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The concept of economic stagnation..and its consequences..and how to deal with it

What is an economic recession?

A recession is defined as a decline in economic growth and more specifically it occurs when the economy experiences two consecutive quarters of economic decline, and this occurs when the gross domestic product declines compared to the previous quarter.

A recession occurs when GDP declines for two consecutive quarters, and consists of consumer spending, business investment, government spending, and net exports, so a decline in any of these may contribute to a recession.

An economic recession is often feared, which can actually have a self-fulfilling effect as consumers and businesses spend less, because confidence in the health of the economy in terms of jobs and consumer demand is affected. In turn it affects the sales forecast of the business.

The results of the economic recession

Many consumers in the economy will suffer a recession and will not even notice. Life may go on as usual but there are far-reaching consequences that indirectly affect everyone. These effects may not necessarily occur during a recession but after many years, for example the 2008 recession had far-reaching effects Continuing to this day, contributed to large budget deficits and massive expansion of the money supply, and throughout Europe austerity took place for many years after that, leading to the provision of fewer public goods . Among the effects of the results of the economic recession :

  • budget deficiency

When there is a recession, workers steadily lose their jobs as aggregate demand decreases, this increase in unemployment means fewer workers contribute to payroll taxes, these workers will then have less income to spend on more goods which means lower government receipts from taxes the sales.

Then we have the fact that governments with welfare states are going to spend more with unemployment payments, so in general spending increases while revenue decreases in the end the government spends more than it gets which leads to budget deficits.

  • Companies going out of business

Economic stagnation is associated with lower aggregate demand, with lower aggregate demand in the economy firms sell fewer goods and services. This puts significant cost pressures on firms and may prevent some from benefiting from the same economies of scale, thus increasing unit prices.

In addition to higher unit prices there are ongoing fixed costs such as rent that have to be paid even though the company sells fewer goods, if these cost pressures are too great for the business they will end up withdrawing.

  • lower real income

During a recession employees tend to take a hit in order to keep their jobs, they may be asked to cut wages or they may not see a wage increase in line with inflation, with lower aggregate demand companies do not have the same financial capacity to hire more workers and pay higher wages, so they are depleted Job opportunities, in contrast, employees have few options apart from accepting stagnant or decreasing salaries.

  • low exchange rate

When a country falls into a recession, central banks tend to lower interest rates to stimulate consumer and business demand for credit, while at the same time lower stock prices and profits encourage capital outflows from the country, foreign direct investment is depleted due to economic uncertainty which then contributes to Low demand and weak currency.

  • Asset prices fall

When a country falls into a recession, the value of assets like home prices and stock market goes down, when people lose their jobs profits go down, businesses go bankrupt and consumers generally see a drop in disposable income and this creates panic in the stock market and uncertainty among consumers.

The uncertainty that a recession creates shifts to asset prices. Both investors and consumers begin to question the true value of assets and more importantly when their value will stop falling.

They don't want to buy when its value goes down another 30 per cent so they stop buying thus reducing demand and creating more panic selling. Only when that confidence returns will prices stabilize.

  • Low interest rates

A recession is characterized by low aggregate demand, this means that demand from consumers and businesses is falling, with consumers demand for fewer goods it means that companies have to reduce production, which in turn means that they need fewer employees, at the same time they are discouraged from investing in machinery and equipment As future demand remains uncertain.

In order to try to stimulate aggregate demand central banks will use a number of monetary tools one of them is low interest rates, and by making borrowing money cheaper it creates an incentive for both consumers and businesses to move forward with purchasing decisions, for example it may cost a consumer $50,000 less to move his house because of a lower rate instead of That would cost a more productive machine $20,000 less to do.

How to deal with economic recession

The main cause of economic stagnation is reduced demand within the economy whether from businesses, consumers, government or from other countries. Therefore, the most effective solution and handling will depend on the root cause of the stagnation.

If consumer spending stagnates, it may be better to cut taxes. This will give them extra income and allow more spending to be encouraged in the economy. Alternatively, a slowdown in business investment may require lower interest rates to reduce the debt burden. Among the ways to deal with economic stagnation:

  • tax cuts

When governments cut taxes, it comes at the cost of increasing the budget deficit. The government receives less tax revenue but usually keeps spending at the same level. This way the economy receives an overall boost, while this increases the budget deficit, it puts more hands in the pockets. Ordinary consumer.

The effectiveness of the tax reduction will depend on the marginal propensity to consume, in other words, what percentage of that income will be spent in the wider economy If the propensity to consume is high, consumers may spend all the tax credits in stores, in return more goods and services are demanded than It creates jobs and boosts the economy.

  • Increasing government spending

Government spending itself is a component of GDP so any increase here will create an overall boost in the economy, however this can come at a cost in the long run either through higher inflation rates or higher taxes, both of which can cause a significant drain on growth Economic.

However, increased government spending can boost the economy significantly. Public work programs and infrastructure investment help put money into the hands of workers who can then go out and spend it and boost the broader economy. At the same time, such programs are more cost-effective. Because the government does not have to pay welfare benefits to those it appoints, so instead of making welfare payments the government pays wages instead which means the actual cost is lower.

  • quantitative easing

Most central banks use quantitative easing to flood the market with new money with the aim of liquidating credit markets, making it easier for financial institutions to lend money. The central bank buys government debt from financial institutions and then releases it to lend to consumers and businesses. Alternatively, institutions may simply buy new government debt if they choose to borrow More.

Financial institutions will have a number of options for moving new cash although this is not always efficient, as we saw during the 2008 financial crisis banks kept newly minted money in their reserve accounts because the risk of lending them was too great, however quantitative easing can increase Economic growth if money moves to consumers, businesses, and possibly the government.

  • lower interest rates

By lowering interest rates the central bank is essentially putting more money back into the pockets of consumers and businesses which encourages savers to spend their money, so consumers with variable rate mortgages will pay less to their provider each month, instead having that extra stream of income to spend in the economy.

Lower interest rates also mean that companies have to repay less, which boosts the company's cash flow, and these lower rates make borrowing cheaper, which creates an opportunity for companies to invest in better equipment.


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