What is Recession?

In economics, a downward move in the business cycle specified by reduction in manufacture and employment, that's causes the incomes and spending of households to decrease.

Yet not all households and businesses experience real declines in income, their assumptions about the coming times become not so much sure during a economic downturn and cause them to delay making production and employment.

Recession is the period when the business and industry of a country experience two consecutive quarters (six months) of negative economic growth.

The period when the business and industry of a country is not successful. During an economic downturn, households and businesses experience real declines in income and spending because their assumptions about the coming times become less sure.

Types Of Recession

  1. Boom and bust recession (e.g. UK 1991/92) – Very high growth causing inflation. Then recession as interest rates rise.
  2. Balance sheet recession (e.g. Global recession of 2008/09 after credit crunch)
  3. Supply-side shock (1973/74 and 2022 recession due to higher oil prices)
  4. Depression (the 1930s, decline in GDP)

1. Boom and bust recession

Many recessions occur after a previous economic boom. In the economic boom, economic growth is well above the long run trend rate of growth; this rapid growth causes inflation, and a current account deficit and the growth tends to be unsustainable.

2. Balance sheet recession

A balance sheet recession occurs when banks and firms see a large decline in their balance sheets due to falling asset prices and bad loans. Because of large losses, they need to restrict bank lending – leading to a fall in investment spending and economic growth.

3. Supply-side shock

A very rapid rise in oil prices could cause a recession due to the decline in living standards. In 1973, the world was highly dependent on oil. The tripling in the oil price caused a sharp fall in disposable income and also caused lost output due to lack of oil.

4. Depression

A depression is a prolonged and deep recession, where output falls by over 10% and very high rates of unemployment. A balance sheet recession is more likely to cause a depression because falling asset prices and bank losses have a long-lasting impact on economic activity.

Solution of Recession

The most popular, or most recommended, policy for any country to dig itself out of recession is expansionary fiscal policy, or fiscal stimulus. This is usually a two-pronged approach – tax cuts and increased government spending.