During recession, the government can run an expansionary fiscal policy which will help to restore output to normalcy. This will also help put the unemployed people back to work. Recessions more often than not results in decline of international trade. During this time, credit grows but by a small percentage with both house and equity prices contacting greatly during the recession. Due to the volatile nature of equity, their decline and in prices is more than twice that of house prices. For some macro-economic variables, they show signs of a slowdown before the real recession starts. An example in point is residential investments that typically decline before the start of recession. These types of investments often give a negative year changes in the first quarter of a recession.
For the industrial production, they show weakness signs early and often register a big decline before the start of recession. As recession starts to hit, inflation continues to increase sharply and unemployment starts to hit and during the recession onset, inflation rate declines but unemployment rate increases. It is a business fact that during recession that investment is volatile than the output and usually investments decline in most recessions but for consumption it contracts.
Canada and Its Fiscal Policy to Economic Growth
These global landscapes have a lot for the Canadian business to learn from. Thus the private sector ought to replace public support as the main driver for a sustained economic growth. Significant restructuring should be done in many of the sectors of the economy. The export sector of Canada has to adapt to a strong Canadian dollar. There is some evidence on the role of fiscal policy being a source of an increasing macro-economic stability. Explanations put forward account to some structural shifts in nature: that is shifting from manufacture of goods to services, better access to financial services and improving in inventory management.
From Keynesian emphasis of on public works, it is understood that once a cyclical boom is allowed to develop and investment opportunities have been exhausted, there is little that can be done to stimulate the private sector to spend thus compensation is sought by stimulating other sources of investments. In a federal state like Canada, proper planning and timely implementation of projects requires all levels of the government to be involved. During this time, public investment lies in the jurisdiction of municipalities and provinces. Although intergovernmental collaboration in Canada has never been such successful, public works implementation should be insisted as it will be used to reduce expansion. During a boom, demand becomes saturated and stimulants are usually not effective. Residential construction during these times should also be emphasized although not as effective as public works. This will compensate for the usually cyclical fluctuations of business investments.
While addressing executives in Toronto earlier February 2009, the chairman of General Electric Co. said that during recessions, businesses should invest in technology and innovations as their competitive advantage grows. Due to globalization and regulations regulating international businesses, finding and using a technology that utilizes these complexes and market development that will put the Canadian business on a growth path. Research shows that continuing to invest in all sectors of the economy especially in transformational research and innovation will be central to the advancement of Canada’s place in the world markets. Thus clearly, the country’s business needs to do more on research and innovations during recessions to keeps pace with its peers when recession is over and entering the expansion cycle (Carlson D. 2009).
Thus for a country like Canada to go forward, the private sector demand ought to replace public support as the one that drives the Canadian economy. The new international economic order also has many opportunities that these businesses should cash in during the bad times of recessions. There is a strong demand in the world market during recessions and the important issue that faces the Canadian businesses is how to deal with these deals and challenges that are posed during economic downturns. The opportunities are substantial like that of developing innovative products and services while optimizing the global and local mix of activities.
Much of the research has been devoted to measurements of business cycles and the different approaches that have been proposed by the government. This study is based on the classical definition of business cycle. Thus a cycle is defined as an expansion that occurs in many of the economic activities which is later followed by a recession. A recession starts when the economy reaches its peak and ends when the economy is at its lowest (Jenkins P. 2010).
The above essay provides a comprehensive analysis of the linkages between the main macro-economic variables and the financial cycles touching especially to the Canadian businesses. Focusing on these behaviors of these variables around recessions and during expansions we can conclude on several issues. A typical recession lasts four quarters and usually is accompanied drop in output of about 2%. We have seen that recessions are associated with housing and credit crunches, whereby residential investments fall sharply during this time. Therefore the government and businesses should take the right policy measures to mitigate recession. Direct support should be offered in the housing sector while a mixture of accommodating monetary and fiscal policies should be offered by the government to local businesses to make them competitive in the global market. In conclusion therefore, we could encourage Canadian businesses to invest in productivity during recessions as the economy will most definitely rebound and start growing again.