Readers Question: Identify and explain economic variables that may be affected positively by the economic slowdown.
A recession is a period of negative economic growth. It is a period of higher unemployment, falling wages and higher government borrowing. It generally causes economic costs
But does anyone benefit from a recession?
Some people who may do well in a period of a slowdown in economic growth
- Companies dealing with bankruptcies and IVF
- Companies dealing with debt problems.
- It is said bookmakers and publicans do well in a recession because people like to ‘drown their sorrows’ with small gambles and getting drunk. (this may be just an old wives tale though 🙂 )
- Pawnbrokers and people who pay cash for goods.
- Firms selling inferior goods. (goods where demand rises when income falls) e.g. value goods, second-hand stores e.t.c.
- Greater efficiency – enabling the economy to more productive in the long term. A recession tends to be a shock and inefficient firms may go out of business, but in recession – new firms can emerge.
- Economists and analysts – get to talk about recession and how to get out of it
- Falling asset prices can make it cheaper to buy a house. Good for first-time buyers.
Inflation falls during recession
In a recession, the rate of inflation tends to fall. This is because unemployment rises moderating wage inflation. Also with falling demand, firms respond by cutting prices.
This fall in inflation can benefit those on fixed incomes or cash savings. It can also help tackle long-term inflationary pressures. For example, the 1980/81 recession helped reduce inflation from the high rates of the 1970s.
The Recession of 1991 occurred after the Lawson boom and double-digit inflation.
The chancellor Norman Lamont even said that the unemployment (from the recession) was a price well worth paying for lower inflation. This was a controversial statement.
Before the 2007-08 recession, inflation wasn’t really a problem. We had a little cost-push inflation from rising oil prices. But we didn’t have the demand-pull inflation of the late 1980s. Therefore, the recession did not cause a benefit of lower inflation.
It has sometimes been argued that a recession forces firms to increase efficiency or go out of business. A recession can accelerate the process of ‘creative destruction.’ Where inefficient firms go out of business but efficient firms thrive.