All businesses, whether big or small, experience a decline in sales and profit during a recession. Many businesses are worried for the next recession because of the rise in inflation rates and negative gross domestic product (GDP) data that upshoots as a result.. Recession is a periodic occurrence that causes abrupt downturn by interrupting economic growth. Regardless of the business size, there will always be an effect , negative most times, whenever there is a recession. During a recession, smaller businesses have smaller margins of error that can curb credit access, slow collections and even lead to bankruptcies in business. Larger businesses have more of a financial cushion that can help them withstand the downturn.
People usually experience significant impacts on their daily lives. There is increased prices of everything shooting up, from groceries, to clothes and even food items. Consumers could even begin to experience the recession effect long before it becomes official. It is important to be aware of how your business or company can be affected by an economic downturn. This will help ensure your business does not become one of the casualties of the upcoming recessions. Companies like retailers and suppliers of technology with high fixed costs face an excessive hit to the bottom line as the profit declines. Demand will reduce and manufacturers may experience bloated inventories enforcing them to slow output until demand improves again.
What is Recession?
A recession is a significant, widespread and prolonged contraction in economic activity(Investopedia). Recession is used to describe a slowdown in general economic activity or when there is a decrease in the economy’s performance. This decrease extends to a period of several months. Recession, in macroeconomics, is officially recognized after two consecutive quarters of GDP growth rates resulting in higher unemployment rates and lower consumer spending. These are some of the indicators that are looked out for when deciding to declare a recession. Lets see them under the effects below
The Effect of Recession on the Economy
Staff/employee layoffs
Companies want to cut costs during recession. The inflation rates then tend to go down as a result of decrease in consumption rate. These job layoffs then create a vicious cycle of an economic slowdown. Companies want to cut off capital spending and marketing, resulting in employees lay offs. It may become tougher to find a new job as the available vacancies become limited with more people contending for them. For example, during the covid-19 pandemic, the US Bureau of Labor Statistics reported that the number of unemployed persons rose by 15.9 million to 23.9 million in April,2023.
Increased Cost of Living
As a result of inflation, you may realize that gasoline, groceries, clothes and other household essentials become more expensive than before. Therefore in order to cut excessive spending, people tend to have strict budgets.
Industrial Production/Manufacturing Reduces
Manufacturing industries/businesses always cut down on production in response to the rising cost of raw materials during recession. This can contribute to an overall decrease in economic activity because there is a high tendency for exports to decrease during this period. As mentioned earlier, there was an abrupt fall of overall manufacturing activity in the United States manufacturing activities as a result of the Great Recession, leading to a 10% decline in employment in manufacturing.
Decrease In Retail Sales
Retail sales is an aspect of consumer spending which depicts the total amount of money consumers spend on goods and services. Generally retail sales will decrease because people have less money to spend during a recession. Consequently as retail sales decline, there will be new measures by businesses to reduce cost, which may include laying off workers, and some others may even shut down.
Long Term Impact
An economic recession can leave a ‘scar’ behind- the negative effects on the economy could be longer than expected, it may also take a longer time for businesses and individuals to recover from this. Some of the evident proof demonstrating the long term impact of recession are:
Damaged Economy
A large percentage of all sectors of the economy will often be affected by recession. There will be higher unemployment rate, lower wages and income, lost economic opportunities, and this is bad for the economy. Though there tends to be rapid growth during the recovery period, the effect of the downturn will still prevent the recovery from reaching the best it could.
Unemployment/Job Loss
Unemployment obviously does not just affect the individual who loses the job only, it also impacts the family members. Even after securing a new job after a recession, which will often come at a lower salary, the negative impact can still stay for years.
Education
As rise in poverty causes many families face financial hardships, many children will suffer hunger or malnutrition. They may not have access to adequate health service. This will affect their reading comprehension, grade attainment, cognitive ability and consequently, their earnings later in life. In other cases, children may be forced to stop their education for a while. They may even be asked to stop permanently.
Private Investment
This is perhaps the most obvious area in which economic growth can be slowed down because the central role of investment and technology has been long recognized by economists, as key contributors to economic growth. As a long term impact of recession, there could be decrease in investment spending and the adoption of new technologies.
Poverty & Wealth
Wealth and Poverty are part of what shapes the economy. Poverty is bad for the economy. In most cases, children who grow up in poverty are more likely to have low earnings or commit crimes later in life. Wealth provides a life line for when things are tough. These two have a large influence on the financial and educational achievement, cognitive development, behavioral and emotional outcome for kids and adults alike.