Question

How does GDP growth (or lack of its growth) impacts the lives of average citizens? In other words, why is GDP growth in the economy important for the people who live in that economy?

What happens during recessions and does it impact investment and consumption in the economy? Moreover, any idea why do recessions happen?

Answer 1

One of the most common indicators used to track the health of a nation's economy is gross domestic product (GDP). It includes various factors such as consumption and investment. It represents the total dollar value of all goods and services produced over a specific period of time, often referred to as the size of the economy. GDP is generally expressed as a comparison to the quarter or year before.

Economic production as well as growth–which GDP represents–have, as one can imagine, a major impact on almost everyone in that economy. For instance, if the economy is healthy, low unemployment and wage increases will typically occur as businesses demand labor to meet the growing economy. In order to determine how much an economy is flourishing, economists look at positive GDP growth. In contrast, they can use negative growth in GDP to determine if the economy is in recession.

A significant GDP change, whether up or down, usually has a major impact on the stock market. It's not hard to understand why — a bad economy usually means lower corporate earnings. This, in turn, means lower stock prices. Often investors pay attention to both positive and negative growth in GDP when evaluating an investment idea or developing an investment strategy.

Companies will produce less in a recession and will therefore need fewer workers. Some firms will also leave business in a recession, causing workers to lose their jobs. For example, after the 2008/09 credit crunch, many financial industry workers have lost their banking jobs. Then, when demand for cars fell, car companies also began laying off workers.

People tend to save money in a recession because there is a fall in trust. If people expect unemployment (or fear unemployment), then you don't want to spend and borrow, saving becomes more appealing.

Interest rates tend to drop in recessions. This is because there is lower inflation and Central Banks want to try to stimulate the economy. Theoretically, lower interest rates should help the economy out of recession. Lower interest rates reduce borrowing costs, and investment and consumer spending should be encouraged.
Stock markets may fall due to less profit from firms. Hazardous firms may also go out of business.
If stock markets were to anticipate the recession, it could already be incorporated into share prices. In a recession, share prices do not necessarily drop.
But, if the recession is unexpected, the forecasts of profit will be downgraded, and share prices will fall generally.