Recession (economics)

Definition

In economics usage, the term recession is conventionally defined (except in official pronouncements by the United States government) as two consecutive quarters of negative growth of gross domestic product (GDP). In the United States, the official designation of an economic situation as a recession is the responsibility of the National Bureau of Economic Research , who define 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" .

Before 1930, what are now termed recessions were referred to as "depressions". That term is nowadays reserved for exceptionally severe or prolonged recessions .

The nature of recessions

The best measure of the depth of a recession is the algebraic difference between the economy's GDP growth rate and its typical, or "trend", growth rate (usually between two and three percent for most industrialised countries, so that a GDP fall of one percent amounts to a three to four per cent loss of output). Negative GDP growth rates are invariably accompanied by significant increases in unemployment, and usually by significant reductions in inflation rates.

The causation of recessions is a topic of continuing controversy among economists, and is at the heart of the study of macroeconomics, but there is general agreement concerning some of their common characteristics. By common consent a recession is generally triggered by a failure of the market mechanisms that normally keep supply in line with demand. The result is a deficiency of demand, meaning that suppliers are unable to sell their output - and that, in particular, many people find themselves unable to get employment (a simple explanation of its occurrence is provided Richard Sweeney's baby-sitting analogy). The breakdown of the market mechanism is often triggered by an economic "shock" that reduces consumer confidence. The severest recessions have been balance sheet recessions e triggered the bursting of speculative asset price bubbles. More commonly, recessions have been brought about by sudden increases of commodity prices, or credit shortages resulting from financial crises. The initial fall in demand usually prompts firms to run down their stocks, which depresses activity among their suppliers. The re-stocking that occurs when consumer demand starts to rise again tends to speed the recovery and, according to the "Zarnowitz rule", the steeper the initial downturn in activity, the more rapid will be the subsequent upturn (but that rule may not hold for balance sheet recessions).

Some major recessions

See interactive graphic of recessions since world war one [4]::

The nineteenth century

There are reported to have been eleven recessions of varying severity in the United States between 1865 and 1900 , the worst of which was the panic of 1893 in which a monetary crisis led to the failure of 500 banks and an unemployment rate of over ten per cent.

In Britain there were credit-related recessions in 1826 and 1847, and an exceptionally severe downturn in 1858 which was partly a reflection of events in the United States and a downturn in 1890 triggered by the failure of the Barings bank due to losses affecting its Latin American investments.

The episode that was colloqually known as the "Great Depression of 1873" may not even have been a recession as that term is now defined, but only a protracted reduction in economic growth.

The twentieth century

The only major international recession in the inter-war years was the global Great Depression that followed the American stock exchange crash of 1929 the triggering of which has variously been attributed to the bursting of a speculative stock exchange bubble and to a monetary shock administered by the United States Federal Reserve System, leading to persistent deflation. From its origin in the United States, it spread to other industrialised countries, resulting in massive unemployment and human suffering. It lasted in the United States from 1930 until the outbreak of the second world war in 1939.

The most important of the international recessions that occurred in the post-war years of the twentieth century were the global recession of 1973, triggered by the sudden rise in the price of oil, and an Asian recession in the 1990s triggered by the bursting of a real-estate buble and the consequential development of the Asian banking crises.

In addition to the international recessions there were numerous national recessions .

The twenty-first century

The global recession of 2009 is largely attributable to the banking and credit crash of 2008 which was triggered by the bursting of a speculative real-estate bubble in the United States, and the following subprime mortgages crisis.