Why it is crucial understanding Recession
In recent years a number of financial buzzwords have perpetually dominated our television screens and newspaper pages: dip, growth, output, GDP, bail-out… and the one that all economists and governments seem to fear – recession.
It’s fairly common knowledge that the UK, the Eurozone and other Westernised nations are “in recession” but to many people, while this may be a familiar phrase, the meaning may be unclear. Media hysteria about “double dip” recession or even “triple dip” recessions may also add confusion so here’s a rough guide to what it’s all about.
What is a recession?
To be honest even some experts disagree on the answer to this question. However it is generally agreed that a recession is a period of economic decline which is measured by a country’s GDP (gross domestic product) – the value of all goods and services produced on quarterly basis. If the GDP contracts during two consecutive quarters (equal to a period of six months) then a country’s economy technically slides into recession.
What are the consequences of a recession?
Although recessions are considered a normal part of an economy’s cycle, governments are usually keen to avoid them where possible as the consequences can be severe. During a recession a country may see higher unemployment rates, a fall in the stock market, stagnation in the property market and a decrease in both personal and business income. All these factors need to be carefully managed during the period of recession which generally lasts from 6 to 18 months.
How do recessions differ?
As GDP is usually based on estimated figures to begin with, an economy may be incorrectly described as being in recession until actual statistics are confirmed. Similarly a recession may not be confirmed until the following quarter which, given that there has to be negative growth for six months, means that it can be some considerable time before all the facts are known.
There are different degrees of recession that an economy can experience. An economy may contract for two consecutive quarters but then experience growth in the 3rd quarter, bringing the country out of recession. This is the classic V-shaped recession when a short period of economic decline is matched by strong growth and this would be classed as a mild recession.
The U-shaped recession describes an economy that slides into recession and remains there for a longer period of time, such as the 1973-75 US recession where subsequent growth was delayed.
The W-shaped recession (or the ‘double dip’ as it is commonly known) describes an economy that experiences a traditional recession with growth following decline, but sinks back into recession for a second time as growth is not strong enough to sustain an economic recovery. This is the type of recession that the UK and Eurozone have recently experienced. By applying the same principle of stagnation and growth it is easy to comprehend the concept of a ‘triple dip’, which some commentators are anticipating the UK will experience in the near future.
Finally the L-shaped recession is one where a country’s economy enters recession and remains there for a considerable period of time, such as Japan in the 1990s following over forty years of strong post-war growth.
How is it determined when a recession has ended?
Economic experts are responsible for analysing a mountain of data including GDP and unemployment rates. In the US this is undertaken by the National Bureau of Economic Research and in the UK by the Office of National Statistics.
The end of a recession is an indicator of a return to growth, increased employment and rising prices but, as recent history has demonstrated, sluggish growth may be enough to end a technical recession but insufficient to kick-start an economy that is faltering.