The Causes and Consequences of the Global Recession - Seeker's Thoughts

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The Causes and Consequences of the Global Recession



The Causes and Consequences of the Global Recession


An extended period of economic weakness and slow income growth could undermine recent progress made in fighting poverty and meeting sustainable development goals, as well as undercut much-needed financing for these efforts.


Monetary tightening impedes some economic activities, including housing construction and car sales, which in turn reduce household spending. When consumers reduce demand, businesses respond by cutting output.


 Read : How to Survive and Thrive in a Recession


1. Global Economic Slowdown


An economic slowdown could be caused by multiple factors. COVID-19 pandemic, Ukrainian war impacting food and energy prices, surging inflation rates and tightening debt conditions are all contributing to its cause.


These forces have combined to undermine demand, the key driver of economic growth. Furthermore, global economies are currently experiencing what economists refer to as "prolonged weakness", or a prolonged downturn lasting more than several months that does not meet the definition of recession (two consecutive quarters with negative GDP growth).


As these factors weigh on the global economy, global GDP growth has significantly declined with China and Western Europe being notable exceptions; moreover, its rate of decline is accelerating further; any sharp economic downturn will impact millions of working people worldwide regardless of measures that governments might implement to support them.


Many countries have raised interest rates to combat inflation, leading to slower economic activity in sectors that rely heavily on interest such as housing construction and car sales.


 Yet changes to monetary policy don't immediately have an effect on real economic activity - the Federal Reserve may raise rates in November 2022 but its effect could lead to consumer spending decreasing and lead to recession.


 Also Read: How to Recession-Proof Your Business - Best Practices and Lessons Learned


Monetary policies work best on the demand side of an economy, yet cannot address all its problems. High energy prices have decreased household incomes and hindered businesses from investing in new projects. 


To avoid recession, governments must do more than raise interest rates: They should subsidize energy costs for vulnerable population groups and offer tax incentives that may ease the burden associated with high prices.



2. Inflation


If a country's inflation rate becomes excessively high, it can trigger recession. When prices for goods and services increase rapidly, dollars become worth less in real terms; inflation also makes debt management easier by reducing interest rates on loans or mortgages and encouraging people to spend their cash; ultimately leading to greater demand for products and services. 


There can be some advantages associated with inflation, though. It makes debt easier to manage through reduced interest rates on loans or mortgages while encouraging consumers to spend money which boosts demand for goods and services.


Inflation can be caused by many different factors. One common source is when businesses pay more for raw materials or labor to produce goods; these increased costs are then passed onto consumers through higher prices resulting in cost-push inflation.


As another means of inducing inflation, shortages of goods or services are another significant contributor. This can happen for various reasons such as natural disasters that disrupt production chains or higher demand outstripping manufacturing capacities - this phenomenon is known as demand-pull inflation.


There can be some positive aspects to inflation, such as making loan repayment easier for those in debt. Unfortunately, inflation also raises living costs and reduces purchasing power of citizens.


An international recession would wreak havoc on the world's working population. Although measures to support employment could help to mitigate some of its adverse impacts, global economic slowdown will still have profound ripple effects across millions of lives worldwide due to consumer spending reduction causing businesses to scale back operations causing job loss and income losses for millions around the world.



3. Unemployment


Unemployment occurs when individuals capable of working actively search for opportunities but are unable to secure employment. 


These individuals form the labor force and form an integral component of any economy; an indicator of labor market conditions, unemployment rates are an invaluable way of measuring them; having high unemployment can cause economic slowdowns, financial crises, mental and physical health impacts on individuals and increases crime rates which demoralize society - as well as placing undue strain on government budgets which lead to less income tax revenue and higher borrowing from them.


Unemployment can have numerous causes and it can arise either from demand side or supply side causes of the economy. 


On the demand side, recessions, financial crises and high interest rates may all play a part in contributing to unemployment; while on supply side it could include frictional and structural unemployment as potential culprits.


Frictional unemployment occurs when people are transitioning between jobs or switching careers, as well as when companies need to cut production due to decreasing consumer demand and consequently lay off employees.


Structural unemployment refers to long-term joblessness that results from being unable to find jobs that meet one's qualifications, whether due to an absence of new jobs being created, technological advances necessitating more expertise than previously needed, or simply having too few of them available.


Unemployment of this sort is particularly harmful to economies, and may even trigger global recession. Consumers cut back spending which lowers real wages and causes inflation - leading to real wages declining further and inflation rising even faster, creating an endless cycle in which GDP falls while citizens suffer the effects of unemployment.



4. Credit Crunch


People and businesses unable to obtain credit, either individually or corporately, become unable to purchase homes, cars or make investments, leading to an economic downturn and creating what is known as a credit crunch.


Credit crunches usually result from too lenient lenders lending policies which lead to higher-than-usual levels of debt and bad loans resulting from too lenient lenders extending loans in the first place. 


As this occurs banks become more selective about who they lend money too; usually favoring those with higher credit scores and lowest risk-- harming lower-income individuals and small to medium sized companies more.


Credit is considered to be "the mother's milk of economic activity" according to Mark Zandi, chief economist of Moody's Analytics. When banks tighten up on lending practices it can slow the economy significantly or even cause it to enter recessionary territory.


Due to recent bank crises sparked by Silicon Valley Bank and Signature Bank's collapses, banks are becoming more cautious about doling out credit. Furthermore, Federal Reserve hikes interest rates, making borrowing more costly.


Due to these factors, the world may be on the cusp of an imminent credit crunch. As the economy slows down and spending restrictions tighten, consumers will become less willing to spend as spending power declines further - potentially leading to recession in 2022-2023 (this is still uncertain but seems increasingly likely). You can take steps now to safeguard against potential recessionary effects: for instance by hiring a company which works directly with credit bureaus and creditors to resolve issues on your report.



5. Natural Disasters


Natural disasters such as hurricanes, typhoons (tropical cyclones), tsunamis, floods, droughts and wildfires kill an average of 45,000 people every year worldwide. 


These events also destroy property, disrupt economies and damage natural environments - although their causes vary from place to place - earthquakes can be caused by shifting of Earth's crust near tectonic plate boundaries; their aftermath includes lava flows, explosions, toxic gas clouds, ash falls and even pyroclastic flows that destroy populated areas.


Flooding-related disasters typically arises as heavy rainfall causes sea level rise; while landslides and volcanoes may result from volcanic eruptions - making these natural disasters destructive events regardless of where they strike.


Global warming has been shown to increase the frequency and severity of weather- and climate-related natural disasters, such as extreme heat waves, droughts, famine, more intense hurricanes and flooding. Warmer temperatures deliver increased precipitation to areas unfamiliar with it, which increases flooding risks while simultaneously decreasing amounts delivered in drought prone regions, increasing drought risks further.


Natural disaster victims include children, women, the elderly, indigenous populations and less-than-privileged communities. Sub-Saharan Africans tend to suffer more because they do not possess the physical and mental resources to adapt to environmental change, may receive inadequate information regarding hazard warnings, and have few economic resources for recovery and reconstruction. 


 Disasters tend to strike low-income countries that lack enough resources for overall development and poverty alleviation efforts, leading to high death tolls from natural disasters. Disasters strike more frequently in poorer countries because they lack the infrastructure to prepare and respond to natural hazards. Death tolls tend to be lower in richer countries with advanced emergency response systems and access to private insurance markets that offer protection.


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