What is Recession and How is it Determined?

The term recession is used to exhibit a downturn in the economic activity of a country. According to macroeconomics, recessions occur after two successive quarters of negative Gross Domestic Product (GDP) growth rates. This phenomenon can last for short-term, like a few months, on an average of 10 to 12 months. However, the economy takes several years to reach its peak thereafter. If you want to know what recession is, keep reading.

Recession refers to a persistent and pervasive decline in the economy of a nation that starts as the economy reaches its peak and lasts till the economy reaches the trough. Recession signifies a sustained period of negative or poor growth in real Gross Domestic Product (GDP) or output which is supplemented by a considerable increase in the rate of unemployment.

Usually, recessions are triggered by various factors, like a financial crisis, an external trade shock, an adverse supply shock, a large-scale anthropogenic crisis, natural calamities, etc.

There is hardly any fixed definition of recession, which is defined in various ways across global financial institutions. Earlier, after 1947, India faced a plethora of recession phases due to several causes. However, it recovered in due course of time.

The three most critical recessions that shook the Indian economy from the root were the recession of 1958 due to the Asian Flu Pandemic. Secondly, the recession of 2008 was caused due to the housing bubble and careless lending practices. Finally, the recession of 2020 triggered by the COVID-19 pandemic that made numerous business sectors stop their activities to prevent the spread of the virus.

Mentioned below are some noteworthy recessions that have shaken the economy of the world several times:

• 1948 Post-War Slump
• Gulf War Recession of 1991
• The V-Day Recession of 1945
• Dot-Bomb Recession of 2000
• Oil Embargo Recession of 1973
• COVID-19 Recession 2020
• The Own Goal Recession of 1938
• Investment Bust Recession of 1957
• Great Recession of 2007

There are several things that are caused during recessions. Recessions lead to standard monetary as well as fiscal effects that comprise decreased credit availability, reduction in short-term interest rates, increase in unemployment, and so on. This results in the reduction of consumption rates, which declines inflation rates. Following are three significant impacts of the recession on the economy of a nation:

1. Escalation in Cost of Living

With the occurrence of inflation to a recession, the prices of household products such as clothes, foods, groceries, and gasoline will become costlier than their usual amount. As the prices increase, it will get more complicated for individuals to acquire them. This is why you need to make a predetermined budget and avoid unnecessary expenses in order to stay away from such situations.

2. Job Loss and Unemployment

During the recession period, in order to lower the overhead costs, businesses typically start laying off the current employees and equally stop hiring new people. Thus, it leads to job loss and the rate of unemployment increases.

On the assumption of becoming unemployed, people start spending less during the recession. Those who are already unemployed become forced to cut back their expenditures. The reduction in spending by too many people results in the 'paradox of thrift’.

3. Increase in Government Debt

One of the significant effects of recession is that it increases government expenditure on various areas, like providing unemployment benefits, income support, expenses towards welfare, etc. Put simply, as the businesses earn less revenue, it lowers the government earnings from commercial tax. Secondly, the lower income of workers affects the earnings of the government from income tax. Thirdly it also lowers government income from stamp duty, VAT payments, etc.

During a recession, the economic output, consumer spending, and employment decline considerably. Typically, during a downturn phase, the economic landscape is impacted in different ways while indicating there is a recession. They comprise:

• A fluctuation in unemployment
• A downturn of the yield curve
• A reduction in personal income due to job loss
• A decline in bank interest rates as the demand for loans drops
• Deceleration of a manufacturing activity
• Slowing down in consumer spending

So far, there is no clear surety of whether and how these factors will reinforce or disappear altogether.

Following are some of the real world examples of recessions that affected the economic balance worldwide:

Trade Balance (1958)

India came across its first recession in 1958 owing to the imbalance of payments. The vital sector of the economy, 'agriculture' went through the worst time in this phase since its production got affected by the severe monsoon. Soon, India imported more than 60 Lakhs tonnes of food, which eventually caused a decline in the economy and an upsurge in prices. Furthermore, the Gross Domestic Product (GDP) reached negative 1.2%.

Dreadful Drought (1966)

In 1966, India experienced another severe recession after a battle between Pakistan and China. The country soon came across two dreadful droughts, which caused a negative effect on the production of food grains that dropped by 20%. Some foreign countries supported India during this time, wherein almost 1 Crore tons of food aid was received. In this phase, the rate of GDP growth fell short of 3.66%.

Energy Emergency (1973)

India went through a major energy crisis owing to the oil embargo or ban on oil trade by the Organisation of Arab Petroleum Exporting Countries (OAPEC). They particularly attacked those countries which supported Israel at the time of the 'Yom Kippur' war. This made oil prices rise by 400%, which almost doubled its usual price in India during that period. In this phase, the growth of GDP was negative by 0.35%.

Oil Breakdown (1980)

Another recession period occurred in 1980 when the world suffered an oil shortage owing to the Iranian revolution. It stunned the world and caused an increase in the costs of oil. It even continued after the Iran-Iraq war triggered the prices. At this time, the growth of GDP was negative 5.2%, which created a crisis in the balance of payment for India.

Now, as you become aware of what recession is, you can easily predict the future from the prevailing situation of the economy. Remember that various unforeseen factors lead to recession, which persists for several months or even years. However, having a detailed idea about this subject may help you take precautionary measures to keep yourself in the safe zone during this phase.