Signs of an Economic Downturn

GDP Illustration

Following a severe economic contraction last year, the Philippines is on the recovery. The economy goes through cycles of highs and lows, much like a wave in the ocean: when it grows, its crest comes to a peak, declines, and then starts to rise again. When the economy goes up, it’s called “economic growth,” but when it goes down, it’s called “economic contraction” (or “downturn”). If the Philippines experienced an economic contraction last year, what are the signs of an economic contraction (or downturn)?

We conducted research in order to identify signs of an economic downturn. Here’s the list below.

  • Decrease in production/output.
  • Increase in unemployment.
  • Decrease in wages.
  • Decrease in consumer spending.

Read on to find out more about the economic downturn and recession.

What is an Economic Downturn?

An economic downturn is the downswing of the business cycle toward a trough. It is a prolonged decrease in economic activity. It’s also distinguished by a decrease in GDP, industrial production, and employment. It could be regarded as a general economic downturn. A downturn in the economy could last a few months or several years. It is defined by a drop in GDP for two consecutive quarters.

Decrease in production/output

Decrease in production/output is one of the signs of an economic downturn. Businesses generally see a decrease in revenue as the economy contracts. Their product sales or demand. This will elicit a response from businesses. Demand is reduced by producing fewer goods and services.

Increase in unemployment

Because businesses do not need to produce as much to meet demand, some will reduce the size of their workforce by laying off some employees. This raises the number of unemployed people.

Decrease in wages

Decrease in wages is one of the signs of an economic downturn. Because firms are doing less well, they do not require as many employees. They can attract enough labor at cheaper wages.

Workers are willing to accept lower earnings since the increase in unemployment has increased competition for jobs.

Decrease in consumer spending

Another sign of an economic downturn is a decrease in consumer spending. People spend less on products and services since their salaries are lower. They may be more afraid about losing their work, thus they are more prone to conserve money rather than spend it.

6 Possible Causes of an Economic Downturn

Economic downturn can be caused by a variety of factors. Each of them contributes to the overall drop in economic activity. Among these factors are:

1. Uncertainty

Uncertainty regarding the future is one element that can contribute to economic downturn. When businesses and customers are uncertain about the future, they may reduce their spending. Furthermore, investors may be less willing to invest in the stock market or other types of assets.

2. Speculation

Speculation about the future might also lead to economic downturn. When investors feel the economy will weaken, they may sell their investments. This action has the potential to lower asset prices and slow economic activity.

3. Decrease in consumer demand

A decrease in consumer demand can cause a decrease in economic activity. When consumers spend less, firms may produce less, causing GDP and employment to fall.

4. Decrease in business investment

When firms invest less, production tends to fall, similar to when consumer demand falls. This drop may also have an impact on GDP and employment.

5. Government policies

Government policies can also contribute to the downturn of the economy. For example, if the government hikes taxes, consumer spending and company investment may suffer.

6. Natural calamities

Natural calamities, such as hurricanes or earthquakes, can also cause economic downturn. They have the potential to disrupt production, travel, and consumer spending.

What is Recession?

A recession is a phrase used to describe a broad slowdown in economic activity. Recessions are formally declared in macroeconomics after two consecutive quarters of negative GDP growth rates.

Recessions are thought to be a natural element of the business/economic cycle of expansion and contraction. An economy begins to expand at its trough (lowest point) and begins to contract after reaching its peak (highest point). A deep recession that lasts a long time eventually leads to depression. The Great Depression lasted many years in the early 1900s and saw a GDP decline of more than 10%, with unemployment rates reaching at 25%.

Indicators of a Recession

1. Gross Domestic Product (GDP)

Real GDP is the entire value generated by an economy (by products and services produced) over a specific time period, adjusted for inflation. Negative real GDP indicates a significant decrease in productivity.

2. Real income

Real income is computed by taking personal income and adjusting it for inflation, as well as discounting social security measures such as welfare payments. Real income declines weaken purchasing power.

3. Manufacturing

The health of the manufacturing sector, taking into consideration overall exports/imports and trade deficits (or surpluses) with other countries, indicates an economy’s strength and self-sufficiency.

4. Wholesale/Retail

To assess the market performance of items, wholesale and retail sales are both measured and adjusted for inflation.

5. Employment

A high unemployment rate is a lagging indication. It often validates an economy’s transition into a recession stage rather than forecasting a future recession. Unemployment rates near 6% of the overall workforce are typically regarded as bad.

Causes of a Recession

1. Real factors

A recession can be triggered by an abrupt change in external economic conditions and structural alterations. The Real Business Cycle Theory explains this reality by stating that a recession is how a rational market participant responds to unexpected or negative shocks.

A sudden increase in oil prices, for example, due to rising geopolitical tensions, can affect crude oil-importing economies. A new technology that causes factory automation can have a disproportionately large influence on economies with a large pool of unskilled labor.

2. Financial/Nominal factors

A recession, according to a school of thought known as monetarism, is the direct result of excessive credit expansion during expansion periods. During the early phases of a slowdown, it is exacerbated by insufficient money supply and credit availability.

There is a strong relationship between monetary and real elements, such as interest rates and the relationships between different things. Because monetary policy instruments such as interest rates also include institutional reactions to predicted slowdowns, the relationship is not explicit.

3. Psychological factors

Excessive euphoria and overexposure to risky money during an economic expansion era are two psychological aspects. Psychological issues can also manifest as reduced investment as a result of widespread market pessimism, which lacks foundation in the real economy.

Effects of a Recession

Recessions have the expected monetary and fiscal consequences: credit availability tightens and short-term interest rates fall. Unemployment rates rise as businesses strive to decrease costs. This, in turn, reduces consumption rates, causing inflation rates to fall. Lower prices diminish business earnings, which leads to additional job layoffs and produces a vicious economic slowdown cycle.

How does Recession Affect People? 

People losing their jobs is one of the first things that happens during a recession. This was true during the Great Recession and the brief pandemic-era recession, when tens of millions of people were laid off.

Finding new employment during a recession is difficult, and this is how a recession affect the average person, thus people are frequently unemployed for extended periods of time, during which time they begin to draw down their savings and paying bills becomes more difficult.

As a direct result of the stress caused by unemployment, financial strain, and a lack of housing, families and individuals often experience poor health, sleeping problems, and mental health issues such as depression, as observed by the Population Reference Bureau (PRB) in those most affected by the 2007-2009 Great Recession. Real estate prices tend to be cheaper during an economic recession. Thus, it’s a great opportunity to purchase one of the house and lot or condominium units in BRIA Homes while the interest and total package are cheaper.