Effects of Economic Expansion and Recession on Various Variables
Expansion and contraction, also known as a recession, characterizes the business cycle which has several phases or stages. During the expansion stage, the growth of the economy is relatively rapid, the general level of interest rates is high, production rate increases, real interest rates increases, rate of employment is high, and the pressure on inflation of prices build up. Consumers can afford to buy more; corporates make more profit, the stock prices increase, and bond prices decrease. The yield curve steepens indicating the growth of the economy. On the contrary, during the recession, everything that goes up during the expansion phase comes down. The growth of the economy slows down, the general level of interest rates is low, rate of production or output decreases, real interest rates decreases, rate of employment decreases and the pressure on price inflation decreases. Consumers spend less, and Corporates make less profit, and stock prices increase while bond prices fall. The yield curve flattens showing the contraction of the economy. Inflation leads to a decrease in consumer spending and companies laying off more employees. The higher the rate of unemployment, the less the consumers buy or spend. A situation whereby the rate of demand is faster than the rate of production is experienced if the economy grows too fast. Companies are forced to increase prices, which cause undesirable inflation. The rate of economic growth can be slowed down by setting higher interest rates, thus increasing the borrowing cost. Credit spending and investors are discouraged. Higher interest rates can also cause exchange rate appreciation, which in turn reduces the pressure on inflation. A decline in business activities leads to an increase in unemployment and a decrease in retail sales. Consequently, stock prices and profits made by corporates decrease. The severity of a recession and the type of bonds causes variance in the bond performance. The bond market predicts the economic activity and inflation levels in the future. A flattening yield curve indicates that the economy is becoming weak, showing low-interest rates and decreasing inflation levels of inflation. On the other hand, a steepening yield curve shows strong growth of an economy characterized by rising inflation levels and increasing interest rates. The expansion and recession of an economy affect the discussed variables which are correlated.