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A recession refers to a significant decline in economic activity across an entire country or region

What is a recession?

A recession refers to a significant decline in economic activity across an entire country or region. It is characterised by a contraction in gross domestic product (GDP), a decrease in consumer spending, declining business activity, and rising unemployment rates. To officially be in a recession, there needs to be two quarters of negative economic growth.

Key takeaways

- A recession is a period of economic decline characterized by reduced economic activity, job losses, and declining business activity.
- It is caused by various factors and has widespread impacts on individuals, businesses, and financial markets.
- Recognizing the signs of a recession and understanding its effects can help individuals and policymakers make informed decisions during economic downturns.

Causes of a recession

Recessions can be caused by various factors, including:

1. Economic imbalances: Imbalances such as excessive debt, asset bubbles, or overinvestment can lead to a downturn when these imbalances are corrected.

2. Financial crises: A severe banking or financial crisis, like the one experienced in the 2008 global financial crisis, can trigger a recession as it disrupts the normal functioning of the financial system and credit availability.

3. External shocks: External events, such as natural disasters, geopolitical conflicts, or major policy changes, can also impact the economy and contribute to a recession.

Impact of a recession

A recession can have far-reaching effects on individuals, businesses, and the overall economy:

1. Job losses: During a recession, businesses may cut costs by reducing their workforce, leading to higher unemployment rates and reduced income for individuals.

2. Decline in consumer spending: With rising job insecurity and reduced income, consumers tend to cut back on discretionary spending, leading to a decrease in demand for goods and services.

3. Business contraction: Companies may experience reduced sales and profitability, leading to cost-cutting measures such as layoffs, delayed investments, and business closures.

4. Stock market declines: Recessionary periods often coincide with declines in stock markets as investors anticipate lower corporate earnings and economic uncertainty.

Recessions throughout history

The Great Recession (2007-2009): The global financial crisis of 2008 triggered a severe recession, resulting in a significant decline in economic activity, widespread job losses, a housing market crash, and a stock market downturn.COVID-19 pandemic recession (2020): The outbreak of the  COVID-19 pandemic led to lockdowns, travel restrictions, and disruptions to businesses worldwide, causing a sharp economic downturn. Many countries experienced recessions due to the impact of the pandemic on various industries.