A recession is a prolonged period of low economic activity that might last months or even years. When a country’s economy faces negative gross domestic product (GDP), growing unemployment, dropping retail sales, and contracting income and manufacturing metrics for a protracted period of time, experts call it a recession. Recessions are an inescapable element of the business cycle, which is the regular cadence of expansion and recession in a country’s economy.
What constitutes 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 are the five reasons for a recession?
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.
Who decides if we’re in a downturn?
The answer is that the National Bureau of Economic Research (NBER) is in charge of identifying when a recession starts and stops. The Business Cycle Dating Committee of the National Bureau of Economic Research makes the final decision.
The National Bureau of Economic Research (NBER) reported on Friday, November 28, 2008, that the United States entered its most recent recession in December 2007.
Many people use an old rule of thumb to define a recession: two consecutive quarters of negative Gross Domestic Product (GDP) growth equals a recession. This isn’t fully correct, though. According to the National Bureau of Economic Research (NBER),
“A recession is a sustained drop in economic activity that affects all sectors of the economy and lasts more than a few months, as evidenced by production, employment, real income, and other indicators. When the economy reaches its peak, a recession begins, and it ends when the economy reaches its trough.”
When determining whether or not we are in a recession, the NBER considers a number of criteria. However, because “The committee emphasizes economy-wide measures of economic activity because a recession is a broad downturn of the economy that is not confined to one sector. Domestic output and employment, according to the committee, are the primary conceptual metrics of economic activity.”
– Domestic Manufacturing: “The committee believes that the quarterly estimates of real Gross Domestic Product and real Gross Domestic Income, both issued by the Bureau of Economic Analysis, are the two most credible comprehensive estimates of aggregate domestic output.”
– Workplace: “The payroll employment measure, which is based on a broad survey of employers, is considered by the committee to be the most trustworthy comprehensive estimate of employment.”
What are the three hallmarks of a recession?
The business cycle includes recessions, which are a normal, albeit unpleasant, part of the process. A spate of corporate failures, including often bank failures, weak or negative growth in production, and high unemployment characterize recessions. Even if recessions are only temporary, the economic misery they create can have significant consequences that transform an economy. This can happen as a result of structural changes in the economy, such as vulnerable or obsolete firms, industries, or technologies failing and being swept away; dramatic policy responses by government and monetary authorities, which can literally rewrite the rules for businesses; or social and political upheaval caused by widespread unemployment and economic distress.
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.
What caused the recession of 1991?
Consumers’ pessimism, the debt accumulations of the 1980s, the surge in oil prices when Iraq invaded Kuwait, a credit crisis produced by overzealous banking regulators, and Federal Reserve attempts to control the pace of inflation have all been blamed for the recession.
How is the probability of a recession determined?
A recession is defined as a drop in real GDP over two quarters in a row. After six months of declining national income, an economy is officially in recession. Higher unemployment, reduced confidence, declining housing values, lower investment, and lower inflation are all common outcomes of a recession.
However, while this may appear to be a simple task, it might be challenging to determine in practice. GDP statistics may not tell us till a long time after the event has occurred.
For policymakers, knowing whether or not you’re in a recession is critical. The Central Bank can decrease interest rates as soon as it becomes aware that a recession is underway or is expected to develop, and the government may decide to pursue expansionary fiscal policy. Because monetary and fiscal policy can have a temporal lag, the sooner you know, the better.
Real GDP is the most relevant figure. This indicates that the UK experienced negative economic growth in the second quarter of 2008. Because it is the second quarter of negative economic growth, the UK is ‘officially’ in recession by Q3 2008.
The Central Bank, on the other hand, did not lower interest rates until September 2008, and rates did not reach 0.5 percent until March 2009. The Federal Reserve took a long time to recognize the severity of the recession. (However, cost-push inflation from rising oil prices added to the complexity.)
The first factor is that GDP statistics are published after a few months’ delay. The statistics for the first quarter (January to March) are released on April 27 over two months later. The second problem is that preliminary GDP figures are approximations based on incomplete data. Later, when the picture becomes clearer, they are altered (more firms send in data). Initial estimations may overlook any significant shift in the trend. The initial estimates of GDP in 2008 were dramatically revised down subsequently.
Economic growth in Q2 2008 was estimated to be 0.2 percent in the first month. Three years later, this positive increase has been lowered to -0.6, indicating a significant decline.
For the third quarter of 2008, the first-month estimate was -0.5 percent. However, this was amended three years later to a far more catastrophic -1.7 percent.
To put it another way, when the second quarter of 2008 numbers were released two months after the end of June it appeared like the economy was still increasing. However, the economy was already in a downturn. This is a drawback of relying on real GDP figures.
2. Consumer assurance
Consumer confidence measures whether people are optimistic or pessimistic about the future of the economy. This is frequently a reflection of the state of the economy. Consumers will lose confidence if they see people being laid off, if getting a bank loan is difficult, or if housing prices are declining. They will spend less in this situation, resulting in lower aggregate demand and, as a result, negative economic growth.
This illustrates that consumer confidence has been declining since September 2007. At the start of 2008, this decrease in confidence becomes even more pronounced, with consumer confidence reaching new lows. This proved to be a strong economic leading indicator. When confidence levels plummet like this, a recession is almost certain to follow.
Because of the financial turbulence, such as banks running out of cash, confidence has plummeted. Consumers have become risk-averse and have increased their savings and reduced their expenditure.
Business confidence is similar to consumer confidence. Businesses will reduce borrowing and investment if they are harmed by financial instability. This results in a reduction in economic activity.
The Bank of England took a year to respond to the drop in consumer confidence.
The OECD produces a combined measure of corporate and consumer confidence.
A drop in consumer confidence is not proof that the economy is in trouble. Consumer confidence may decline as a result of political issues that are just ephemeral and have no impact on an economy’s core economic fundamentals. For example, there was a reduction in consumer confidence following 9/11, but this did not result in a long-term economic downturn.
Consumer confidence has been declining since July 2016 as a result of Brexit, and this trend has continued since the beginning of the year. Will this be enough to send the economy into a tailspin? Consumer confidence is crucial, but you could argue that the uncertainty around Brexit is not the same as the change in economic fundamentals that occurred in 2008, when the regular banking system collapsed. A significant drop in consumer confidence, on the other hand, can become self-fulfilling. We get a drop in overall demand when we combine a delay in company investment with more cautious consumer purchasing, which could result in a negative multiplier effect. (Will there be a recession as a result of Brexit?)
Unemployment will increase during a recession. Unemployment, on the other hand, is frequently a lagging indication. Firms strive to postpone firing workers to see whether they can weather the downturn without incurring the costs of firing and rehiring. A decrease in average hours worked may be a more immediate indicator of an economic downturn. This is one method businesses can save money without having to lay off employees.
A drop in stock markets could signal a deterioration in economic morale. The stock market, on the other hand, is a poor predictor of economic growth. For example, despite strong economic development, the stock market saw a lengthy fall in 2002-04. (See the sections on the stock market and the economy.)
Investors may expect lesser growth, poorer returns, and lower interest rates in the future if long-term bond yields decline. Negative bond rates have risen in 2016, indicating poorer global growth predictions. Other factors, such as the availability of investment options and investor views of investment security, have an impact on bond yields. It’s not a foolproof way of indicating that you’re in a slump.
Technically, we can have economic growth, but people believe they are in a recession because their situation is deteriorating. Although Britain escaped recession in 2012/13, average wages were decreasing. Because ordinary employees’ salaries are declining, some may consider this a sort of recession.
House prices in the United Kingdom are susceptible to economic developments. During a downturn in the economy, the UK’s unpredictable housing market sees prices decline. Even the uncertainty of Brexit caused people to begin making lower house offers. House prices that are falling are an indicator of economic sentiment, but they can also have an impact on the economy. House prices falling produce a negative wealth effect and a reduction in consumer expenditure.
One cause may not be sufficient, but having more than a couple is a strong indicator of recession.
What triggered the Great Recession of 2008?
The Great Recession, which ran from December 2007 to June 2009, was one of the worst economic downturns in US history. The economic crisis was precipitated by the collapse of the housing market, which was fueled by low interest rates, cheap lending, poor regulation, and hazardous subprime mortgages.
What is the primary driver of economic development?
In general, there are two basic causes of economic growth: increase in workforce size and increase in worker productivity (output per hour worked). Both can expand the economy’s overall size, but only substantial productivity growth can boost per capita GDP and income.
Is the economy currently in a downturn?
In the first two quarters of 2020, the US economy was in recession for the first time. In the second quarter of this year, it increased by 6.7 percent over the previous quarter. However, according to a recent article by two well-known economists, GDP estimates might fall into negative territory for the rest of the year.