford. The buyers find it really lucrative opportunity to buy houses since, the international market was not behaving lucrative, this tendency lured the buyers to buy houses as ‘fixed assets’ with a hope of housing price will shoot up in future and become source of future profitability but the Federal reserve should have increased the interest rates back in 2004 to avoid the future turmoil of ‘monetary collapse’ but due to blur probability, the interest rates remained low in 2004 and 2005, resulting in ‘housing bubble‘ which means during any uncertainty in financial market, the fixed assets, stocks brokerages and houses prices inflate beyond their sustainable value, this compresses the market forces to ‘recession bubble‘ which systematically bubbles up. The irrational exuberance entered again in the market as several  investors foreseen the low rates as an advantage of low rates to buy homes just to resell on a profitability expectations.

However, in 2006 this ‘bubble’ burst-up as housing prices continuously kept declining, which kept the homeowners left the investors with no option to earn profit even they couldn’t retain the market value of the houses, eventually fell into collapse since they have taken loans from banks with higher mark-ups.

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Worldwide Recession (2007-2008).
The financial crisis of 2007-2008 which effected several economies worldwide is the worst economic crisis/recession after ‘Great Recession of 1930’. This spiral effect of recession damaged international financial institutions and causes heap of collapses, foreclosures and crashes in stock markets worldwide causing a blistering rise in interest rates, shutting down of businesses and unemployment globally. This badly effected the housing market and heap of international businesses evicted, reduction in consumer wealth and in asian economies, the exports of electronic products remained very low with less demands at international markets leading and this downturn activity at international markets causing  ‘Global Recession-2008-2012′.

It started back in 2004 in United States when housing bubble bursted up causing the values of securities to U.S. real estate pricing to shack, and causing the linked international financial institutions.

This financial crisis was duly triggered by the overdue implementing of policies which enticed the domestic home buyers to buy homes on easy and accessible mortgage loans by the banks to buy houses with an overlapping hope that the prices of homes would escalate in near future thus, the brokers hurried to this short term deal over long term while unable to back by financial institutions and insurance companies capital holding cover-up against any unforeseeable loss for the deals they were making.

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This lack of bank’s assurances over credit availability, solvency and financial holding cover up, dropped the confidence of investors which replicated on international stock markets where the securities sustained heavy losses at international markets in 2008-2009. This led to the continuous decline in economic activity with narrowed credit hampering international trade and investment.

However, strenuous efforts were being by the financial institutions of each and every effected country to restore and rehabilitate their effected economies, as the governments and central banks in Asian, European and American economies  responded with aggressive fiscal stimulus, expanding monetary policies, and institutional bailouts. In USA, the congress passed American Recovery and Reinvestment Act of 2009.

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