While the world’s leading central banks are increasing interest rates one after another, almost all of them are warning of recession. So what is an economic recession or recession? In what situations are we considered to have entered a recession?
In its broadest definition, recession means a significant and widespread decline in economic activity that can last for months or even years, rising unemployment, declining retail sales and falling industrial production.
Because a recession usually lasts six months or longer, experts use a popular definition of the country’s GDP falling for two consecutive quarters. This definition was coined by economist Julius Shiskin in 1974. Stating that a healthy economy will continue to grow continuously, Shiskin argued that the contraction seen in two consecutive quarters shows that there are serious underlying problems. This statement later gained general acceptance.
It is believed that the imbalances that developed in the growth period just before the recession, which is seen as a part of the economic cycle, are corrected and paved the way for the start of a new growth cycle.
Although stagnation is a known situation in developed economies, it has started to be experienced less and shorter in recent years. According to the International Monetary Fund (IMF), there were 122 recessions in 21 advanced economies between 1960 and 2007, lasting about 10 percent of the total time.
What are the causes of the recession?
More than one factor can cause a recession. These can be many reasons, from a sudden economic shock to out-of-control inflation, but some of them alone or a few of them can cause the economy to shrink.
Sudden economic shock: An economic shock is used for unexpected and financially damaging developments. For example, the Covid-19 epidemic, which caused the closure of many economies around the world, is one of the closest examples of sudden economic shock.
Excessive debt: When individuals and companies become over-indebted, they can reach a point where they no longer have any more money to spend at payback time. An increase in the number of companies that default and go bankrupt can take a hit to the economy in general.
The bursting of asset bubbles: When investment decisions are made emotionally, the results may not go as desired. Investors may make stock or real estate purchases with the prediction that the strong course of the economy will continue, causing their prices to inflate. When it explodes, panic selling can push the economy into contraction.
Extremely high inflation: Inflation means that prices tend to rise over time. In a normal course, inflation is not dangerous, but getting out of control by getting too high can drag the economy into recession.
Excessive deflation: Deflation, which means that prices fall over time, is more dangerous than hyperinflation. When prices fall, companies’ incomes decrease, which leads to lower wages, and the pressure on prices increases further and it enters a vicious circle.
technological progress: Technological development and new inventions are factors that strengthen the economy in the long run. However, in the short term, the adaptation process to these developments can cause various problems. In the nineteenth century, the decrease in the need for labor with the industrial revolution caused unemployment to reach its peak. Today, some economists warn that artificial intelligence and robots could have the same effect.
How does recession affect individuals?
The most direct impact of the economic recession on individuals is seen in the field of employment. As economic activity declines, layoffs increase and it becomes more difficult to find new jobs. Those who continue to work may also face reduced salaries or bonuses or delayed raises.
Those who invest in areas such as stocks, bonds and real estate may lose money. Business owners’ sales may fall during a recession and bankruptcies may occur.
Banks may also turn down their credit taps as repayments decrease.
Can a recession be predicted?
Considering that all of the economic forecasts are estimates, it is not possible to say yes to this question unequivocally. For example, no one could have foreseen the Covid-19 outbreak.
However, there are some indications that tough times are approaching. Factors such as the decline in consumer confidence, sharp losses in the stock markets, the rise in unemployment, and the increase in non-performing loans are shown as the biggest indicators of an approaching recession.
What is the difference between recession and depression?
The factors that cause recession and depression are generally the same. But the effects of depression are felt much deeper and longer. Unemployment rises much more, gross domestic product falls more, and most importantly, depression lasts longer than a recession.
There is no consensus among economists as to at what point a recession turns into a depression, but it is generally accepted that it is more devastating.