Recession : What is it & How it can impact your Finances

A recession is an economic phenomenon that occurs when the economy's output, employment, and income decrease.

Recessions are a natural element of the "business cycle," which is a cycle of contraction and expansion in a country's economy.

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A recession is declared when a country's economy sees negative GDP, increasing unemployment, declining retail sales, and shrinking indicators of incomes and manufacturing over a protracted time period.

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Such a downturn in business growth may endure for several quarters, stifling an economy's progress. In this case, economic metrics such as GDP, business earnings, employment, and so on collapse. This causes havoc across the economy. To combat the threat, economies often relax their monetary and fiscal policy by injecting more cash into the system, raising the supply of money.

It is accomplished through interest rates being reduced. Increased government expenditure and lower taxation are both regarded as viable solutions to this challenge. The 2008 global recession is the most current example of a recession.

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What Causes Recessions?

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These phenomena are some of the main drivers of a recession:

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• A sudden economic shock: Economic shocks are both predictable and unpredictable and in most of the cases uncontrollable as well!

• Excessive debt: The debt-to-income ratio is the % of one's debt servicing commitments relative to your total income each month (after taxes). The debt-to-income ratio should be lower or equal to 36%. Every debt-to-income percentage more than 43% is regarded as excessive

• Asset bubbles :An asset bubble arises whenever the value of a particular asset, including such shares, securities, property investment, or commodities, increases rapidly with no economic fundamentals to explain the price hike, like rapidly expanding demand.

• Too much inflation: Inflation expectations encourage conserving since they diminish the buying power of savings. This possibility can entice users to purchase and companies to develop. As a consequence, as inflation increases, unemployment frequently falls at first.

• Too much deflation: Deflation indicates a declining economy. Economists are concerned about deflation since dropping costs result in lower consumer expenditure, which is a key aspect of economic development.

• Technological change: is an improvement in a product's or system's performance which leads to an increase in output without the need for a corresponding increase in input.

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