Monday, July 7, 2008

How Damaging Are Recessions?

Sometimes the media give the impression that a recession will lead to widespread economic disaster. It is easy to drag up memories of the Great Depression, the Jarrow Crusade, and unemployment rates of 30% +. This is made easier because the media highlight the bad news; the companies who go bankrupt, the people who are made unemployed, falling house prices.

Negative news makes the most interesting headlines; the media won't start reporting - "Big supermarkets doing OK - no job losses this year" I don't blame them for this, however, it is worth bearing in mind that for most people a recession might not actually change things very much. Most people will keep their jobs, most companies won't go bankrupt. For example, in the last recession, unemployment in the UK doubled from 1.5million (5%) to 3 million (10% of workforce). But, the majority of people still kept their jobs.

People are more likely to be directly affected by rising costs of living. The rise in food and energy prices is hard to ignore; it is estimated that many consumers could be worse off this year because prices are rising faster than wages. This is what people will notice. Interestingly, many non-economists may confuse the concepts of recession and inflation. However, it is worth pointing out that although rising oil prices may help to cause a recession. A recession means real output or at least real output per capita falls.

Of course, for those who are made unemployed in a recession, the effects are severe. Being made unemployed is one of the most stressful events in life, both economically and on an individual level. Surviving on unemployment benefits is no joke and the impact far greater than rising petrol prices

The impact of a recession also depends on various factors such as:

How Long does Recession Last? An important factor is how long and how deep the recession is. One of the notable features of the Great Depression was how long the mass unemployment existed. More recent recessions have been shorter in duration.

Some sectors hit more than others. The impact of a recession is not equally distributed throughout the economy. A recession will usually affect some sectors much more than others. For example, in the present downturn, it is the construction sector which is particularly badly hit. This is for two reasons:
  • The collapse in house prices
  • Construction investment tends to be more volatile than economic growth.
Some firms will be hit more than others. Early casualties of the current downturn are companies like Starbucks and Marks & Spencer. Both have businesses focused on luxury items. E.g. Starbucks coffee could be considered an expensive luxury; it is the kind of spending you can easily cut out. Other companies producing basic food items are barely touched by a recession. People do not stop buying grocery items in a recession; they just buy less luxury items like a takeaway Starbucks or Marks & Spencer organic salad.

The important thing is that some firms will be hit much harder than others. If you're not in construction, real estate or producing luxury SUV cars, the impact of the forthcoming recession may feel more muted.

Does Anyone Benefit from A Recession?

Some economists may even go as far as saying a recession can have a beneficial impact because it increases the long term efficiency of the economy. See: Does Anyone Benefit from a recession?
Can a Recession be A Good thing?

Are Recessions Inevitable?

This is a good question, I will look at this later. It is related to another question - Are recessions getting shorter?

1 comment:

Richard Jennings said...

There are still lots of high paying jobs on employment websites. Here's a few from's top 10 employment sites -

The whole list here: