In simple words economic recession is a slowdown in the economic activity. During recession the production, investment, spending, employment, income, business profit, capacity utilization etc. fall and at the same time unemployment and bankruptcy rise.

Effects of economic recession

Let us see on a very basic level what happens when there is an economic recession.

During recession, there will be a decline in the sales revenue and profit. When there is a decline in the sales revenue and profit of a business establishment, there will be a cut in the spending, hiring new employees and forced lay-offs and/or reduction in the manpower. If it is a manufacturing company, it will cut the production to minimize the cost because of reduction in the sales and hence revenue. New products will not be rolled out and research and development will be slowed down or even stopped. Spending on advertisement and marketing will be reduced. As a chain reaction, those small and medium establishments supplying raw materials to this manufacturing company also will be affected and they in turn will be forced to take necessary precautionary steps to sustain their business.

Employees will lose jobs, so there will be unemployment in the country and people will be forced to cut their spending. When they reduce their spending, many retail establishments will be affected. So, they will also take precaution for their survival.

The Gross Domestic Product (GDP) of a country is affected.

GDP is the public consumption + government outlays + investments + net exports where net exports (net export being export less imports)

Share Markets will be affected due to falling stocks. Shareholders will be upset by the falling share values because they suffer a loss in their investment. They will try to sell the shares they hold of a company in distress at reduced rates and reinvest in other better-performing shares. This will upset the credibility of the companies affected by such sales.

Business establishments will not get money from their customers and they will be forced to offer discounts to recover as much as possible from the market. When a company or person does not have money to pay the suppliers or repay the loan outstanding, they will resort to late payment or no payment at all. So the suppliers as well as banking establishments will be affected by this. Suppliers will not any more supply raw materials to such companies. Banks will stop giving loans and be forced to take action on defaulters by ceasing properties or vehicles that they have financed.

When a business cuts its manpower, more work will have to be done by less people and their work timings may increase without any increase in their wages or benefits. Employees will be unhappy and their morale will be suffered. This will also reflect in the output and quality of the produced goods. At a stage when a business cannot sustain further, it will be forced to shut down or file a bankruptcy.

People who cannot afford to meet their living will resort to practices like theft and burglary and there will be unrest in the community. Those who cannot any more survive will take it to the extreme of committing suicide unable to face the public.

Thus recession produces a chain reaction in which people from top to bottom will be affected. Recessions will come and go. In some cases the impact will be severe and last longer than others. Some countries will be affected more than others. But it will not last for ever. We know very much the effects of the recent recession which actually started in December 2007 and lasted almost for 18 months – up to June 2009.

There will always be bright light at the end of the tunnel.