Economic Recession
An economic recession is a significant decline in economic activity that lasts for more than a few months, typically reflected in falling gross domestic product, employment, income, and industrial production. A common rule of thumb, used in some countries, defines a recession as two consecutive quarters of negative GDP growth.[1]
Definition
A recession is a period of contraction in the business cycle. It is characterised by:
- Falling output and GDP.
- Rising unemployment.
- Declining consumer spending and business investment.
- Reduced industrial production and trade.
- Falling business and consumer confidence.
Causes
Recessions may be triggered by a variety of shocks:
| Cause | Description |
|---|---|
| Demand shocks | A sharp fall in consumption or investment. |
| Supply shocks | A sudden rise in input costs, such as oil prices. |
| Financial crises | Credit crunches, bank failures, or asset price collapses. |
| Policy errors | Excessive monetary tightening or fiscal contraction. |
| External shocks | Global downturns or geopolitical events. |
Effects
Recessions impose significant costs on households and firms. Unemployment rises, incomes fall, and poverty may increase. Governments typically respond with expansionary fiscal policy and central banks with expansionary monetary policy to stimulate demand and speed recovery.[1]