What is a recession? – Forbes UK Advisor

A recession is a severe decline in economic activity that lasts for months or even years. Experts declare a recession when a country’s economy experiences negative gross domestic product (GDP), rising unemployment levels, falling retail sales, and declining income and manufacturing measures for an extended period of time. . Recessions are considered an inevitable part of the business cycle or the steady rhythm of expansion and contraction that occurs in a country’s economy.

Official definition of recession

During a recession, the economy struggles, people lose their jobs, businesses make fewer sales, and the country’s overall economic output declines. When the economy officially falls into recession depends on a variety of factors.

In 1974, economist Julius Shiskin proposed some rules of thumb for defining a recession. The most popular was two consecutive quarters of falling GDP. A healthy economy develops over time, so two consecutive quarters of contracting output suggest there are serious underlying problems, according to Shiskin.

This definition of a recession has become a common standard.

What causes recessions?

There’s more than one way to trigger a recession, from a sudden economic shock to the fallout of runaway inflation. These phenomena are some of the main drivers of a recession:

  • A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. The coronavirus outbreak, which has crippled economies around the world, is a more recent example of a sudden economic shock.
  • Over-indebtedness: When individuals or businesses take on too much debt, the cost of servicing the debt can increase to the point where they can no longer pay their bills. Defaults and growing bankruptcies then capsize the economy.
  • Asset Bubbles: When investment decisions are driven by emotion, poor economic results are not far behind. Investors can become overly optimistic during a strong economy. Former Fed Chairman Alan Greenspan called this trend “irrational exuberance,” which inflates stock market or housing bubbles – and when bubbles burst, panic selling can crash the market, causing a recession.
  • too much inflation: Inflation is the constant upward trend in prices over time. Inflation is not a bad thing in itself, but excessive inflation is a dangerous phenomenon.
  • too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation occurs when prices fall over time causing wages to contract, causing prices to fall further. When a deflationary feedback loop spins out of control, individuals and businesses stop spending, which undermines the economy. Central banks and economists have few tools to address the underlying issues that cause deflation. Japan’s struggles with deflation for most of the 1990s caused a severe recession.
  • Technological change: New inventions increase productivity and help the economy in the long term, but there may be periods of short-term adaptation to technological breakthroughs. In the 19th century, there were waves of labor-saving technological improvements. The Industrial Revolution made entire professions obsolete, triggering recessions and hard times. Today, some economists fear that AI and robots could cause recessions by eliminating entire categories of jobs.

Related: Britons are battling the cost of living crisis

What is the difference between a recession and a depression?

Recessions and depressions have similar causes, but the overall impact of a depression is much worse. There are bigger job losses, higher unemployment and steeper declines in GDP. Crucially, a depression lasts longer – years, not months – and it takes longer for the economy to recover.

Economists don’t have a set definition or fixed measures to show what counts as a depression. Suffice to say that all the impacts of a depression are deeper and last longer.

In the UK, the Great Depression (also known as the Great Depression) was a period of national economic downturn in the 1930s, which resulted from the global Great Depression.

What UK recessions have there been?

As an inevitable movement of any economy, people will typically experience several recessions in their lifetime.

In the UK, the most recent recession was during COVID-19 where in the first and second quarters of 2020 GDP grew negatively. GDP only returned to pre-pandemic levels at the end of 2021. Some economic effects of the virus – such as the limited availability of manufactured goods – continue to have an impact on rising inflation.

Before the economic crisis caused by the pandemic, there was the Great Recession of 2008 and 2009, largely resulting from the subprime mortgage crisis in the United States, which had an impact on the British banking sector – and the “credit crunch” that followed. Lasting more than a year, it was the worst recession in the UK since World War II.

The 1990/1991 recession was caused by factors such as rapid economic expansion under Margaret Thatcher and Britain seeking to maintain its adherence to the exchange rate mechanism. The recession of the early 1990s saw interest rates peak at 14.8% and inflation at 9.5%. Unemployment also reached 10.7% of the working population.

Can you predict a recession?

Given that economic forecasts are uncertain, predicting future recessions is far from easy. For example, COVID-19 appeared seemingly out of nowhere at the start of 2020, and within months the UK economy had been virtually shut down and millions of workers had lost their jobs.

That being said, there are indicators of impending trouble. Warning signs include falling consumer confidence, sudden declines in stock markets, rising unemployment, and people unable to pay their mortgages and household bills.

How does a recession affect me?

You can lose your job during a recession as the unemployment rate rises. Not only are you more likely to lose your current job, but finding a replacement is becoming much more difficult as more and more people are out of work. People who keep their jobs may experience pay and benefit cuts and struggle to negotiate future pay increases.

Investments in stocks, bonds, real estate and other assets can lose money in a recession, reducing your savings and upending your retirement plans. Worse still, if you can’t pay your bills due to job loss, you could lose your home and other possessions.

Business owners make fewer sales during a recession and may even be forced into bankruptcy. The government is trying to support businesses in these tough times, but it’s hard to keep everyone afloat during a severe recession.

With more people unable to pay their bills during a recession, lenders are tightening standards for mortgages, auto loans and other types of financing. You need a better credit score or a larger down payment to qualify for a loan, which you would in more normal economic times.

Even if you plan ahead to prepare for a recession, it can be a scary experience. If there’s a silver lining, it’s that recessions don’t last forever. Even the Great Depression eventually ended, and when it did it was followed by arguably one of the strongest periods of economic growth in UK history.

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