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What is a recession and its role in the economy. What is a recession in the economy Recession of balance sheets

“What is an economic recession?” — this question may be of interest to every person interested in the situation in the country. Our article will tell you what a recession in the economy is, what this phenomenon brings to the life of the state and whether it is worth fearing.

What does the word "recession" mean? The meaning of the word from the point of view of economists and ordinary people

The economy of a country, just like that of an ordinary company, develops cyclically: there are periods of revival, growth, slowdown and recession. Economists use the term “recession” to describe a period when the rate of development of a country’s economy slows down.

A recession does not mean that key economic indicators have stopped growing - just that their growth rate has been declining for 2 quarters in a row. There is a decline in business activity, enterprises begin to produce fewer products, due to which their profits decrease. The population begins to experience slight difficulties with work, due to which demand decreases.

This phase of the business cycle usually occurs after an economic recovery. And quite often after it a crisis or depression begins. But competent measures by the state can prevent such consequences and normalize the economic situation in the country.

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What does stagnation mean?

Stagnation is a complete stop of the economy. Production and trade practically stop, unemployment becomes widespread, wages and the standard of living of the population fall.

The stagnation of production can last for a long time until the state takes action and begins to bring the country's economy out of this state. At a time when the country is experiencing stagnation, life becomes very difficult.

Recession in Russia - can it be avoided and is it necessary to do so?

It is impossible to avoid a period of economic downturn, and the emergence of a recession is quite natural. During this period, the effectiveness of the state and the functioning of the financial system is checked.

If the right measures are taken during a recession to overcome it, the decline in economic growth rates will be almost unnoticeable. But if the government uses ineffective measures, the consequences could be serious, even leading to an economic crisis.

Types of recession in the economy

Economists divide economic recession into 3 types.

  1. An unplanned recession occurs due to unexpected changes. This could be the start of hostilities, a fall in world prices for gas and oil, and much more. As a result, a state budget deficit forms and the level of GDP begins to fall. According to economists, such a recession is dangerous for the country, since it is impossible to predict and it is difficult to select measures to overcome it.
  2. A psychological or political recession occurs due to mistrust of consumers, businessmen and investors. Purchasing activity decreases, the volume of investments decreases, and securities prices fall. But this type of recession is easy to overcome - it is enough to regain the confidence of the country's population. This can be done by lowering interest rates or using various psychological methods.
  3. A recession may also occur due to rising external debts. As a result, stock prices fall and there is an outflow of funds. Such a recession is also dangerous, as it can last for many years.

Signs of recession in the economy

You can determine that a recession has begun in a country based on a number of signs:

  • the unemployment rate in the country began to increase slightly (gradually);
  • there is a decline in production, but enterprises continue to operate and provide the population with the necessary products;
  • stock market indices began to fall;
  • inflation rates are increasing;
  • there is an outflow of capital abroad.

But all of the above phenomena do not have critical indicators. For example, the inflation rate may increase by only 2-3%. When all of the above signs manifest themselves actively, they say that a depression has begun in the country.

What triggers a recession in the economy and what can this phenomenon bring to the country's economy?

A recession can start for many reasons. Economists name 4 main ones that most seriously affect the situation in the country and can lead to a recession.

  1. Changing market conditions. WFP growth may slow due to military activities, falling oil prices and much more. For example, the main source of replenishment of the Russian budget is the sale of oil. If the price of a barrel falls, the budget deficit immediately begins to appear.
  2. Decline in national production. The predominance of imported goods in the country leads to a decline in the activity of domestic enterprises. Consumers do not see the point in buying Russian goods if they can buy imported ones for the same price. As a result, production rates fall, leading to a recession.
  3. Decrease in people's income. This leads to a drop in demand and has a detrimental effect on the economic situation.
  4. Fall in investment. If the population with money stops trusting the state or finds more profitable and reliable ways to invest abroad, a recession may begin. To prevent this from happening, the state must constantly monitor the conditions provided and improve them - then investors will invest money only in the national economy.

Recession Translated from Latin, Recessus means retreat. The phase of the economic cycle that occurs during a recovery and is a precursor to a depression and a crisis state of the economy is called a recession. A recession, as a phenomenon, slows down the rate of national economic growth, its manifestations are observed in a moderate decline in production or negative and zero dynamics of GDP growth.

The concept of recession in economics and macroeconomics is interpreted as a moderate decline in production, which is not critical for reducing the rate of economic growth. When production growth falls for six months, the size of GDP stands at zero or falls to a negative value.

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It is almost impossible to predict a recession, but with the right government measures it can be reduced. The development of a recession can become the source of a serious economic crisis.


The business cycle represents regular changes in the level of production, including employment and profits. The duration of one business cycle ranges from 2 to 10 years. The economic cycle is a single process that sequentially passes through periods of economic activity; they differ in direction and level of activity.

There are the following phases of the economic cycle:

Crisis, aka recession

Subsequently, economic equilibrium is disrupted. A crisis occurs after a recession—production growth is accompanied by a decline. A crisis state occurs after a decrease or decrease in the volume of manufactured products; in particularly difficult situations, a reduction in work entails the destruction of productive forces.

In a market economy, a production crisis most often occurs; it negatively affects the sale of goods, a fall in prices and production volume. A decrease in production volume and subsequently the balance of unsold inventories, a reduction in production, a drop in demand for labor, a decrease in profits, a decrease in creditworthiness and a slowdown in the growth of prices for manufactured goods and services are factors of recession.

A production crisis due to the insolvency of an enterprise leads to bankruptcy.

Depression

Follows the crisis. During a depression, surplus products are gradually sold off, product sales resume and production volumes increase. The economy is stagnant and GDP has stopped falling.

The resulting free capital is integrated into banks, which expands the possibilities for providing loans. Gradual economic growth during the depression stage precedes economic recovery. At this phase, organizations face the main task of increasing profits; during the crisis, costs were reduced.

Revival

Is the latest level of economic recession. During the recovery phase, there is a gradual expansion of reproduction and a return to the level of the pre-crisis state.

Rise or expansion is accompanied by active economic development. Expansion implies exceeding production volumes that were before the crisis. The rise is accompanied by an increase in the price level, a decrease in unemployment, an increase in loan capital and the attraction of investment.

The main phase of the economic cycle is crisis (recession). A crisis accompanies the end of one period of development and precedes the emergence of a new cycle, thus cyclicality arises. During a crisis, the entire established reproduction pattern is destroyed and a new, more developed system is created. The mechanism of falling prices during a recession leads to falling stock prices, falling interest rates, declining profits, and bankruptcy.

The crisis eliminates the overaccumulation of capital through the depreciation of funds, which stimulates the renewal of production and improvement of technology.

Causes and types

An economic crisis can arise for many reasons, some of which are the following factors:

  1. A recession can occur due to unplanned global changes in market conditions. Events that influence changes in the global economy can be wars, natural disasters and sharp fluctuations in the cost of natural resources (gold, oil, coal, etc.).
  2. A sharp drop in sectoral industrial production leads to a recession.
  3. A recession may arise from a decrease in the purchasing power of the population. A decrease in income levels leads to a decrease in sales volumes, which results in a decrease in production volumes.
  4. A recession can be caused by a decline in the national economy. The majority of public capital consists of investments made by private entrepreneurs. Accordingly, a decrease in the level of investment leads to a state crisis.

Depending on the causes of occurrence, there are three types of recession:

  1. Influenced by changes in market conditions- with very sharp changes in global economic conditions, the preconditions of which are wars and a decrease in the pricing policy for natural resources, there is a risk of a recession. Such conditions are very dangerous, since they are not typical and cannot be analyzed or predicted.
  2. Political and social aspects, as the cause of a recession, are less dangerous for the economy, since they can be regulated and eliminated. Such reasons include a decrease in consumer confidence, a decrease in investment and a decrease in business activity.
  3. Loss of economic balance, during which debt obligations increase and there is a rapid drop in market prices also leads to a crisis.

Consequences

The main consequences of a recession in the economy include:

  • decline in production volumes;
  • collapse of financial markets;
  • decreased creditworthiness;
  • increase in unemployment;
  • reduction in the level of income of the population;
  • fall in GDP;

The most critical consequence of a recession is the economic crisis. A production decline entails job cuts. Lack of money and unemployment leads to a decrease in demand for manufactured products. Unsold goods generate unnecessary costs for maintaining inventory.

When a surplus of products occurs, an enterprise reduces production volumes. Citizens have debt on loans, as a result of which the policy of lending to legal entities and individuals is becoming harsher, and investment in the research and development industry is being reduced. The securities market collapses and stocks become significantly cheaper.

Next comes inflation and a decrease in the purchasing power of the population. The state, trying to deal with the situation, increases its external debt by taking out loans. In general, the national level of reproduction and GDP are declining.

Economic stability is achieved only after many years of work; the main criterion for avoiding a crisis is forecasting and regulating recessions.

Historical example

History knows several examples of recessions that affected entire groups of countries around the world. Thus, in the 1990s, the global financial crisis affected the economies of the countries of the European Union, Latin America, Southeast Asia and Russia. A clear example of a financial and economic recession that has affected almost the entire world economy is the global crisis that began in 2008.

In 2006, the US mortgage system collapsed. Over time, the crisis engulfed the banking and financial system of the state. By the beginning of 2008, the crisis had become global. The impact of the crisis was reflected in a decrease in the scale of production, a decrease in the level of GDP, and an increase in unemployment. Some countries, including Russia, have reduced lending to a minimum. In Russia, the global crisis led to the bankruptcy of many banking organizations, large firms and a decline in the living standards of the population.

The global financial crisis has affected the economies of developed and developing countries. World practice has shown that the most important task of any state is to ensure financial stability and prevent recession.

An economic crisis never happens unexpectedly. It is anticipated by a recession. Any economic system, even a progressive one, sooner or later enters a recession stage. A recession is undesirable, but inevitable.

What does recession mean?

Recession- this is a long-term, initially not very pronounced decline in production and business activity, which worsens over time and turns into a crisis.

The recession period is characterized by such phenomena as:

  • negative GDP dynamics (both the quantity of products produced and the demand for them decrease);
  • low business activity;
  • lack of progress in the economy.

A recession is the stage following the stage of rapid economic development. Since all economic systems are cyclical, recession can be considered a natural process.

It is known that there are four phases in every economic cycle. Rise and prosperity are inevitably followed by a stage of stabilization and stagnation. Stagnation is replaced by recession. The “life cycle” of the system ends with an economic crisis.

It is futile to try to predict when a recession will begin. However, the government can prepare the country for it, take a kind of “depreciation” measures that will partially neutralize the negative phenomena accompanying the recession. A crisis will come only if the state's economic policy turns out to be ineffective.

Causes of recession in the economy

An economic downturn does not happen suddenly. It is the result of many events and processes.

  1. 1. The cause of a recession can be global and unexpected changes in the market, which, in turn, are provoked by political changes. Roughly speaking, armed conflicts or jumps in gas/oil prices on the world market may be to blame for a slowdown in production and a decrease in demand for any product.

    Unfortunately, the Russian economy is clearly dependent on the cost of oil. As soon as the market price of oil decreases, the budget begins to experience underfunding, which ultimately affects the volume of gross domestic product. Experts believe that a recession that develops according to this scenario poses the greatest danger to the state, since it cannot be predicted and neutralized in time.

  2. 2. The second possible cause of recession is a total decrease in production volumes. A serious decline in production was recorded in 2008. It amounted to more than 10%.
  3. 3. The lack of “extra” money among citizens and a decrease in their purchasing power also lead to a recession. True, it is believed that a recession caused by these reasons is completely surmountable and does not have such dire consequences as a recession provoked by wars or market turmoil.
  4. 4. Another factor causing a recession is capital outflow and lack of investment. Replenishment of the state's fixed capital occurs at the expense of private enterprises. If the government is interested in these injections, it must provide business with conditions under which it can develop normally within the framework of the national economic system.

Consequences of recession in the economy

Now let's list the consequences of the recession:

  • financial markets collapse;
  • production rates are slowing down;
  • banks limit the issuance of loans;
  • interest rates on loans are rising;
  • the number of unemployed is also growing;
  • household incomes are declining;
  • GDP volume decreases.

All these phenomena together lead to an economic crisis.

The result of the decline in production is a decrease in the need for labor. Industrialists fire people, and they can no longer find a new job. A decrease in income leads to a reduction in needs. As a result, the demand for goods that can be dispensed with decreases. Production does not experience any incentives for development.

Individuals and legal entities become debtors of banks. Circumstances force banks to limit the issuance of loans. Investment in research projects and industrial enterprises is reduced, and the country begins to lag behind in terms of science and technology. Stagnation in the production sector affects the value of shares issued by industrial enterprises. They lose value.

The next stage of the crisis is characterized by rising inflation and the beginning of the devaluation of the national currency. Prices continue to rise and incomes continue to fall. The standard of living of the population is also falling, which leads to mass discontent.

The government is turning to more prosperous countries for financial assistance. The state's external debts are growing. To pay off one loan, you have to take out several others.

All these negative phenomena directly affect the volume of GDP. Its decline indicates a deterioration in the economic situation in the country.

It is noteworthy that there is no consensus among economists about the nature of the recession. Some believe that this phenomenon in itself is not critical, while others believe that recession, collapse and depression are synonymous.

The business activity of any enterprise or the economy of an entire state includes several stages. First there is a rise, then the work reaches its peak. Sooner or later, a decline occurs, which may end in complete decline. The third stage, preceding the crisis, is predetermining. This stage is called a recession. Let's talk about it in the article.

general information

There are two ways out of the recession. An economic recession can lead, as mentioned above, to the complete decline of the country with all the ensuing consequences. A decline in activity can also be used by the state government to find solutions to pressing problems that will allow it to enter a new growth cycle.

Concept

The state of the economy, which often occurs after all indicators have increased and has a non-critical decline in production, is called a recession. During this period, there has been a deterioration in key indicators that influence macro indicators. The fact that the economy is in recession is evidenced by:

  1. Decrease in GDP indicators.
  2. Decrease in income of the population.
  3. Deterioration of investment attractiveness.
  4. Decrease in production volumes of industrial enterprises.
  5. Decrease in consumer activity.

An economy in recession means that the country has entered an unfavorable period. During it, enterprises reduce production speeds, produce fewer goods, citizens receive reduced wages, which is why they begin to save.

Causes

An economy in recession may be due to:

  1. Collapse in gas and oil prices. Their decline leads to economic decline in states where these resources act as a key strategic product.
  2. Active growth in the cost of raw materials. It can be triggered by increased consumer demand and excitement.
  3. Issuing an unacceptable number of high-risk mortgages.
  4. Decrease in production volumes in all industries.
  5. Reductions in salaries and other incomes of citizens. This entails, accordingly, a deterioration in the population.

What happens in the economy after the recession process? The consequence of a recession inevitably becomes a depressive state or a crisis. According to all economic laws, it will not be possible to avoid such a state. However, thanks to the work of analysts and other specialists, the process can be significantly smoothed out. The work of the highest government minds will reduce the negative effect of the recession and reduce the scale of the consequences.

Scope of distribution

If the economy of a country is in recession, this can lead to negative consequences not only within that state. There is currently active international cooperation. The economic activities of one country may have a close connection with certain sectors in other countries. Thus, a decline in one subject will inevitably lead to a deterioration in the situation in another. This, in turn, could lead to a global world crisis. Thus, in particular, according to a number of analysts, the EU economy is in a deep recession. Within the framework of international relations, during the recession there has been a decline in stock exchange indices. As a result, the national currency of a country whose economy is experiencing deterioration depreciates. This, in turn, raises the possibility of default on external debt. When the economy is in recession, it is mainly the businesses operating in the country that suffer. They are faced with the need to reduce production volumes due to inefficient consumption of goods. Late payments for delivered products lead to tax and salary arrears. As a result, enterprises that are not prepared for the crisis are declared insolvent (bankrupt). The impact of the recession is also acutely felt by direct consumers of goods. The population receives lower salaries, people become insolvent, cannot fulfill loan obligations, and fall into debt traps.

Classification

When the economy is in recession, experts analyze the reasons for this situation. Based on this, the type of recession is determined:

Period

A recession in the economy is recognized if a decrease in production volumes and a deterioration in gross indicators occurs for more than six months and begins to take a protracted nature. The duration of such a period will directly depend on the reasons that caused this situation. For example, if there is a recession of a political or psychological nature, then the duration of the recession can be reduced by regaining the trust of the population and businessmen. To achieve this, loyal measures are applied in the areas of lending and social security. The situation is different with an unplanned recession. As mentioned above, it is quite difficult to predict such a decline. It depends on negative global factors. A state experiencing a decline in production cannot influence them. In such a situation, the only thing analysts can do is to develop measures aimed at maximally smoothing out the negative effects.

Recession in Russia

The state of the domestic economy directly depends on the performance of the oil and gas market. The rapid fall in energy prices entails a number of negative consequences for the country. First of all, the amount of revenue that goes to the budget fund from the sale of strategic products decreases. begin to fall, followed by a weakening of the ruble. The decline in production causes a decrease in citizens' incomes. Consumer activity of the population is deteriorating. With a simultaneous decrease in citizens' incomes, prices for services and goods rise. The economic decline in the country is also due to external factors - sanctions from a number of countries around the world. Since 2015, relations with various international corporations have been severed, which has jeopardized the functioning and development of large enterprises and had an extremely negative impact on the GDP indicator. As experts noted earlier, this situation could last until 2017. However, today the situation may change if an agreement on freezing oil production volumes comes into force.

Recession and stagnation

These two concepts have significant differences. A recession is characterized as a moderate economic downturn. At the same time, stagnation is characterized by a complete stop of key strategic sectors. In this period:


Conclusion

During a recession, the process of reformatting the country's economic regime begins. Specialists develop and implement plans for the further development and re-equipment of the main sectors of the national economy. At the same time, stagnation does not provide for any positive dynamics and adaptation to the new reality. As a result, the country reaches the last stage of its cycle, and a deep economic crisis begins.

When studying the fundamental factors of price movement, it is important to take into account the general state of economic development of a particular state at the current moment in time, since the national bank will rely on it when planning its further actions. Among the popular conditions is economic recession, which is currently observed in a number of countries.

Therefore, below we will describe what this phase of the country’s economic situation is and what measures against its background should be expected from Central Banks, whose task is to support the national currency and domestic producers. Theoretical material and examples will be presented in simple words so as not to leave anything unsaid.

Explanation of the term and specifics of its use

History shows that the economy of any country always goes through cycles of growth and decline, developing in a cyclical pattern. In this regard, four main stages are noted, namely:

  • active development;
  • being at the peak of development;
  • attenuation;
  • reaching the bottom (crisis).

The period of decline when the economy is experiencing problems and the situation within the country is deteriorating, moving from the peak of its development to the bottom, is called a recession.

If we look at the morphology of the word, it comes from recessus, which is translated from Latin as retreat. The main signs will be a slowdown in economic development, a decrease in production volumes, a decrease in wages, a decrease in working hours, and so on. Moreover, this process is usually quite lengthy and lasts for at least a year, or even more. If the crisis is unfolding at an intense pace, then the word recession is not used, then they say recession, collapse, etc.

Periods of recession in the economy are inevitable, since the economy, like the ocean, also experiences its own peculiar ebbs and flows. Therefore, economists are always prepared in advance for a new round of recession, and the Central Bank has a number of mechanisms in its arsenal that help it lead the country out of this period, spurring development.

Concluding the introductory part, it should be noted that the most developed countries of the world are so closely intertwined with each other that a recession in one inevitably leads to problems in the other. Therefore, if the economy of one of the key countries stagnates, a chain reaction usually begins, which soon causes, for one reason or another, a recession in other countries. One of the most striking examples in recent years is China. As soon as China entered the recession phase, other countries immediately felt the negative effects of this phenomenon.

What phenomena are typical during this period?

It is not difficult for financiers to notice the slowdown that has begun, since they can observe very characteristic phenomena during a recession in the economy that are difficult to miss. If above we briefly outlined the signs by which attenuation can be noticed, now we will describe the main signs in more detail.

  1. A general macro-indicator that reflects a combination of economic factors is the volume of gross product, known by its abbreviation - GDP. If its indicators fall, then there is no doubt that the country’s economy is in a recession phase.
  2. The second factor will be a slowdown in production volumes, as well as a decrease in the activity of consumers, who are beginning to save more and save more than they spend. These signs are well reflected by the macroeconomic indicator - the level of business activity.
  3. As soon as a business begins to experience problems, workers are laid off. As a consequence, the number of unemployed is growing, and the corresponding macro indicators clearly indicate this.
  4. The slowdown in growth causes another negative phenomenon - manufacturers and service providers begin to save money by cutting wages for their employees. This leads to a decrease in profits for the population, who are again forced to reduce their expenses, which aggravates the overall situation in the state.
  5. The last characteristic feature will be inflation. Its change clearly reflects the presence or absence of economic problems within the country.

Usually all these phenomena are interconnected, since the appearance of one of them causes a chain reaction. Therefore, any of the signs described above speaks volumes about an urgent problem.

Why is the economy entering a recession?

Despite the fact that the state’s economy regularly enters the recession stage, obeying cyclical development, the reasons that lead to this are usually completely different. Moreover, they can be both internal and external. Below are described the most common negative factors that lead to a recession in the economy, reasons that cause damage to the state and lead to a halt in the pace of economic development.

Scientific and technical progress

It seems strange, but a revolution in the world of scientific and technological progress is not always a joyful phenomenon. Progress often causes a recession, since the introduction of new solutions may make old familiar goods or services no longer necessary. Accordingly, some industries or service sectors may cease to exist, which will cause a large number of unemployed, a decrease in state budget revenues, and so on.

Declining commodity costs

For a number of countries whose budgets are filled by exporting raw materials to the world market, the decline in energy costs leads to a recession. A very good example is the fall in oil prices in 2013-2015. Against the backdrop of falling prices for black gold, a number of countries, including Canada, Russia, Mexico, etc., experienced severe budget deficits, which led to a deterioration in the country’s economic condition.

Banking segment crisis

Here it is enough to recall the 2008 crisis in the United States, when American banks, which seemed unshakable and represented the personification of financial stability, suddenly became the cause of a severe economic crisis in one of the most developed economies in the world. The reason was that they easily provided loans to everyone, especially for real estate, as a result of which the volumes of loan funds issued upset the natural balance. At some point, loan holders lost the ability to repay them, which caused the bankruptcy of small financial institutions, while large institutions were forced to insure their risks and tighten their requirements. As a result, businesses began to experience extremely poor working conditions, which caused a general slowdown in production, the service sector, trade, etc.

Force majeure circumstances

In some cases, a recession is a consequence of force majeure. A good example is the strong earthquake that occurred several years ago in Japan. It was impossible to predict, but the destruction caused was so significant that investors who use the yen as a safe haven currency for their capital began to quickly withdraw them. The rapid outflow of finance caused a sharp fall in the yen and, as a consequence, a protracted period of recession.

Consequence of recession for the country's economy

If we talk about the consequences that a recession causes, many of them have already been described above, which talks about the recession in the economy and the phenomena that accompany it. However, below is a list of points that you need to keep in mind, as in many ways they provide earning opportunities for currency speculators that can be used to their advantage.

  1. A decrease in production volumes will lead to a loss of profit for enterprises, as a result of which the value of their shares falls.
  2. Decrease in consumption of goods and services. This factor leads to a depreciation of the national currency, since the Central Bank will soften the course of monetary policy in order to neutralize the negative consequences of this phenomenon.
  3. Increase in the number of unemployed. Few traders do not know how much the monthly publication from the labor market - NFP - affects the US dollar exchange rate. The same applies to other countries - the unemployment rate serves as a significant benchmark for investors, so an increase in unemployment weakens the currency, and a decrease strengthens it.
  4. A drop in the number of loans issued by banks and an increase in interest rates on loans also indicates that the conditions for the development of the country's economy are deteriorating, and therefore its currency will become cheaper.
  5. If some factors indicate that a recession has begun, then we can expect a fall in the state's stock market. At this point, you can go short by selling blue chip stocks or opening short positions on a stock index.

Actions of the National Bank in a Recession

As soon as the first signs of a recession appear, the State National Bank begins to gradually put into action certain mechanisms that stimulate the economy and improve conditions for business.

The most common option that the Central Bank resorts to is lowering interest rates. This lowers the exchange rate of the national currency, quite significantly, which allows traders to make good money at a distance by opening short positions.

In addition, the Central Bank can carry out interventions in the foreign exchange market, preventing the development of particularly protracted and strong trends, when the quotes of the national currency begin to weaken significantly. This is, for example, what the Central Bank of the Russian Federation did in 2014-2015, injecting large volumes of money to stop the fall of the Russian ruble against the American dollar.

Knowing the specifics of developments during a recession, skillful speculators and investors can find many opportunities for themselves that allow them to make good money.