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Explainer: What is a recession

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  • Economists are pessimistic about the cost of living crisis.
  • According to the World Bank, many countries will experience a recession.
  • Low consumer confidence is a sign of a downturn.

In 2022, the economic downturn caused by the COVID-19 pandemic and the ongoing war in Ukraine led to a significant economic decline. Some commodities have record prices, and economic growth is slowing. Inflation is also rising.

According to David Malpass, World Bank President, “recession is difficult to avoid” in many countries. This is the most significant global economic event since the financial crisis of 2007-2009, which was the worst after the Great Depression in 1929. What is a recession? How do you know if it is occurring?

Definition of a recession

Reckoning is not a term that can be universally defined.

Julius Shiskin, an American economist, defined a recession in 1974 as “two consecutive quarters with declining growth.” Many countries still follow this definition.

The US, however, has chosen to use a more flexible definition. The National Bureau of Economic Research (NBER) considers several factors in determining whether America is in recession. A recession is defined by the institution as “a substantial decline in economic activity that spreads across the economy and lasts more than a few month, normally visible in production or employment, as well other indicators.” A recession occurs when the economy peaks and ends at its lowest point.

Definition of a global recession

A consensus has not been reached on what constitutes a global recession, just as national recessions. Multiple major economies in different countries contracting simultaneously is the leading indicator by the World Bank of a worldwide downturn. There are also other indicators of weak global economic growth.

Over the past seventy years, the world economy has experienced four significant downturns: in 1975, 1982, 1991 and 2009. According to the IMF, recessions last about one year in advanced economies. According to the NBER, the average recession lasted eleven months from 1945 to 2009.

Recession signs

A prolonged drop in the gross domestic product is one indicator of recession. The unemployment rate is another. This can cause a chain reaction of economic problems as the demand for goods and services slows down. According to the Bureau of Labor Statistics, 9.5% of Americans were unemployed during the last global recession.

While employment is high in most major economies, sentiment is low, according to the consumer confidence index. This can be due to factors like the cost of living crisis, which leads to lower spending. In turn, this can cause the economy and tax revenues to drop.

Recessions can also cause stock markets to fall. Companies may have to lay off workers as consumer confidence and spending drop. This can cause poor investment performance and market panic. According to Goldman Sachs, the US stock index, the S&P 500, contracted by an average of 24% in the 12 recessions that followed World War II.

What happens when recessions end?

Short-term interest rates can be lowered by the Central Bank. As borrowing costs are lower than buying items like cars or homes, this can boost consumer confidence and stimulate spending.

Governments can adopt policies to reduce unemployment, such as consumer tax cuts or infrastructure programs, including road and railway construction.

Receding means that growth is resumed, regardless of how slow it happens. The governments implemented various quantitative easing measures to revive the economy after the 2008 great recession. Although markets started to recover after this unprecedented stimulus, there were still scars such as higher unemployment and lower incomes many years later.

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