Since the appearance of the new coronavirus in China and its spread to every continent on the planet, many of us have wondered... Is the world moving towards a recession? The truth is that we are quite close to giving a definitive answer. Cases of COVID-19, a disease caused by the SARS-CoV-2 coronavirus, already number in the hundreds of thousands and are increasing much more each day. This fact has not only affected the most powerful health systems but has also had a strong impact on the economy and production of all the countries involved.
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With this in mind, glimpsing a possible recession is becoming more common. Seeing how all people have been affected in almost all areas of their lives since this pandemic arose is a constant alarm that makes us question the future that we thought we would see. Do you think this is possible? Keep reading this article and get much more information about it!
First of all, what is a recession?
The correct definition is quite similar to the one we imagine when we hear the term. And, yes, a recession is known as the cessation or decrease in economic activity of a country or region for a period that directly affects wages, worker benefits, and the level of employment.
Officially, it is considered that there is a recession when there is a variation (in a tailspin) of the real Gross Domestic Product (GDP), that is, when its variation rate is negative. In general, the authorities dictate this based on a year-over-year period (for two consecutive quarters) but, on some occasions, it happens in such a drastic and significant way that they can consider this possibility long before that amount of time elapses.
In summary, the economic recession is the phase of the economic cycle in which economic activity decreases, consumption and investment are low and unemployment increases.
Factors that cause a recession
- Overproduction: This is one of the main causes. When there is overproduction in previous years (economic growth and price increases), people tend to borrow more by taking advantage of this "financial boom" and this, consequently, causes the slowdown in the economy in later years.
- Decrease in consumption due to lack of demand: This is, to explain it better, when the situation occurs in which the quantity demanded of a product or service is greater than the quantity offered.
- Lack of investment: When, in a massive way, some businessmen or family of businessmen stop investing to accumulate liquidity, which causes a decrease in spending and income.
- Political and economic corruption by governments, especially by those of powerful nations.
- Health crises or pandemics, as in the case of COVID-19.
Why do we think the world is about to go into recession?
At this point, to know why many experts say that the world is about to go into recession due to the spread of COVID-19, it is important to analyze its characteristics a little. In general, speaking of the theory of business cycles, this event corresponds to the descending phase in which there is a reduction of almost all economic variables. So, this way, here we have some of them:
- Production of products, goods, and services: We have seen how the appearance of this coronavirus has literally frozen the work of a large percentage of the world's production companies.
- Employment: the previous point, that is, the reduction in the production of products and services, causes companies to demand less labor and this translates into a significant increase in unemployment rates.
- Consumption: Since the first case of this pneumonia was confirmed and hundreds of thousands were added on all continents, people began to demand (consume) many products to store them during the quarantine stipulated by most countries. But the problem is that, after that, the demand falls completely. People no longer go out to buy essentials (or do it less frequently) because they have a large quantity in their homes. The automobile and housing trade is also completely halted.
- Inflation: In periods of recession, inflation tends to drop. Many people may consider this positive, but the reality is completely different. As the demand for raw materials falls, their prices fall. Wages and industrial prices are less likely to fall but tend to rise less rapidly as well.
- Tourism: The coronavirus is motivating people to stay home and avoid traveling, a situation that reduces the demand for flights, hotel rooms, and restaurant reservations.
Recession and COVID-19 pandemic: What the experts say.
The director of the International Monetary Fund (IMF), Kristalina Georgieva, indicated last Friday that the world is on the verge of an economic recession that will be worse than that experienced in 2009 after the global financial crisis.
"The COVID-19 pandemic has led the world economy into a recession that will require massive funds to help developing nations”, Kristalina Georgieva said.
Furthermore, with the sudden pause in the world economy, Georgieva said that the IMF estimate for the general financial needs of emerging markets is $ 2.5 trillion. And he indicated that this could be the lower range since already more than 80 countries have requested emergency support from the international organization, in which they know that their own reserves and internal resources will not be sufficient.
Besides, she explained that the degree of contraction of world GDP this year and the pace of its recovery will depend directly on the speed to control the pandemic, as well as the coordination of monetary and fiscal policy measures.
All this means that, yes, this pandemic has affected both the social and the political sectors of all countries. And, most worryingly, it has had a very negative influence on the world economy. The competent agencies are making their efforts to counter this situation but, when a recession happens as suddenly and abruptly as this, we must speak of a crisis. This can have serious consequences for countries economically weakened and with vulnerable political and financial systems but, hopefully, we would overcome it.
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