A recession is a business cycle contraction, a general slowdown in economic activity over a period of time. A recession occurs when there is a fall in economic growth for two consecutive quarters.
As stated by the National Bureau of Economic ResearchÂ (NBER), recessionÂ is definedÂ as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic productÂ (GDP), real income, employment, industrial production and wholesale-retail sales".Â More specifically, recession is defined as whenÂ businesses cease to expand,Â the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.
During recessions, employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall during recessions; while bankruptcies and the unemployment rate rise.
Recessions are generally believed to be caused by a drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.
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Many factorsÂ contributed to 2008/2009Â economy'sÂ fall into aÂ recession, but theÂ major causeÂ is Cost push inflation. Inflation refers to aÂ general rise in the prices of goods and services over a period of time, the higher theÂ rate of inflationÂ theÂ smaller the percentage of goodsÂ and services that can be purchased with the same amount of money. InflationÂ occurred for different reasons asÂ increased production costs, higher energy costsÂ and national debt. In an inflationary environment, people tend toÂ cut out leisure spending, reduce overall spending and beginÂ to saveÂ more. But as individuals and businessesÂ shorten or limitÂ expenditures in an effort to trimÂ costs, this causes GDPÂ to decline [Production is measured by Gross Domestic Product (GDP)]. UnemploymentÂ ratesÂ rise because companiesÂ layÂ offÂ workers to cut costs.Â It is these combined factorsÂ that cause the economy to fall into aÂ recession.
The financial crisis can also be linked to reckless and unsustainable lending practices resulting from the deregulation and securitization of real estate mortgages in the United States. The US mortgage-backed securities, which had risks that were hard to assess, and most significantly were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices. In the year 2006.Then there was an unexpected regression in the price of houses and real estate merchants knew that they could not muddle through, so they had to put up for sale the houses at prices lower than the initial mortgage loan price, thus they could not pay up their loans from banks and they had to shut down.
A global recession became inevitable once the government decided not to rescue Lehman Bros. from default in September 2008. With loan losses increasing and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the international-bank loan market. As share and housing prices declined many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance, Lehman's was the biggest bankruptcy in history, and it led promptly to a powerful economic contraction.
Another factor which contributed to the 2008/2009 recession was the global savings imbalances, which put upward pressure on U.S. asset prices and downward pressure on interest rates during the bubble years.
However, some solution were adopted by America (who actually started the recession) to bring to an end to the recession, solutions such as;
The government had to respond to recession by adopting expansionary macroeconomic policies, meaning policies of expanding a countries economy, such as increasing money supply, increasing government spending and decreasing taxation.
The government had to make firms shares publicly available; firms like AIG (American insurance company), bear Stearns and others, to enable them stay in business and prevent them from shutting down.
In 2009 the government also adopted an economic motivational plan. This plan enabled America spend over $185 billion in 2009, thus greatly reduced the recession by the third quarter of the year.
There was also a $700 billion rescue that was granted to banks to liquidate them.
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Recovery which is the return from recession to a normal or improved state after a setback or loss has started manifestation; many analysts have noted that in fact, china is leading the world and the semiconductor industry out of recession into recovery. According to Robert fry, a senior associate economist at DuPont whom assert that china has since surpassed its pre-recession peak.
Robert further asserts that that China was a major factor helping the world semiconductor industry out of its downturn this time around. He said. China's cell phone and automotive sales are surpassing the United States for first time, he said, and China has become the second largest consumer of PCs.
Another statistic or sign of the road to recovery from recession is consumers spending which is already showing some positive signs. Consumer spending constitutes about 70% of the U.S. economy. When consumers spend, the economy grows. According to statistics, Consumer spending rose 0.6% in January, after a 1% decrease in December and a 0.8% drop in November.
The US Federal Reserve claim many regions of the country were showing small signs of improvement amid better than expected data from US manufacturing, housing and banking.
Nevertheless, this recession triggered various depressing effects to the economy; one of such effect is that: a lot of people (estimated 30 million people) lost their jobs in the year 2009 due to the economic crises, which increased the amount of unemployed workers in the world.
Another effect of the recession was that it led to a financial setback. The recession caused depreciation in the stock markets, for example Europe and America both experienced decrees in stocks to about 30% to the extent the United States security and exchange commission had to place a ban on the sale of short selling financial stock.
Due to the recession: household incomes, investment spending and business profits experienced a fall during the recession; however these were among the few effects of the previous recession.
In conclusion the US Federal Reserve said many regions of the country were showing small signs of improvement amid better than expected data from US manufacturing, housing and banking. However we are still in the recovery processes, the IMF and World Bank have predicted it might take three and a half extra years before the economy would fully recover from the recession.