A recession is something that relates to the decline in the country’s Gross Domestic Product (GDP), and impacts the growth during two or more quarters of that financial year. There could also be several quarters of slowdown during the recession period and this has serious economic implications for the country. A growing economy is always faced with the proposition of recession influencing its further growth. This is because an economy, which grows at a constant rate over a period of time, tends to slow down a little, as part of the natural economic cycle and recession is a kind of tool that brings about this slowdown.
Typically, an economy tends to expand for more than 4 years before it faces the prospect of an economic slowdown for the next 1 to 2 years. This is all beneficial to developing countries as recession provides the opportunity for growth consolidation and takes them forward to the next growth cycle. The main impact of recession is that customer’s loose confidence in purchasing the products being manufactured by the companies due to loss of confidence and decline in their purchasing capabilities.
This directly links with the manufacturing process, as there is lesser demand for goods and services from the consumers. The companies in order to survive the recession period tend to go for cost cutting measures like decreasing production, applying various internal cost control methods, lay offs, and trying to provide heavy discounts on already manufactured goods and services to sell them.
The worst thing about recession is the increase in unemployment rate as people loose their jobs. The stock markets also crash as the value of the stocks decrease. Investors fear the worst during recession and stay away from the markets. These negative sentiments affect the liquidity present in the market, as the price of the stocks and other financial instruments tends to fall in a drastic manner.
The main reason for the global recession from 2008 onwards has been due to defaults on sub-prime mortgages in the US. This has affected major US and Non-US financial institutions worldwide, as they had invested a huge chunk of money into financial instruments related with the sub-prime mortgages. People with poor credit worthiness who were sanctioned these loans have failed to pay for the sub-prime mortgages. This has caused a lot of trouble to major banks worldwide who were part of this sub-prime mortgage deal, thereby planting the seeds of recession around the world.