Economic Contraction
Economic contraction, also known as a recession, is when an economy experiences a significant decline in economic activity over two consecutive quarters of negative GDP growth. During times of economic contraction, businesses suffer from decreased demand for their products and services, leading to reduced output levels and layoffs. This can result in increased unemployment rates and falling wages—leading to further reductions in consumer spending power. In addition, banks may become more reluctant to lend money due to the heightened risk associated with lending during such periods of uncertainty. Although some governments respond by implementing expansionary monetary policy which increases liquidity within the financial system (e.g., lowering interest rates), it is often not enough to prevent or mitigate the effects of an economic downturn on global markets.
In order for economies to return back into expansionary cycles after experiencing an extended period of recession/contraction, there needs be consistent investment from both public sector entities (governments) and private sector companies alike; this usually takes place via government stimulus programs that are designed specifically stimulate job creation and increase consumer confidence throughout the country’s population base–which ultimately leads towards higher consumption levels–and therefore helps foster sustainable economic growth moving forward into new business cycles./
