- 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 does the term “economic recession” mean?
A recession is defined as a major drop in economic activity across the economy that lasts more than a few months and is reflected in real GDP, real income, employment, industrial output, and wholesale-retail sales.
What factors lead to a downturn?
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 is an example of a financial downturn?
Economic Recession Examples The decline in subprime lending in the United States caused a dip in bank liquidity in 2008-2009. The collapse of Lehman Brothers, one of the country’s largest banks, signaled the start of the recession. For banks and financial institutions, credit growth was exponential.
What would you expect with a downturn in the economy?
Two consecutive quarters of GDP fall is a typical definition, although it isn’t required for the economy to be in a recession. A recession is defined as a contraction of the economy marked by decreased production and consumption, increased unemployment, and (sometimes) reduced price levels.
When it comes to declaring a recession, the National Bureau of Economic Research (NBER), a renowned economic think tank founded in 1920, is the generally accepted authority in the United States. It’s referred to as a recession “a widespread drop in economic activity that lasts more than a few months, as measured by real GDP (Gross Domestic Product), real income, employment, industrial production, and wholesale-retail sales.” 1
The National Bureau of Economic Research (NBER) normally declares a recession 6 to 18 months after it begins. “We’ve waited long enough for the existence of a recession to be established.” 2 The COVID-19-related economic shock, on the other hand, was enough for the NBER to declare the recession practically immediately after it began.
What’s the distinction between a depression and a recession?
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.
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 prices 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 the economy on the decline?
Indeed, the year is starting with little signs of progress, as the late-year spread of omicron, along with the fading tailwind of fiscal stimulus, has experts across Wall Street lowering their GDP projections.
When you add in a Federal Reserve that has shifted from its most accommodative policy in history to hawkish inflation-fighters, the picture changes dramatically. The Atlanta Fed’s GDPNow indicator currently shows a 0.1 percent increase in first-quarter GDP.
“The economy is slowing and downshifting,” said Joseph LaVorgna, Natixis’ head economist for the Americas and former chief economist for President Donald Trump’s National Economic Council. “It isn’t a recession now, but it will be if the Fed becomes overly aggressive.”
GDP climbed by 6.9% in the fourth quarter of 2021, capping a year in which the total value of all goods and services produced in the United States increased by 5.7 percent on an annualized basis. That followed a 3.4 percent drop in 2020, the steepest but shortest recession in US history, caused by a pandemic.
What makes the Great Depression different from the Great Recession?
- A recession and a depression are both times when the economy shrinks, but their severity, duration, and total impact are different.
- A recession is a prolonged drop in economic activity that affects all sectors of the economy.
- A depression is a more severe economic slump, and in the United States, there has only been one: the Great Depression, which lasted from 1929 to 1939.