Effects of Recession

4 Key excerpts on "Effects of Recession"

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  eBook - ePub

  The Recession and Beyond

  Local and Regional Responses to the Downturn

  • David Bailey, Caroline Chapain(Authors)
  • 2012(Publication Date)
  • Taylor & Francis

    (Publisher)

  Recession is commonly identified as an economy experiencing ‘at least two quarters’ of falling GDP. On this basis, the UK has experienced four ‘major’ recessions in the post-Second World War period: 1973–75, 1980–81, 1990–91 and 2008–09. At the same time more ‘minor’ recessions occurred on three occasions between the mid 1950s and early 1960s, but these were short lived and characterised by immediate periods of strong growth (Chamberlin 2010). Recessions are typically marked by contractions in output, income, employment, production and sales. However, both between and within recessionary periods the magnitude of impact on businesses, and the way in which such impacts are experienced, varies dramatically. The most recent recession, in 2008–09, witnessed the steepest decline in output since the Second World War, with six successive quarters of negative growth, yet the effect on employment has been relatively modest (at the time of writing at least) when compared to previous recessions. It is the aim of this chapter to describe and account for this somewhat unique outcome through an analysis of the critical interplay of structural, economic and political factors. Specifically, the chapter will first explore in detail how UK business has been affected by the recent recession compared to those previously, using metrics such as output, employment, unemployment, redundancies and insolvencies to evidence impact; second, describe the differential impact the recession has had on businesses, drawing out spatial, sectoral and structural contrasts; third, account for the trends observed through an exploration of the strategies employed by firms in reacting to recession; and fourth, identify the combination of factors which underpinned firms’ strategic behaviour.

  Key features of the 2008–09 recession Employment and output

  In describing and accounting for the key features and impact of the recent recession, it is important to understand its origins and how these differed markedly from each of the two preceding recessions. These factors are significant in helping to account for the way in which businesses have to a large extent been better placed to respond to recession this time. In the recessions of the 1980s and 1990s, significant inflationary pressures resulting in tightened monetary policy (either through taxation or interest rates) saw a sharp fall in demand, with consequent rises in unemployment. In contrast, the 2008–09 recession followed a period of unparalleled stability in the UK and global economies, marked by a ‘non-inflationary constantly expanding decade’ (Jenkins 2010: 30). This period of relative stability masked an unsustainable credit boom brought to light by the collapse of the US sub-prime mortgage market and subsequent hiatus in lending, otherwise described as the ‘credit crunch’. This process led to a fall-off in demand as indebted households and businesses sought to restructure their finances. A crucial point to note is that the factors which underpinned the 2008–09 recession provided a more conducive fiscal environment and enabled firms to enter the downturn on a stronger footing in terms of their profitability than was the case in either the 1980s or 1990s recessions.

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  The Student's Guide to Financial Literacy

  • Robert E. Lawless(Author)
  • 2010(Publication Date)
  • Greenwood

    (Publisher)

  When high inflation persists, interest rates on credit cards, automobile, home and business loans, and other borrowing sources rise. Higher interest rates make it more expensive for consumers and businesses to borrow money, which leads to lower spending. Lower spending leads to greater unemployment, lower GDP, and lower economic growth. If the economy grows too slowly, stagnates, or experiences negative growth, a country runs the risk of moving into a recession or even a depression. The term economic recession can be measured in different ways. A common defini- tion of a recession is two or more quarters of negative growth in GDP. This means that instead of growing for a six-month or longer period, the economy y GUESS WHAT? Most U.S. economists agree that GDP growth of 3 to 5 percent per year is favorable for the overall economy. y GUESS WHAT? The U.S. economy is the largest in the world. For the year 2007, its gross domestic product was estimated to be $13.8 trillion. Economics 171 contracts. During periods of recession, people spend less and businesses make lower profits. This causes companies to reduce their workforces, and unemployment rises. As unemployment increases, people tend to spend even less, which places further strain on households and businesses. A depression is much more severe than a recession. There is no formal defi nition for an economic depression, but a depression includes a longer period of declining economic performance. During a depression, unem- ployment reaches very high levels, and many companies are forced to fi le bankruptcy. The last depression in the United States began in 1929 and lasted through the early 1930s. Other U.S. depressions occurred in the 1870s and 1890s. y GUESS WHAT? During the economic depression of the 1930s, one out of every four persons wanting to work could not find a job. In addition, the stock market declined by almost 90 percent from peak to bottom.

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  A History of Big Recessions in the Long Twentieth Century

  • Andrés Solimano(Author)
  • 2020(Publication Date)
  • Cambridge University Press

    (Publisher)

  So, recessions may have long-run effects on living standards, as the economy may fail to recover the output losses incurred during a crisis’s episode. 5 When there are hysteresis effects, the traditional concept of the out- put gap becomes less precise as the level of potential output also declines as a consequence of a severe recession. A permanent output loss calcu- lated with a trend line unaffected by the recession will not reflect the actual degree of unused capacity that can accurately guide fiscal and monetary policy. This may induce a government to undertake a fiscal over-expansion as the output gap is overestimated (potential GDP is not adjusted downward). A good calibration of the output gap becomes challenging. Recalculations of the output gap in the United States and Europe under- taken by Cerra and Saxena (2016) for the period 2000–2009 show that there was no “over-heating” prior to 2008 when calibrated with adjusted potential output. Regarding the intensity of output contractions, different empirical studies show that the size and persistence of the declines in output and investment are larger, and the speed of recovery slower, when a recessionary cycle is accom- panied by financial crises, currency crises, and twin crises (Calvo, 1998, 2007, 2016; Bordo, 2006; Cerra and Saxena, 2008, 2016; Solimano, 2017). In fact, financial crisis often involves excessive debt accumulation by households, enterprises, and the government, which acts as a drag on the recovery of con- sumption and investment after negative shocks have occurred. In addition, the process of restoring solvency and reducing debt –“improving the balance sheets” – is often slow when there has been a financial sector crisis. Typically, firms and corporations are reluctant to invest if they have high levels of debt; at the same time, households postpone consumption (mainly of durable goods) at times of low employment and high debt.

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  From the Great Recession to Labour Market Recovery

  Issues, Evidence and Policy Options

  • I. Islam, S. Verick, I. Islam, S. Verick(Authors)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The Recession: Causes, Consequences and Policies 41 well-managed. This strategy contributes to the long-run growth poten- tial of the region and also confers benefits to the donor countries by increasing demand for their goods and services. Labour market and social policies as part of the response to the crisis In addition to the role of macroeconomic policy, specific labour market measures also play a role in mitigating the impact of the crisis on work- ers, helping reduce the lag between economic growth and job creation, as well as preventing the risk of unemployment persistence, long-term unemployment and human capital deterioration. Formulating appro- priate policy interventions requires recognizing how the labour mar- ket adjusts as a result of the credit squeeze and collapse in aggregate demand, which is discussed further in chapter 5. In this respect, the degree and form of adjustment will depend on the magnitude of the cri- sis in their country and region, and the level of labour market flexibility, which is influenced by the institutional arrangements in the labour market (such as wage setting institutions, unionization, employment protection legislation, and so on). In light of the various labour market adjustment mechanisms dis- cussed above, the labour market policy response to the crisis has centred around four main areas: maintaining and increasing labour demand; improving the match between demand and supply; providing income support; and targeting of vulnerable groups. Table 2.4 Continued Agency Sample coverage Estimated size of fiscal expansion (as % of GDP) Key findings OECD OECD economies 3.4 * Although size appears large, impact not significant enough to offset output gap * Diversified approach, but evidence is that ‘spending multipliers’ bigger than ‘tax multipliers’ * -ve relationship between ‘auto- matic stabilizers’ and size of fiscal expansion Sources: IILS (2009), IMF (2009c,d), Khatiwada (2009), OECD (2009c) and Prasad and Sorkin (2009).

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