A recession is a period of negative economic growth. Falling output leads to higher unemployment, and this rise in unemployment causes a negative multiplier effect. e.g. those made unemployed will spend less causing even less demand in the economy. Thus there are many factors which make it difficult to get out of a recession. What needs to occur for a recession to end?
- Interest rate cuts take time. The MPC have cut interest rates from 5% to 0% with little seeming effect. However, over time, people may start responding to lower interest rates and increase spending and increase investment. e.g. people on fixed rate mortgages may find a decrease in mortgage payments next time they remortgage.
- Fiscal Policy takes time. Government spending has increased, but again it takes time for this to filter through into the economy.
- Banks Restore liquidity. This recession was steep because banks were very exposed to subprime losses. It meant they had little funds to lend. They have held back on lending to improve their liquidity. Consumers are also saving more and overpaying mortgages. This means in a few months time banks may be in a position to start lending again. This will increase investment and consumption
- House prices stop falling. Falling house prices has a big effect on reducing consumer spending. As house prices fall they become more affordable and so there will come a point when they stop falling (or fall at a slower rate) this will encourage spending again.
- Time. In a recession, consumers and firms delay spending and investments which are non-essential. e.g. consumers wait an extra 12 months to replace their TV. But, it still needs replacing, therefore although some decisions are delayed their comes a time when firms and consumers can’t wait any more.
- Global Recovery
This recession is very severe so it may take a while for these factors to occur. But, these are some of the issues which will determine when the recession ends. It is also worth pointing out there are many more factors and theories such as balance sheets of firms and banks
See also: How long do Recessions Last?