We explain what an economic recession is and what its causes are. Characteristics and difference between recession and economic depression.
What is economic recession?
We understand by economic recession the decrease in the commercial and financial activity of a nation or geographic region during a certain period of time.
There is no definitive agreement regarding the length of said period, although usually two quarters are considered a standard measure and is calculated through the measurement of the real Gross Domestic Product (GDP), that is: when the variation of GDP is negative for two continuous quarters, we will be in the presence of an economic recession.
A recession of this type can occur within the framework of an economic cycle, preceded or followed by stages of GDP growth, or as part of a process of economic slowdown that leads to worse situations. In many cases the recession operates like a pendulum swing after a period of sustained growth due to the overproduction of the bonanza.
Thanks to the processes of globalization and economic integration, times of economic growth or recession affect more and more people, as financial and commercial processes involve populations from various countries. Thus, the negative consequences of the recession are no longer suffered by a single nation or group of them, but by entire segments of the planet.
Characteristics of an economic recession
Periods of recession bring with them economic difficulties that, logically, translate into negative political and social impacts. This means often all sectors of the economy decline: both the production of goods and services, their consumption (especially non-essential ones), capital investment and also the generation of employment, since many companies tend to go bankrupt.
On the other hand, when the economic recession is accompanied by an increase in general prices (inflation), we speak of stagflation: economic stagnation along with inflation. It is one of the worst possible scenarios for the economy of any country. Similarly, when the recession does not occur gradually, but is sharp and sudden, it is usually referred to as economic crisis and often requires extraordinary measures to save the economy from going under.
Causes of an economic recession
According to the British economist John M. Keynes, the recession is the result of the growing distrust of the business community, which then stops investing, preferring to accumulate liquid money. This loss of momentum in the economy slows down the entire dynamic, and entails the aforementioned negative consequences.
However, there are other causes of economic recession, such as:
- Economic cycles The cycles have stages of growth, in which a lot is produced, and others of decrease, in which the overabundance of supply slows down the economy. This worsens if the initial period was of pronounced prosperity and the increase in prices is accompanied by an increase in debt and stock market indices, which generates a pendulum effect that accentuates the contraction of GDP.
- Shortage of demand The impoverishment of consumer sectors (due to increases in basic goods and services, for example) pulverizes their purchasing capacity and slows down the pace of recovery of commercial investments, causing new capital to take longer to form and the economy to fall asleep.
- Uncertainties about the future In scenarios of political, social or economic uncertainty, investors prefer to play conservatively, as no one wants to take more risks than they should. This often means that bad political decisions or social conflicts are accompanied by an economic shock that tends towards recession.
- Massive capital loss This can occur at a regional or even global level, due to major conflicts or problems, such as wars, revolutions, natural tragedies, etc.
Difference between recession and economic depression
When an economic recession is very intense and very prolonged in time, the use of the term is preferred economic depression. So this last is a more pronounced degree of recession in which the economy is no longer tending to slow down, but rather to paralysis or, worse still, to collapse.
