Consequences of recession for consumers, workers, producers/firms and the government

Government and the Macro‑economy – Economic Growth

Learning objective

Identify and explain the main consequences of a recession for the four key groups in the economy:

• Consumers
• Workers
• Producers / firms
• The government

What is a recession? (Cambridge IGCSE 0455)

Measuring a recession (optional)

The growth rate of real GDP can be expressed as: $$\Delta GDP = \frac{GDP_{t}-GDP_{t-1}}{GDP_{t-1}}\times 100\%$$ A negative Δ GDP for two quarters in a row indicates a recession.

Why do recessions happen?

Demand‑pull recession

• Aggregate demand falls because of a fall in C (consumer spending), I (business investment) or (X‑M) (net exports). This shifts the AD curve leftwards.

Cost‑push recession

• Aggregate supply contracts (AS shifts left) when input prices rise sharply, wages increase rapidly, or taxes/regulations raise firms’ production costs.

Consequences for Consumers

• Lower real incomes – wage cuts or job loss reduce disposable income.
• Higher uncertainty – households postpone big‑ticket purchases such as cars, houses or holidays.
• Reduced consumption – a fall in C lowers aggregate demand.
• Increased precautionary savings – households save more to protect against future income loss, further depressing demand.
• Tighter credit conditions – banks raise lending criteria; loans become more expensive or unavailable.

Consequences for Workers

• Rising unemployment – firms lay off staff to cut costs.
• Reduced hours or pay cuts – part‑time work and lower wages become common.
• Skill erosion – long periods out of work can lead to loss of job‑specific skills.
• Greater competition for jobs – more applicants per vacancy give employers stronger bargaining power.
• Psychological effects – stress, lower morale and reduced confidence in the future.

Consequences for Producers / Firms

• Falling sales and profits – weak consumer demand reduces revenue.
• Inventory buildup – unsold stock ties up cash that could be used elsewhere.
• Cost‑cutting measures – lay‑offs, reduced investment and postponement of expansion projects.
• Harder access to finance – higher interest rates or tighter credit make borrowing more expensive.
• Risk of bankruptcy – small firms are especially vulnerable to cash‑flow problems.
• Changes in market structure – some firms exit the market, potentially increasing concentration for the survivors.

Consequences for the Government

• Lower tax revenues – declines in income tax, corporation tax and VAT collections.
• Higher public spending – more money spent on unemployment benefits, welfare and any stimulus measures.
• Wider budget deficit and rising public debt – the gap between revenue and expenditure must often be financed by borrowing.
• Monetary‑policy limits – central banks may already be near the zero‑lower‑bound, restricting further rate cuts.
• Fiscal‑policy responses
  1. Expansionary fiscal policy – increase government spending (G) or cut taxes to boost AD.
  2. Automatic stabilisers – unemployment benefits and progressive taxes that automatically inject demand when the economy slows.

Monetary‑policy responses

• Lower policy interest rates to reduce the cost of borrowing for households and firms.
• Quantitative easing – central bank purchases of government bonds to increase the money supply and lower long‑term rates.
• Credit‑easing measures – targeted lending facilities for small‑business loans or mortgage support.

Summary table – impacts and typical policy responses

Evaluation (AO3)

Diagram suggestion