What is a Recession? – Everything You Need to Know
Especially recently, this term is often heard during the ongoing Russia-Ukraine war. What is it, and what do you need to know about this process? Let’s dive in.
It is a macroeconomic term and means a significant reduction in general economic activity in a given region. Typically, this is referred to as two consecutive quarters of economic downturn, which reflects GDP and monthly figures such as rising unemployment.
However, the National Bureau of Economic Research, officially announcing the recession, says two-quarters of absolute GDP shrinkage has not been identified yet. The NBER identifies this phenomena as a significant reduction in economic activity across the economy, which lasts for more than a few months, usually seen in real GDP, employment, industrial production, real income, and wholesale and retail sales.
The recession is evident in employment, manufacturing, real income, and wholesale trade. The working definition of this process is two consecutive quarters of negative economic growth, which measures the country’s gross domestic product. However, the National Bureau of Economic Research does not necessarily need to see this to point to a recession. It more often uses the reported monthly data to make a decision. Therefore, the quarterly decline in GDP does not always coincide with the decision to declare a recession.
After the Industrial Revolution, the long-term macroeconomic trend was economic growth in most countries. However, there were short-term fluctuations with this long-term growth when vital macroeconomic indicators showed a slowdown, Or even a noticeable decrease, over six months to several years before reverting to their long-term growth trend. This short-term decline is known as a recession.
What is recession in the economy?
A recession is when the economy slows down significantly for a period. It’s marked by a decrease in the gross domestic product (GDP), which is the total value of all goods and services produced.
During an economic decline, businesses make less money, leading to layoffs and higher unemployment rates. People spend less because they have less money or are worried about the future. This drop in spending further reduces economic growth.
The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months.
It’s a part of the business cycle. The process is characterized by business failures and often bank failures, slow or negative output growth, and increased unemployment. The economic pain caused by this, however temporary, can have significant consequences that change the economy.
This may be due to structural changes in the economy; vulnerable or obsolete firms, industries, or technologies fail and die out.
Dramatic policy responses from government and monetary authorities that can rewrite business rules. Or social and political uprisings by widespread unemployment and economic hardship. For investors, one of the best strategies during a recession is investing in companies with low debt, good cash, and a strong balance sheet.
What predicts economic slowdown?
Predicting a recession involves looking at various economic indicators. A common sign is two consecutive quarters of negative GDP growth. Other predictors include a rise in the unemployment rate, a drop in consumer spending, falling factory orders, and declining business investments.
Rising interest rates can also slow down economic activity by making loans more expensive. Sometimes, a sudden increase in oil prices can trigger a recession by increasing costs for businesses and consumers. Economists and the NBER analyze these indicators to predict recessions.
What is depressions in economy?
A recession is a temporary economic decline, while a depression is more severe and lasts longer. The Great Depression of the 1930s was the worst economic downturn in the history of the industrialized world, marked by a steep decline in GDP and extremely high unemployment rates. Recessions are common in the business cycle, but depressions are rare and indicate a profound economic crisis. The main difference lies in the duration and severity of the economic downturn.
What are recent recessions?
It’s the global financial crisis of 2007-2009, which significantly impacted advanced economies worldwide. The United States experienced a sharp decline in economic output, a dramatic increase in unemployment, and a crisis in the housing market.
Another recent downturn was the COVID-19 recession of 2020, caused by the global pandemic that led to economic shutdowns and a swift, significant drop in economic activity.
During a recession, economic activity declines across the board. GDP growth turns negative as businesses produce fewer goods and services. Unemployment rates rise because companies lay off workers to cut costs.
Consumer confidence falls, leading to decreased spending. The housing market often suffers as people are less willing or able to buy new homes. Interest rates may fall as governments try to stimulate spending and investment. The stock market can also drop, reflecting lower company profits and investor pessimism.
The last recession in the United States began in February 2020, triggered by the COVID-19 pandemic. This recession saw businesses closing and unemployment rates skyrocketing due to health measures and lockdowns. The NBER, which officially defines recessions, declared this economic downturn as a result of the unprecedented global health crisis. It was a sharp but relatively short recession, as the economy started to recover in the second half of 2020.
How Long Does It Last?
The duration of recessions can vary. The rule of thumb is that they last about 11 months, but this can differ widely. The Great Depression lasted for over a decade, while the global financial crisis recession lasted about 18 months in the United States. Some recessions may be brief, lasting only a few months. The National Bureau of Economic Research assesses the length of recessions by looking at a range of economic indicators, not just GDP growth. The recovery period also varies, with some economies bouncing back quickly while others take years to return to pre-recession levels.
The main indicators
There is no one way to predict how and when a recession will occur. However, in addition to the decline in GDP for two consecutive quarters, economists estimate several metrics to determine if a recession is imminent or already underway. Many economists believe that there are generally popular forecasts that, if co-generated, could indicate a possible recession.
First, the leading indicators historically show changes in trends and the corresponding changes in macroeconomic trends in growth rates. These include the Conference Board Leading Economic Index, the ISM Purchasing Managers Index, the OECD Composite Leading Indicator, and the Treasury Yield Curve. This is very important for investors as well as for making business decisions.
They can provide early warning of a recession. Second, officially published data series from various government agencies that represent the major sectors of the economy. For example, such as housing statistics and data on new orders of capital goods published by the U.S. Census.
Changes in these data may cause or shift slightly with the onset of the recession partly because they are useful to calculate the components of GDP. This will eventually be good to determine the start of a recession. In addition, there are backward indicators that can be used to confirm the economy’s transition into recession.
Causes and Explanations
Many economic theories explain why and how the economy can collapse from a long-term growth trend. These theories can divide based on fundamental economic factors, On the financial and psychological reasons that lead to the abyss.
According to some economists, fundamental and structural changes in industries best explain when and how an economic recession occurs. For example, a sudden rise in oil prices due to a geopolitical crisis may simultaneously increase costs in many industries; revolutionary new technology could quickly leave entire sectors behind. In both cases, there is a complete recession.
An example of an economic shock type is the spread of the COVID-19 epidemic. This will result in a shutdown of public health in the economy by 2020, leading to a recession. Other vital economic trends may also be emerging, leading to a recession. And the economic shock is only pushing for a decline.
Conclusion
Some theories explain the recession as dependent on financial factors. It usually focuses on over-extending financial or credit risk, In the reasonable economic period before the recession, either at the beginning of reducing money and credit. Monetarism is an excellent example of this type of theory.
Psychology-based recession theories typically look at the excessive agitation of the previous boom period; Or the deep pessimism of a recessive environment. This is an explanation of why a recession can occur and even continue. This is precisely the category of Keynesian economics, according to which, at the onset of a recession, for whatever reason, investor pessimism can become a predictor of reduced investment costs based on market pessimism.
This, in turn, leads to a reduction in revenue. Minskyite theories look for the cause of the recession in the speculative euphoria of financial markets and the formation of debt-based financial bubbles, which combine psychological and economic factors.
-
Support
-
Platform
-
Spread
-
Trading Instrument
