Explain the factors that may cause a recession in an economy.

Introduction

Recession is defined as having two consecutive quarters of negative growth. Actual growth of an economy is measured in terms of the growth rate of its real GDP. A positive growth rate means an increase in real GDP whereas a negative growth rate means a decrease.

Fall in AD X Falls

Being Singapore’s major trading partners, US and Europe import around 33% of Singapore’s exports. When US and Europe suffered from a recession, Singapore was not spared from its adverse effects. Singapore is especially vulnerable, given its small and open economy; manufacturing will be hit, as well as trade-related services such as wholesale and transport. Given the Europe debt crisis and global financial crisis, global demand for exports has fallen as people’s purchasing power falls. European countries and our trading partners would be adversely affected by the crisis and demand less of Singapore’s exports. This leads to a fall in AD.

C & I Falls

Consumer and business sentiment could be affected as the outlook of the global economy would be bleak as US has not really recovered from recession and Europe likely to cut consumption due to its debt problems has sent a wave of pessimism across the globe. Consumers and investors lose confidence in the future, resulting in a cut back on spending, delay in major purchases and postponement of investment plans due to negative business sentiments which would cause a fall in the consumption (C) level and investment level to fall in the country. The fall in consumption and investment will resulted in a drastic fall in AD thus affecting Singapore’s actual growth.

Fall in Short-Run AS

Another possible external shock will be rising global oil prices and imported inflation also caused a slowdown in Singapore’s actual growth. Geopolitical tensions in the Middle East have kept oil prices high. With that, cost of production went up for industries which in turn reduced AS.

Adverse weather in countries like Malaysia, and Thailand, where Singapore gets her main food sources from, created food shortages and thus drove up food prices. The recent monsoon flood in Thailand has cut off supplies of both food and electronics components necessary for manufacturing exports.

The above is illustrated by a leftward shift of the AD curve from AD to AD1 and coupled with a decrease in AS to AS1. Real GDP falls from Y0 to Y1 showing that Singapore has experienced a fall in actual growth.

Other examples:

(Food price)

Soy-bean based products also faced an increase in price due to the reduction production in South America.

High wheat prices were caused by massive wildfires in Russia in 2010. In response, commodity speculators drove prices even higher to take advantage of this trend.

Drought conditions throughout the southern U.S. reduced both the number and output of egg-laying hens, raising the price of poultry and eggs. (Update on severity on July 2012 – Impact on other agricultural products such as corn etc)

Seafood prices were affected due because of decreased fishing capability due to Japan’s earthquake.

*Other valid reasons are accepted

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