A recession is called a decrease and fall in economic activity during a certain period of time. The recession affects production, employment, income and other indicators. For there to be a recession, it is officially said that the annual rate of change of the GDP it is negative for two consecutive quarters. Commonly, the recession is called the "lean" period.
The recession is a natural phase of the economic cycle that goes from when the economy reaches its maximum until it reaches its minimum.
Characteristics of the recession
During a recession, a series of events occur:
- Unemployment increases, since new jobs cannot be generated due to lack of growth and layoffs appear because growth is negative.
- Consumption decreases for two reasons: the first is that the price of products increases (which is called inflation), and the second is that the consumption capacity of citizens decreases (wages are reduced, there are more interest rates on loans, etc.).
- Increase unpaid credits. This is because debtors are unable to pay their debts, caused by inflation and rising interest rates.
- GDP decreases due to the decrease in consumption.
- The inventories increase causing a collapse in warehouses, so production is decreased, causing unemployment.
- When a recession is very strong and long-lasting, it causes what is called a depression. The best known is that of the 20s, which produced very important losses and dramatic changes in the economy.
How to prevent problems in the event of a recession?
For the effects of a recession to be as negative as possible, it will be necessary to:
- Preserve employment and increase productivity, preserving or increasing the quality of products.
- Saving and investing wisely during the pre-recession years, which are often good economic times.
- Make an orderly and rational spending, and a personal budget with a good balance.