Recession (economics)

Terminology

The terms recession and depression are used colloqually to describe any deep or persistant decline in economic activity, (and sometimes to a persistant reduction in the rate of growth of ouput). More precise definitions have been adopted the statistics authorities. In the United States the National Bureau of Economic Research defines 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

Other authorities have not adopted a formal definition of recession but most commentators and analysts use

a period of of negative growth of real (inflation-adjusted GDP lasting for at least two quarters]].

The term "double-dip recession" refers to a second fall in economic growth following an aborted recovery from a recession, such as occurred in the 1937-39 phase of the Great Depression. The terms "downturn", and "trough" are used to denote the onset of negative growth, and the point at which positive growth resumes.

Before 1930, what are now termed recessions were referred to as "depressions". That term is nowadays reserved for exceptionally severe or prolonged recessions. Again there is no formal definition, but it has been suggested that the term be applied to a decline in real GDP that exceeds 10%, or one that lasts more than three years.

How recessions start

Recessions have been triggered by perceived events, (termed economic shocks) that have prompted firms and consumers to cut back their spending plans. Supply shocks have been either exogenous (such as increases in the oil price); or endogenous (such as power supply failures). Exogenous demand shocks have included sudden falls in demand for exports, and endogenous demand shocks have included tax increases and reductions in consumer confidence. Perceptions have been influenced by forecasts, rumours and herding behaviour, as well as from factual reports and experiences. Global shocks (such as the crash of 2008) have arisen from the tighly coupled character of modern financial systems, and there have been many instances of the international contagion of domestic shocks.

What happens in a recession

There is an unsettled controversy concerning the mechanism of recessions, but they are known to have a number of common features. The running down of manufacturers' stocks hastens the decline in activity, and their rebuilding hastens its eventual recovery. An output gap develops between the level of output and its former trend, and there is an increase in unemployment. Prices tend to fall in response to the reduction in demand and, if the recession persists, there is a danger of deflation. The economy's automatic stabilisers cause tax revenues to fall and benefit payments to rise, causing an increase in the budget deficit. Depending on the pre-recession level of the foreign-held public debt as a percentage GDP and the prospects of a return to growth, the market may add a risk premium to the yield that it expects from the government's bonds to compensate for the perceived risk of sovereign default. If the market's concern about the government in question develops into one of debt aversion, the premium may rise to a point at which the government finds it difficult to avoid default.

Recessions in history

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 that continued intermittently until 1895 (although, according to definition used by the United States National Bureau of Economic Research, there were several recessions during that period ). Its distinguishing feature was its length rather than its depth, and also the fact that it had an unprecedentedly internationl impact

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.