What Happens In A Recession
The question of what happens in a recession is not easy to answer. These events happen due to several factors but the following should provide an overview of what one may expect in a recession.
The Stock Market Falls
Before the Great Depression of the 1930s, the US stock market experienced a crash in 1929. At the height of the housing crisis in the US, the stock market also experienced sharp downturns.
This was followed by market declines in London, Tokyo and other markets around the world. As investors sense uncertain economic times, they pull their money out of the market. This is usually what happens in a recession first. Even before the companies lay off workers, the stock markets go in a decline.
People and Banks End up in Debt
The current recession in the US was a direct result of people buying homes they could not afford. During the housing boom, banks made it very easy for people to get loans. The result was that people ended up owing the banks a lot of money. When the bubble burst, they found themselves heavily in debt.
The banks also got into trouble by risking their money in various investments. Thus, what happens in a recession is this: both people and banks end up owing and losing money. This combination starts a chain reaction that affects businesses in various industries.
Companies Downsize or Go Bankrupt
When recession hits, companies in many industries are affected. Because people have less money, they focus on buying only necessary items. Stores are forced to offer discounts on their products to entice buyers.
Car companies are also forced to slash their prices. This policy extends to airline companies, travel agencies, manufacturing companies etc.
If the company fails to make profits, it will be forced to downsize. A company in debt may sell some of its assets just to be able to pay its debt. If this fails, the company will be forced to declare bankruptcy.
In certain cases, the company may ask for help from the government. Sometimes what happens in a recession is the government may bail the company out. However, the corporation has to pay the debt back. In addition, the company has to follow the government’s policy for rehabilitating it.
Workers Lose their Jobs
When companies struggle or go under, their employees suffer the most. In some cases, company workers may be forced to take pay cuts or have their working time reduced.
If this doesn’t help the company, workers may be laid off. Workers lose their jobs when the company shuts down. In other cases, a company has to close some of its branches to cut back on costs. The people working there lose their jobs.
There is no single answer as to how an economic downturn ends. Some countries prefer to spend their way out of the problem. The government may embark on a series of projects to give people jobs and jumpstart the economy. Often though, what happens in a recession will determine the government’s response.
No related topics.