Recession is the second stage in the business cycle. It is a period of six months and at times more of declining real gross domestic product. The cause of the recession is due to the effect of falling demand and higher interest rates start to knock in the economy. Incomes and consumer demand fall and profits are much reduced. During this stage, some businesses may shut down and many other businesses will record their losses.
When an economy is going through the recession, there are serious consequences for most businesses and the whole economy. As the output is decreasing, fewer labor force would be needed, this will lead to an increase in unemployment and in incomes. This will lead to a further decline of the demand of goods and services within the country which is facing recession. The government would have to decrease the tax revenue, as less income tax and sales revenue tax will be released. The firms which are producing income-elastic goods will them with spare capacity.
Many government and businesses prepare themselves for recession beforehand. On the other hand, the recession is not all bad news for businesses. There are also opportunities available, which well managed firm s can take full advantage of.
Firms can take advantage of buying capital assets such as land and property and even other businesses because due to recession cost of assets have decreased, so investing is the best decision to be made. This could be a profitable investment for businesses which would only be revealed after the economy has recovered.
On the other hand, demand for inferior goods could actually increase. Furthermore, the risk of retrenchment and job losses encourage an enhancement in the employees and employers relationship leading to increased efficiency. Contrariwise, hard decisions would have to be made regarding closures of factories and offices. This can make businesses ‘leaner and fitter’ and at a better state to take advantage of economic growth when the economy recovers.
For example producers of luxury goods and services during the recession may not reduce prices for fear of damaging the long-term image. Businesses would start allowing credit terms to improve their affordability. During this period businesses would introduce a lot of promotions and discounts for their targeted consumers. Producers of goods and services would have to lower their prices, introduce promotions to attract current and new customers or they would simply do nothing since the sale is not affected that much.