Business

Recessionary Economy: The way out

 

With Mike Adeyemi

A recession is when the economy declines significantly for at least six month. That means there are a drop in the following five economic indicators; real GDP, Income, employment, manufacturing and retail sales. People often say a recession is when the GDP growth rate is negative for two consecutive quarters or more. But, a recession can quietly begin before the quarterly gross domestic product reports are out.

A recession is usually underway when there are several quarters of slowing but still positive growth. Often a quarter of negative growth will occur, followed by positive growth for several quarters and then another quarter of negative growth.

The first sign of an impending recession occur in one of the leading economic indicators such as manufacturing jobs. Manufacturers receive large orders months in advance. That’s measured by the durable goods order report. If that decline over time, so will factory jobs. When manufacturers stop hiring, it means other sections of the economy will slow.

A fall-off in consumer demand is normally the culprit behind slowing growth. As sales drop off, business stop expanding. Soon afterward, they stop hiring new workers. By this time, the recession is usually underway. A recession is destructive. It creates wide-spread unemployment, sometimes as high as 10 percent. That’s when it affects most people. As the unemployment rate rises, consumer purchases fell off even more. Businesses go bankrupt.

In many recessions, people lose their homes when they can’t get a good job after school. That throws off their entire carrier. Even if the recession is short, its impact can be long-lasting. The only good thing about a recession is that it cures inflation. The Federal Reserve must always balance between slowing the economy enough to prevent inflation without triggering a recession. Usually the Fed does this without the help of fiscal policy.

There are many theories that have been put forward as to what causes an economic recession. But most likely the most common thought on what causes a recession is that they are caused by events that have an economy –wide impact , such as, an increase in interest rates or a decline in consumers’ confidence. In fact, the general consent is that a recession is mainly caused by the actions taken to control the money supply in the economy.

Another theory about what causes an economic recession is that they are caused by events that damage particular firms or industries rather than events causing damage to entire economy. The basis that some economists believe in this theory is because of how a recession seems to influence some industries badly, while other industries seem to flourish during this hard time. Economists believe that this happens because either a major limitation or change in the price of a key item can adversely affect some firms.

This series of events lead to another factor and the industries are badly affected, they tend to set off workers and cut down on their production, which slows down that industry. What happen is that the people who were laid off can’t find work right away because sometimes it takes time to find new employment so while they are waiting for that new job to come in there is a period of unemployment is another factor causing a recession.

Every recession has a unique reason, while others think that recession usually only have a single reason, bad investment by businesses, stock market crashes.

The following negative items could cause recession; (i) value of local currency going down. (ii) Rise in oil prices (iii) Inflation (IV) Unemployment (v) Housing fizz. (vi)Global economy.

During a recession, many companies are forced to make very difficult decisions. This has been especially true in the current recession, which has been not only been deep, but global.

Most recession decision-making is pragmatic. The future is not guaranteed and depending on your company’s financial situation, short-term survival often trumps long-term strategy. But while surviving may be your priority, decisions made during a recession can have a significant impact on the future of your business well beyond the recession.

Given the high level of economic pains, policymakers need to pursue stimulus policies that work. Neoclassical school of thought has suggested measure of ending economic recession. The major measure is to reduce tax rate and increase aggregate demand.

*Reduction in tax rate; Government should reduce tax rates on individuals, small business, and corporations by lowering the tax rate by at least 10 percent points. The government instead of reducing tax rate to increase purchasing power rather increased the tax rate killing so many small scale businesses who cannot meet up with the cost of doing business.

*Effective spending; mere increase in government spending will not solve the problem of recession. It is strategic spending in area with high multiplier effect such as agriculture and manufacturing sector that increase aggregate demand.

*Enhance access to credit; The total consumer credit in Nigeria stands at less than $ 10 billion dollars in about $500 billion economy, this corresponds to about 2% of her GDP. Look at some developed economies, consumer credit ranges from about 20 per cent (USA) to 50% of GDP (Brazil).

*Increase manufacturing produce and export.

It is almost certain that the much talked about economic recession is here as the International Monetary Fund (IMF) is certain that economic growth in the second quarter will shrink again. Even the Central Bank of Nigeria (CBN) has said that economic rebound in the second quarter is unlikely. The question on every lip now is, “What is the way forward?” even as analysts have said that economic recession is not a death sentence. Matter of fact, to some of them, it is cyclical. It comes around every now and then. What matters is the way it is perceived and dealt with. In fact, one way out of an economic recession is spending.

Nations spend their way out of recession. Unless capital is injected into the system productively, the economy will remain gloomy and the masses will continue to suffer. Spending on viable projects like road construction will bring about some level of employment. Thereafter, good roads will lead to cheaper transportation that will facilitate easy flow of trade from one point to another, thus boosting economic activities

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