What is Recession?
A recession is a long period of economic downturn characterized by a significant decline in overall economic activity. This downturn is typically marked by negative GDP growth, rising unemployment, decreased consumer spending, and reduced industrial output. These conditions persist for several months or even years. Recessions are a natural, albeit unwelcome, part of the economic cycle, alternating with periods of growth and expansion.
What Causes Recession?
Recessions are complex economic events triggered by a variety of factors. Economic shocks, such as sudden increases in production costs (supply shocks) or sharp declines in consumer spending (demand shocks), can destabilize an economy. Financial factors, including credit crises and asset bubbles, also play a significant role. When lending becomes too easy, a buildup of bad debt can occur, and a sudden tightening of credit can lead to financial institution failures. Additionally, the collapse of inflated asset prices can trigger a recession.
Government policies, both monetary and fiscal, can influence economic cycles. Overly restrictive or expansive monetary policies, as well as excessive government spending or taxation, can contribute to economic instability. On the global stage, trade wars, geopolitical tensions, and natural disasters in other countries can disrupt trade and investment, leading to recessions. It's important to note that recessions are often caused by a sort of these factors, and the specific causes vary from one recession to another.
Indicators of Recession
A recession is typically indicated by a significant decline in economic activity. Several key indicators are closely monitored to determine if an economy is heading into or is already in a recession.
Gross Domestic Product (GDP): Two consecutive quarters of negative GDP growth is often considered a technical recession. However, this is not the sole determinant.
Unemployment Rate: A sustained increase in unemployment is a strong indicator
of economic slowdown.
Industrial Production: A decline in industrial output signals a contraction in manufacturing activity.
Retail Sales: Falling retail sales indicate decreased consumer spending.
Consumer Confidence: A decline in consumer faith can lead to reduced spending, impacting economic growth.
Housing Market: A downturn in the housing market, including declining home prices and sales, can contribute to a recession.
Stock Market Performance: A prolonged and significant decline in stock market indices can reflect investor pessimism about the economy.