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What is the Relationship Between Investment and Recession?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 27 October 2016
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A strong link exists between the concepts of investment and recession, as a recession is classically defined as two consecutive quarters of negative economic growth, and economic growth comprises a large conglomerate of various business transactions, one of which is investment. A nation’s economic growth is measured by the country’s gross domestic product, which represents all goods and services produced within the country’s borders. Gross domestic product consists of consumption, investment and government spending. Oftentimes, investments decrease during a recession, which in turn drives an economy further into a recession.

In terms of gross domestic product, a large portion of the investment factor is the result of businesses looking to purchase more equipment, facilities, or other long-term assets to increase their production output. Because a rise in business investment can signal a future increase in production output, a reverse trend will likely create fear from the lack of investment and recession. Businesses will often increase their investments when they believe that consumer sentiment is stable or on the rise. This theory is based on the economic concept of supply and demand. As consumer demand for goods and services increases, companies will increase production output that will match this demand and generate higher business profits.

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Investment and recession may also be seen from the side of consumers. Consumer investments — most commonly defined as a purchase of financial products — represent the buying of new homes in terms of gross domestic product. Consumers who fail to purchase new homes will drive this indicator downward, leading to estimation on the purpose behind the lack of consumer investment and recession. The construction industry is often a leading indicator in terms of calculating the reason behind a looming recession. The reason behind this theory is that many construction companies must apply for government permits or other licenses prior to starting new construction projects. As these permit applications fall, so will the sentiment of strength of investment and recession.

Recessions are a time of extremely slow growth for an economy. While some growth can occur in specific industries or sectors, a nation’s overall economy is often unable to generate sufficient growth to stabilize the economic market. Many factors can lead to a recession. Poor central bank fiscal or monetary policy, tight money supply, lack of sufficient economic resources or restrictive government legislation can all play a role in the onset of a recession. Both businesses and consumers typically retract their spending habits because they do not wish to overextend their limited resources in light of an uncertain economic future.

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