- What is economic recession?
- Characteristics of an economic recession
- Causes of an economic recession
- Difference Between Recession and Economic Depression
We explain what an economic recession is and what its causes are. Characteristics, and difference between recession and economic depression.
What is economic recession?
We understand by economic recession the decrease in the commercial and financial activity of a nation or geographic region, for a period of weather certain.
There is no definitive agreement regarding the length of said period, although two quarters are usually considered as a standard measurement, and it is calculated through the measurement of the real Gross Domestic Product (GDP), that is to say: when the variation of the GDP is negative for two consecutive quarters, we will be in the presence of an economic recession.
A recession of this type can occur within the framework of an economic cycle, preceded or followed by stages of GDP growth, or as part of a process economic slowdown leading to worse situations. In many cases, the recession operates as a swing of the pendulum after a period of sustained growth, due to the overproduction of the boom.
Thanks to the processes globalization and economic integration, times of economic growth or recession affect more and more people, as financial and business processes involve stocks from various countries. Thus, the negative consequences of the recession are no longer suffered by a single nation or group of them, but by entire segments of the planet.
Characteristics of an economic recession
Recession periods bring with them economic difficulties that, logically, translate into negative political and social impacts.This often means that all sectors of the economy decline: both the production of goods and services, the consumption of them (especially the non-essential ones), the investment of capitals and also the generation of employment, since many Business They usually go bankrupt.
On the other hand, when the economic recession is accompanied by a rise in general prices (inflation), we speak of stagflation: economic stagnation together with inflation. It is one of the worst possible scenarios for the economy from any country. Similarly, when the recession does not occur gradually, but rather is sharp and sudden, it is often referred to as economic crisis and it often requires extraordinary measures to save the economy from going under.
Example of recession in a country. Image: Economipedia.Causes of an economic recession
According to the British economist John M. Keynes, the recession is the result of the growing mistrust of the business community, which then stops investing, preferring to accumulate liquid money. This loss of momentum in the economy slows down the entire dynamic, and has the aforementioned negative consequences.
However, there are other causes for economic recession, such as:
- economic cycles. The cycles have stages of growth, in which much is produced, and others of decrease, in which the superabundance of the offer slows down the economy. This worsens if the initial period was a pronounced boom and the increase in prices is accompanied by an increase in debt and stock market indices, which generates a pendulum effect that accentuates the contraction of GDP.
- Shortage of demand. The impoverishment of the sectors consumers (due to increases in basic goods and services, for example) shatters their purchasing power and slows down the rate of recovery of investments making new capital take longer to form and the economy lulling to sleep.
- Uncertainties about the future. In scenarios of political, social or economic uncertainty, investors prefer to play conservatively, because nobody wants to run faster risks of the due. This often means that bad political decisions or social conflicts are accompanied by an economic tailwind that tends to recession.
- Massive capital loss. This can occur at a regional or even global level, due to large conflicts or problems like wars, revolutions, natural tragedies, etc.
Difference Between Recession and Economic Depression
During an economic depression the economy is seen to be paralyzed.
When an economic recession is very intense and very prolonged in the weather, the use of the term is preferred economic depression. So the latter is a more pronounced degree of recession, in which the economy tends not to slow down, but to paralyze or, worse still, collapse.