What Is The Definition Of Recession?

A recession is a period of falling economic performance that lasts several months and affects the entire economy.
Businesses, investors, and government officials monitor a variety of economic indicators that can help anticipate or confirm the onset of recessions, but the National Bureau of Economic Research (NBER) is the one who officially declares them.
To explain how and why recessions happen, a variety of economic theories have been created.

What exactly is a recession?

A recession is characterized as a prolonged period of low or negative real GDP (output) growth, which is accompanied by a considerable increase in the unemployment rate. During a recession, many other economic indicators are equally weak.

What happens when there is a recession?

A recession is a period of economic contraction during which businesses experience lower demand and lose money.
Companies begin laying off people in order to decrease costs and halt losses, resulting in rising unemployment rates.
Re-employing individuals in new positions is a time-consuming and flexible process that faces certain specific problems due to the nature of labor markets and recessionary situations.

What are the three different sorts of economic downturns?

A recession is defined as a time in which the economy grows at a negative rate. Economic contraction, on the other hand, can have a variety of causes and types. The length, depth, and impacts of the recession will vary depending on the type of recession.

Boom and bust recession

Many recessions follow a period of economic expansion. Economic growth is well above the long-run trend rate of growth during an economic boom; this rapid growth creates inflation and a current account deficit, and the expansion is unsustainable.

When the government or the Central Bank notices that inflation is out of control, they respond by enacting strict monetary (higher interest rates) and fiscal policies (higher taxes and lower government spending)
Furthermore, an economic boom is frequently unsustainable; for example, corporations may be able to temporarily increase output by paying workers to work extra, but this may not be the case in the long run.
In addition, consumer confidence tends to rise during a boom. As a result, the savings ratio tends to shrink, and private borrowing to finance increasing consumption rises. Rising debt is fueling the economic boom. As a result, when economic fortunes shift, consumers drastically alter their behavior; rather than borrowing, they strive to pay off their debt, and the saving ratio rises, resulting in a decrease in spending.
Following the Barber boom of 1972, the UK experienced a recession in 1973. (Though the 1973 recession was also triggered by an increase in oil prices.)
The Lawson boom of the late 1980s was followed by the 1990-92 slump. In the late 1980s, the UK’s yearly growth rate surpassed 5%, prompting inflation to reach double digits. Interest rates were raised in response, housing prices fell, and consumer confidence plummeted, resulting in the 1991-92 recession.
Reversing rate hikes, if triggered by excessive interest rates, can help the economy recover.
Keep growth close to the long-run trend rate and inflation low to avoid this.

Balance sheet recession

When banks and businesses experience a significant reduction in their balance sheets as a result of decreasing asset prices and bad loans, a balance sheet recession ensues. They must restrict bank lending due to substantial losses, resulting in a drop in investment spending and economic development.

We also witness decreasing asset prices in a balance sheet recession. A drop in property values, for example, reduces consumer wealth and raises bank losses. Another element that contributes to slower growth is these.

The Great Recession of 2008-2009. Bank losses in 2008 caused a drop in bank liquidity, leaving banks cash-strapped. As a result, bank lending decreased, making it difficult to obtain financing for investment. Despite interest rates being cut to zero, the economy slipped into recession due to a loss of trust.
Because of the liquidity trap, interest rate cuts may not be enough to spur economic recovery.
We must avoid a credit and asset bubble in order to avert a balance sheet recession. Inflation targeting is insufficient.

Depression

A depression is a lengthy and deep recession in which output declines by more than 10% and unemployment rates are extremely high. Because decreasing asset prices and bank losses have a long-term influence on economic activity, a balance sheet recession is more likely to result in a depression.

Supply-side shock recession

A sharp increase in oil costs might trigger a recession as living standards fall. The globe was heavily reliant on oil in 1973. The tripling of oil prices resulted in a significant drop in discretionary income as well as lost output due to a lack of oil.

This is a rare occurrence. In comparison to the 1970s, the globe is less reliant on oil. Oil price increases in 2008 were merely a modest contributor to the 2008 recession.
Short-run aggregate supply (SRAS) shifts left when there is a supply-side shock. As a result, we have lesser output and more inflation. It’s also known as’stagflation.’

Demand-side shock recession

An unanticipated incident that results in a significant drop in aggregate demand. For example, a drop in consumer confidence as a result of the 9/11 terrorist attacks contributed to the short-lived recession of 2001 (GDP decreased only 0.3 percent) (and also the end of dot com bubble).

Different shaped recessions

W-shaped recession a double-dip recession occurs when the economy enters a second downturn after rebounding from the first.
After an initial drop in GDP, an L-shaped recession refers to a period of slow recovery. Even though the economy is growing at a positive rate (e.g., 0.5%), it still seems like a recession because growth is moderate and unemployment is high.

What’s the difference between a recession and a depression?

A recession is a natural element of the business cycle that occurs when the economy declines for two consecutive quarters. A depression, on the other hand, is a prolonged decline in economic activity that lasts years rather than months.

What might cause a downturn?

In general, an economy’s expansion and growth cannot persist indefinitely. A complex, interwoven set of circumstances usually triggers a large drop in economic activity, including:

Shocks to the economy. A natural disaster or a terrorist attack are examples of unanticipated events that create broad economic disruption. The recent COVID-19 epidemic is the most recent example.

Consumer confidence is eroding. When customers are concerned about the state of the economy, they cut back on their spending and save what they can. Because consumer spending accounts for about 70% of GDP, the entire economy could suffer a significant slowdown.

Interest rates are extremely high. Consumers can’t afford to buy houses, vehicles, or other significant purchases because of high borrowing rates. Because the cost of financing is too high, businesses cut back on their spending and expansion ambitions. The economy is contracting.

Deflation. Deflation is the polar opposite of inflation, in which product and asset prices decline due to a significant drop in demand. Prices fall when demand falls, as sellers strive to entice buyers. People postpone purchases in order to wait for reduced prices, resulting in a vicious loop of slowing economic activity and rising unemployment.

Bubbles in the stock market. In an asset bubble, prices of items such as tech stocks during the dot-com era or real estate prior to the Great Recession skyrocket because buyers anticipate they will continue to grow indefinitely. But then the bubble breaks, people lose their phony assets, and dread sets in. As a result, individuals and businesses cut back on spending, resulting in a recession.

How long do economic downturns last?

A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump. Since 1854, there have been 33 recessions. 1 Recessions have lasted an average of 11 months since 1945.

In a downturn, who benefits?

Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.

A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.

Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR

The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.

Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.

After the Lawson boom and double-digit inflation, the 1991 Recession struck.

Efficiency increase?

It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.

Covid Recession 2020

The Covid-19 epidemic was to blame for the terrible recession of 2020. Some industries were particularly heavily damaged by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).

Profitability hasn’t kept pace with Amazon’s surge in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.

Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.

The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics effect the firm as well as aggregate demand.

Is it a smart idea to buy a house during a recession?

Buying a home during a recession will, on average, earn you a better deal. As the number of foreclosures and owners forced to sell to stay afloat rises, more homes become available on the market, resulting in reduced housing prices.

Because this recession is unlike any other, every buyer will be in a unique position to deal with a significant financial crisis. If you work in the hospitality industry, for example, your present financial condition is very different from someone who was able to easily transition to working from home.

Only you can decide whether buying a home during a recession is feasible for your family, but there are a few things to think about.

What will happen with bank credit during the recession?

Standard monetary and fiscal impacts occur during recessions: credit availability tightens, and short-term interest rates tend to decline. Unemployment rates rise as businesses strive to decrease costs. As a result, consumption rates fall, and inflation rates fall as well. Lower prices diminish business earnings, which leads to additional job layoffs and an economic slowdown in a vicious cycle.

National governments frequently step in to save big firms on the verge of failure or fundamentally essential financial institutions like huge banks. Some companies with vision and planning recognize the implicit opportunity afforded by lower capital costs as interest rates and prices fall, and are able to profit from a downturn. Employers can attract more qualified applicants with a wider pool of unemployed workers.