Understanding recession in very simple terms


Recession is a very big problem for everyone. Economists have a very scientific way to explain this phenomenon. Yet, it can be very easily understood in common sense terms and every single person, who does not know economics can also understand the concept. Such an understanding is based on observation of real world happenings. This article is an attempt to discuss some aspects of recession in very simple terms.

Introduction

The simplest definition of recession is a situation where there is a huge stagnation and negative growth in several industries and also very less or zero demand for goods and services. In other words, the cash flow cycle is badly affected and there is a big problem with the economic cycle. The particular reference here is to a) squeeze on fresh investment b) huge decline in both demand and supply c) the great job squeez and d) revival of the economic cycle.

Squeeze on fresh investment

Recession brings along with it, a big squeeze on fresh investment. This squeeze happens as industrialists cannot predict demand and, based on current trends in demand, decide to either postpone fresh investment and put expansion plans on hold, or invest very little on even existing facilities. For example, no fresh recruitment is done and the existing people are taxed with additional responsibilities. Since this prolongs for a very long period, the unemployment situation becomes worse and the cash flow in the economy is so badly affected.

There is "consolidation". There is also "restructuring", which is another glorious word for massive retrenchment. .

The bankers are also affected. Even the jewel loans portfolio is affected. The personal loans portfolio is also affected. Fresh deposits do not come in a big way, like before. Whatever is saved at the individual level is saved to tide over periods of unemployment. People cut down on all wants. Low cost warriors emerge everywhere.

Huge decline in both demand and supply

Just go over to a mini super market and ask for a high end variety of chocolate, found in cities. There are chances that the shopkeeper will say that he does not stock them, as they "do not move". That is, the demand for the particular product is not there at all. Hence, no supply.

Ditto is the situation elsewhere, during times of recession. Those who are without jobs, find out some other job, even at lower salaries. Wives who were not hitherto working, suddenly accept whatever jobs come their way, if not for anything else, to just tide over the difficulty of paying the EMI on the housing loan. This is the reality.

What happens to their spending habits on wants? Zero or near zero. The KFC eat outs are put off. The week end eating in high class restaurants are also put off. The movie experience in malls is gone. Watching movies only on television is in. The lower middle class, who are very badly affected, eat in the smallest of hotels and the mobile shops. The entire economic activity revolves around those who produce cheaper goods and services. The branded potato chips, jams, bread, cheese, butter and everything else is just not taken. No buyers for these items. The friendly neighborhood guy who has cheaper substitutes at much cheaper prices, does not suffer. His profit position actually goes up.

Branded soaps and detergents and even branded textiles is out of question. The cycle of economic activities sees a big drop everywhere.

However, we also ought to remember that for those with limited incomes, recession is a normal phenomenon. For example, even those who earn Rs.45,000 in normal times, would not buy costly curtains for their windows and doors. The cheaper substitutes available for just Rs.5000 ( instead of Rs.35,000/). is always preferred. The family would save the rest and spend it on education of children, for example.

The NEET examination coaching is a big business now. Even today, hundreds of families cut down on all wants and pump the money into the coaching for their children. So, there is a big squeeze in demand all over. The supply is also less as the excess inventory will only add to the problem of the dealer, the manufacturer and so on. So, somebody's loss is somebody's gain. Simple economics of the real world.

The great job squeeze

This is a big problem with recession. When the man looses his job, the poor servant maid looses hers too, particularly in smaller towns, where the housewife will decide to cut down on costs. This will happen all over. Fresh recruitment is zero. The existing guys double up on their efforts, as they do not have any other alternative. Seeing the world around them, literally everyone who is lucky to save their jobs, will happily live with the no bonus, no merit payment situation, till the situation becomes normal. Sixteen hour workdays are very common indeed.

The fact that there are no fresh jobs, and only contract jobs, creates problems for even professionals. For example, even IIM products, who were 45+ in the post twin tower attack in 2001 situation, lost their jobs. A few of them entered the B schools as teachers. The recession lasted for a full eighteen months, and since then there was a good revival.

The loss of jobs has a huge impact on the state of so many markets where the demand becomes very less. For example, the real estate market went for a big toss in the 2001 period. Flats and apartments were unsold. They were sold for much cheaper prices. Since the number of those who are unemployed is so huge, the fresh cash flow is affected and hence there is always a big problem with demand. This is exactly what happened. However, in the 2003 to 2005 period, the entire Indian economy saw a huge push for better times. The happy times were back.

The next shock came in 2008. The sentiments in the stock market took a turn for the worse. The mutual fund industry was badly affected. The equity analysts lost their jobs too. Fresh recruitment in banks was put off. Several projects were also delayed. The big job squeeze meant there a big problem with stagnant or near zero demand for many goods and services.

The highly educated and experienced guys who have multi-functional roles survived, as the Managements could not do without them. These were the senior most employees of the Top Management, who were charged with the big task of cutting costs in every single item of expenditure.

Revival of the economic cycle

This automatically happens when the situation in the developed Europe and USA becomes better. The economies will see a big revival since the demand for goods and services will be huge. In the year 2003 and thereafter, till 2007, for example, the Indian industry grew so fast. The GDP growth rate was almost seven percent. There was a big revival of demand, as the jobs were back and the high wages phenomenon happened once again. The demand for wants also grew by leaps and bounds.

Let us understand this situation through common sense. Our labor costs are low, and our production costs are also low. So, we are competitive in exports in many fields. However, in the post 2008 situation, the demand for new cars was rather subdued in the West. This badly affected the auto-ancillary companies of the TVS group. Most of them did not recruit new people at all.

However, after the revival of demand, these companies were back to good times. Exporting their products to the auto majors ( the original equipment manufacturers) happened so well. This is exactly what is called end of recession. That is, end of the low demand cycle. End of the cash flow problem. Once this picked up, the employees are paid well. Bonuses and merit payments were back. When fresh investments happen and the expansion plans of companies happen once again, the new jobs are once again created. The economic cycle starts rolling again.

Conclusion

Recession, as explained above, can happen when the demand for products and services is very poor or zero. Also, when fresh investment does not happen, the recession sets in so badly.Recession is a passing phenomenon and the post-recession period is one of massive growth in most situations.


Comments

Author: Reena Upadhya28 Sep 2018 Member Level: Diamond   Points : 6

It is a very well written article and is going to help all those readers who want to know what recession is in real terms. The recession is not for short duration. It is an event which takes place for a prolonged duration. During this period, the economy of a country that is facing recession reaches to lower levels or can be termed as contracting. A decrease in the sale will result in a decrease in the production in various industries. When the industry lowers its production, there will be a rise in unemployment. The rise of unemployed citizens will hamper the personal income. All these traits do affect the stock market. All these factors make the stock market unstable and unhealthy. Contracting economy should last for at least 6 months. Only then the duration can be called as a period of recession.

A country’s economy is nothing but the manufacturing and then consuming of various commodities and services. Every person who is manufacturing goods or lending services and every person who is consuming goods and accepting services is contributing in one way or the other to the economy. Whether it is an abstract market or a physical market, recession period badly hits it as every market is comprised of consumers and businesses. When consumers and businesses are not spared by the period of recession so will not be the market.

Author: umesh01 Oct 2018 Member Level: Diamond   Points : 3

A good article on the recession and its effects on society.

A recession is a dangerous phase in the economy and when it happens it goes in a vicious circle and does not stop. It makes the financial scenarios topsy-turvy and the seller does not find any buyer for his product. It is a strange situation as the whole economy collapses.

The period of depression can be short or long depending upon many economic considerations. It ultimately weakens and will be replaced by another start of industrial growth and things get back to normalcy.

During the recession many business houses are adversely affected and even the share markets and financial instruments also suffer. It is the most unwanted thing in the business and industrial world.

Author: Sanjeev Gupta01 Oct 2018 Member Level: Silver   Points : 4

Great article to know about the recession. There are few things which we should do during recessions like we should reduce our expenses first. There are chances that one may lose a job during the recession so it would be better to have some additional source of income to survive.

During recessions stocks of even reputed companies goes down. So it would be better to buy stocks during that period and keep them till it gets over.

The most important thing is that one should not panic. Some people go into depression when they are fired from the job. Try to keep yourself happy as bad time doesn't last forever.



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