What Causes a Recession, its Impacts, and its History?

Most people know what a recession is, but few understand what happens during one. A recession is when the economy slows down, and businesses make less money. This can lead to job losses, which can cause even more problems. This blog post will explore what happens during a recession and why. We will also explore the history of each recession and the key factors.

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What are the factors that cause a recession?

Several factors can cause a recession. The most common include:

1. Sudden economic shock:

A sudden change in the economy can lead to a recession. This could be something like a natural disaster or a political upheaval.

2. Excessive debt:

When businesses and individuals have too much debt, they may cut back on spending to pay it off. This can lead to a decrease in demand, which can cause a recession.

3. Asset bubbles:

When asset prices (like housing or stock prices) rise too high and then fall sharply, it can lead to a recession.

4. Too much inflation:

If prices rise too quickly, it can lead to a recession. This is because people may start hoarding money instead of spending it, decreasing demand.

5. Too much deflation:

If prices fall too quickly, it can also lead to a recession. Businesses may cut back on production, which can lead to job losses.

6. Technological shift:

A significant technological change can lead to a recession. This may make some jobs obsolete and cause businesses to downsize.

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Recessions & The 5 Stages Of The Economic Cycle

Recessions are a normal part of the economic cycle, which is the natural ups and downs of the economy. The economic cycle has five stages: expansion, peak, contraction, trough, and recovery.

1. Expansion: This is when the economy is growing, and businesses are doing well. This usually leads to job growth and higher wages.

2. Peak: This is when the economy is doing as well as it can before slowing down.

3. Contraction: This is when the economy slows down, and businesses start to make less money. This can lead to job losses.

4. Trough: This is when the economy reaches its lowest point and is often referred to as a recession.

5. Recovery: The economy starts to grow again, and businesses begin to make more money.

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What is the difference between a recession and a depression?

A recession is when the economy slows down, but a depression is a more severe economic downturn. A recession may last a few months to a couple of years, but depression can last for several years or longer. During a depression, unemployment and poverty levels tend to increase, and business activity and investment decrease significantly.

What impact does a recession have on both individuals and businesses?

1. Job losses: When businesses make less money, they often lay off employees. This can lead to higher unemployment rates and lower incomes for those affected.

2. Decreased demand: People who lose their jobs or have less money to spend may cut back on purchasing goods and services. This can lead to lower business sales and cause some to go out of business altogether.

3. Lower incomes: People who lose their jobs or have their hours reduced may have less money to spend. They may also have to downsize the job. This can lead to financial difficulties and cause people to default on loans or declare bankruptcy.

4. Increased debt: People who lose their jobs or have their incomes reduced may have difficulty making ends meet. This can lead to more borrowing, increasing debt levels, and making it even harder to get out of the recession.

5. reduced investment: As businesses make less money, they may cut back on investment. This can lead to lower productivity and may cause a further decline in the economy.

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How does a recession impact healthcare?

  • First, job losses can lead to a decrease in demand for healthcare services. This can cause hospitals and other providers to cut back on staff and services.
  • Second, lower incomes may make it difficult for people to afford health insurance or pay for medical care. This can lead to an increase in the number of people who are uninsured or underinsured.
  • Thirdly, increased debt levels may make it difficult for people to repay their medical debts, leading to financial difficulties for individuals and healthcare providers.
  • Finally, Procedures may be declined due to a lack of funding in the health care system and fewer staff.

What happened to health care in the last recession?

In the last recession, the demand for healthcare services decreased, which led to hospitals and other providers cutting back on staff and services. In addition, lower incomes made it difficult for people to afford health insurance or medical care. And increased debt levels made it difficult for people to repay their medical debts, which led to financial difficulties for both individuals and healthcare providers.

What Is the Average Length of a Recession?

The average length of a recession is about 10 months. However, recessions can vary in duration, with some lasting only a few months and others lasting for years. The Great Recession, for example, lasted for 18 months.

Historical Recession examples

2020 Pandemic Recession

The outbreak of COVID-19 causes the 2020 pandemic recession. The pandemic has led to a decrease in demand for healthcare services, as well as job losses and lower incomes. This has made it difficult for people to afford health insurance or medical care. In addition, the pandemic has caused a decrease in investment and productivity, further increasing debt levels and making it even harder to get out of the recession.

  • Duration: Two months

2008The Great Recession

The Great Recession was caused by several factors, including the subprime mortgage crisis and the housing market’s collapse. This led to job losses, lower incomes, and increased debt levels. In addition, as businesses made less money, they reduced investment and productivity, which further decreased the economy.

  • Duration: Eighteen months
  • GDP decline: 4.3%41
  • Peak unemployment rate: 9.5%

2001Recession

The 2001 recession was caused by the dot-com bubble burst and the terrorist attacks of September 11th. This led to job losses, lower incomes, and decreased demand for goods and services. In addition, Businesses cut down on investment and productivity as their profits declined, further harming the economy.

  • Duration: Eight months
  • GDP decline: 0.3%
  • Peak unemployment rate: 5.5%

1990-1991Recession

The 1990-1991 recession was caused by several factors, including an oil price shock and a decrease in government spending. This led to job losses, lower incomes, and increased debt levels. In addition, due to the drop in profits, firms were less invested and productive, thus dampening economic activity.

  • Duration: Eight months
  • GDP decline: 1.5%37
  • Peak unemployment rate: 6.8%

1982Recession

The 1982 recession was caused by several factors, including high-interest rates and a decrease in government spending. This led to job losses, lower incomes, and increased debt levels. In addition, Businesses’ declining profits led to lower investment and output, which weighed more on a contracting economy.

  • Duration: 16 months
  • GDP decline: 2.9%31
  • Peak unemployment rate: 10.8%

1973 Nixon/OPEC Embargo Recession

An oil price shock caused the 1973 Nixon/OPEC embargo recession. This led to job losses, lower incomes, and increased debt levels. In addition, as businesses made less money, they reduced investment and productivity, which further decreased the economy.

  • Duration: 16 months
  • GDP decline: 3%28
  • Peak unemployment rate: 8.6%

1969-1970 Recession

The 1969-1970 recession was caused by many factors, including high-interest rates and a decrease in government spending. This led to job losses, lower incomes, and increased debt levels. In addition, companies were making less money and cut their investment and productivity levels, further hampering the economy.

  • Duration: 11 months
  • GDP decline: 0.6%16
  • Peak unemployment rate: 5.9%

1957-1958 Recession

  • Duration: Eight months
  • GDP decline: 3.7%16
  • Peak unemployment rate: 7.4%1

1937-1938 Recession

The 1937-1938 recession was caused by several factors, including the end of the New Deal and a decrease in government spending. This led to job losses, lower incomes, and increased debt levels. In addition, as businesses made less money, they reduced investment and productivity, which further decreased the economy.

  • Duration: 13 months
  • GDP decline: 10%5
  • Peak unemployment rate: 20%5

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What can we learn from past recessions?

Job losses decreased earnings, and rising debt are all contributing variables that have been identified in earlier recessions. When companies lose money, they have less incentive to invest or improve productivity, which negatively impacts the economy as a whole. Therefore, the government’s expenditure and investment levels must be raised to pull the economy out of a slump.

How can we prevent future recessions?

There is no sure way to prevent future recessions, but we can learn from past recessions and take steps to reduce the likelihood of them happening. For example, we can try to keep interest rates low, increase government spending during economic downturns, and reduce the economy’s debt.

In Conclusion

Recessions are a part of the business cycle and happen for various reasons. We can learn from past recessions and take steps to try to prevent them in the future. However, there is no sure way to prevent a recession from happening. If one does occur, it is often necessary for the government to take action to help get the economy back on track.

If you want to learn more about preparing for a recession, please click the link below.