Understanding What Happens During a Recession

By Trevor Johnson

During these tough economic times it is important to understand what happens during a recession in a country or the world. Before we are able to understand the happenings, we first have to establish what a recession means.
Difference between recession and depression.

A recession is defined as period of time characterized by economic contraction either limited in it's time frame or scope. Depression is a sharp drop in real GDP, usually 10% plus for three to four years.

What occurs during a recession phase?

Firstly, the stock markets crash. Economists look at market trends to determine when to expect recessions. It is a fact that a bear market precedes an economic recession due to stock markets feeling the economic slowdowns months or weeks before actual contraction in the economy. Luckily the stock markets will also foretell when the end of a recession is insight.

Rate cutting - Interest Rates are also linked to market behavior and will also drop during recessions. The purpose of rate cuts is to stimulate consumer spending by making money borrowing cheaper and easier. On the other hand stricter regulation of financial instruments are enforced by the State or Financial Institutions to curb easy access to instruments or systems.

Secondly, jobs are lost. This is a result of manufacturing companies producing less product as customer demand is so little often non-existing in some industries. The first thing a business will do is cut jobs if the required turnover is not reached after a couple of months. Company's go bankrupt and apply for liquidations in their thousands, again causing more job loses.

Government intervention - Usually Governments intervene by adopting policies and introducing rebates and tax cuts. This is another method of attempting to boost or stimulate consumer spending.

Surviving recession.

The greatest secret to successfully surviving a recession is to keep calm. Don't go all crazy and in a panic. When you are in a panic you are unable to think clearly and will make impulsive decisions having a greater negative impact on your pocket. Adapt yourself and your budget to the circumstances and you will be just fine.