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There is a decline in economic activity, which is known as stagnation, due to a variety of reasons, and this is evident in the lack of industrial production, employment, real income, weak wholesale and retail trade, the cessation of business expansion, and the decline in GDP for two consecutive quarters, followed by a rise in In the unemployment rate, how does the decline in economic activity occur?
How does the decline in economic activity occur?
A decrease in economic activity occurs as a result of a decrease in the growth of the gross domestic product, which is due to a group of reasons, as follows:
Financial crises
This is represented by the financial crisis that occurred in 2008, when Bear Stearns announced that it had suffered large losses due to the collapse of two hedge funds it owned, as it had invested the money of these funds in collateralized debt obligations (which are debts with a low risk of default). This caused other banks that had invested in the debt to panic, which contributed to companies and commercial banks stopping lending and causing a major credit crisis that led to a decline in economic activity.
High interest rates
Interest rates determine liquidity (money available to invest or spend); when interest rates fall, consumers will be able to increase spending and investment, and thus growth in economic activity will occur. While the matter differs when raising interest rates, which causes a decline in economic activity and investment,
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Stock market crash
Investing in the stock market is one of the strong investment pillars on which the economy is based. As the occurrence of growth in the stock market will lead to an increase in economic growth due to the increase in investments that occur in it, the stock market crash will lead to a decline in economic activity due to lower investments.
Loss of confidence in investment and the economy
The loss of confidence pushes consumers to stop buying and consuming in the economy, which will affect the movement of companies and industries. The economic activity.
High exchange rates
Exchange rates have an inverse relationship with exports; when the exchange rates rise, the demand for exports will be reduced due to the increase in the cost of exports. as happened in 1981, when the United Kingdom recorded a sharp rise in the value of the pound, which caused a sharp drop in exports.
Wage and price laws
When the government imposes prices that do not suit companies on the products it provides, it will have to lay off employees who work for it because it is unable to adapt to the costs that it will incur. This will lead to a weakness in economic activity due to the lack of available income for people to enable them to invest or consume.
Economic downturn
Deflation reduces the value of goods and services that are sold in the market, which encourages people to wait to buy until prices fall, which will help lower demand and cause a recession.
Follow a policy of fiscal austerity.
When the government cuts spending and increases tax rates on consumers, this will negatively affect the movement of the economy by reducing consumption and demand for goods and products due to the lack of available income for consumers. Hence, consumers will stop making investments as well, which will eventually cause a decline in economic activity.
Read also: Inflation : What You NEED TO KNOW!!
