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UNDERSTANDING RECESSIONS
In this chapter, we will delve into the nature of recessions to provide you
with a solid foundation for making informed investment decisions.
Understanding what causes recessions, their defining characteristics,
and their impact on various sectors and industries, you will be better
equipped to navigate the challenges and opportunities during these difficult
economic times.
1.1 Definition and Characteristics of a Recession
A recession is generally defined as negative economic growth lasting at
least two consecutive quarters or six months. During a recession, the
economy contracts, leading to a decline in various economic indicators,
such as gross domestic product (GDP), employment, and consumer
spending. Recessions are an inevitable part of the economic cycle,
occurring periodically as the economy transitions between periods of
expansion and contraction. Some of the critical characteristics of a
recession include the following:
Decreased consumer spending: As individuals and households
face economic uncertainty, they tend to cut back on discretionary
spending, reducing demand for goods and services.
Increased unemployment: As businesses experience reduced
revenues and profitability, they may be forced to cut costs, often
leading to layoffs and higher unemployment rates.
Declining business investment: Uncertainty about the economic
outlook can cause businesses to delay or cancel planned
investments, leading to reduced capital spending and slower
economic growth.
Reduced inflation or deflation: A decline in demand for goods
and services can lead to lower prices, resulting in reduced inflation
or even deflation in severe cases.
Tighter credit conditions: Banks and other financial institutions
may become more risk-averse during a recession, leading to
stricter lending standards and reduced credit availability.
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