what is an economic recession
A recession refers to the significant decline or drop in general economic activity that occurs in the economy as a whole during a specified period of time. The word, as such, comes from Latin recessio, recessiōnis.
Recessions are measured by the decline in the annual rate of gross domestic product (GDP) over a specific period of time.
We are considered to be in a recession when an economy suffers a drop in growth for at least two consecutive quarters.
However, if a recession lasts for a long time, it turns into a depression, especially when there is a 10% drop in GDP in one year or when it lasts for more than three years.
A recession begins when the economy reaches its maximum growth, and ends when it reaches its lowest point of decline. The recession, then, corresponds to the downward phase of the business cycle.
The indicators in which recessions are significantly reflected are, above all, production, employment and real income, among others.
Recessions can occur abruptly or gradually. When it does so abruptly, it is also called an economic crisis.
Causes of a recession
Recessions occur due to the confluence of a set of factors of economic activity. Among them we can count:
- Overproduction: when goods or services are produced beyond the purchasing power of the public.
- Decrease in consumption: demand falls due to fear of the future outlook of the recession; people consume what is necessary.
- Lack of investment and new capital formation: Many investors turn away to protect their money.
- Political and economic corruption: irregular situations in the management of interests and economic resources can precipitate a recession.
Consequences of a recession
The consequences of the economic recession operate as a cycle. Due to the situation, consumers, for example, spend only what is necessary, which implies that the consumption of society in general decreases.
For their part, many companies are left with an inventory that nobody buys, a situation that can lead to the collapse of the business sector, which results in the dismissal of workers and, sometimes, the closure of some companies.
Both the layoffs and the closures only aggravate the crisis. Many will not be able to pay their loans, and very few will want to take new loans, which also complicates the situation in the financial sector.
Likewise, the recession may appear accompanied by deflation as the demand for goods and services falls. This leads to a situation of oversupply, since people do not want to buy, and this forces prices to fall.