What is Recession - An Overview
Welcome Back to Basics.
What is Recession?
There is no standard definition for Recession. It is generally defined has period of decline in economic activity consecutively for two quarters. In simple, fall in Real (inflation-adjusted) Gross Domestic Product (GDP) for two consecutive quarters is called Recession.
The rule of thumb has its drawbacks, as GDP alone is narrow. It is always better to consider broader set of measures of economic activity to determine whether country is indeed in recession or not.
In India, Reserve Bank of India (RBI) has its own definition, “a recession is widely regarded as a period of prolonged decline in output experienced across much of the economy. To be more concrete, commentators often consider a recession to be in progress when total output (real gross domestic product) has declined for at least two consecutive quarters.”
The private National Bureau of Economic Research (NBER) in United States, uses a broader definition and defines recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”
In other words, during recession the economic growth will be negative.
Why do recessions happen or causes of Recession?
Reasons for recession varies from economy to economy. Recession may be due to increase in prices of inputs which are needed to produce goods and services. For Example, an increase in oil prices may be a cause of recession. An increase in energy price may lead to overall inflation in an economy and may result in aggregate demand.
Over using the contractionary economic policies (both fiscal or/and monetary) to control inflation can also be a trigger to recession. The excessive use of contractionary economic policy send a wrong signal to the economy which may result in decline in aggregate demand for goods and services, which will result in recession.
There are psychological factors, which also causes recession. Keynesian economics focuses on the psychological and economic factors which reinforce and prolong recessions.
Other than these the recession may occur due to sudden economic shock, excessive debt, too much inflation, too much deflation, and technological changes.
What are the Signs of Recession?
The signs of recessions are as follows:
- More unemployment and tighter labour market.
- More d0wnsizing than normal times – No promotions or increments for workers
- More decline in stock market and stock prices.
- Bankruptcy of Businesses than in normal times.
- Increases Trade deficit – trade gets affected due to increase in prices, lower level of incomes, and less aggregate demand for foreign goods.
Global Recession and Growth Rate:
World Bank states that since 1970 the world economy has gone through five recessions. The period of global recessions are 1975, 1982, 1991, 2009, and 2020. This decline in GDP or say recession is due to slowdown in global trade, employment, industrial production, capital flows and oil consumption.
The World Economic Outlook (WEO) of International Monetary Fund (IMF) released in October, 2022, the global growth for 2022 is at 3.2 per cent and it slows down further to 2.7 per cent. This is 0.2 percentage points lower than its earlier forecast (i.e. in July).
Recession in India:
According to RBI, India has faced four recessions and the period of recessions are 1958, 1966, 1973, and 1980. Though the fifth one is the most recent is during COVID-19, many didn’t accept this due to lockdown.
The 1958 recession is due to Balance of Payment problems, as agriculture production was severely affected due to poor monsoon. In 1966, India was hit by famine after China ware in 1962 and Pakistan war in 1965. India’s food production was affected during this period.
In 1973, energy emergency happened due to oil embargo made by Oil Producing and Exporting Countries (OPEC), on those countries which supported Israel of the ongoing war during that period. In 1980, due to oil breakdown as the oil production was affected by Iranian revolution.
How it affects People?
As it is mentioned above during recession, the unemployment rate goes up, less hiring, more layoffs, very less or no job incentives like bonuses and hikes, decline in stock market and prices, increase in debt or loan payments etc…
What one should not do and keep your investments safe
- Avoiding risky investments
- Quitting Jobs without or before finding another Job or taking jobs for granted (this is best option even during normal times)
- Investing in bonds
- Investing in large-cap companies with good balance sheet
- Investing in Mutual Funds
These are few general suggestions, but, each individual knows what is best they can do in their situations.
