What Exactly Is A Recession?

During a recession, the economy suffers, people lose their jobs, businesses make fewer sales, and the country’s overall economic output falls. A recession is defined as a significant drop in economic activity that lasts months or even years. A recession is declared when a country’s economy experiences negative GDP, rising unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time. Recessions are regarded as an unavoidable component of the business cycle or the regular cadence of expansion and contraction in a country’s economy.

what is a recession

What Causes Recessions?

• An unexpected economic shock An economic shock is a problem that occurs unexpectedly and causes significant financial damage.
• Bubbles in assets When investing decisions are influenced by emotions, poor economic outcomes are not far behind. During a strong economy, investors may become overly optimistic.
• Excessive inflation Inflation is defined as a consistent upward trend in prices over time. Inflation is not inherently bad, but excessive inflation is a dangerous phenomenon. Inflation is controlled by central banks raising interest rates, and higher interest rates dampen economic activity.
• Unreasonable debt When individuals or businesses incur excessive debt, the cost of servicing the debt can escalate to the point where they are unable to pay their bills. The economy is then capsized as debt defaults and bankruptcies increase.
• Excessive deflation While excessive inflation can cause a recession, deflation can be even more damaging. Deflation occurs when prices fall over time, causing wages to contract, further depressing prices. When a deflationary feedback loop becomes too strong, people and businesses stop spending, undermining the economy.
• Changes in technology New inventions boost productivity and benefit the economy in the long run, but there may be a period of adjustment to technological breakthroughs. There were waves of labor-saving technological advancements in the nineteenth century. The Industrial Revolution rendered entire professions obsolete, resulting in recessions and difficult times. Some economists are concerned that artificial intelligence and robots will cause recessions by eliminating entire job categories.