The Causes of Economic Recession

There have been number of global economic recessions around the world. As a result of different issues, the economy falls into a recession. It is considered to be the phase during which there is a significant decline in the economic activity lasting more than a few months. This essay will discuss the three main reasons of why economy is pushed into recession of which most significant causes are reduced consumer confidence, high interest rates and credit crunch.

The consequence of a reduction in consumer confidence is the economic recession. When consumers begin to feel pessimistic about the future of the economy, they tend to save more and spend less that leads to a decrease in demand for goods and services in the economy (Ireland, 2011). Due to surplus of production, firms automatically begin to lay off workers due to increased cost of production leading to unemployment and then to recession. The 2007- 2009 financial crisis is considered to be due to erosion of consumer confidence in financial sector that ensured the depth of the crisis (French, et al., 2009).

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The second cause is higher interest rates. Whenever the interest rates are raised for encountering the higher inflation from the domestic economy, the consumers’ spending reduces and cause a downturn on output and jobs leading to recession (Jolley, 2012). Since higher interest rates limit the liquidity that results in reduction in investment, output and spending. Increased interest rates were main causes of recession in UK in 1979 when the Conservative government followed tight monetary policy to curb 15% inflation rate (Rose & Speigel, 2012). Moreover during 1980 Fed also raised interest rates to battle stagflation worsening the Great Depression (Carmassi, et al., 2009).

Finally, the third cause of recession is credit crunch. It refers to the situation in which the financial institutions cut back the amount of credit they are prepared to lend to the business and household sectors while raising the interest rates on the loans. During 2007 – 2009 the crisis was caused by the banks that created too much money, too quickly and pushed up the house prices along with the personal debt (Ari, 2014). Since the debts were rising quicker than incomes, people became unable to pay back leading to recession.

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Bibliography

Ari, A., 2014. The European Debt Crisis: Causes, Consequences, Measures and Remedies. s.l.:Cambridge Schoalrs Publishing.

Carmassi, J., Gros, D. & Micossi, S., 2009. The Global Financial Crisis: Causes and Cures. Journal of Common Market Studies, 47(5), pp. 977-996.

French, S., Leyshon, A. & Thrift, N., 2009. A very geographical crisis: the making and breaking of the 2007–2008 financial crisis. Cambridge Journal of Regions, Economy and Society, p. 13.

Ireland, P. N., 2011. A new keynesian perspective on the great recession. Journal of Money, Credit and Banking, 43(1), pp. 31-54.

Jolley, G. J., 2012. The Roller Coaster Economy: Financial Crisis, Great Recession, and the Public Option. s.l.:Routledge.

Rose, A. K. & Speigel, M. M., 2012. Cross-country causes and consequences of the 2008 crisis: early warning. Japan and the World Economy, 24(1), pp. 1-16.