What is a Recession?

Open a newspaper, switch on to a news channel on TV, browse on the Internet – and one of the main topics of concerned discussion these days seems to be the recession. Economics gurus, business pundits, vexed politicians, verbose journalists… all are talking about it. Some say we are heading into a recession, while others propound that we are already in one. Yet, scratch a little below the surface, and you discover that none of them seem to be quite sure what exactly a recession is. The term seems to be quite hard to quantify. So, what is a recession, really? How is it different from depression? And, how does it affect ordinary people like you and me?

What is a Recession? How does it differ from Depression?

A country’s economy is said to be in a recession when the GDP, or Gross Domestic Product, falls below 5-10 percent, lasting for two or more quarters consecutively. The GDP can be defined as the total market value of services, goods, investment and labor within a country in a given period of time, which is usually one year.

Generally speaking, it is said that a recession is a less severe downturn in the economy, and it has a tendency of getting resolved faster.

To some economists, a recession is an economic downturn that lasts for about 6 months to 1½ years, while a depression can be defined as a sharp downturn lasting a number of years. To other economists, a recession occurs when 4,000,000 - 5,000,000 people are unemployed for a period of 6-18 months, whereas a depression occurs when 7,000,000 - 8,000,000 people are unemployed for a longer period of time lasting years.

Recession, in fact, means different things to different people. For example, according to retailers, a recession means a fall in sales, although they do not agree whether it is a 5 percent or a 20 percent drop. To stockbrokers, it means a fall in the prices of stocks. For manufacturers, on the other hand, industrial production is the criterion.

For ordinary people, it can either mean a significant increase in prices, known as inflation, or a decrease in prices, known as deflation. When there is a decrease in prices it means that people may have less money to spend or choose not to spend as much money, which leads to the lowering of the GDP. Whereas, when there is an increase in the prices it can result in a reduction of public as well as private spending, which again leads to the GDP decreasing.

The Causes of the Current Recession

Generally, periodic mild recessions are quite normal in the economic life of countries, and can be said to be a built-in factor. After all, there will be ups and downs in prices as well as increases and decreases in consumption and spending. But, an additional factor apart from the normal built-in falls in spending that occurs occasionally is required to trigger a recession.

The recession that is being currently talked about in the US has been triggered off by the so-called subprime mortgage crisis. This was caused by banks extending loans to people who normally would not have qualified for them because of bad credit. Higher interest rates were charged for these subprime loans compared to regular loans. However, these people who received these subprime loans were demarcated with bad credit in the first place since it was determined that it was not likely that they had the ability to pay their bills according to the stipulated time, and that is what happened exactly. So, innumerable mortgages as well as other loans went into default, resulting in a number of companies belonging to the financial sector posting in enormous losses.

Then, there was a sharp fall in many of the markets around the world because of the speculation about a full-blown recession in the US. Since the US is the largest economy, it has a significant impact on the markets of the world. However, soon magazines and newspapers began speculating that because of the corrective actions taken by government and commercial bodies, it was likely that the current recession would not be as severe as it was expected to be.

Hence, although the bogie of recession, both in the US as well as globally, still is rearing its ugly head, the market and the government are trying hard to make it as pain-free as possible.