Causes of Economic Recession

Behind the Hitch: The Causes of Economic Recession



An economic situation in which a country’s gross domestic product or output is
sustaining a negative growth for at least two consecutive quarters or six months
is called an economic recession. For the National Bureau of Economic Research (NBER),
“recession is a significant decline in economic activity lasting more than a few
months”.



Economic recession lasts for eleven months and may reach until two years. While
a recession that is short lived is called economic correction. Meanwhile a
sustained recession turns into a depression.



What causes recessions to happen?



There are complex reasons as well as simple reasons why
economic recessions
happen. John Maynard Keynes states that there are “animal spirits” as driving
elements for a recession. “Animal spirits” could be confidence, uncertainty, and
pessimism. These “animal spirits” prevent objectivity and quantitative analysis.




An example where these “animal spirits” take over, is when consumers lose
interest on products and outputs. On the eve of an economic recession, there
will be overproduction. Supply will exceed the demands of products and goods.




This will push companies to increase prices and consumers will lose confidence
and will be uncertain in purchasing products. Until the event that consumers
will stop buying. Another example for this element driving recession will be the
psychological impact the events of the September 11 attacks on consumers and the
people.



Some economists suggest that recession may not only be caused by events that
have large or huge impact on the people. Events that hurt particular companies
or industries can also cause recession. Major innovations or change in a price
of a major component needed in the completion of the product can have dramatic
effects on some firms. These may cause reduction of workers or production.



Overconsumption can also be a cause of recession. Spending more that what is
necessary may lead to recession and poverty. And example will be the major fuss
over the expenditure of the United States in the Iraq war. Economists are saying
that the United States should be careful with their consumption in the future.



Government economic policies can be used to avoid economic recession. But
failure to provide good economic policies can lead to recession. There are some
errors that can be made in economic policies. There are some economic policies
that can lead to a boom and bust. This means that the economy is running in an
unsustainable pace. Inflation is increasing.



Another policy error is that the policymakers themselves are not attentive
enough to see the increasing inflation and onset of recession. Policymakers
often times regard the onset of recession as just a slow economic growth and
will correct themselves. But failure to address this may lead to more economic
disasters.



Economic recession is not just a United States issue. The United Nations
expressed an alarm that there might be a global economic recession as early as
January 2008. According to United Nations, world economic growth for 2008 is
estimated to be on 3.4 percent, flowing from the down trend since 2006 (3.9
percent) and 2007 (3.7 percent).



The bursting of the housing market bubble of the United States and the unfolding
credit crisis of other countries are some contributing factors for a global
recession. Currently, Latvia, Estonia and Lithuania are in risk of experiencing
economic recession due to credit crisis.



To summarize, economic recession can be brought about by external as well as
internal economic shocks and widening imbalances in the economy. Numerous ways
can cause recession. Steps can be undertaken to avoid altogether this kind of
economic scenario to happen. But the most difficult part is to recover from the
impacts of this economic turmoil.