What is Economic Recession?

Financial crises directly impact the daily lives of a population. See what economic recession is and its main causes

The economic recession is a period that generates great concerns for the population of a country, since this is a moment that affects not only investors in the financial market, but also the financial life of people in general. This is a phenomenon that can happen not only in emerging countries, but also in developed countries and in the largest economies in the world.

What is recession?

In economics, recession means the period in which GDP falls for two consecutive quarters in a country. Basically, it indicates a time of significant economic decline and is therefore associated with financial crises. In the dictionary, recession is the act or effect of going back, or going backwards. Thus, the meaning of recession in the economy is related to the drop in economic activity, that is, an economy that is “regressing”. According to the American Economic Association (AEA), an economic recession is characterized by a slowdown in economic activity, which can spread across several sectors.

What are the causes of economic recession?

The causes of economic recession are diverse and complex, but some of them are:

financial crises

Financial crises are one of the main factors leading to economic recession. They happen when investors lose confidence in the financial market and start selling their shares and other assets massively, which causes a big drop in prices and can lead to a generalized bankruptcy of companies.

Drop in domestic demand

When a country's population consumes less, whether because of a rise in interest rates, an increase in unemployment, or for any other reason, domestic demand drops. This can lead to a drop in industrial production and other sectors of the economy, which contributes to a recession.

Crisis in the international market

When problems occur in the international market, such as an economic crisis in a major country, the recession can spread to other countries. This happens because many countries have their economies interconnected and depend on exports and imports to maintain themselves financially.

high public debt

High public debt is another cause of economic recession. When the government spends more than it collects, it has to issue government bonds to finance this debt. If investors lose confidence in the country's economy, they may stop buying these bonds, which leads to an increase in interest rates and can cause a recession.

What are the consequences of economic recession?

Despite this theoretical definition, economic recession goes far beyond just the sequential drop in the Gross Domestic Product (GDP) of a country. Some of the main indicators and consequences of the recession are:

increase in unemployment

During a recession, companies often scale back their operations and cut costs, which can result in mass layoffs. This can lead to a significant increase in unemployment, with many people struggling to find work.

income reduction

When fewer jobs are available, competition for jobs increases and wages tend to fall. Additionally, some companies may reduce existing employees' salaries or benefits as a way to cut costs. This can result in a significant reduction in people's income, making it harder to pay bills and maintain a decent standard of living.

stock market crash

During a recession, the stock market tends to crash, which can have a negative impact on investor wealth and confidence. This can lead to a reduction in consumer spending, which can further affect the economy.

increase in debt

When the economy is in a downturn, many businesses and individuals can struggle to pay off their debts. This can lead to an increase in bad debts and bankruptcies, which can have a negative impact on the economy as a whole.

Decrease in investment

During a recession, many investors tend to become more cautious and reluctant to invest in new projects or ventures. This could lead to a decrease in investment, which could negatively affect long-term economic growth.

With this, we can conclude that the economic recession does not need to be seen only as a negative and discouraging scenario. It is possible to adopt smart strategies to profit and take advantage of the opportunities that arise in times of crisis.

How to invest and take advantage of the recession

There are some strategies that can be used to profit and take advantage of the scenario. One of them is to invest in shares of companies that tend to benefit in times of crisis, such as those that operate in the health sector, technology, essential services, among others.

Another option is to invest in real estate, since in times of crisis it is common for real estate prices to become more affordable, which can generate advantageous buying opportunities.

It is also common for the shares of well-founded companies to have their prices discounted, which can be an opportunity for investors seeking long-term gains.

Finally, it is important to remember that the recession can be an opportunity to undertake and start your own business, taking advantage of the market demands that may arise during this period. However, caution and planning are required to avoid losses and maximize results.

I hope that this article was helpful to you in some way and that everyone prepares to face the next recession in order to take advantage of the next economic expansion.