Recession

Key Highlights

• A recession is a significant decline in economic activity across an economy that lasts for an extended period, typically recognized as two consecutive quarters of negative growth in a country's gross domestic product (GDP).

• During a recession, various economic indicators, such as employment, investment, consumer spending, and industrial production, tend to decline, reflecting a broad-based downturn in economic performance.

What is Recession?

A recession is a significant decline in economic activity across an economy that lasts for an extended period, typically recognized as two consecutive quarters of negative growth in a country's gross domestic product (GDP). During a recession, various economic indicators, such as employment, investment, consumer spending, and industrial production, tend to decline, reflecting a broad-based downturn in economic performance.

Characteristics of Recession

1. Decreased GDP: A key marker of a recession is a sustained reduction in GDP, indicating a contraction in the overall economic output.

2. Rising Unemployment: As businesses experience lower demand for goods and services, they often reduce their workforce, leading to higher unemployment rates.

3. Reduced Consumer Spending: Economic uncertainty and job losses typically result in decreased consumer confidence and spending, further slowing down economic activity.

4. Lower Investment: Businesses cut back on capital expenditures and expansion plans due to uncertain economic conditions and reduced revenue expectations.

5. Falling Industrial Production: Manufacturing and production activities decline as demand for goods decreases.

6. Deflation or Stagnant Prices: Prices for goods and services may stagnate or fall due to reduced demand, though in some cases, prices can increase if supply chains are disrupted.

Causes of Recession

1. Economic Shocks: Sudden, unexpected events such as financial crises, natural disasters, or geopolitical tensions can trigger a recession.

2. High Inflation: Rapid increases in prices can reduce consumer purchasing power and lead to a slowdown in economic activity.

3. High Interest Rates: Central banks may raise interest rates to combat inflation, but higher borrowing costs can dampen investment and spending, potentially leading to a recession.

4. Decreased Consumer Confidence: When consumers and businesses lose confidence in the economy, they tend to cut back on spending and investment, contributing to economic decline.

5. Declining Exports: A significant drop in exports due to global economic conditions or trade barriers can negatively impact domestic industries and overall economic growth.

Impacts of Recession

1. Job Losses: Unemployment rises as companies reduce their workforce to cut costs.

2. Business Failures: Financially weak businesses may close down due to decreased revenues and profits.

3. Stock Market Decline: Investor confidence typically wanes, leading to falling stock prices and reduced market valuations.

4. Lower Household Income: Wages and salaries may stagnate or decline, reducing disposable income and living standards.

5. Government Intervention: Governments often implement fiscal and monetary policies, such as stimulus packages or interest rate cuts, to mitigate the effects of a recession and stimulate economic recovery.