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When the performance of a country’s economy is evaluated, the term recession might come up. In economics, recession is a period during which economic activity of the country slows down. During this period macroeconomic indicator gross domestic product (GDP) of a country is said to be declining or have declined compared to the past periods. The weakening of the economic performance is reflected by several elements which act as indicators of economic growth. Elements that are negatively affected during recession are employment rates and income level.
The impact of recession may take some time for it to be felt by residents of a given country. This is because it begins within a business cycle and is indicated by a reduction of demand for consumer goods. When sales decrease as a result of decrease in demand for goods and services, most firms tend to reduce their total output in response to the decline of purchases by households. Subsequently, firms cut down the total number of their employees through lay-offs to reduce their production costs. Lastly, when people lose their jobs because of lay-offs, the impact of recession is beginning to be felt by households as a result of reduction of income and increase of the cost of commodities. An example of the worst recessions that had been recorded in the world was one which occurred between the year 1929 and 1933. During this recession gross national profit (GNP) of United States and other countries fell tremendously. Subsequently, prices of commodities increased as a result of reduced production. Finally, recession lead to the highest rate of unemployment ever recorded in America and other countries as many businesses collapsed as a result of low consumer demand. In recent times, the last recession which hit the world occurred in the year 2009.
Consequences of Recession
Every time an economic melt down is experienced, it creates numerous negative and positive consequences to players of an economy such as the state, residence/households, and business people. Effects of recession are discussed further.
The first effect of a recession is a decline of household spending. The end result of the entire recession cycle is that consumers do not have enough income to spend. As firms are faced with low demand for their products, they are forced to lay-off employees or reduce their average wage. Lay-offs and reduced wages make households economically week, which causes a subsequent decline in spending.
The second effect of a recession is an increase of unemployment rate. Loss of jobs and decline in recruitments are one of the major consequences of any recession. Most firms tend to reduce the number of employees as a result of low demand, which forces them to reduce their production. This in turn reduces volumes of sales, therefore, it becomes economically efficient to reduce the cost of sales by reducing the number of employees. On the other hand, firms may face a lot of pressure from the employees, as the latter will want enough money to cope with the rising cost of commodities. This may also reduce the profit margin of firms.
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The third effect of a recession is reduced lending rate. Lending institutions, especially banks, reduce their interest rates on loans to the public. During recession the amount of money in circulation tends to reduce as most of the households’ income reduces. It is, therefore, the role of the state to implement a monetary policy to ensure that there is enough money in circulation. This can be achieved by advising commercial banks to reduce their lending rates, which in turn attracts a lot of households to take loans. The increased amount of money leads to an increase in money circulation.
The fourth effect of a recession is increased competition among businesses. The circulation of money between firms and households leaves the household with a reduced income during recession. This leads to a reduction of spending, which leaves business people competing for fewer customers. In contrast, some business might thrive during this period since some competitors might close down as a result of declining profits.
The fifth effect of a recession is investment diversification. During economic difficulties some business people and companies might benefit while others might lose. Investments are all about speculation. Investors are likely to find lifetime opportunities in new investment sectors. Recession may have a negative impact on the stock market and cause most shares to be sold at low prices. This, therefore, may be an advantage to potential investors as they will be able to buy these shares at reduced prices and sell them at high prices during economic boom. However, existing shareholders may lose substantial profits by selling their shares at low prices.
The next effect of a recession is social one. As a result of increase of unemployment, reduced household income, and increased commodity prices due to recession, people’s lifestyles are changed to the worst.
Finally, recession results in financial crisis. Most business people and companies, particularly those that are involved in open (international) trade, are likely to experience a bigger financial damage. International trade involves exchange of domestic currency against other foreign currencies. During recession, however, countries’ currencies may be exchanging at high rates against other currencies. This is especially true in countries which already have strong economies, for example, exchange rates of other currencies against the dollar might be higher than usual.
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Effects of Recession on the Performance of the Economy of United Arab Emirates
United Arab Emirates (UAE) is a hub of business activities of the world. UAE is composed of seven countries in the Asian continent with their capital in Abu-Dhabi. UAE is considered to have a very well developed economy in the Asian continent. All member countries of UAE are governed by presidents while the political system is monarchy. On the other hand, all member countries of UAE speak Arabic as their official language and their religion is Islam. Some of the world’s renowned leading economies of UAE are Abu-Dhabi and Dubai.
The fist consequence of recession that the UAE experienced was the decline in sales volume. Purchasing power of most customers who buy from UAE countries went down as their income was reduced as a result of unemployment. The majority of business people who buy from UAE for resale had to reduce their total purchases since they were experiencing a reduction in sales and profits. Reduced sales volume and profits led to a decline of the economy of UAE.
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Another consequence that UAE faces as a result of recession is the reduction in the volume of production. Since the reduction in demand for goods and services offered by these countries went down, there was a reduction in the volume of sales. Therefore, the total profits were affected negatively making businesses to reduce their production output. Reduced output negatively impacted economies of scale that countries used to enjoy by selling large volumes of goods. This contributed to slow economic performance.
Subsequently, UAE faced stiff competition from other countries during the recession period on the international market due to worsened exchange rates. High foreign exchange rates forced international customers to withhold imports from UAE or seek alternative markets where the exchange rates would be favorable. This reduced the number of customers that UAE had been serving and competition for clients with the other countries increased.
UAE also experienced the loss of huge capital from the stock markets as a consequence of recession. Stock market trade worsened during recession as most of share prices went down as a result of reduced number of potential investors. UAE being one of the major players in the stock market trade with huge investments in various sectors, particularly energy, had to sell most of its investments at a reduced rate which led to a decline in its economy. On the other hand, worsening trade in the stock market can also have the positive effect on UAE economy, since it can diversify their investment. This can be done by buying shares in new markets at low costs and selling them higher when the economy expands.
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Finally, social welfare is an indicator of the performance of an economy. UAE residents experienced a decline in social welfare as a result of recession. Low economic activity in United Arabs Emirates, which resulted from a reduction of per capita income caused by lowered wages and unemployment, automatically forced residents of UAE to change their normal lifestyle and reduce spending. Declining social welfare is, therefore, one of the major consequences and an indication of economic recession.
Economic recession is a period when the performance of an economy declines in comparison to other periods. It is also called economic melt down or period of slow economic activities. There are several consequences that occur as a result of recession. These include some of the mentioned impacts on UAE economy which are reflected in reduced spending, increased unemployment, reduced lending rates, competition, decline in social welfare, and financial crisis among other consequences.
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