A recession is a prolonged significant reduction in economic activities characterized by a severe decline in the gross domestic product (GDP). Typically, recessions lead to a general decrease in consumer demand, economic output, and employment levels (Forbes & Krueger, 2019). A peak from economic expansion usually precedes recession before arriving at the lowest downturn point. Several economic theories have been used to explain how an economy moves from its long-term growth to a recession.
Some theories tend to focus on the structural changes in manufacturing sectors. In this case, it is claimed that a sharp increase in commodity prices due to a crisis might result in a general rise in costs throughout the economy. In the same manner, an introduction of new technology is likely to render the whole industry outdated. The two cases will finally make a recession to be a plausible outcome. During this period, the state budget deficit tends to increase alongside increased spending on insurance and other public programs as more citizens are adversely affected.
The excellent news to the country and individuals affected by the recession is that they are unlikely to last long, based on history. The economic downturn is usually expected to last for two to eighteen months (Vafin, 2018). Although this might sound like an eternity to those affected by business closure and job loss, the effects are relatively small to expansion results. The rate of equity returns during the expansion period is far, much higher than the average loss in a recession.
To withstand economic recession, government expenditure and taxation need to be rationally controlled to counteract deficiencies in the private sector and alleviate the economy. In this case, the government must tax less and spend more to increase individuals’ purchasing power and public demand (Weaven et al., 2021). This, together with other expansionary tools and policies, will help get the country out of the economic recession and back to its desired peak point.
References
Forbes, M. K., & Krueger, R. F. (2019). The great recession and mental health in the United States. Clinical Psychological Science, 7(5), 900-913.
Vafin, A. (2018). Should Firms Lower Product Price in Recession? A Review on Pricing Challenges for Firms in Economic Downturn. ResearchBerg Review of Science and Technology, 2(3), 1-24.
Weaven, S., Quach, S., Thaichon, P., Frazer, L., Billot, K., & Grace, D. (2021). Surviving an economic downturn: Dynamic capabilities of SMEs. Journal of Business Research, 128, 109-123.