Introduction
What is the recession?
Recession, as established by economists, is the condition in which economic growth slows and all elements of economic growth begin to fall in terms of their average measurement. The question is if the economy doesn’t work for a month or two, then we call it a recessionary period. The answer to this is ‘No’. A standard period to make sure the economy is hit by recession is when the factors of production and related items start to decline and decline steadily for two or more than two quarters.
The elements referred to here are the following:
Gross Domestic Product or GDP
Employment
investment
Entry
Spent
Due to the fall of these items, there is a huge impact on all businesses, whether they are local or global, and the revenue of the companies and their subsequent profits start to decrease. The global village is greatly affected and all companies these days are multinational in nature and interact and trade with companies from countries and buy or sell their products in various countries or are dependent in one way or another. Therefore, in a phase of decline, all countries also suffer to different levels and degrees.
The Story Behind the Recession: Causes of the Recession
The history of the 2006 recession dates back to the period when Jimmy Carter was president of the states (1978-1982). He had signed a bill that was called the ‘Community Reinvestment Act’. This act made the house available to the poor. During the last year of Bill Clinton’s presidency, he realized that the bill signed by Jimmy Carter was not being enacted as seriously and he reinforced and strengthened this bill. Due to this law, banks were forced to make mortgage loans to borrowers who suffered from bad credit and did not have the ability to repay the debt. All that was needed to obtain the home loan was a written statement that they have the ability to repay the loan for which they are applying. Because of this law, there were large numbers of people who bought the houses at extremely low rates from the year 2000 to 2006. This was called subprime mortgages and there were millions of such subprime mortgages that were issued to people.
Therefore, the housing market in the US was abuzz with enthusiasm and excitement, leading people to buy houses that they otherwise could not have afforded. The reason behind this is that home mortgage charges were extremely low, less than 4 percent. People assumed that the prices of the houses they are buying on loans would definitely go up, but apparently they didn’t. Then the Federal Reserve raised interest rates from 1% to 5%, and subsequently the interest rate on home mortgages went up to 7% and 8% in some of the cases.
In 2006 housing prices fell and many people began to foreclose on the debt they took on to buy houses. This led to instability for the banks and hedge fund service that had done the legwork to get the securities so people could buy houses with loans. Therefore, many banks and hedge funds faced severe losses. At the end of August 2007, banks were afraid to lend to other banks and the whole financial scenario became very unstable. This had cost $700 billion in ransom. Many of the nationalized banks and hedge funds were on the verge of bankruptcy, and many had already done so. The companies did not have enough money to pay their employees and began laying people off. The unemployment rate rose sharply.
Some facts about the economic recession of 2008
1.- Oil prices stagnated and crossed the price of $100 per barrel. This was due to the destabilization of the geopolitical environment, the decline in share prices, cuts in oil production by OPEC.
2.- There was a considerable increase in stable food prices. It ranged from an approximate 15% increase in prices.
3.- The inflation rate rose to 6% and the increase in external debt grew in an amazing way. It reached 2.5 million US dollars. The current account deficit rose to 15% of the Gross Domestic Product. State income fell and later the purchasing power of individuals.
4.- At the end of 2008, the increase in the unemployment rate rose to 12.5%.
Impact of the recession on the economic growth of the country
1. Stock prices fall and the inflow of cash into the economy is reduced.
2. Fluctuating and Inconsistent Credit Cycle of companies: Not having enough purchasing power, individuals did not pay the debt in a timely manner, forcing companies to restructure their credit policies or opt for the refinancing option.
3. Unemployment: Layoffs are another major setback when thinking about the recession. Companies try to save and set aside money and they try to fire their employees to do it.
4. Decrease in Gross Domestic Product or GDP
The decrease in income and profit leads to a decrease in the production of the goods that are produced.
5. Decreased quality of goods and services
Companies do not spend money on their people, research and development, quality production, marketing or advertising, and therefore there is a sharp decline in the goods and services that companies provide. The quality does not tend to stay the same as before and declines.
What solution did the government apply to cure the recession?
The government in 2009 launched a program called the Economic Stimulus Plan. Under the plan, the government decided to spend $185 billion that year. Although the effect of the recession diminished to a great extent, the situation was not completely eradicated in the same year. The unemployment rate began to decline but was still seen in many countries and companies and persisted in 2011 as well.
Suggestions
There are some suggestive ways that companies can fight the recession when it hits. These methods and strategies cannot claim to eradicate the effect of the crisis, but they help to stabilize the company when all other companies are on the brink of decline and keep the company in a healthy position.
1. Diversification
The company should not stick with just a set of products that it sells in the market. They should try to break into new products and services or break into a whole new industry. This will help the company to reduce the risk.
2. Investment in R&D, Marketing and Improvisation
Any investment in research and development, marketing, customer connection, branding, and product improvisation pays off over the normal course of time and even during economic slowdowns.
3. Customer commitment
Maintaining a large and loyal customer base helps businesses fight the recession. The company must establish effective policies and plans to acquire and retain customers. Investing in customer strategies is a good option.
