Monday, July 7, 2008

The Effect of A Recession

There is a lot of talk about recession at the moment. There is a general understanding recessions are bad, but what does it actually mean to be in a recession and how does this affect the average consumer?

The definition of a recession is negative economic growth for two consecutive quarters. This means a fall in Real GDP, - lower National income and lower National Output. However, it is worth noting some people talk of a recession, even when growth is very low.

A recession is characterised by:
  • Rising unemployment (often unemployment is a delayed factor) i.e. it takes time for unemployment to rise, but, even when the economy is recovering, it takes time for unemployment to fall.
  • Rising Government Borrowing. A recession is bad news for the government budget. A recession leads to lower tax revenues (lower income tax and corporation tax revenues) and higher government spending on unemployment benefits. The UK is forecast to borrow £60 billion, a recession could make this borrowing even worse in 2009. This borrowing means higher taxes and higher interest payments in the future.
  • Falling Share Prices. Generally a recession leads to lower profitability and lower dividends. Therefore, shares are less attractive. Note share prices often fall in anticipation of a recession. e.g. the recent falls in share prices are largely because the market expects a recession soon. During the actual recession, share prices often increase in anticipation of the economy recovering. Note also, falling share prices don't always mean a recession, falling share prices can occur for many other reasons.
  • Lower Inflation. Typically a recession reduces demand and wage inflation. This should result in a lower inflation rate. However, this recession is complicated because of rising oil prices. Therefore, the forthcoming recession may actually occur simultaneously with higher inflation - a term known as stagflation. But, a recession will definitely reduce demand pull inflation pressures and encourages price wars on the high street as firms seek to retain consumers.
  • Falling investment. Investment is much more volatile than economic growth. Even a slowdown in the growth rate (economy expanding at a slower rate) can lead to a significant fall in investment.


Anonymous said...

With our economy going into a slump, why is it that political figures are destroying valid financial options? Payday loans are an essential part of the U.S. financial system, providing loans to those who have bad or no credit that need the money fast. Yet, for one reason or another, legislators are targeting this financial system. Some states, such as Georgia and North Carolina, have even banned the industry all together! The politics behind it is simple; banks are lobbying the legislators to try and destroy their oncoming competition, and the legislators are falling for it. Even taking out the fact that banks are trying to take away your financial choices and freedoms so they can have a monopoly on loans, the corruption of our politics is simply wrong. Our opinions must be heard, and our freedom of choice, financial or not, should not be dampened on the soul fact on one person's financial gain.

Anonymous said...

The eyes of the American nation were fixed upon Hempstead, New York, on Wednesday, October 14th, 2008, for the third and final U.S. Presidential Debate. The Democratic candidate, Sen. Barack Obama, of Illinois, went into the debate with an eight point lead, and he was indeed content with it. The Republican candidate, Sen. John McCain brought it hard to his opponent, challenging his expertise, character, judgment and proposed policies. Obama’s position on the economic policies of the last eight years was far more critical than McCain’s, though he maintained that he is “not President Bush.” Both pledged that they would make cuts in the federal budget, McCain pledging to enact an “across the board spending freeze,” and take a hatchet to some programs whilst using a scalpel on others. Obama’s take was to “go through the federal budget page by page, line by line” in order to cut out those programs that are dysfunctional. Both of the candidates pledged to bring the change that America needs, but what does that mean? For instance, many politicians want to do away completely with the PAYDAY LOANS industry. Should they succeed, it will mean the end of the freedom to choose for the consumer, and the triumph of certain interest groups (the banks and credit unions, who have gotten themselves in enough trouble already) over the freedom of we, the American People.