We explain the definition of economic recession. What its causes are. Characteristics, and difference between recession and economic depression.
Definition of Economic Recession?
We understand by economic recession the decrease of the commercial and financial activity of a nation or geographic region , during a determined period of time.
There is no definitive agreement regarding the length of that period, although two quarters are usually considered as a standard measure , and it is calculated through the measurement of the real Gross Domestic Product (GDP), that is: when the variation in GDP is negative for two continuous 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 an economic slowdown process that leads to worse situations. In many cases the recession operates as a pendulum blow after a stage of sustained growth , due to the overproduction of the bonanza.
Thanks to the processes of globalization and economic integration, times of economic growth or recession affect more and more people, as financial and commercial processes involve populations from different countries. Thus, the negative consequences of the recession are suffered no longer by a single nation or group of them, but by entire segments of the planet.
Characteristics of an economic recession
The periods of recession bring economic difficulties that logically translate into negative political and social impacts. This often means that all sectors of the economy decrease : both the production of goods and services, their consumption (especially non-essentials), capital investment and also the generation of employment, as many companies usually go to bankruptcy.
On the other hand, when the economic recession is accompanied by a rise in general prices (inflation), there is talk of stagflation : economic stagnation along with inflation . It is one of the worst possible scenarios for the economy of any country. Similarly, when the recession does not occur gradually, but is acute and sudden, there is often talk of an economic crisis and often requires extraordinary measures to save the economy from plummeting.
Causes of an economic recession
According to the British economist John M. Keynes, the recession is the result of the growing distrust of entrepreneurs, which then ceases to invest, preferring to accumulate liquid money. This loss of momentum in the economy slows the entire dynamic, and carries the aforementioned negative consequences.
However, there are other causes for the economic recession, such as:
- Economic cycles . The cycles have stages of growth, in which much is produced, and others of decrease, in which the overabundance of supply slows the economy. This worsens if the initial period was of pronounced bonanza and the increase in prices is accompanied by an increase in indebtedness and stock market indices, which generates a pendulum effect that accentuates the contraction of GDP.
- Shortage of demand . The impoverishment of the consumer sectors (due to increases in basic goods and services, for example) pulverizes their purchasing power and slows the pace of recovery of commercial investments , causing the new capital to take longer to form and the economy to fall asleep.
- Uncertainties about the future . In scenarios of political, social or economic uncertainty, investors prefer to play conservatively, because nobody wants to take more risks than they should. This often means that poor political decisions or social conflicts are accompanied by an economic shock that tends to recession.
- Massive loss of capital . This can happen regionally or even globally, due to major conflicts or problems, such as wars , revolutions, natural tragedies, etc.
Recession Vs Depression
When an economic recession is very intense and very prolonged over time, the use of the term economic depression is preferred . So the latter is a more pronounced degree of recession , in which the economy tends not to slow down, but to paralysis or, worse, collapse.