What is a Recession?

A recession is a sustained period (generally defined as two consecutive quarters) during which there is a decline in economic activity.¹

What are the signs of a recession?

Several economic indicators signal the onset of a recession. Negative growth in Gross Domestic Product (GDP) is considered the most basic way to assess a recession. GDP measures the value of goods and services generated in a country, and a negative growth rate suggests a decline in business activity. In most market-based economies, a recession will affect the majority of industries.

Generally, the spending level of consumers drops drastically with a fall in the overall income. The level of credit also tends to drop as industries are no longer keen to expand their business during this period. Other common indicators of a recession include a high unemployment rate, low inflation or deflation, falling stock prices, and lower industrial production.

The key difference between a recession and a depression is that the latter has a more profound effect on the economy. A depression also lasts longer, as witnessed during the Great Depression, which lasted from 1929 to 1939, versus shorter recessions in 2008 and 2020.²

Example

During COVID-19, we saw economic activity drop abruptly as fierce lockdowns were imposed in most countries worldwide.³ Unemployment levels rose to unprecedented levels, and many economies witnessed a double-digit decline in their GDP growth rate.⁴ Fortunately, the recession only lasted a few months due to the intervention of central banks and government spending. The 2008 sub-prime crisis, on the other hand, lasted longer and had a more profound impact on the global economy, stock markets, and especially financial regulation.⁵

References

1. “What is a Recession?” Investopedia. https://www.investopedia.com/terms/r/recession.asp
   
2. “Depressions and recessions differ in their severity, duration, and overall impact. Here's what you need to know.” Business Insider. https://www.businessinsider.com/recession-vs-depression
   
3. “Global Economic Effects of COVID-19.” SGP.  https://sgp.fas.org/crs/row/R46270.pdf
   
4. “COVID-19 recession.” Wikipedia. https://en.wikipedia.org/wiki/COVID-19_recession#:~:text=The%20COVID%2D19%20recession%20is,most%20countries%20in%20February%202020.&text=By%20October%202020%2C%20more%20than,insurance%20computer%20systems%20and%20processes.

5. “The 2007–2008 Financial Crisis in Review.” Investopedia. https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

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