What Is an Economic Crisis? & How Does It Happen?

What Is an Economic Crisis?

An economic crisis means a decline in the GDP of an economy, growth of the unemployment rate, decrease in the sales for the majority of businesses, and a lot of problems for families that can’t repay their loans, and can’t cover their living expenses.

• The economic crisis is a tragedy for both businesses and people
• People losing their jobs, the economy is declining, people can’t repay their banks, and banks don’t have sufficient liquidity to operate normally
• Also, an economic crisis will make the family’s life harder, they can’t cover their expenses and repay their loans
• Many people and families may lose their homes and become homeless

As it’s clear, the economic crisis is a disaster, but a reality that people and businesses, especially investors and traders, must take it seriously, because this can happen anytime, anywhere in the world.

Financial markets are affected heavily by the economic crisis, alternative markets will grow during the economic crisis, and other markets will decline.

The question is, what factors and conditions can help with the economic crisis?

We will answer this question in the next section of this article by Aron Groups Broker.

Read more: How to work with Economic Calendar

What are the causes of the economic crisis?

Not every factor and reason written and drawn about the causes of the economic crisis is comprehensive. In other words, it can be seen that the variables that cause one country to collapse do not harm another country. It would be correct to express it this way: Economic crises may also occur due to reasons other than the factors that reveal the economic organization.

Again, it should be known that crises may arise entirely from a disease in the economic organization. The most important non-organizational reasons are political gain and struggle. This struggle may escalate into a hot war. Due to this pessimistic picture, economic organization elements are affected and as a result, economic data begins to decline as they avoid taking risks.

Read more: What Is the Economic Growth Rate? & How It Happens?

How Does an Economic Crisis Happen?

Economic crisis doesn’t happen in an empty world, many factors can lead to an economic crisis.

In this section, we want to get to know the most important factors that can create an economic crisis in the world.

How does an economic crisis happen?

#1. High-Interest Rate

High-interest rates will make the money more expensive, slowing the economic growth rate, and liquidity in an economy will keep decreasing.

• A High-interest rate is used as a tool by the central banks to fight against the high inflation rate by slowing the circulation speed of the money
• But if the high-interest rate continues without proper management, and combined with other problems can lead to an economic crisis

A slower economic growth rate combined with a high debt ratio and a higher unemployment rate, all are engines for an economic crisis.

In any high-interest rate, there is a degree of recession and economic crisis that must be considered by traders and investors.

#2. Energy Crisis

Energy is the engine power of any economy and is the most important asset for manufacturing different products.

• An energy crisis means there’s sufficient energy for companies or factories, this will create a manufacturing crisis that can lead to an economic crisis

How can an energy crisis lead to an economic crisis?

• If the scale of the energy crisis becomes very big, this will decrease the manufacturing power of an economy
• The GDP will decrease, the unemployment rate increases, as supply is lowering, the inflation rate will boom, and living expenses will become higher and higher

While millions are losing their jobs, this will decrease the purchasing power of society, and all of these events mean a full-scale economic crisis.

#3. Health Crisis

We experienced a global health crisis recently in the world, the Covid-19 pandemic.

• A health crisis will slow the economic growth rate, also decrease the power of the human capital
• Trade and tourism will stop, investing will be lower, and people will lose their jobs
• A global health crisis means governments must support their citizens, and increase the liquidity in the economy

All of these mean a real economic crisis, industries, and services will sell less, people are losing their jobs, the inflation rate is on the rise, and living expenses will become higher than ever.

As you can see, a health crisis can easily lead to a disastrous economic crisis.