A recession is a significant decline in economic activity that lasts for an extended period, typically visible in metrics such as real Gross Domestic Product (GDP), real income, employment, industrial production, and wholesale-retail sales. This downturn affects various sectors of the economy, leading to reduced consumer and business spending.
A common rule of thumb is that a recession occurs when there are two consecutive quarters of negative GDP growth. However, official definitions can vary by country. In the United States, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
In the United Kingdom, a recession is typically defined as two consecutive quarters of negative economic growth.
Recessions can be triggered by various factors, including financial crises, external trade shocks, adverse supply shocks, the bursting of economic bubbles, or large-scale disasters like pandemics. During a recession, unemployment rates generally rise, consumer confidence declines, and businesses may scale back investments. Governments often respond with expansionary macroeconomic policies, such as increasing the money supply, decreasing interest rates, boosting government spending, or cutting taxes, to stimulate economic activity.
It’s important to note that while the “two consecutive quarters” guideline is commonly referenced, some economists and institutions prefer a more comprehensive analysis that considers a range of economic indicators beyond just GDP. For instance, the NBER examines multiple metrics to determine the onset and duration of a recession.