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.
In simple terms, what is a recession?
A recession is defined as a slowdown or a significant contraction in economic activity. A recession is usually preceded by a major drop in consumer expenditure.
This type of downturn in economic activity can endure for several quarters, thereby halting an economy’s expansion. Economic metrics such as GDP, business earnings, employment, and so on collapse under such a situation.
The entire economy is thrown into disarray as a result of this. To combat the threat, most economies loosen their monetary policies by injecting more money into the system, or raising the money supply.
This is accomplished through lowering interest rates. Increased government spending and lower taxation are both regarded viable solutions to this problem. The most recent example of a recession is the one that shook the world in 2008.
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 disposable 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 is the formal definition of a recession in the United Kingdom?
The impact of a UK recession on investment portfolios and the prognosis for different asset classes in the future are discussed by Paul Danis, Head of Asset Allocation.
The economic impact of the lockdown has been felt, and the UK is now officially in recession.
Two quarters of falling GDP is generally termed a recession. Despite the dramatic decrease in UK GDP (22.1 percent from peak to trough), this is more likely to be a recession than a depression, as it appears to be short-lived.
Why is the UK in recession?
Recessions can occur for a variety of causes, but they are most commonly linked to increased unemployment and decreased household spending.
Recessions in the United Kingdom have been caused by a variety of factors over the last century. The depression of the early 1920s, for example, was caused by deep deflation following the end of WW1. The early 1930s saw a dramatic drop in UK exports due to the Great Depression.
An oil shock and industrial disputes fueled the early 1970s recessions. Meanwhile, soaring inflation and interest rates caused the early 1980s recession. High interest rates, decreasing property values, an overvalued currency rate, and spillovers from the US savings and loan crisis prompted the early 1990s recession. Finally, excessive interest rates, as well as excesses and imbalances in the banking and real estate industries, contributed to the Global Financial Crisis’ recession.
The 2020 recession, on the other hand, is unique in that it originates from efforts to halt the spread of COVID-19.
How has the UK economy performed compared to other countries?
Only Spain has had a more severe economic contraction in the first half of this year among the main European countries. The UK economy has been hit particularly badly because it is a service-oriented economy, which is the sector most affected by the COVID-19 crisis.
How has the recession impacted equity markets?
Longer recessions are usually accompanied with the steepest drops in global equity markets. The long-term recession of the early 1970s and the recession that accompanied the Global Financial Crisis, which saw global equity markets plummet, are two examples.
Global shares have plummeted at an unprecedented rate during the 2020 recession. The decreases indicate the magnitude of the drop in economic activity as well as the virus’s uncertainty. The good news is that, while unpleasant, the equity market falls were quite temporary, lasting roughly a month. Markets began to price in a rebound after promptly pricing in the economic suffering, with gains aided by the Fed’s ultra-accommodative monetary policies.
As equity markets have rebounded, some regions have performed better than others. Because it has significant weightings in the tech and internet growth-oriented names, the United States has dominated. Due to the nature of the recession, these companies’ earnings have held up pretty well, and they have profited from the extremely low interest rate environment. The UK, on the other hand, has underperformed due to its large exposure to out-of-favor finance and energy industries and limited exposure to technology.
What’s the outlook for global equities from here?
Since the gloomy days of March, the market has made tremendous gains. However, there are some hazards to performance. While the virus poses the greatest danger, ongoing geopolitical tensions between the United States and China are also a source of concern.
Nonetheless, we remain bullish on the stock market. Central banks are indicating that interest rates will remain low for a longer period of time. This has resulted in exceptionally low returns on assets that compete with equities and discount rates used to lower the present value of future corporate cash flows. In this environment, the appeal of equities has strengthened, and we predict them to be the best-performing asset class in the coming year.
What’s the distinction between a recession and a technical recession?
A recession is defined as a period of economic contraction that lasts for a long time. When a country’s GDP falls for two quarters in a row, it is said to be in a technical recession.
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 forces 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.
In a worldwide recession, what happens?
A global recession is a prolonged period of worldwide economic deterioration. As trade links and international financial institutions carry economic shocks and the impact of recession from one country to another, a global recession involves more or less coordinated recessions across several national economies.
What causes a downturn?
Most recessions, on the other hand, are brought on by a complex combination of circumstances, such as high interest rates, poor consumer confidence, and stagnant or lower real wages in the job market. Bank runs and asset bubbles are two further instances of recession causes (see below for an explanation of these terms).
With an example, what is recession?
There have been five such periods of negative economic growth since 1980, all of which were classified as recessions. The worldwide recession that followed the 2008 financial crisis and the Great Depression of the 1930s are two well-known examples of recession and depression. A depression is a severe and long-term economic downturn.
What exactly is a V-shaped recovery?
- After a steep economic fall, a V-shaped recovery is defined by a rapid and durable recovery in economic performance indices.
- Given the recession, a V-shaped recovery is the best-case scenario due to the speed of economic adjustment and macroeconomic performance recovery.
- V-shaped recoveries can be seen in the United States following the recessions of 1920-21 and 1953.
Is the Great Depression considered an epoch?
The Great Depression, which lasted from 1929 to 1939, was the worst economic downturn in the history of the industrialized world. It all started after the October 1929 stock market crash, which plunged Wall Street into a frenzy and wiped out millions of investors.