A recession is a decrease in economic activity over a period of time. A recession is generally considered to exist when the rate of change in GDP is negative for two consecutive quarters. It was commonly known as the "lean period".
The economic recession is the phase of the business cycle in which economic activity slows, consumption and investment decline, and unemployment increases.
In the following graph we can see an example of a recession, with two quarters of negative growth. If negative growth continued, it would be a longer economic recession. However, if negative growth occurred only during one quarter, we could not officially consider that decrease as an economic recession.
Characteristics of economic recessions
Recessions are characterized by the worsening of the economy for at least two consecutive quarters. They tend to lead to a decrease in consumption, investment and the production of goods and services. Which, in turn, causes workers to be laid off and, therefore, increases unemployment.
It is also very common for inflation to go down in recessions due to falling consumption. Deflation can occur on many occasions, which can be dangerous if you enter a deflationary spiral. When, on the other hand, during a recession there is high inflation, it is known as stagflation. Stagflation produces the impoverishment of the population and makes it difficult to emerge from the recession. In other words, it makes it more difficult for governments and central banks to take effective measures to correct the situation.
The years before a recession are usually boom years. As reflected in the theory of business cycles, the economy is made up of phases, in which the economy first grows and then decreases. Recession is the phase when the economy slows down.
Causes of the economic recession
One of the main causes of the recession is usually the overproduction that occurred in previous years when there is economic growth and rising prices. The increase in prices occurs mainly in raw materials, stock market indices and housing. This increase in prices leads many people to go into debt taking advantage of this economic boom, thus causing, later, the slowdown of the economy is stronger and the economy falls into recession.
When an economic recession is very intense and prolonged in time, it is called an economic depression. Recessions are clearly reflected in financial markets by falling stock indices.
Keynes said that an economic recession occurs when families and entrepreneurs lose confidence and stop investing, wanting to accumulate liquidity. When a person decides to do this nothing happens, but if everyone wants to accumulate cash, spending and income decreases. What in the economy as a whole translates to the bankruptcy of companies, empty stores and a decrease in the credit provided by the banks.
Different definitions of economic recession
There is no exclusive consensus among economists at the global level. However, based on different sources, we can consult the definitions of institutions such as the Organization for Economic Cooperation and Development of the countries (OECD) or the United States Bureau of Labor Statistics.
The National Bureau of Economic Research (NBER) does not limit itself to defining the recession as a single GDP issue. They indicate that there are other variables to take into account such as employment, industry or global trade.
For its part, the OECD indicates that the recession may begin when the expansionary phase of the economic cycle ends and not from when it marks negative records exclusively.
The problem with these alternative definitions is that they are not totally objective and it will be up to the economist to analyze whether it is indeed a recession. At Economipedia we prefer the criteria of Julius Shiskin, who in 1974, while he was a commissioner in the United States Bureau of Labor Statistics, published in the New York Times the decrease criteria for two consecutive quarters. It is a simple and objective goal.Conditions for economic growth